Presentation on theme: "Tax deduction on remittances abroad (Section 195 and others) Page 1 Tax deduction on remittances abroad (Section 195 and others) 27 th August 2010 by Dhinal."— Presentation transcript:
Tax deduction on remittances abroad (Section 195 and others) Page 1 Tax deduction on remittances abroad (Section 195 and others) 27 th August 2010 by Dhinal Shah, Chartered Accountant
Section Payments to Non-residents
Tax deduction on remittances abroad (Section 195 and others) Page 3 Presentation Outline Payments to Non-residents – Section 195 Overview Certain recent controversies
Tax deduction on remittances abroad (Section 195 and others) Page 4 Withholding Tax Why TDS ? Ensure regular flow of income for the Revenue Collect tax in advance Minimizes cases of tax evasion or avoidance Minimizes incidence of interest costs for the recipient Place responsibility on the persons other than payees Circular of RBI for certificate of C.A. for all trade payments. Overview Pay as you earn scheme Deduction at the time of payment or credit whichever earlier Deposit within one week from end of month of deduction Income credited/ paid on last day of financial year, tax withheld deposited within period of two months from last day Default attracts Disallowance of expenses Penal Interest Penalty Prosecution 4
Tax deduction on remittances abroad (Section 195 and others) Page 5 Section 195 – Overview SectionProvisions 195(1)Scope and conditions for applicability 195(2)Application by the Payer for lower or Nil withholding 195(3)Application by the Payee for lower or Nil withholding 195(4)Validity of certificate issued by the AO u/s 195(3) 195(5)CBDT empowered to make Rules in respect of sec 195(3) 195(6)CBDT empowered to provide forms in which information to be furnished - Rule
Tax deduction on remittances abroad (Section 195 and others) Page 6 Section 195 – scope and conditions for applicability Any person responsible for paying to a non-resident, any interest or any other sum chargeable under the provisions of this Act (other than Salary) shall, at the time of credit of such income to the account of the payee or at the time of payment, whichever is earlier, deduct income-tax thereon at the rates in force Proviso 1: In case of interest payable by Government or public sector bank or public financial institution, deduction of tax only on payment basis Proviso 2: No deduction in respect of dividend under section 115O Explanation: Credit to Interest payable account or Suspense account deemed as credit of such income to payees account
Tax deduction on remittances abroad (Section 195 and others) Page 7 Overview of non-resident WHT provisions WHT provision (Sec 195) applicable on: any sums payable by any person to a non-resident (NR) which is chargeable to tax in India at rates in force Arises at the time of credit or payment, whichever is earlier Certificate for tax authority for appropriate rate or appropriate amount of WHT Possible to seek advance ruling Procedural rules require the payer to obtain an Accountants certification before making remittance
Tax deduction on remittances abroad (Section 195 and others) Page 8 Overview of non-resident WHT provisions Final tax liability (where tax liability is on gross amount) or could be a collection on account of the final tax liability Tentative in nature, subject to determination of final tax liability Recipient can file tax return and claim refund for excess WHT Typical payments subject to WHT Any sums which are chargeable to tax in India Interest Royalty Service Fees (managerial, technical or consultancy services) Capital gains Business profits attributable to a PE/ business connection in India Any other income accruing or arising in India
Tax deduction on remittances abroad (Section 195 and others) Page 9 Overview of non-resident WHT provisions Consequences of WHT default: Payer treated as assessee in default (AID) under Section 201 Recovery of taxes not withheld from payer Payer subject to interest and possibly penalties Expense disallowance Net of taxes clauses in contracts Common but may be expensive Section 195A requires gross up of taxes borne by payer
Tax deduction on remittances abroad (Section 195 and others) Page 10 Comparative analysis of 195(2), 195(3) and 197 Particulars195(2)195(3)197 Application byPayerPayee under Rule 29B Payee PurposeTo determine the appropriate proportion of sum chargeable No deduction of taxNo deduction/ deduction at lower rate Whether appealable? A revision petition under section 264 would lie against such orders Appeal u/s 248 denying liability to deduct tax after payment of tax No appeal
Tax deduction on remittances abroad (Section 195 and others) Page 11 Alternate option – (I) CA certificate Form 15CA (format of undertaking) and Form 15CB (CA Certificate) notified Circular also issued by CBDT (Circular No 4 dated June 29, 2009) Points to be factored Examination of PE and related issues Beneficial ownership/ Tax residency evaluation Declaration that payer continues to be liable for taxes, interest and penalty Declaration that payer will submit all requisite documents
Tax deduction on remittances abroad (Section 195 and others) Page 12 Documentation to be maintained Agreement and Invoices Tax Residency Certificate Certificate from payee for – no PE, tax residency, beneficial owner, treaty entitlement, etc and Indemnification from payee Payment details Correspondences Technical Advice – prove bonafides Proof of services being rendered in case of Group Company transactions s etc regarding pricing in case of Group Company transactions
Tax deduction on remittances abroad (Section 195 and others) Page 13 Alternate option – (II) Advance Ruling under Chapter XIX-B Mechanism for upfront determination of taxability of transactions undertaken by/ with non-residents Ruling by quasi-judicial authority on reference by payer/payee Ruling binding on applicant as well as the tax authorities unless change in facts/ law Usual 4-tier appeal mechanism not available/ applicable Upfront determination of the taxability; certainty of tax treatment even at lower levels of income tax authorities Fast track mechanism; protracted litigation on a year on year basis can be avoided
Certain Recent Controversies
Issue 1- Is it obligatory to approach AO for non-withholding of taxes?
