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6 th Annual Workshop on Direct Taxes Sanjiv Chaudhary/ Nidhi Maheshwari International Taxation - II Concept of source rule/ Section 195 All India Chartered.

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Presentation on theme: "6 th Annual Workshop on Direct Taxes Sanjiv Chaudhary/ Nidhi Maheshwari International Taxation - II Concept of source rule/ Section 195 All India Chartered."— Presentation transcript:

1 6 th Annual Workshop on Direct Taxes Sanjiv Chaudhary/ Nidhi Maheshwari International Taxation - II Concept of source rule/ Section 195 All India Chartered Accountants’ Society

2 2 Contents 1. Glossary 2. Setting the context 3. Overview of Section Objective of Section Recent developments 6. Other interesting issues 7. Refund of taxes withheld u/s Consequences of non-compliance 9. Key takeaways

3 3 Glossary ActIncome-tax Act, 1961 AO Assessing Officer CBDT Central Board of Direct Taxes CG Central Government DTAA Double Taxation Avoidance Agreement FTS Fees for Technical Services FY Financial Year HC High Court ITAT Income-tax Appellate Tribunal NR Non Resident PAN Permanent Account Number SC Supreme Court TRC Tax Residency Certificate u/s Under Section WHT Withholding Tax

4 4 Setting the context

5 5 Chargeability… The Act applies to the whole of India and became effective from 1 April 1962 Applicability: Section 1 Section 4 gives the authority to the government to charge Income-tax Charging Section: Section 4 Any person responsible for paying to a non resident…any interest or any other sum chargeable under the provisions of this Act shall…deduct income-tax thereon… Section 195 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

6 6 Income deemed to accrue or arise Section 9 Income deemed to accrue or arise: Section 9 Chargeability to tax governed by provisions of Act / DTAA Nature of IncomeAct*DTAA (OECD model) Business/ Profession S.9(1)(i)A.5 and A.7 Salary Income S.9(1)(ii), S.9(1)(iii)A.15 Dividend Income S.9(1)(iv), S.115AA.10 Interest Income S.9(1)(v), S.115AA.11 Royalties S.9(1)(vi), S.115AA.12 FTS S.9(1)(vii), S.115AA.12 Capital Gains S.9(i)(i)A.13 * Apart from S. 5, wherever applicable Act/ DTAA, whichever is beneficial prevails

7 7 Royalty/ FTS as per the Act Section 9(1) Income by way of Royalty/ FTS shall be deemed to accrue or arise in India if payable by Government Business/ Profession outside India EXCEPT OR ResidentNR Source of income outside India Business/ Profession in India Source of income in India WHERE OR 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 Finance Act, 2010

8 8 Overview of Section 195

9 9 SectionProvisions 195(1)Scope and conditions for applicability 195(2) Application by the “Payer” to the AO 195(3) Application by the “Payee” to the AO 195(4) Validity of certificate issued by the AO 195(5) Powers of the CBDT to issue Notifications 195(6) Furnishing of information by payer 195A Grossing up of tax Part of Chapter XVII of the Act – A collection and recovery measure

10 10 Objective of Section 195

11 11 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 Objective of Section 195 of the Act Circular No. 152 dt XYZ, In Re: P.No.18 of 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.”

12 12 Broad analysis of Section 195

13 13 Section 195(1) Analysis Covers all sums Except salaries, dividends referred in Section 115O Scope Time Credit or Payment, whichever is earlier Rate Rates in force Section 195 Withholding tax not conclusive; subject to regular assessment

14 14 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) Satellite Television Asian Region Ltd. 99 ITD 91 ITAT Mum Vodafone International Holding BV 221 CTR 617 (SC)* NoYes  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

15 15 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 Section 195(1) Scope 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)

16 16 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)

17 17 Point of Tax Withholding Section 195(1) Affirmed by - National Organic 96 TTJ 765 (ITAT Mum) Contrary View - Flakt (India) Ltd 267 ITR 727 (AAR) Raymond Ltd. 86 ITD 791 (ITAT Mum) United Breweries Ltd (211 ITR 256) (Kar) Pfizer Corporation 259 ITR 391 (Mum) Payment of Royalty under DTAA - tax deductible on payment? Tax withholding in cases where RBI approval required Tax to be withheld even when no remittance on adjustment of dues Withholding at the time of credit or payment whichever is earlier

18 18 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?

