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6 th Annual Workshop on Direct Taxes. International Taxation - II Concept of source rule/ Section 195. Sanjiv Chaudhary/ Nidhi Maheshwari. All India Chartered Accountants’ Society. Contents. 1. Glossary. 2. Setting the context. 3. Overview of Section 195. 4. Objective of Section 195.

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Presentation Transcript
slide1

6th Annual Workshop on Direct Taxes

International Taxation - II

Concept of source rule/ Section 195

Sanjiv Chaudhary/ Nidhi Maheshwari

All India Chartered Accountants’ Society

slide2

Contents

1. Glossary

2. Setting the context

3. Overview of Section 195

4. Objective of Section 195

5. Recent developments

6. Other interesting issues

7. Refund of taxes withheld u/s 195

8. Consequences of non-compliance

9. Key takeaways

chargeability
Chargeability…
  • Any person responsible for paying to a non resident…any interest orany other sum chargeable under the provisions of this Actshall…deduct income-tax thereon…

Section 195

  • The Act applies to thewhole of Indiaand became effective from 1 April 1962

Applicability: Section 1

  • Income received or deemed to be received in India
  • Income accrues or arises or deemed to accrue or arise in India

Scope of Total Income of NR: Section 5

  • Section 4 gives the authority to the government to charge Income-tax

Charging Section: Section 4

income deemed to accrue or arise section 9
Income deemed to accrue or ariseSection 9

Income deemed to accrue or arise: Section 9

Chargeability to tax governed by provisions of Act / DTAA

* Apart from S. 5, wherever applicable

Act/ DTAA, whichever is beneficial prevails

royalty fts as per the act section 9 1
Royalty/ FTS as per the ActSection 9(1)

Income by way of Royalty/ FTS shall be deemed to accrue or arise in India if payable by

Government

Resident

NR

EXCEPT

WHERE

Business/ Profession outside India

Business/ Profession in India

OR

OR

Source of income outside India

Source of income in India

Finance Act, 2010

  • Income shall be deemed to accrue or arise irrespective of whether:
  • NR has residence/ place of business/ business connection in India
  • NR has rendered services in India
overview of section 1951
Overview of Section 195

Part of Chapter XVII of the Act – A collection and recovery measure

objective of section 195 of the act
Objective of Section 195 of the Act
  • Tax is collected at the earliest point of time
  • No difficulty in collection of tax at the time of assessment
  • Avoiding loss of revenue as non residents may have no assets in India for subsequent recovery
  • Examples of payments covered – royalty/ fees for technical services

Circular No. 152 dt. 27-11-1974

XYZ, In Re: P.No.18 of 1995- 238 ITR 575

“the objective is to ensure, as best as possible, that the tax liability on the income element, on the amount paid is got deducted at source itself so that the department is not put to the hassles of recovering it from a non-resident whose connection with India may be transient or whose assets in India may not be sufficient to meet the tax liability.”

section 195 1 analysis
Section 195(1)Analysis

Scope

  • Covers all sums
  • Except salaries, dividends referred in Section 115O

Withholding tax not conclusive; subject to regular assessment

Time

  • Credit or Payment, whichever is earlier

Section 195

Rate

  • Rates in force
section 195 1 scope
Section 195(1)Scope

Whether payment made by an NR to another NR outside India is covered under the ambit of Section 195?

  • Shrikumar Poddar 65 ITD 48 (ITAT Mum)

No

  • Satellite Television Asian Region Ltd. 99 ITD 91 ITAT Mum
  • Vodafone International Holding BV 221 CTR 617 (SC)*

Yes

  • The Supreme Court had directed the AO to determine the jurisdiction issue who has decided the matter against Vodafone. However, Vodafone has filed a writ in the Bombay High Court which is to hear the appeal on 8 July 2010
section 195 1 scope1
Section 195(1)Scope

Obligation to withhold tax u/s 192 may arise for payments made by NR/ Foreign Company to NR in relation to services rendered in India