Tax deduction on remittances abroad (Section 195 and others) Page 16 Scope of Section 195 (1) Any person responsible for paying to a non-resident, any sum chargeable under the provisions of this Act shall deduct income-tax thereon at the rates in force. (2) Where the person responsible for paying any such sum chargeable under this Act 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, 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.
Tax deduction on remittances abroad (Section 195 and others) Page 17 Scope of section 195(1) The provisions of Section 195 of the Act require withholding of tax on any…sum chargeable under the provisions of this Act". A plain reading of the provision would suggest that in a case where there is no sum chargeable to tax in India, the payer is not liable to withhold taxes on the payments made. Hence, where a transaction is not taxable in India, either on account of an exemption in the Act or on account of provisions in the relevant tax treaty, Section 195 should, as such have no application.
Tax deduction on remittances abroad (Section 195 and others) Page 18 Karnataka HC Ruling in the case of Samsung & Others  320 ITR 209 (Kar HC) Background Tax Authority on appeal before Karnataka High Court (KHC) against order of Bangalore Income-tax Appellate Tribunal (ITAT) in a case involving several taxpayers Principal issue before HC - whether payment for purchase of computer software should be subject to royalty WHT? Tax Authority argued that payment is in the nature of royalty, subject to WHT The first appellate authority ruled in favor of the Tax Authority while the ITAT ruled in favor of the Taxpayer
Tax deduction on remittances abroad (Section 195 and others) Page 19 Samsung Ruling KHC decision Taxes have to be withheld on any payment made to a NR which is in the nature of income Reliance placed on certain observations of Supreme Court (SC) decision in Transmission Corporation  239 ITR 587 (SC) As the Taxpayers had not obtained certificate for lower WHT from Tax Authority contention that there is no liability to WHT cannot be sustained Charging provisions under the ITL are independent of the provisions governing withholding of taxes WHT provisions seek to withhold a tentative amount as taxes before determination of actual tax liability of the NR
Tax deduction on remittances abroad (Section 195 and others) Page 20 Samsung Ruling KHC decision (Contd) Tax Authority not required to assess the income of the NR for the purpose of WHT when an application is filed For failure to withhold taxes, Tax Authority can initiate proceedings for recovery of taxes and interest NR can contest its tax liability in India by filing a tax return under the ITL Principal question of characterization of payment for purchase of computer software not addressed
Tax deduction on remittances abroad (Section 195 and others) Page 21 Samsung Ruling Implications Payments made to NR for all commercial transactions subject matter of WHT, irrespective of taxability Taxpayers would need to follow the process of seeking certificate under Section 195(2)/ 197 in each and every case Significant increase in number of such applications Adverse implications on international trade in case of delay/ reluctance in processing certificates Indiscriminate application of ruling can result in denial of deduction for most payments to NR Possibility of tax authorities seeking to re-open past matters Current status of litigation - The SC has heard the matter on August 19, 2010 and the order has been reserved
Tax deduction on remittances abroad (Section 195 and others) Page 22 Van Oord & Prasad Productions rulings Van Oord Payer obligated to withhold tax only if payment is chargeable to tax Delhi HC expressed is disagreement with some of the observations of Karantaka HC Certain observations in the concluding paras – disturbing? Prasad Productions – comprehensive and well reasoned ruling If assessee under bonafide belief that income is not chargeable, then he is not under statutory obligation to withhold tax Various situations summarised by Prasad Productions in the ensuing slide
