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Payments to non-residents Obligations, compliances and issues – Section 195 29 November 2012 Presentation at ICAI – Hyderabad Branch.

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Presentation on theme: "Payments to non-residents Obligations, compliances and issues – Section 195 29 November 2012 Presentation at ICAI – Hyderabad Branch."— Presentation transcript:

1 Payments to non-residents Obligations, compliances and issues – Section November 2012 Presentation at ICAI – Hyderabad Branch

2 Obligations, compliances and issues u/s 195 of the Act Page 2 Introduction “195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest, not being interest referred to in section 194LB or section 194LC or any other sum chargeable under the provisions of this Act, not being income chargeable under the head "Salaries" shall, 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”

3 Obligations, compliances and issues u/s 195 of the Act Page 3 ► Section 195 of the Act deals with deduction of tax at source on payments made to non-residents and foreign companies ► Objective of Section 195 is to ensure tax collection at source, where a non- resident’s income is taxable in India ► No threshold limit prescribed – tax deductible even on a negligible amount of credit/ payment ► Does not apply to salaries, dividends, interest on infrastructure debt fund and interest paid by Indian company on loan borrowed by it under a agreement approved by the Government of India ► Deductor has option to approach the Assessing Officer (‘AO’) to determine the quantum of income on which tax is deductible ► Benefit of tax treaty would be available to the non-resident Introduction

4 Obligations

5 Obligations, compliances and issues u/s 195 of the Act Page 5 * Subject to Section 206AA of the Act ► Who is responsible ? Any person responsible for making payment to a non-resident (including individuals and HUF payers) ► What is the nature of payment ? Any sum chargeable to tax under the Act ► When to deduct ? At the time of payment or credit, whichever is earlier ► What rate to apply ? Lower of the two rates: ► Rates in force prescribed by the Finance Act; or ► Rates under tax treaty* Obligations – Applicability

6 Obligations, compliances and issues u/s 195 of the Act Page 6 Obligation to withhold the tax will be applied regardless of absence of any territorial nexus. ► The scope of withholding tax obligation on payment of income to non-resident expressly 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 ► Effective 1 July 2012, payment to non-residents by specified persons or in specified cases (to be notified) to require an application to be made to the Tax Officer for determination of withholding tax, irrespective of whether such payment is taxable in India or not – Section 195(7). Obligations – Applicability (contd…) Amendment in Section 195 – Finance Bill 2012

7 Obligations, compliances and issues u/s 195 of the Act Page 7 Obligations - Sum chargeable to tax under the Act ► Payments to non-residents (other than salaries), which are chargeable to tax under the Act, are covered u/s 195 of the Act ► Chargeability under the Act – Scope of total income: Sec 5 & Sec 9 ► Received or deemed to be received in India ► Accrue or arises or deemed to accrue or arise in India ► Income deemed to accrue or arise – Section 9 ► Salary Income [Section 9(1)(ii)] ► Interest Income [Section 9(1)(v)] ► Royalty Income [Section 9(1)(vi)] ► Fees for technical services [Section 9(1)(vii)] ► Income through or from any business connection in India or from any property in India or from any asset or source of income from India [Section 9(1)(i)]

8 Obligations, compliances and issues u/s 195 of the Act Page 8 Obligations - Sum chargeable to tax under the Treaty (contd…) ► Chargeability under tax treaty: ► Article 7 (Business profits) ► Article 11 (Interest) ► Article 12 (Royalty and FTS) ► Article 13 (Capital gains) ► Article 22 (Other income) ► The Finance Act, 2012, introduced sub-section 4 to section 90, mandating non resident taxpayers to furnish TRC from the country of residence containing prescribed particulars to avail the benefits of tax treaties. ► In this regard, CBDT, on 17 September 2012 notified Rule 21AB in the Rules providing the details that are required to be included in TRC submitted by a non-resident

9 Obligations, compliances and issues u/s 195 of the Act Page 9 Obligations – Facilitation ► Option to determine charaterisation of income and quantum of income chargeable to tax in India : ► Authority of Advance Rulings (‘AAR’) ► Application u/s 195(2) ► Application u/s 197

