1. TDS on Payments to Non-Residents & Certification Procedures - CA Rutvik Sanghvi ICAI, Coimbatore Branch 8 th February 2013

2. Contents Scope & Methodology Certificates & Analyses LEGAL PROVISIONS Approach & Safeguards Consequences & Refund PRACTICAL ISSUES 2

3. LEGAL PROVISIONS - Scope & Methodology Snapshot of Section 195 Scope of Section 195(1) Chargeability to tax in India Taxability - Interplay between Act & DTAA Deductibility of tax Extraterritoriality Taxability - on income or gross sum Timing of Deduction Rates in force Section 206AA Tax Residency Certificate Grossing up of tax 3

4. Snapshot of Section 195 195(2) & 195(7) Application by Payer Mandatory Application to AO 195(3), 195(4) & 195(5) Application by Payee 195(6) Reporting Requirements 195(1) Scope & applicability 4

5. Scope of Section 195(1) 5  What is covered?  Payments to NR for business, services & transfer of assets  Incomes taxable in India without any threshold limit  Except for Salaries, Dividends, Interest u/s. 194LB &194LC, Payments to FIIs, Shipping income u/s. 172  When is it applicable?  On credit or payment whichever is earlier  Who are covered?  Residents –  All types of persons  Non-residents –  Whether or not they have a nexus

6. Chargeability to Tax in India 6 Section 5 Received or Deemed to be received Accrues or arises Section 9 Is deemed to Accrue or Arise DTAA Exempt from Tax Lower tax rate Provisions of the Act or DTAA, whichever are more beneficial, prevail

7. Taxability – Interplay between the Act & DTAA 7 Business Income Section 9(1)(i) Article 7 r.w. Article 5 Royalties/FTS Section 9(1)(vi) & (vii) Article 12 Capital Gains Section 9(1)(i) Article 13 Interest Section 9(1)(v) Article 10

8. Deductibility of tax 8  On business income or professional fees paid to NR  In case of ‘business connection’ or PE / Fixed Base in India  On Royalties & FTS  As expanded by Finance Act, 2012  On reimbursement of expenses  On purchase of shares or property  On gifts to non-relatives  On payments made by a branch to its HO  On payment in kind  On payments to Agent of Non-resident as per Sec. 163

9. Extraterritoriality  Applies to transactions between Non-residents  The Act applies to the whole of ‘India’  SC Decisions  GVK Industries  Vodafone  Clarificatory amendment – Explanation 2 to S. 195(1)  Obligation to make deduction applies and is deemed to have always applied to all NRs whether or not NR has any presence in any manner whatsoever in India!  Enforceability 9

10. Taxability – on income or on gross sum 10  Income tax to be deducted from ‘sum chargeable to tax’  Transmission Corporation - 239 ITR 587 (SC)  The obligation of the respondent-assessee to deduct tax under section 195 is limited only to appropriate proportion of income chargeable under the Act  Karnataka High Court in Samsung Electronics  GE India Technology Centre - 193 TAXMAN 234 (SC)  One cannot read section 195, as suggested by the department, namely, that the moment there is remittance the obligation to deduct TAS arises.  Section 195(7) – Amendment by Finance Act 2012

11. Timing of Deduction 11  Deductibility at the time of credit or payment whichever is earlier  Exception for interest payable by Government, Public Sector Bank or Public Financial Institution  Amount adjusted, not paid  Raymond Ltd. (80 TTJ 120)  Treaty Situation?

12. Rates in force 12  Section 2(37A)(iii)  Part II to the First Schedule of Finance Act 2012  DTAA rates  Surcharge to be added?  Education Cess to be added?  Presumptive provisions: 44B, 44BB, 44BBA, 44BBB  Section 44DA r.w. Section 115A

13. Section 206AA 13  Non-obstante provision introduced from 1 st April 2010  Requires the NR receiving income to furnish PAN  Circular 5/2010 dated 3 rd June 2010  In absence of PAN, higher of the following rates applicable:  Rate specified in the relevant provision of the Act;  Rate or rates in force; or  Rate of 20%  Treaty Override?  Credit in the other country?

14. Section 206AA…contd. 14  Applicable where no tax payable?  No, as provision applicable only on sum or income or amount on which tax is deductible  Refund of higher tax deducted  Surcharge or educational cess not to be added to 20%  Grossing up of tax under Section 206AA  Literal reading of Section 195A refers to ‘rates in force’  Certificate u/s. 197 will not be issued without PAN  Section applicable also when PAN incorrect or invalid

15. Tax Residency Certificate 15  Section 90(4) – Introduced w.e.f 1.4.2013  NR cannot avail benefit under Treaty without Tax Residency Certificate  Containing such particulars as prescribed of his being Resident in that country  Obtained from the Government  Applies to all NRs without any threshold limit  Not required in case no benefit availed under treaty  Rule 21AB specifies prescribed particulars  Rule applicable from 1.4.2012 or 1.4.2013?  Introduced vide Notification No. 39 dated 17.9.12  TRC necessary, but not sufficient, for treaty residency  Memorandum to the Finance Bill 2012  Azadi Bachao Andolan

