Published on February 24, 2014
Section 195 of the Income-tax Act, 1961 Withholding Tax on Foreign Remittances Provisions and Issues Susan Dias
Intent behind Sec 195 Regular inflow of revenue for Government Collection of taxes at earliest point of time Checking of tax evasion
Importance of Sec 195 today Increased international transactions Department’s focus on cross border payments Heightened vigilance through Forms 15CA, 15CB
What the section says… 195(1) Liability on payer to deduct tax on payment to non resident 195(2) Application by payer for lower/ NIL withholding 195(3) Application by payee for NIL withholding 195(4) Validity of certificate of lower/ NIL withholding
…What the section says 195(5) Empowers CBDT to notify rules for 195(3) 195(6) Empowers CBDT to provide the manner for furnishing information 195(7) Empowers CBDT to notify class of payers mandated to furnish application to tax officer for determination of WHT rate
Sec 195 (1) – Scope and chargeability Who is responsible to deduct tax? Any person (As defined u/s 2(31)) Who should the payee be? All non residents whether having presence in India or not Does not include RNOR Status of non resident ? Under sec 6 In case of dual residence if tie breaker clause exists - DTAA is applied Payments covered? Any sum chargeable under the IT Act Except salaries and dividend u/s 115O Point of deduction? At the time of credit or payment whichever is earlier Rate of TDS? Relevant rate in force
Sec 195 (1) – Recent amendment Scope of WHT obligation u/s 195 extended to all persons including non residents irrespective of them having a residence or place of business or business connection or any other presence in India Obligation to withhold tax even without any territorial nexus
Sec 195 (2) – Payer’s application for lower/ NIL WHT certificate Application to be made to tax officer by the payer to determine portion of payment chargeable to tax
Sec 195 (3) – Payee’s application for lower/NIL WHT certificate On payee’s application AO on determination to grant lower/ NIL WHT certificate Form No 15C prescribed in case of banking company Form No 15D in other cases Conditions for grant of certificate prescribed under Rule 29B
Sec 195 (4) & (5) – Validity and rules for grant of certificate Certificate granted u/s 195(3) valid till specified period or till cancellation by AO whichever is earlier CBDT empowered to make rules for grant of a certificate u/s 195(3)
Sec 195 (6) – Furnishing information Introduced in 2008 Requires the payer to furnish payment related information Rule 37BB introduced* Information to Department – Form 15CA CA Certificate to be obtained before payment – Form 15CB *Circular No 4/2009 gives manner for submitting and processing payments
Sec 195 (7) – Notification of class of persons Introduced in 2012 Board empowered to notify class of persons (payees) required to apply to tax officer for determination of WHT, irrespective of whether payment is taxable in India or not No class of persons notified yet
Rates of tax Rates of tax specified in the Finance Act or rates specified in the DTAA, whichever is beneficial – Sec 2(37A)(iii) Sec 206AA to apply RBI’s TT buying rate on day on which TDS is required to be deducted to be considered
Sec 195A – Grossing up of taxes Grossing up required in case of net of tax payments Tax payable by non resident to be added to income remitted Tax payable by non resident determined on gross figure Particulars Amount payable to non-resident (net of tax) Tax rate applicable Amount INR100 20% Gross-up income: 100 * 100 . (100-20) INR 125 Tax payable (INR 125 * 20%) INR 25 Net amount paid to non-resident (INR 125 – INR 25) INR 100
Applicability at a glance Payment to Non Resident Taxable under IT Act Yes DTAA available DTAA rates beneficial Deduct tax @ IT Act prescribed rates Yes Income taxable under DTAA Yes No No No No Yes Deduct tax @ DTAA prescribed rate No tax deducted
Chargeability under IT Act or DTAA Nature of Income IT Act DTAA Business/Profession Section 9(1)(i) Article 7 &14 rw 5 Salary Section 9(1)(ii) Article 15 Dividend Section 9(1)(iv), section 115A Article 10 Interest Section 9(1)(v), section 115A Article 11 Royalties Section 9(1)(vi), section 115A Article 12 Fees for technical services/FTS Capital Gains Section 9(1)(vii), section 115A Article 12 Section 9(1)(i), section 45 Article 13
Documents to be relied on by CA before issuing Form 15CB Agreements Invoices Payment details Correspondences Technical advice Proof of services actually rendered in group company transactions Remitting bank details Rate of conversion of foreign currency Tax Residency Certificate Payee declaration/certificate (eg no PE, tax residency, beneficial ownership, treaty entitlement etc)
Some focus areas in issuing Form 15CB Nature of the income – FTS, royalty etc Whether payee has a PE in India? If yes, attributable profit TRC sufficient evidence for claiming treaty benefit?