Payment made by Foreign Company to NR (Expats) seconded

  • Eli Lilly and Co. India (P) Ltd. 312 ITR 225 (SC)
  • Babcock Power (Overseas Projects) Ltd. 81 ITD 29 (ITAT Del)
section 195 1 any sum chargeable
Section 195(1)Any Sum Chargeable
  • Amount paid which wholly bears the character of income; or
  • Gross amount, the whole of which may or may not represent income or profits

Any sum chargeable to tax means

  • Transmission Corporation of AP Ltd. 239 ITR 587 (SC)
  • Headstart Business Solutions (P) Ltd. 285 ITR 530 (AAR)
point of tax withholding
Point of Tax Withholding
  • Section 195(1)

Withholding at the time of credit or payment whichever is earlier

  • Affirmed by - National Organic 96 TTJ 765 (ITAT Mum)
  • Contrary View - Flakt (India) Ltd 267 ITR 727 (AAR)

Payment of Royalty under DTAA - tax deductible on payment?

Point of Tax Withholding

  • Raymond Ltd. 86 ITD 791 (ITAT Mum)

Tax to be withheld even when no remittance on adjustment of dues

  • United Breweries Ltd (211 ITR 256) (Kar)
  • Pfizer Corporation 259 ITR 391 (Mum)

Tax withholding in cases where RBI approval required

section 195 1 rates in force
Section 195(1)Rates in Force
  • Rates of income-tax specified in the Finance Act or DTAA

Section 2(37A)(iii)

  • Beneficial rates to be applied

Circular No. 728 dt. 30 October 1995

Rates prescribed under DTAA: to be increased by surcharge and education cess?

section 195 2 application by payer
Section 195(2)Application by Payer
  • Application by the Payer to the AO for determining appropriate portion of sum chargeable
  • Alternate Mechanism: CA certificate*
  • To be discussed later
section 195 2 application by payer1
Section 195(2)Application by Payer

Mandatory to approach AO?

  • Once income is chargeable to tax, withholding on gross sum unless order obtained from AO

Transmission Corporation of AP Ltd. 239 ITR 587 (SC)

Fact: Gross trading receipt with income element embedded therein

Other Judgments

Yes

No

  • Intel Tech India (P) Ltd. 130 TTJ 348 (ITAT Bang)
  • Frontier Offshore Exploration (India) Ltd. 118 ITD 494 (ITAT Chen)
  • Indopel Garments 86 ITD 102 (ITAT Mad)
  • SOL Pharmaceuticals Ltd. 83 ITD 72 (ITAT Hyd)
  • Maharashtra State Electricity Board 90 ITD 793 (ITAT Mum)
  • Cheminor Drugs Ltd 76 ITD 37 (ITAT Hyd)
section 195 2 application by payer income not taxable
Section 195(2)Application by Payer – Income not taxable?
  • Obligation to withhold tax exists if the income is prima facie taxable, unless a ‘nil’ withholding tax certificate is obtained

Samsung Electronics Co. Ltd. 227 CTR 335 (Kar)

1999

2009

2010

  • Once income is chargeable to tax, withholding on gross sum unless order obtained from AO

Transmission Corporation of AP Ltd. 239 ITR 587 (SC)

  • Liability to withhold tax does not arise where income is not taxable in India
  • Van Oord ACZ India (P) Ltd; Maharishi Housing Development Finance Corporation Ltd; Prasad Production Ltd.

Post Samsung decisions*

Fact: Gross trading receipt with income element embedded therein

section 195 2 application by payer2
Section 195(2)Application by Payer
  • Recent favourable decisions likely to provide some relief to assessees
  • Supreme Court decision in the Samsung case on 18 August 2010 eagerly awaited

What lies ahead

section 195 3 195 5 application by payee powers of cbdt
Section 195(3)/ 195(5)Application by Payee/ Powers of CBDT
  • Applicable to:
    • foreign bank branches and
    • other branches subject to certain conditions
      • In operation for at least 5 years
      • Value of fixed assets in India exceed Rs.50 lakhs

Section 195(3): Application by NR payee for NIL tax withholding

NR payee is regularly assessed to tax and should not have defaulted in respect of Indian tax, interest, penalty, fine etc.

