1. Section 195 – Implications Form & Certification:15CA & 15CB
Northern India Regional Council of ICAI
Section 195 – Implications Form & Certification:15CA & 15CB
Aseem Chawla
Founder Partner, MPC Legal
New Delhi
April 16, 2014
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2. Contents
Background
Sum Chargeable to Tax under the Income Tax Act, 1961 (‘Act’)
Section 195 of the Act : Overview
- Sum chargeable to Tax
Procedural Aspects
New Compliance Procedures: Amended Remittance Compliances
Procedural Aspects: Basic Mechanism of TDS
Anatomy of Rule 37BB
Form 15CA & 15CB: Update & Recent Developments
Form 15CA & 15CB: A comparison
Form 15CA & 15CB: Procedure
Form 15CA & 15CB:Certain Situations
Form 15CA & 15CB: Key Considerations
Tax Residency Certificate: Prerequisite For Claiming treaty benefits
Non Compliance: Implications
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3. Section 195: Overview Sub-Section Description 195(1)
Add other Sub-sections
Section 195: Overview
Sub-Section
Description
195(1)
Scope and conditions for applicability
195(2)
Application by the “Payer” for lower or Nil withholding to the Tax Authorities
195(3)
Application by the specified “Payee” for lower or Nil withholding to the Tax Authorities
195(4)
Validity of certificate issued by the Tax Authorities
195(5)
Powers of the CBDT to issue Notifications
195A
Grossing up of tax ~ when payment is on “net of tax”
195A basis
195(6)
Furnishing of Information in Form 15CA and 15CB
195(7)*
Furnishing of an application to AO to determine the appropriate proportion of sum chargeable and tax deductible thereon.
* Sub-section (7) has been introduced by the Finance Act, 2012 w.e.f. July 1, 2012
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4. Section 195: Overview (Cont…)
Section 195 (1) – Scope and Conditions of application
Aspect
Condition
Nature of Payment
All payments except salary, chargeable to tax in India
Status of Payee
Non- Resident, not being a company or foreign company
Responsibility to deduct tax
Section 195 (1) makes it obligatory for every person responsible for making the payment to deduct tax at source
Rate of TDS
At the prescribed rate under the Act, or the relevant tax treaty , whichever is more beneficial (Section 2(37A))
Time of deduction
Date of payment or credit, whichever is earlier
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5. Section 195: Overview (Cont…)
Withholding tax provision
Applicability of Act
Charging Section of the Act
Scope of Total Income
Any person responsible for paying to a non resident…any interest or any other sum chargeable under the provisions of this Act shall…deduct..
The Act applies to the whole of India and…
Section 4 lays down the authority to the government to charge Income-tax
Income received or deemed to be received in India
Income accrues or arises or deemed to accrue or arise in India
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6. Section 195 (1) – Scope and Conditions of application
Section 195: Overview (Cont..)
Section 195 (1) – Scope and Conditions of application
Payment must be in the nature of income;
Amount paid which can be wholly characterized as income- TDS on full amount
In case income is embedded in the payment, TDS on the gross amount unless an order/certificate permitting lower/nil withholding of tax is obtained.
No deduction of tax required if payment is not chargeable to income tax
Apex Court has ruled that ‘tax’ must be deducted at source in respect of payments made to non-residents, only where sums payable are chargeable to tax in India
GE India Technology centre Private Limited v. CIT [2010] 327 ITR 456 (SC)
Deduction at the time of credit or payment;
Deduction required at the time of making provision itself, actual payment not a pre-requisite.