16. Tax Residency Certificate…contd. 16  Particulars include 1. Name of the assessee; 2. Status (individual, company, firm etc.) of the assessee; 3. Nationality (in case of individual); 4. Country of incorporation or registration (in case of others); 5. Assessee’s tax identification number in the country of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country; 6. Residential status for the purposes of tax; 7. Period for which the certificate is applicable; and 8. Address of the applicant for the period for which the certificate is applicable; Certificate should be verified by the Government of that country

17. Grossing up of tax 17  Section 195A - Income payable “net of tax” Payment of Rs. 100, tax deductible @ 10% Without Gross Up of Tax (A) With Gross up of Tax (B) Invoice Amount100 Tax Deductible @ Source10 Net Amount payable90100 Amount/Grossed up amount100100+100/[ (100/10) - 1] = 111.11 Less: Tax deducted1011.11 Net Payment90100 -Not applicable to Presumptive tax provisions? -CIT vs. ONGC (264 ITR 340)

18. LEGAL PROVISIONS - Certificates Applications by the Payer Sec. 195(2) vs. Sec. 197 Sec. 197 – Rules & Form Mandatory application – Sec. 195(7) Application by the Payee - Sec. 195(3) Reporting u/s. 195(6) CA Certificate Clause-wise Analysis – Form 15CB Form 15CA 18

19. Applications by the Payer - 195(2) vs. 197 19 Section 195(2)Section 197 Can be made by Payer Application for Appropriate proportion of the sum chargeable to tax Application for lower rate or nil rate for deduction of tax at source Application to be made for each payment. Binding only for particular transaction. Application can be for a particular period. Applicable to period for which issued. Appealable u/s. 248Not appealable – only writ petition Doubts on grant of total exemptionCan provide certificate for deduction at nil rate of tax Application to be made on plain paperApplication to be made in Form 13 as per Rules 28 & 28AA

20. Section 197 – Rules and Form 20  Rule 28A  Form 13  Rule 28AA – Conditions applicable  Determination of existing and estimated tax liability based on  Tax payable on estimated income of previous year  Tax payable on assessed/returned income of past 3 years  Existing tax liability  Advance tax payment & Tax deducted at source  Certificate valid for such period of the previous year as specified  Will be issued direct to the person responsible for deduction of tax at source

21. Mandatory application - Section 195(7) 21  New provision brought in by Finance Act 2012  Mandatory application to AO for determination of sum chargeable to tax  Even if sum is not chargeable to tax as per provisions of the Act  Specify a class of persons or cases by notification  No notification yet  General or special order of the AO  Once order provided, deduction of tax from such sum  No provision for appeal?

22. Application by Payee -195(3) 22  Payee eligible as per Rule 29B can only apply  Indian Branch of a Foreign Bank  For interest or any other sum not being dividends  Indian Branch of a Foreign Company  For any sum not being interest or dividends  Conditions  Income receivable on its own account  Regularly assessed to tax  Not in default of any tax, interest, penalty or fine  For a non-banking company, further conditions of  Carrying on business since last five years  Value of fixed assets exceeds Rs. Fifty Lakhs  Application in Form 15C for Banks & Form 15D for others  No prescribed format for issue of certificate, valid for that FY  Certificate not appealable

23. Reporting u/s. 195(6) 23  Person making payment to NR to furnish prescribed information online  Rule 37BB applicable from 1.7.2009  Information & Undertaking – Form 15CA  CA Certificate – Form 15CB  Applicable for every remittance  Separate certificate for each type of income

24. CA Certificate 24  RBI mandate for No Objection Certificate from IT Department in case of remittance to NR  Objective of CBDT circular to dispense with NOC requirement  CA certificate not a substitute for 195(2) or 195(3)  Not required where order u/s.s 195(2) or 195(3) available  Typical transactions  Transfer of funds from own bank account in India to Foreign  Transfer from NRO to NRE accounts  Payment of Expenses  Form uploaded online – but apparent mistakes

25. Form 15 CB 25  CA certificate to be provided in physical form  Information to be uploaded online in Part B of Form 15CA  Clause-wise analysis -  Certification clause - Documents that should be reviewed  Certified copy of signed Contract  Certified copy of signed/stamped invoice  Certified ledger account  Correspondence on which reliance is placed including emails  Supporting vouchers in case of reimbursements a must  Print out of website details of Payee  Physical certificate should be amended for documents reviewed

26. Form 15 CB…contd. 26  Clause A - Name and address of the beneficiary of the remittance  ‘Beneficiary of Remittance’ not to be confused with Beneficial Owner of Income  Clause B(6) & (7) – Amount & Rate of TDS  Documentary backup for determination of rate  Tax Residency Certificate