10 Obligations, compliances and issues u/s 195 of the Act Page 10 ► Section 206AA to apply to any person entitled to receive any sum on which tax is deductible under the Act ► Deductee to furnish his PAN to the deductor ► On failure in providing PAN, the deductor is required to withhold taxes at higher of the following rates: ► Rates provided under relevant provisions of the Act or ► Rate or rates in force (i.e. rate provided under the Act or the tax treaty) ► Rate of 20 percent ► Applicable with effect from 1 April 2010 ► The above provision will be applicable to all payments made to residents/ non-residents on which tax is required to be deducted under the Act ► Further, the certificate for deduction at lower rate or nil rate of deduction shall not be given by the AO unless the application bears PAN of the applicant/ deductee Obligations - 206AA implications

11 Obligations, compliances and issues u/s 195 of the Act Page 11 ► For the purpose of deduction of tax, income to grossed-up (proportionately increased) when tax chargeable on that particular income is to be borne by the payer of the income ► The proportionate increase in the income should be such an amount as would, after deduction of tax thereon at the rates in force be equal to the net amount payable under such agreement or arrangement. ► Section 195A not applicable to: ► income referred to in Section 192(1A) ► profits when computed under presumptive sections – Section 44B, Section 44BB, Section 44BBA and Section 44BBB of the Act [ONGC, 264 ITR 340 (Uttaranchal)] Obligations – Section 195A – Grossing-up

12 Compliances

13 Obligations, compliances and issues u/s 195 of the Act Page 13 ► Furnishing of Information – Rule 37BB ► Furnishing of information to the tax department – Form 15CA ► To obtain CA certificate before making payment to non-resident – Form 15CB ► Circular no. 4/2009 dated providing the manner for submitting and processing the details of payment ► Filing of e-TDS returns in Form 27Q ► Documentation to be maintained – TRC, PE declaration, documentation to be maintained for assessment Compliances – Furnishing of information

14 Obligations, compliances and issues u/s 195 of the Act Page 14 ► Circular No 10/ 2002 dated 9 Oct – Authorizes remittance of money on the basis of a CA certificate ► Circular requires an undertaking in the prescribed format from the assessee (payee) and the CA certificate to be issued to Banker ► Assessee not absolved from penalty/ prosecution if found that tax deducted was lower than what was required ► This procedure does not apply where a general/ specific order has been passed by the AO ► Whether a particular payment made to a non resident is chargeable to tax in India or not, the payer may approach an Accountant as opposed to approaching the Revenue Authorities - amounts to sufficient compliance of law [Millenium Infocom Technologies Ltd, 21 SOT 152 (Del. ITAT); Prasad Productions, ITA No. 663/Mds/2003 (Chennai ITAT)] Compliances – Chartered Accountants’ Certificate

15 Obligations, compliances and issues u/s 195 of the Act Page 15 ► Section 195(2) “195. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.” ► Payer applies to determine appropriate portion of sum chargeable to tax and liable for withholding ► ‘NIL’ withholding application are not maintainable ► Section 195(3) ► Non-resident’s application to AO for appropriate determination ► Section 197 ► Payee’s application to AO for appropriate determination, lower or Nil withholding order Compliances – Determination of tax quantum

16 Obligations, compliances and issues u/s 195 of the Act Page 16 ► Payee satisfying certain conditions can make an application for receipt of any amount without deduction of tax at source ► Prescribed conditions include (Rule 29B): ► The non-resident has been regularly assessed to Income-tax ► Not in default or deemed to be in default in respect of tax, interest, fine or any sum payable under the Act ► Has not been subjected to penalty for concealment of particulars of income. ► Where not a banking company: ► Has been carrying on business or profession in India continuously for atleast 5 years ► Value of fixed assets in India exceeds Rs. 50 Lakhs ► Certificate issued by the AO valid for the financial year mentioned therein Compliances – Determination of tax quantum