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7. Section 195: Overview (Cont…)
Extra Territorial operation of Section 195: Position prior to Finance Act, 2012
Whether payment made by a NR to another NR outside India is covered under the ambit of Section 195? No
Yes
“Any person” does not include non-resident - Principally, machinery provisions are meant to ensure easier collection of taxes. This would be nullified if both payer and payee are non-residents
Vodafone International Holding BV (SC)* [concurring judgment by Justice K.S. Radakrishnan]; B4U International Holdings Ltd**
“Any person” includes non-resident - On a plain reading, the words ‘any person” could not be construed to exclude non-residents; nor could it be said that payments made outside India were outside the scope of the section
Satellite Television Asian Region Ltd. (99 ITD 91) ITAT Mum; ABC, In re [1997] 228 ITR 487 (AAR)
*Vodafone International Holdings B.V. v UOI [2013] 341 ITR 1 (SC)
** B4U International Holdings Ltd v DCIT [2012] 21 taxmann.com 529 (Mum)
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8. Position post amendments to Finance Act, 2012
Section 195: Overview (Cont..)
Position post amendments to Finance Act, 2012
Explanation 2 to section 195(1) inserted to clarify that obligation to withhold tax applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non- resident has:
a residence or place of business or business connection in India; or
any other presence in any manner whatsoever in India
The aforesaid amendment to take effect retrospectively from April 1, 1962;
Sub-section (7) to section 195 inserted to empower the CBDT to specify a class of persons or cases, where the person responsible for paying to a non-resident payee, any sum, whether or not chargeable, shall make an application to the Assessing Officer to determine, the appropriate proportion of sum chargeable, and tax deductible thereon
The aforesaid prospective amendment would be effective from July 1, 2012
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9. Position post amendments to Finance Act, 2012 (Cont..)
Section 195: Overview (Cont..)
Position post amendments to Finance Act, 2012 (Cont..)
CBDT via Circular dated May 29, 2012 clarified with regard to retrospective amendments:
In case where assessment proceedings have been completed under section 143(3) of the Act, before April 1, 2012 and no notice for reassessment has been issued prior to that date; then such cases shall not be reopened under section 147/148 of the Act on account of the abovementioned clarificatory amendments introduced by the Finance Act, 2012
Assessment or any other order which stands validated due to the said clarificatory amendments in the Finance Act, enforceable
Aforesaid circular is silent on the TDS provisions under section 195 while making payments to non-residents on account of retrospective amendments
No clarity in Circular as regards opening withholding tax assessment for prior years
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10. Meaning of ‘Rates In Force’
Section 195: Overview (Cont..)
Meaning of ‘Rates In Force’
Sec. 195 refers to deduction of tax at the “rates in force”
“Rates in force” for the purpose of Section 195 is defined under Section 2(37A)(iii) to mean rates of income tax specified in:
Finance Act; or
rates specified in the relevant DTAA whichever is applicable by virtue of Section 90 or Section 90A of the Act, as the case may be;
In terms of CBDT Circular No. 333 of 1982 and Circular No. 728 of 1995, the beneficial rates to be applied
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11. Procedural Aspects: Basic Mechanism of TDS
Deductor
Payment net of TDS
TDS
Deductee
Government
Deductor files TDS returns with National Securities Depository Limited(‘NSDL’) with following details-
deductee, Permanent Account Number(‘PAN’) Payment, TDS, Rate, etc.
NSDL updates the details with the Government
Deductee files his Income tax(‘IT’) return with the Government
Upon validation and matching deductee gets credit from the Government
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12. Form 15 CA & 15CB: Anatomy of Rule 37BB
Rule 37BB of Income Tax Rules,1962
(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or salary or any other sum chargeable to tax under the provisions of the Act, shall furnish the following, namely:—
(i)   the information in Part A of Form No.15CA, if the amount of payment does not exceed fifty thousand rupees and the aggregate of such payments made during the financial year does not exceed two lakh fifty thousand rupees; (ii)   the information in Part B of Form No.15CA for payments other than the payments referred in clause (i) after obtaining— (a)   a certificate in Form No. 15CB from an accountant as defined in the Explanation below sub-section (2) of section 288; or (b)   a certificate from the Assessing Officer under section 197; or (c)   an order from the Assessing Officer under sub-section (2) or sub-section (3) of section 195. (2) The information in Form No. 15CA shall be furnished by the person electronically to the website designated by the Income-tax Department and thereafter signed printout of the said form shall be submitted to the authorised dealer, prior to remitting the payment.