Section 195(5): Powers of CBDT

  • CBDT can by notification in the Official Gazette make rules specifying the cases for the grant of certificate u/s 195(3) and the related conditions
section 195 4 validity of certificate issued by ao
Section 195(4)Validity of certificate issued by AO
  • A certificate granted u/s 195(3) shall remain in force:
    • for the FY mentioned therein; or
    • until cancelled by the AO before expiry of FY
  • Provisional Certificate only
section 195 6 new rules for information
Section 195(6)New Rules for Information
  • Requires the person making payment to NR to furnish the information relating to payment

Section 195(6) introduced by Finance Act 2008 (w.e.f. 1 April 2008)

Furnishing of information - Rule 37BB (w.e.f. 1 July 2009)

  • Furnish information to the tax department - Form 15CA
  • Obtain CA certificate before making payment to NR - Form 15CB
procedure form 15ca and 15cb
Procedure Form 15CA and 15CB

Remitter

  • Every remittance required to follow procedure even if not chargeable to tax in India
  • Requires the payer to provide PAN of the non resident
  • Form 15CB need not be filed with the tax department – information requirement is same as Form 15CA

Printout of the undertaking form (15CA) is signed

Obtains certificate of Accountant (Form 15CB)

Submit the signed paper undertaking form to the RBI/ AD along with certificate of an Accountant in duplicate

Electronically upload the remittance details in Form 15CA on www.tin-nsdl.com

RBI/ AD remits the Amount

Take printout of filled undertaking form (15CA) with system generated acknowledgement number

A copy of undertaking (15CA) & Certificate of Accountant (15CB) forwarded to AO

practical issues in certification by ca
Practical Issues in certification by CA

Whether TRC sufficient evidence to claim Tax Treaty Benefits?

Characterization issues: Royalty, FTS, etc.

No books of accounts in India

Issues

Issuance of certificate in absence of complete information about payee

Amount attributable to PE or not; if yes, then quantum of amount attributable?

Verification of PE in India

Can Nil withholding foreign remittance certificate be issued???

section 195a grossing up of tax
Section 195AGrossing up of Tax
  • Grossing up required in case of net of tax payments*
  • Amount of tax payable by the NR has to be added to the income remitted to the NR and the tax payable by the NR should be determined with reference to the gross figure arrived at as above

* Not applicable in case of payments referred to in S.192(1A) - Non monetary perquisites taxable as salary

section 206aa
Section 206AA
  • Section 206AA* stipulates withholding at higher of following rates in case PAN of payee is not furnished:
    • Rate specified in the relevant provisions of the Income-tax Act, 1961 (varying rates prescribed for different nature of payments); or
    • Rates in force (as specified in the Schedule to the Finance Act; relevant tax treaties); or
    • 20 percent.
  • Further, PAN to be quoted on all correspondence, bills, vouchers, etc. between payer and payee.

* with effect from 1 April 2010

certain issues connected with 206aa
Certain issues connected with 206AA

Applicability restricted to transactions where tax is deductible?

Timing for applicability of Section 206AA

Applicability on payments to non residents?

Overriding effect on tax treaties

Grossing up and determination of income liable to tax in payee’s hands in ‘net of tax’ contracts

Levy of surcharge and education cess on maximum rate of 20%

Credit under relevant tax treaty of the non-resident’s home country for higher taxes paid

new wht rules some important changes
New WHT Rules Some important changes

New WHT provisions applicable w.e.f. FY 2010-11 (Not applicable to FY 2009-10)

cost to cost reimbursement obligation u s 195
Cost to cost reimbursement Obligation u/s 195

Cost to cost reimbursement requires TDS

  • Danfoss 268 ITR 1 (AAR)
  • Timken India Ltd. 193 CTR 610 (AAR)

Reimbursement of cost allocation

  • Cochin Refineries Ltd. 222 ITR 354 (Ker)
  • Hyder Consulting Ltd. 236 ITR 640 (AAR)

Reimbursement of expenses along with FTS

cost to cost reimbursement obligation u s 1951
Cost to cost reimbursement Obligation u/s 195
  • Decta 237 ITR 190 (AAR)
  • Clifford Chance UK 82 ITD 106 (ITAT Mum)
  • HNS India VSAT Inc. 95 ITD 157 (ITAT Del)
  • Tata Engineering and Locomotive Co. Ltd. 245 ITR 823 (Bom)
  • HCL Infosystems Ltd. 76 TTJ 505 (ITAT Del)
  • Dolphin Drilling Ltd. 121 TTJ 433 (ITAT Del)
  • ABB Ltd. 230 CTR 327 (AAR)

Cost to cost reimbursement does not require TDS

software payments
Software Payments

Payment for Software – whether royalty??