17 Issues

18 Obligations, compliances and issues u/s 195 of the Act Page 18 ► The provisions of the Act has extra-territorial operation in respect of the subject-matters and the subjects which are permissible under Article 245 of the Constitution and the provisions are enforceable within the area where the Act extends through the machinery provided under it ► Machinery provisions are not independent of charging provisions ► The Act is an integrated code in which one cannot segregate the computation machinery from the collection and recovery machinery [Eli Lilly and Co. (India) P. Ltd (2009) 312 ITR 225 (SC)] Issues – Extra territorial operation

19 Obligations, compliances and issues u/s 195 of the Act Page 19 ► ‘Any sum chargeable to tax’ includes income or profit element embedded in gross sum payable [Transmission Corporation of A. P. Ltd., 239 ITR 587 (SC)] ► Question whether payment is wholly in the nature of income or not is irrelevant – important point is the sum to be chargeable to tax in India [Headstart Business Solutions (P) Ltd., 285 ITR 530 (AAR)] ► Tax is required to be withheld only where the payments are chargeable to tax in India [GE India Technology Center – Civil Appeal No ] Issues –Chargeability

20 Obligations, compliances and issues u/s 195 of the Act Page 20 ► No income accrued in India when the payment is made by one non-resident to other non-resident situated abroad resulting in an off shore deal [Vodafone International Holdings B.V. vs UOI and Anr., 341 ITR 1] ► Payment of interest by Branch to Head Office ► CBDT Circular No 740 dated 17 April 1996 – Branch of a foreign company in India is a separate entity and liable to deduction of tax at source from payments of interest to Head Office or any other branch outside India ► CBDT Circular No 649 dated 31 March 1993 – Technical fees received by head office from its branch in India shall be taxable in accordance with Section 115A read with section 44D of the Act ► ABN Amro Bank, 97 ITD 89 (Kol. ITAT) – Branch of a foreign bank making payment of interest to head office is not liable to deduction of tax at source Issues - Applicability

21 Obligations, compliances and issues u/s 195 of the Act Page 21 ► Withholding tax applicable if payment satisfies the definition of ‘Royalty’ under the Act or the treaty ► Instances where payment not held as ‘Royalty’ ► Payment for publicly available information, not leading to any imparting of skill or expertise [HEG Ltd., 263 ITR 230 (MP)] ► Payment made for standardized products or services accessible to any subscriber willing to pay - not taxable as ‘Royalty’ [Dunn & Bradstreet Espana, S.A. 272 ITR 99 (AAR)] ► Outright sale of know-how [Davy Ashmore India Ltd., 190 ITR 626 (Cal.) and Pro-quip, 255 ITR 354 (AAR)] ► Payment held as ‘Royalty’ ► Subscription fees paid for accessing information from a website is ‘Royalty’ under the Act and the India-UK treaty [ONGC Videsh Ltd ITAT Delhi] Issues – Royalties

22 Obligations, compliances and issues u/s 195 of the Act Page 22 ► Payment for supply of computer software with hardware not taxable as royalty – The definition of royalty only amended in the Act but not treaties [Nokia Networks OY (Delhi HC) TS-700-HC-2012(DEL)] ► Software payments ► Acquisition of software inextricably linked with hardware - [Lucent Technologies Hindustan Ltd., 82 TTJ 163 (Bang. ITAT)] ► Payment for use of copyrighted article as against use of copyright ► Royalty and FTS income taxable on receipt basis and not when the payee is credited in the books of accounts of the payer – [Siemens Aktiengesellschaft (Bombay HC) TS-795-HC-2012(BOM)] Issues – Royalties

23 Obligations, compliances and issues u/s 195 of the Act Page 23 ► Fees for Technical Services ► Tax deductible if payment satisfies the definition of ‘Fees for technical services’ (‘FTS’) ► Instances where payment not held as FTS ► Treaties having ‘make available’ clause - Restricted definition in tax treaties with USA, UK, Singapore ► Services rendered for earning a source of income outside India or utilized in a business outside India [Aktiengesellschaft Kuhnle Kopp and Kausch, 262 ITR 513 (Mad)] Issues – Fees for Technical Services