(3) An income-tax authority may require the authorised dealer to furnish the signed printout referred to in sub-rule (2) for the purposes of any proceedings under the Act.
(4) The Director General of Income-tax (Systems) shall specify the procedures, formats and standards for ensuring secure capture, transmission of data and shall also be responsible for the day-to-day administration in relation to furnishing the information in the manner specified.
Explanation 1.—For the purposes of this rule, "authorised dealer" means a person authorised as an authorised dealer under sub-section (1) of section 10 of the Foreign Exchange Management Act, 1999 (42 of 1999).
Explanation 2.—For the removal of doubts, it is hereby clarified that for payments of the nature specified in column (3) of the specified list below, no information is required to be furnished under sub-rule (1).
Rule 37BB provides list of 28 items which are in nature of payments not chargable to tax for which the requirements stipulated in Rule 37BB shall not be applicable,i.e., no requirement for file Form 15CA/CB.
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13. Section 195(6): Compliance Procedures
Section 195(6) – Furnishing of information relating to payment
Information is to be furnished by any person responsible to make payment to non-resident in the prescribed form;
Rule 37BB introduced prescribing forms (15CA and 15CB) with effect from July 1, 2009 and manner in which information is to be furnished;
Form 15CA : Prescribes the information to be furnished by the payer;
Form 15CB: Prescribes the format of certificate to be obtained by Chartered Accountant by the Payer;
- Certificate needs to be uploaded on the designated website.
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14. Section 195(6): Compliance Procedures
(Contd..)
Section 195 (6): Rationale
Circular No. 1/2009, dated
“..The purpose of the undertaking and the certificate is to collect taxes at the stage when the remittance is made as it may not be possible to recover the tax at a later stage from the non-residents. There has been substantial increase in foreign remittances, making the manual handling and tracking of certificates difficult. To monitor and track transactions in a timely manner, it is proposed to introduce e-filing of the information in the certificate and undertaking. The amendment therefore, proposes to provide that the person responsible for deduction of income tax shall furnish the information relating to payment of any sum to the non-resident or to a foreign company in a form and manner to be prescribed by the Board…..”
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15. Form 15 CA & 15CB: Update and Recent Developments
Finance Act 2008, introduced Rule 37BB in the Income Tax Rules, 1962 (‘Rules’);
The above rule 37BB prescribes regulations for electronic filing of Form 15CA and 15CB;
Form 15CA is filed by the person responsible for payment (Remitter), while Form 15CB is issued by the Remitter’s Chartered Accountant;
CBDT vide Notification no. 67/2013 amended Rule 37BB and the forms effective October 1, 2013;
The amended Rule includes an ‘exempt list’ of transactions, for which, the procedure of filing Form 15CA and 15CB have been dispensed with.
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16. Form 15 CA & 15CB: A comparison
Criteria
Erstwhile (applicable upto September 30, 2013)
Revised (applicable effective October 1, 2013)
Application of Form 15CA
The reporting of remittance by the remitter in Form 15CA is necessary in all instances of outward remittances made, whether or not taxable.
The amended Rule 37BB requires the reporting to be made only in respect of payment of interest, salary or any other sum, which are taxable under the Act.
Additionally, it specifies 28 types of payments for which no information is required to be furnished at all
Further, small payments not exceeding Rs. 50,000 individually or aggregate Rs. 2,50,000 for the financial year, to be reported in Part A of Form 15CA.
All other payments to be reported in Part B of Form 15CA.
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17. Form 15 CA & 15CB: A comparison (Cont..)