27. Form 15CB…contd. 27  Clause B(10) - Nature of remittance as per agreement/document  Important for determining classification of income  Documents reviewed must enable determination of nature of remittance – otherwise call for more documents  Many options provided in the form – one can use as reference  Clause B(11) - In case the remittance is net of taxes, whether tax payable has been grossed up? If so computation thereof may be indicated.  Provide computation on a separate sheet

28. Form 15CB…contd. 28  Clause B(12) - If the remittance is for royalties, fee for technical services, interest, dividend  DTAA clause and reasons for selecting the clause  Proper reasoning to form part of the physical certificate  Detailed reasoning if rate lower than DTAA rate applied  Finance Act 2012 amendments  Retrospective explanations expanding scope of taxable Royalties  Issues  Software Payments  Online Transactions  “Make Available”  E-commerce transactions  Source Rule u/s. 9

29. Form 15CB…contd. 29  Clause B(13) - In case remittance is for supply of articles or things (e.g. plant, machinery, equipment etc.)  Obtain proper declaration from payee for no PE in India  Proper validation of facts, cross-checking  If PE in India, whether CA can issue certificate for profits attributable?  Issues  Offshore supply  Withdrawal of Circular 23 of 1969  ‘Force of Attraction’ clause in DTAA

30. Form 15CB…contd. 30  Clause B(14) - In case the remittance is on account of business income  Liable to tax in India?  Obtain declaration for no ‘business connection’ in case DTAA not applicable  Issues  ‘Business Connection’  Payment to Foreign Agents  Explanation 4 to Sec. 9(1)(i) – expansion?

31. Form 15CB…contd. 31  Clause B(16) - In case of any other remittance, if tax is not deducted at source for any reason, details thereof.  Provide reasons why classified as ‘other remittance’  In case of remittance other than income – mention the exact nature  Separate certificates for income and non-taxable capital receipts  Issues  Reimbursements – facts, documents and supporting

32. Form 15CA 32  Remitter’s details  PAN mandatory  TAN mandatory if deduction of tax at source  Contact and Address Details  AO Code generated from PAN  Recipient’s details  PAN – S. 206AA  Status – does not cover individuals  Separate fields for Principal place of business & Country to which remittance made  Undertaking  Assessee not absolved from interest, penalty or prosecution  AO can call for more details

33. PRACTICAL ISSUES Objectives The Right questions to ask Tax Treaty Some Practical Aspects Other laws Consequences Refund of TDS 33

34. Objectives 34  To determine taxability in India  To know the actual overall tax cost  How would it be treated in the residence country  To provide a complete and practical solution  Am I safeguarding myself properly?

35. The Right questions to ask  Facts  Details about the transaction  Locking down the facts  Residential status of the assessee  Tax Residency Certificate  PE?  Identify the legal status of the tax payer  Determining the Country of Residence of tax payer (CoR)  Determining the Country of Source of income (CoS)  Ascertaining the nature of income and its categorisation  Declaration to be obtained for key facts 35

36. Tax treaty  Applicability of treaty  Residential status  Taxes covered  Persons covered  Must check  Technical Explanation (US)  Protocols and Memorandum of Understandings  MFN clause  LOB clause  References  OECD and UN Model Convention Commentary  Commentaries by learned authors  Klaus Vogel  Arvid Skaar 36

37. Some practical aspects  Cost benefit analysis  Credit in the home country against tax paid in India  Complex legal structures – Unresolved issues  LLPs / Partnerships  Law is always trying to catch up to business  Eg - E-commerce  Not to make TP adjustments  Foreign Exchange Rate  Rate as on the day on which tax is deducted at source as per Rule 26  Difference between forex rate on date of deduction and date of remittance  Forex gain or loss – no TDS required 37

38. Other laws 38  Consider for cross-checking  FEMA  Customs  Service tax  R & D cess

39. Consequences 39  Disallowance of expense u/s. 40(a)(i)  Assessee in default u/s. 201(1)  Retrospective effect from 1.6.2002  Penalties  For failure to pay tax deducted – S. 221  For failure to deduct tax – S. 271C  For failure to file TDS return – S. 272A  Prosecution  For failure to pay tax deducted – S. 276B

40. Refund of TDS 40  CBDT Circulars r.w. Section 239  Application to be made within 1 year from last date of AY  Applicable to cases where:  Contract is cancelled in whole or partially  Change in law, or order, reducing tax liability  Mistakes in payment of tax

41. THANKS 41 Rutvik Sanghvi Partner, Rashmin Sanghvi & Associates rutvik@rashminsanghvi.com

42. Section 195(1) – Scope  Any person  Responsible for paying  To a non-resident  Or a Foreign Company  Any interest or  Any other sum chargeable to tax under the provisions of this Act  At the time of credit of such income to the account of the payee or  At the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode,  Whichever is earlier,  Deduct income-tax thereon  At the rates in force 42