  • Motorola Inc. 96 TTJ 1 (ITAT Del) (SB)
  • Lucent Technologies International Inc. 28 SOT 98 (ITAT Del)
  • Infrasoft Limited (Indian Branch Office) 28 SOT 179 (ITAT Del)

Not Royalty

  • Airport Authority of India 304 ITR 216 (AAR)
  • IMT Labs India (P) Ltd. 287 ITR 450 (AAR)

Royalty

software payments1
Software Payments

Payment towards use/ access of computer server is royalty or not

  • Factset Research Systems, Inc. 317 ITR 169 (AAR)
  • Wipro Limited 278 ITR 57 (ITAT Bang)
  • Dun & Bradstreet Espana S.A. 272 ITR 99 (AAR)

Not Royalty

  • ABC, In re 238 ITR 296 (AAR)
  • IMT Labs (I) (P) Ltd. 287 ITR 450 (AAR)
  • Cargo Community Network Pte. Ltd. 289 ITR 355 (AAR)

Royalty

fees for technical services
Fees for Technical Services
  • Raymonds Limited 86 ITD 791 (ITAT Mum)
  • C.E.S.C. Ltd. 87 ITD 653 (ITAT Cal)
  • The Boston Consulting Group 94 ITD 31 (ITAT Mum)
  • Gujarat Ambuja 2 SOT 784 (ITAT Mum)
  • National Organic 96 TTJ 765 (ITAT Mum)

Treaties with USA, UK, Singapore, Australia, Canada etc. have the concept of “make available” in the FTS definition

Make available significantly narrows down the scope of FTS

refund of tax withheld u s 195
Refund of Tax Withheld u/s 195…
  • Contract is cancelled and no remittance is made to the non-resident
  • Remittance is made to the non-resident but the contract is cancelled
  • Contract is cancelled after partial execution
  • Retrospective amendment in law/ exemption by way of notification making the sum remitted exempt from tax
  • Order u/s 154/ 248/ 264
  • Tax deducted twice on the same income by mistake

Payer is entitled to claim refund in prescribed cases

Circular No. 7/ 2007 dt. 23-10-2007

refund of tax withheld u s 1951
…Refund of Tax Withheld u/s 195
  • Tax deducted at domestic tax rates; lower rate as per DTAA
  • Prior Approval of the Chief Commissioner/ Director General
  • Refund is first to be adjusted against any existing tax liability
  • Interest u/s. 244A is not payable on such refunds
  • Undertaking to be given by the payer that TDS certificate has not been issued
  • Deductee has not filed the return of income and time of filing the return has also been lapsed
  • Claim should be made within 2 years from the end of the FY in which tax has been deducted
consequences of non compliance2
…Consequences of non compliance

Non compliance results in severe consequences

concluding thoughts
Concluding Thoughts
  • Payment to non-residents should be thoroughly examined from tax withholding perspective
  • Payments can be remitted under the alternate mechanism (with CA Certificate) if the case is strongly supported by judicial precedents
  • In case of doubt coupled with substantial amount - Advisable to obtain tax withholding order u/s 195
  • Mitigate grave consequences of non compliance with S.195

Tax Withholding from cross-border transactions is critical

open house
Open house

Questions…

contact details
Contact details

Sanjiv Chaudhary

KPMG India

Tel (Direct): +91 124 334 5032

Cell: +91 9810127362

e-mail: schaudhary@kpmg.com

Nidhi Maheshwari

Tel (Direct): +91 (124) 307 4322

Cell: +91 9810583215

e-mail: nmaheshwari@kpmg.com