Criteria
Erstwhile( applicable upto September 30,2013)
Revised (applicable effective October 1,2013)
Obtaining Form 15CB
Obtaining the certificate of a Chartered Accountant in Form 15CB is also mandatory in all cases, even though an order or a certificate of the Assessing Officer may have been obtained u/s. 197/ 195(2)/195(3).
Form 15CB is not required where Part A of Form 15CA is to be filled in, i.e., in case of small payments.
Onus on Authorized Dealer
Presently, there is no onus on the authorised dealer under the Income-tax Act or Rules, to deal with the details furnished by the remitter.
Dealer he revised Rule 37BB casts a duty on the authorised to furnish Form 15CA submitted by the remitter to an income-tax authority for the purposes of any proceedings under the Income-tax Act.
Section 206AA
The existing Forms do not have any specific mention of section 206AA.
The revised Forms state that in the absence of the PAN of the recipient, provisions of section 206AA shall apply.
Manner of Furnishing
Even though, currently Form 15CA along with Form 15CB are being submitted to the authorised dealer prior to making the remittance, the same is not mandated by Rule 37BB.
Sub-rule (2) of the revised Rule 37BB mandates that Form 15CA shall be furnished to the authorised dealer prior to remitting the payment
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18. Form 15 CA & 15CB: A comparison (Cont..)
Criteria
Erstwhile( applicable upto September 30,2013)
Revised (applicable w.e.f October 1,2013)
Form 15CB
Currently, the certificate refers to the Income-tax Act only for the applicable rate of TDS.
In respect of the DTAA, the applicable rate of TDS, and the relevant clause in respect of certain incomes needs to be provided.
Also, the nature of remittance is categorized into four parts—for royalties, FTS, interest, dividend; for supply of articles or things; on account of business income; and any other remittance.
The revised Form 15CB requires detailed enumeration of the taxability of the amount under the Income-tax Act, without giving any effect to the DTAA.
Where DTAA provisions are sought to be applied, the details of the Tax Residency Certificate, applicable DTAA and its relevant article, as also tax liability under the DTAA are to be furnished.
The nature of remittance is divided as — for royalties, FTS, interest, dividend; on account of business income; on account of short-term and long-term capital gains; and any other remittance.
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19. Form 15 CA & 15CB: Summarized Compliances
Category
Type of remittance
Furnishing undertaking in Part A of the revised Form 15CA
Furnishing undertaking in Part B of the Revised Form 15CA
Obtaining CA certificate in the Revised Form 15CB or order/certificate
Category A
Remittance falling within the exempt list X
Category B
Remittance below Rs. 50,000 and not aggregating to more than Rs. 2, 50,000
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20. Form 15 CA & 15CB: Summarized Compliances (Cont..)
Category
Type of remittance
Furnishing undertaking in Part A of the revised Form 15CA
Furnishing undertaking in Part B of the Revised Form 15CA
Obtaining CA certificate in the Revised Form 15CB or order/certificate
Remittance below Rs. 50,000 per remittance and not aggregating to more than Rs. 2,50,000 during the financial year (Chargeable to tax)
Applicable X
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21. Form 15 CA & 15CB: Summarized Compliances (Cont..)
Category
Type of remittance
Furnishing undertaking in Part A of the revised Form 15CA
Furnishing undertaking in Part B of the Revised Form 15CA
Obtaining CA certificate in the Revised Form 15CB or order/certificate
Category C
Remittance not covered within Category A or category B (Not chargeable to tax) X
Chargeable to tax
Applicable
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22. Form 15 CA & 15CB: Procedure
Every remittance required to follow procedure
Requires the payer to provide PAN of the non resident
New Rule 37BB prescribes list of payments for which the said Rule would not be applicable.