Tax deduction on remittances abroad (Section 195 and others) Page 23 Is it obligatory to approach AO for non-withholding of taxes? – Prasad Production summarised Various situations arising under Section 195 Implications under Section 195 How interest of Revenue protected Bonafide belief that no part of payment has any portion chargeable to tax Section 195 inapplicableRevenue has recourse to Section 201 proceedings Payer believes that whole of payment is chargeable to tax Deduct tax under Section 195(1) Tax already deducted Payer believes only part of payment is chargeable to tax Application under Section 195(2) AO to determine the appropriate rate Payer believes only part of payment is chargeable to tax and does not make an application under Section 195(2) Deduct tax from entire payment Tax already deducted, following Transmission Corporation (supra) Payer believes that entire or part of the payment is chargeable to tax and fails to deduct tax Face all consequences under the Act Revenue has recourse to Section 201 proceedings, Section 40(a)(i) disallowance Payer believes that he has to deduct tax and expresses this duty to payee Payee to apply under Section 195(3) to receive payment without tax deduction AO to determine the appropriate rate Under sl.no. (f), if payee fails to obtain certificate under Section 195(3) Payer to withhold tax based on his belief Tax already deducted
Tax deduction on remittances abroad (Section 195 and others) Page 24 Way forward WHT on NR payments has been an area of focus KHC ruling likely to strengthen enforcement efforts of Tax Authorities – though ratio diluted by decision of Van Oord / Prasad Productions Consider reviewing current WHT practices and develop strategy for future payments. Attribution restricted to amount reasonably attributable to operations in India. [Refer Explanation (a) to Section 9] Undertake a risk assessment for past transactions Evaluate options for mitigating risks (e.g. Advance Ruling, Sec 195/ 197 certificates) where appropriate Assess legal remedies that may be available in case of adverse action by Tax Authorities Need to monitor future judicial and legislative developments
Tax deduction on remittances abroad (Section 195 and others) Page 26 Withdrawal of Circular No. 23 : Background Circular 23 has now been withdrawn by the CBDT vide Circular No.7 dated October 22, 2009 with immediate effect The above Circular 23 has been withdrawn only from 22 October 2009 and would not have any impact in earlier years [Mumbai ITAT in the case of Siemens (2010-TIOL-102-ITAT-MUM)] 2 other circulars also withdrawn along with Circular 23 Circular No. 163 dated May 29, 1975 Activity restricted to purchase of goods through an agent for export out of India – No tax liability in India for non-resident [clarified the scope of Para 3(7) of Circular 23] Circular No. 786 dated 7 February 2000 Services rendered by the agent outside India - No taxability in India of commission paid to non-resident agent on export of goods from India (Reiterated the clarification provided in Circular 23, in response to CAG objection) Reason for withdrawal as provided by the CBDT The interpretation not in accordance with the provisions of the Act / intention behind the circulars
Tax deduction on remittances abroad (Section 195 and others) Page 27 Circular 23 – Key clarifications SituationsClarifications provided by Circular 23 Sale of goods by a non - resident from outside India No tax liability on non-resident where the transactions are on principal-to-principal basis Sale of goods by a non - resident from outside India to Indian subsidiary No tax liability on non-resident where the transactions are on principal-to-principal basis & at arms length Business connection arising out of parent – subsidiary relationship or the fact that parent might exercise control over the affairs of the subsidiary is immaterial Sale of plant and machinery by a non-resident on installment basis No tax liability if the transaction is on a principal to principal basis and no other business connection exists between the non-resident supplier and the Indian buyer
Tax deduction on remittances abroad (Section 195 and others) Page 28 Circular 23 - Key clarifications SituationsClarifications provided by Circular 23 Foreign agents receiving commission from Indian exporters No tax liability if foreign agent operates in its own country and receives commission outside India from an Indian exporter Circular No. 786 further clarified that there should be no withholding tax on such commission Non-resident purchasing goods in India No tax liability on income attributable to operations confined to purchase of goods in India for export, even if the non-resident has an office or agency in India Circular 163 further clarified that mere existence of an agent in India, will not be sufficient to charge the non-resident to tax, if the sole function of the agent is to purchase for export.