19 19 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

20 20 Intel Tech India (P) Ltd. 130 TTJ 348 (ITAT Bang) Frontier Offshore Exploration (India) Ltd. 118 ITD 494 (ITAT Chen) Section 195(2) Application by Payer Mandatory to approach AO? Yes Indopel Garments 86 ITD 102 (ITAT Mad) SOL Pharmaceuticals Ltd. 83 ITD 72 (ITAT Hyd) No Cheminor Drugs Ltd 76 ITD 37 (ITAT Hyd) Maharashtra State Electricity Board 90 ITD 793 (ITAT Mum) Once income is chargeable to tax, withholding on gross sum unless order obtained from AO Fact: Gross trading receipt with income element embedded therein Transmission Corporation of AP Ltd. 239 ITR 587 (SC) Other Judgments

21 21 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) 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* Once income is chargeable to tax, withholding on gross sum unless order obtained from AO Fact: Gross trading receipt with income element embedded therein Transmission Corporation of AP Ltd. 239 ITR 587 (SC)

22 22 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

23 23 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 NR payee is regularly assessed to tax and should not have defaulted in respect of Indian tax, interest, penalty, fine etc. Section 195(3): Application by NR payee for NIL tax withholding 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

24 24 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

25 25 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

26 26 Procedure Form 15CA and 15CB Remitter Obtains certificate of Accountant (Form 15CB) Electronically upload the remittance details in Form 15CA on nsdl.com Take printout of filled undertaking form (15CA) with system generated acknowledgement number Printout of the undertaking form (15CA) is signed Submit the signed paper undertaking form to the RBI/ AD along with certificate of an Accountant in duplicate RBI/ AD remits the Amount A copy of undertaking (15CA) & Certificate of Accountant (15CB) forwarded to AO 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

27 27 Practical Issues in certification by CA Issues No books of accounts in India Characterization issues: Royalty, FTS, etc. Whether TRC sufficient evidence to claim Tax Treaty Benefits? Amount attributable to PE or not; if yes, then quantum of amount attributable? Verification of PE in India Issuance of certificate in absence of complete information about payee Can Nil withholding foreign remittance certificate be issued???

28 28 Section 195A Grossing 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

29 29 Recent developments

30 30 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

31 31 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

32 32 New WHT Rules Some important changes ParticularsExistingNewImpact Quarterly WHT statement for Q4 15 June15 MayPre-poned by 1 month WHT deposit for year end provisions 31 May (for 31 March entries) 30 April (for entries in March) Pre-poned by 1 month New WHT provisions applicable w.e.f. FY (Not applicable to FY )

33 33 Other interesting issues

34 34 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) Cochin Refineries Ltd. 222 ITR 354 (Ker) Hyder Consulting Ltd. 236 ITR 640 (AAR) Reimbursement of cost allocation Reimbursement of expenses along with FTS

35 35 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

36 36 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) Airport Authority of India 304 ITR 216 (AAR) IMT Labs India (P) Ltd. 287 ITR 450 (AAR) Not RoyaltyRoyalty

37 37 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) 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) Not RoyaltyRoyalty

38 38 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

39 39 Refund of Tax Withheld Under Section 195

40 40 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

41 41 …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

42 42 Consequences of non compliance

43 43 Consequences of non compliance… Applicable section Nature of defaultConsequence 40(a)Withholding tax not deducted or not deposited within prescribed time Disallowance of expenses in computation of taxable income of payer; deduction in year of 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 1% per month or part of he month 221Tax withheld not paidPenalty, not exceeding the amount of tax not paid 271CTax not withheld or short withheld Penalty, not exceeding the amount of tax not withheld

44 44 …Consequences of non compliance Applicable section Nature of defaultConsequence 272ADelay in issuing withholding tax certificate/ filing withholding tax statement Rs 100 per day for period of default, subject to maximum of the tax withheld 276BWithholding Tax not deposited within prescribed time Prosecution by way of imprisonment for a term between 3 months to 7 years and with fine Non compliance results in severe consequences

45 45 Key takeaways

46 46 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

47 47 Open house Questions…

48 48 Contact details Sanjiv Chaudhary KPMG India Tel (Direct): Cell: Nidhi Maheshwari Tel (Direct): +91 (124) Cell:


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