Remitter
Printout of the undertaking Form 15CA is signed
Obtains certificate of Accountant (Form 15CB)
Submit the signed paper undertaking form to the RBI/ Authorized Dealer along with certificate of an Accountant in duplicate
Electronically upload the remittance details in Form 15CA on
RBI/ Authorized Dealer remits the Amount
Take printout of filled undertaking form (15CA) with system generated acknowledgement number
A copy of undertaking (15CA) & Certificate of Accountant (15CB) by RBI / Authorized Dealer forwarded to the AO
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23. Recipient's Indian Bank Account
Form 15 CA & 15CB:Certain Situations
Payment to be made to non-resident outside India. However, the amount is to be deposited in the Non-resident’s bank account in India.
Whether the remittance of the amount would require following the attestation and documentation formalities contained in Section 195(6) and require filling Form 15CA/Form 15CB.
Rule 37BB makes no specific distinction between Foreign remittance and other remittances.
Form 15CA/15CB make specific reference to the country of remittance and the currency of Remittance.
Recipient
Outside India
India
Recipient's Indian Bank Account
Payer
Plain reading of provisions does not clarify Payments to Nonresidents in India
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24. Form 15 CA & 15CB:Certain Situations (Cont..)
Whether CA certification is required if a resident is making payment to NRI’s as a gift?
Gifts are not chargeable to tax if they are received from relatives, in cash or in kind. As Gifts is always exempt income for Individuals and HUF.
NRIs had been facing issues in getting their funds repatriated from NRO to their NRE accounts or any other Foreign Accounts even when the source of fund was a Gift received from their relatives.
Recipient
Outside India
India
Payment in the form of Gift from a Relative who is an Indian Tax Resident
Payer
Although new Forms 15 CA/CB has come into force, and have relaxed from preparation and attestation of Form 15CA/CB by a Chartered Accountant and submitting it to the bank.
however NRI’s are not relaxed due to certain guidelines of FEMA which needs to be looked into.
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25. Form 15 CA & 15CB:Certain Situations (Cont..)
Rule 26 of Income Tax Rules, 1962
For the purpose of deduction of tax at source on any income payable in foreign Currency, the rate of exchange for the calculation of the value in rupees of such income payable to an assessee outside India shall be the telegraphic transfer buying rate of such currency as on the date on which the tax is required to be deducted at source under the provisions of Chapter XVIIB by the person responsible for paying such income.
Explanation - "telegraphic transfer Buying rate, as rate adopted by the State Bank of India.
Issues regarding exchange rate:
Rate may very during the day owing to high volatility in Currency market
Remittances are normally through other banks
Tax is required to be deposited before certificate of CA is obtained and therefore, there would normally be some difference on the date of deposit and on the date of remittance.
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26. Form 15 CA & 15CB: Certain Situations (Cont..)
Loan installment is being remitted by an Indian Company to a Foreign Company
Installment consists of both interest and principal components.
Since TDS is to be deducted on interest part only, whether one needs to submit 15CA, CB certificates separately for both interest and principal components or single certificate for whole installment would be suffice
For Interest, 15CB/CA will apply. For repayment of loan, may not be required, as not a taxable transaction.
Recipient
Outside India
India
Payment of Loan installment comprising of both Principal and Interest Amount
LOAN
Payer

27. Form 15 CA & 15CB: Key Considerations
Personal Payments
Burden on the remitter to obtain Tax Deduction Account Number (‘TAN’) for small remittances like online purchases, paid downloads etc.
Payments to non- residents operating in India
Difficulties faced in complying with the procedural obligation to furnish form 15CA in situations where payments made to non-residents; irrespective of whether such payments involve any outward remittance or not.
Credit card Payments
In the era of e-commerce, electronic payments are usually made through credit cards and net transfers. In such cases, it becomes cumbersome for the payer as well as the remitting bank to ensure compliance with the prescribed procedures.
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28. Form 15 CA & 15CB: Key Considerations
(Cont..)
Sums not chargeable to tax
Lack of clarity as to whether compliance required in situations where sum is not chargeable to tax in India;
Import Payments
Rule 37BB silent on import payments creates further ambiguity.