Frequently asked questions Whether transactions between Branch and HO attract sec 195 Whether tax is to be deducted u/s 195 in cases of payment in kind, barter transactions or adjustment against receivables Whether tax is to be deducted by agent when making remittance to foreign principal
Frequently asked questions When is the payer required to deduct tax What exchange rates are to be used while deducting tax Do forms 15CA and 15CB absolve payer from penal consequences
Frequently asked questions By what time is tax deducted required to be deposited Do you need to issue TDS Certificate to non residents Is TDS Certificate to be issued when tax is borne by payer as per Sec 195A Is NIL TDS Return to be filed in the quarter when no TDS is deducted u/s 195
Frequently asked questions Is there a time limit for disposal of application u/s 195 Whether order under section 195(2) can be revised u/s 263 Whether tax officer can take a contrary view than adopted while issuing certificate u/s 195
Frequently asked questions Whether Surcharge & Cess are to be added when treaty rates are applicable Can payee claim credit for excess tax deduction due to sec 206AA Whether Surcharge & Education Cess leviable if higher rate under 206AA applied
Some issues CA Certificate as alternative to Sec 195(2) Taxability of royalty and Fees for Technical Services (‘FTS’) Applicability of Sec 195 to reimbursement of expenses
Key takeaways Sec 195 also applies to non residents payers on payments to residents and non residents In case of doubt and to determine attribution of income – Advisable to obtain WHT order u/s 195(2) CA certificate route - where strong judicial precedents exist Precautions to be taken while issuing Form 15CB – eg. Certificate cum-undertaking to be obtained from payee (such as no PE declaration)
Consequences of non compliance Applicable section Nature of default Consequence 40(a) Withholding tax not deducted or Disallowance of expenses in computation of not deposited within prescribed taxable income of payer; deduction in year of time payment 201(1) Tax not withheld/ deposited appropriately Recovery of tax not withheld/ deposited or short withheld/ deposited 201(1A) Tax not withheld/ deposited appropriately Interest @ 1% per month or part of he month 221 Tax withheld not paid Penalty, not exceeding the amount of tax not paid 271C Tax not withheld or short withheld Penalty, not exceeding the amount of tax not withheld
Refund of tax deducted u/s 195 Situation Condition for refund Contract is cancelled No remittance is made to the non resident Contract is cancelled No remittance is made to the non resident Remittance is duly made to the non resident but contract is cancelled Remitted amount is duly refunded to the payer by the payee Contract cancelled after partial execution No remittance is made to the non resident for the non executed part The contract is cancelled after partial Amount refunded to the payer or no remittance was execution and remittance related to non made but tax was deducted and deposited when executed part is made to the non resident amount was credited to the account of the non resident Reference: Circular No 7/2007 and Circular No 7/2011
Refund of tax deducted u/s 195 Situation Amendment in law or by notification under the IT Act Condition for refund There occurs exemption of the remitted amount from tax Order passed under section 154 or 248 or 264 of the Act Tax deduction liability of payer is reduced Double deduction of tax amount Same amount deducted twice by mistake Other than discussed above Grossing up not required or payment of tax at higher rate under domestic law while a lower rate is prescribed under DTAA Reference: Circular No 7/2007 and Circular No 7/2011
Reimbursement of expenses – Judicial precedents Nature of Expense Case Laws in favour of taxpayer Case laws against the Taxpayer Reimbursement of cost of services of a third party engaged by non resident Nathpa Jhakri Joint Venture - 37 SOT Wallace Pharmaceuticals P Ltd – 278 ITR 97 160 (Mum) (AAR) Modicon Network P Ltd – 14 SOT 204 (Del) Reimbursement of allocated cost (ie cost sharing arrangements) Dunlop Rubber Co - 142 ITR 493 (Cal) Danfoss Industries (India) Ltd - 268 ITR 1 (AAR) Payment for services rendered at cost Timken India Ltd - 273 ITR 67 (AAR) AT&S P Ltd – 157 Taxman 198 (AAR)
Reimbursement of expenses – Judicial precedents Nature of Expense Case Laws in favour of taxpayer Case laws against the Taxpayer Reimbursement of Telco Ltd - 245 ITR 823 (Bom) incidental expenses in Industries Engg Project (P) Ltd - 202 ITR addition to payments of 1014 (Del) royalty & FTS Clifford Chance - 82 ITD 106 (Mum) Mahindra and Mahindra Ltd - 1 SOT 896 (Mum) Fortis Healthcare Ltd - 45 SOT 190 (Chd) Cochin Refineries Ltd - 222 ITR 354 (Ker) SRK Consulting - 230 ITR 206 (AAR) Ashok Leyland - 120 ITD 14 (Chennai) Bovis Land Lease – 36 SOT 166 (Bang) CSC Singapore Pte Ltd - 2012-TII-35ITAT-DEL-INTL (Del) Reimbursement of living Morgenstern Werner - 233 ITR 751(All) allowance, etc of a Goslino Mario - 241 ITR 3 12 (SC) person deputed to India BHEL - 252 ITR 218 (Del) by the non resident Danfoss Industries (India) Ltd - 268 ITR 1 (AAR)
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