Issue 3 – Fees for Technical services – Amendment in section 9(1)(vii)
Tax deduction on remittances abroad (Section 195 and others) Page 30 Section 9(1)(vii) 9(1) The following incomes shall be deemed to accrue or arise in India …………………………….. (vii) Income by way of fees for technical services payable by: The Government; or A person who is a resident, except, where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or A person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India
Tax deduction on remittances abroad (Section 195 and others) Page 31 …Section 9(1)(vii) FTS deemed to accrue or arise in India if payable by: The Government Resident of India except for business / source outside India Non resident for business / source in India Excludes consideration for construction, assembly, mining or like project
Tax deduction on remittances abroad (Section 195 and others) Page 32 Analysis – Pre amendment Landmark SC ruling in Ishikawajima Harima Heavy Industries (288 ITR 408): Taxation rights to India only if twin conditions met: Rendition of services in India Utilization of services in India. Live Link and Territorial nexus essential. As services not rendered in India, NOT TAXABLE
Tax deduction on remittances abroad (Section 195 and others) Page 33 Analysis – Post amendment Explanation to section 9(1) inserted with retrospective effect Source Rule widened for FTS, Royalty, Interest Deemed accrual whether or not: NR has a residence / place of business / business connection in India; NR has rendered services in India Clear intent to overrule following precedents Ishikawajimas Ruling (SC) (288 ITR 408) Jindal Thermal Power Co Ltd (Kar) (225 CTR 220) Clifford Chance vs DCIT (Bom) (221 CTR 1)
Tax deduction on remittances abroad (Section 195 and others) Page 34 Analysis - Ashapura Minechem Ltd - Impact Law now states that utilization of services in India is enough to attract its taxability in India Territorial nexus for determining tax liability is relevant only for a territorial tax system in which taxability is confined to the income earned within its borders Apart from tax havens, only prominent countries following territorial tax systems are France, Belgium, Hong Kong and Netherlands In other major tax systems, source and residence rules are concurrently followed
Issue 4 – Supply of Software
Tax deduction on remittances abroad (Section 195 and others) Page 36 Supply of software as part of hardware Lucent Technologies (ITAT Bangalore): Facts Assessee is a limited company engaged in the business of manufacture and sale of electronic switching systems required for telecommunication industry. During the relevant financial years, assessee imported certain hardware and software from its non- resident group companies without deduction of tax at source. Consequently, assessee was treated as assessee in default for failure to comply with the provisions of section 195 of the Act Decision Acquisition of software was inextricably linked to acquisition of hardware and one cannot function without the other - thus this is purchase of an integrated equipment Assessee had purchased a copyrighted article and not copyright of the rights; therefore, it is wrong on part of Revenue to treat purchase of software as an independent transaction, therefore payments cannot be regarded as royalty Therefore no TDS under section 195 of the Act is required to be deducted 36
Tax deduction on remittances abroad (Section 195 and others) Page 37 Sale of shrinked wrapped software Sonata Information Tech Ltd. – 103 ITD 324 (Bangalore) Facts: Payments made for purchase of software for distribution. Stand of Revenue Authorities - Sale of shrinked wrapped software is Royalty Computer software is licensed and not sold Computer programme is a secret process and consideration for the same is Royalty Software could also be considered as information concerning scientific experience the consideration of which would be in the nature of Royalty Software can also be treated as Invention the consideration of which would be in the nature of Royalty 37
Tax deduction on remittances abroad (Section 195 and others) Page 38 Sale of shrinked wrapped software Revenues from distribution of shrink wrapped software are business profits and cannot be considered as royalty under the Act or DTAA for reasons as under End user of software does not get any license to duplicate software and there is no transfer of intellectual property rights in the software to the end users. The original knowledge in the software (used in developing the software) remains protected and is not transferred to the end users. Sale of computer software cannot be considered as transfer of copyright in secret formula, process, information containing scientific experience as in this case the end user does not get access to knowledge to develop or manufacture the software (OECD Commentaries relied). Payments for acquisition of software products and not for acquisition of IPR in the products. Section 14 of Copy Right Act Exclusive rights in a work i.e. reproduction rights, distribution rights, rental or landing right – not transferred. The property contained in the copy right material and the property contain in the copy right to software are two different rights 38