24 Obligations, compliances and issues u/s 195 of the Act Page 24 ► Provision of transponder capacity by a satellite company to a broadcaster amounts to providing technical services [Asia Satellite Telecommunications Ltd., 319 ITR 269] ► Provision of bandwidth facility for transmission of data and software does not result into technical services ► Wipro Ltd., [80 TTJ 191 (Bang.)] ► Software Technology Parks of India, [3 SOT 529 Bang. ITAT] ► Estel Communications Pvt. Ltd. [318 ITR 185 (Del) (HC)] Issues – Fees for Technical Services

25 Obligations, compliances and issues u/s 195 of the Act Page 25 ► ‘Reimbursement’ not defined in the Act - divergent views expressed by Tribunals and Courts ► Pure reimbursement should not constitute a reward or a compensation paid for a service rendered and therefore not to be construed as ‘fee’ ► Reimbursement of incidental expenses in addition to payments of FTS: ► Reimbursement considered not taxable: ► Tata Engineering and Locomotive Co. Ltd., [245 ITR 823 (Bom)] ► Industrial Engg. Projects (P) Ltd., [202 ITR 1014 (Del)] ► Clifford Chance, United Kingdom, [82 ITD 106 (Mum. ITAT)] ► Bombay Tribunal in the case of Arthur Andersen (unreported) ► Reimbursement considered taxable: ► Cochin Refineries Ltd., [222 ITR 354 (Ker)] ► SRK Consulting Engineers & Scientists, [230 ITR 206 (AAR)] ► Hindalco Industries Ltd., [278 ITR (AT) 125 (Mum. ITAT)] Issues – Reimbursement of expenses

26 Obligations, compliances and issues u/s 195 of the Act Page 26 ► Cases on reimbursement of cost of services of a third party engaged by the non-resident ► Reimbursement considered taxable: ► Wallace Pharmaceuticals P. Ltd., [278 ITR 97 (AAR)] ► Cases on reimbursement of allocated cost (similar to Cost Sharing) ► Reimbursement considered not taxable: ► Dunlop Rubber Co. Ltd., [142 ITR 493 (Cal)] ► ABB Limited – AAR ► Invensys Systems Systems Inc., In re [317 ITR 438] ► Reimbursement considered as provision of service and hence taxable: ► Danfoss Industries (India) Ltd., [268 ITR 1 (AAR)] (where the reimbursement was not established as pure reimbursement while allocation happens) Issues – Reimbursement of expenses

27 Obligations, compliances and issues u/s 195 of the Act Page 27 ► Cases on reimbursement to non resident of salaries of the foreign technicians seconded to Indian co's operations as employees ► Reimbursement considered not taxable: ► HCL Infosystems Ltd., [274 ITR 261 (Del)] ► BHEL, [252 ITR 218 (Del)] Issues – Reimbursement of expenses

28 Obligations, compliances and issues u/s 195 of the Act Page 28 ► Section 40(a)(i) - Any sum chargeable to tax payable outside India or payable in India to a non-resident is deductible in computing income under the heads ‘business or profession’ or ‘other sources’ only when tax is deducted at source and paid ► Provisions applicable not only to interest or royalty or fees for technical services but are applicable to any sum chargeable to tax in the hands of non-residents [Jay Container Services, Unreported (Mum. ITAT) - ITA No. 4769/Mum/2005 ] ► Failure to deduct tax or after deducting failure to pay tax: ► Deemed to be an assessee in default in respect of the tax ► Simple interest p.m. u/s 201(1A) – on non deduction ► Simple interest p.m. u/s 201(1A) – on non payment after deducting the tax at source ► Penalty leviable u/s 221/ Section 271C ► Prosecution u/s 276B ► Onus on the CA issuing the Certificate of remittance for justification and held responsible for his professional judgment Consequences of non-deduction/ short deduction

29 Thank you


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