While payments for imports are considered not taxable in India in a vast majority of cases, this issue in not dealt with in the revised Rule 37BB, which otherwise exempts several types of payments from reporting requirements. In fact, in the proposed Rule 37BB as per Notification No. 58, the specified list consisted of import payments, thereby casting lesser obligations on such remittances. Deletion of imports from the specified list now creates even further ambiguity.
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29. Form 15 CA & 15CB: Key Considerations
(Cont..)
Whether TRC sufficient evidence to claim Tax Treaty Benefits
Characterization of Income issues: Royalty, FTS, etc.
Issuance of certificate in absence of complete information about payee
In the existence of a Permanent Establishment, the amount of payment attributable to the PE as profits?
Verification of PE in India.
No books of accounts in India
Challenges faced by Chartered Accountants while issuing the requisite Forms
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30. Tax Residency Certificate
A new requirement for claiming treaty benefits
Obtaining TRC (in the prescribed format) was made a mandatory condition for claiming treaty benefits by the Finance Act, 2012;
Finance Bill 2013 proposed that furnishing of TRC to be a necessary (may not be conclusive) evidence for claiming the beneficial provisions of the Tax treaty / DTAA;
The aforesaid proposed amendment was rolled back in the Finance Act, 2013, pursuant to heavy representation from the industry;
Whilst the prescribed format of TRC was done away with by the Finance Act, 2013, it did provide that additional information and documentation shall be furnished separately. Rule 21AB was consequently amended, which provides that inter alia, the TIN, address, period of residential status of the foreign assessee is required to be furnished, and sufficient documentation to substantiate the same shall be maintained;
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31. Tax Residency Certificate (Contd..)
Section 90 (4) does not explicitly provide that the TRC will be sufficient for establishing the Residential Status of a Non- Resident;
However, the Hon’ble Supreme Court in the case of Azadi Bachao Andolan (2003) 263 ITR 706, while upholding the validity of CBDT Circular No. 789 dated April 13, 2000, held that TRC is conclusive evidence to justify the residential status;
Press release of the Finance Ministry dated February 28, 2013 clarified that the TRC shall be continued to be accepted as an evidence of the taxpayer’s residency. It was also clarified that the intent of the provision was to ensure that furnishing of TRC should not preclude the Tax Authority from looking into beneficial ownership of the recipient in the matter of interest, royalty etc;
Rule 21AB of the Income-tax Rules, 1962 prescribe the documentation and information o be furnished verification of tax residential status, for claiming benefits under any tax treaty.
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32. Non Deduction / Deposit of Tax: Implications
In the hands of the Payer
Recently, CBDT has adopted a strict position on non payment of tax deducted, by dispensing off the 12 month retention period for Section 276B
Defaulter may be treated as assessee in default:
Interest and penalty may be levied;
Prosecution proceedings may be launched
Disallowance of the expenditure on which, tax was required to be deducted / deposited
In the hands of the Payee
TDS at a higher rate of 20% is expected to act as a deterrent for the recipient for not obtaining PAN;
No specific implication provided.
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33. Non Deduction / Deposit of Tax: Implications (Cont..)
Applicable Section
Nature of Default
Implication
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(IA)
1% per month or part of the month
1.5 % per month or part of the month from the date of deduction till the date on which tax is actually paid
221
Tax withheld not paid
Penalty, not exceeding the amount of tax not paid
271C
Tax not withheld or short withheld
Penalty not exceeding the amount of tax not withheld.
276B
Tax Deducted not paid
Imprisonment for minimum three months and maximum of seven years. In case of a Company , it would be the principal officer thereof who shall be liable for such punishment.
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34. NOTE: This presentation is for discussion and general guidance purposes. It may not be used for any other purpose, or distributed to any other party, without seeking our prior written consent. No party should rely on this presentation without taking necessary prior professional advice
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