Tax deduction on remittances abroad (Section 195 and others) Page 39 Royalty & FTS: Sec. 9(1)(vi) & Section 9(1)(vii): Favorable : ESamsung Electronics (94 ITD 91 (Banglore)) ELucent Technologies (82 TTJ 163) ETCS (271 ITR 401) ESonata Information Technologies (103 ITD 324 (Bang)) EMotorola Inc (95 ITD 269 (Delhi – SB)) EGeoQuest Systems B.V. (A.A.R. No. 774 of 2008) Against : EHead Start (285 ITR 530 (AAR)) EIMT Labs (287 ITR 450 (AAR)) EAir Port Authority of India – 218 CTR 321 (AAR) ECIT and Anr. vs Sonata Information Technology Ltd. (232 CTR 20) (Kar) Payments to agent of shipping Company : ECircular 723 dated 19/09/
Issue 5 – Fees for Technical services – Make available concept
Tax deduction on remittances abroad (Section 195 and others) Page 41 Fees for Technical services – Make available concept Broadly, most of tax treaties signed by India deal with the FTS claise in following mannder : No FTS clause in the tax treaty eg. India – Mauritius, India – UAE FTS clause in line with the Indian domestic law – comprehensive to tax ny managerial, technical or consultancy service FTS clause with make available concept
Tax deduction on remittances abroad (Section 195 and others) Page 42 Whether services involve technical knowledge, etc? Payment for services Whether technical or consultancy services? Yes No Whether make available? Whether development & transfer of technical plan or design Yes No Taxable as FIS Not taxable as FIS Yes No Article 12(4)(b) applies Not taxable as FIS Make Available under India-US DTAA Concept of make available… Yes No Not taxable as FIS
Issue 6 – Reimbursement of expenses
Tax deduction on remittances abroad (Section 195 and others) Page 44 Reimbursement of expenses Reimbursement of cost of services of a third party engaged by the non-resident Wallace Pharmaceuticals P. Ltd. (278 ITR 97) (AAR) – TDS required Reimbursement of allocated cost (ie costs-sharing arrangements) No TDS Dunlop Rubber Co (142 ITR 493) (Cal) TDS required Danfoss Industries (India) Ltd (268 ITR 1) (AAR) Payments for services rendered at cost Timkin India Ltd (273 ITR 67) (AAR) – TDS required
Tax deduction on remittances abroad (Section 195 and others) Page 45 Reimbursement of expenses Reimbursement of incidental expenses in addition to payments of FTS/ Royalty No TDS Siemens (310 ITR 320) (Bom) Krupp Udhe Gmbh (38 DTR 251) Telco Ltd (245 ITR 823) (Bom) Industrial Engg. Project (202 ITR 1014) (Del HC) Clifford Chance (82 ITD 106) (Mum) Mahindra & Mahindra Ltd (1 SOT 896) (Mum) TDS required Cochin Refineries Ltd (222 ITR 354) (Ker) SRK Consulting (230 ITR 206) (AAR) Hindalco Industries Ltd [278 ITR (AT) 125] (Mum)
Issue 7 – Section 206AA – Draconian?
Tax deduction on remittances abroad (Section 195 and others) Page 47 Provision in brief Section 206AA overrides all the provisions of the Act Recipient who is entitled to receive any sum or income or amount which is subject to TDS is expected to furnish his PAN to the payer. Non-furnishing of PAN by the recipient requires payer to deduct tax at higher of the following rates: Rate specified in the relevant provisions of the Act Rate or rates in force as defined in Section 2(37A) 20% PAN required for declaration in form 15G/H and certificate u/s 197 If PAN is invalid or false - Higher of above rates would apply. Payer and recipient will need to indicate PAN of the recipient in all correspondence, bills, vouchers and other documents exchanged between them.
Tax deduction on remittances abroad (Section 195 and others) Page 48 Implications For Payer Failure to withhold tax at 20% - Payer may be treated as Assessee in default (AID) under section 201. Disallowance under section 40(a)(i)/(ia). Problem of recovering excess TDS paid from the recipient. For Recipient TDS at a higher rate of 20% is expected to act as a deterrent for the recipient. No specific implication provided. If recipient has an obligation to obtain PAN under section 139A, failure to do so would attract penalty under section 272B r/w section 139A(5A).
Tax deduction on remittances abroad (Section 195 and others) Page 49 Implications for non-resident NR is covered even if the NR is not otherwise obliged to apply for and obtain PAN under the Act. Application of tax treaty rates in preference to rate of 20% ? Grossing up of TDS at the higher rate of 20% results in increased cost for the payer Whether 20% rate to be increased by surcharge and education cess? Whether higher taxes under Section 206AA creditable in overseas country
Tax deduction on remittances abroad (Section 195 and others) Page 50 Thank you