Updates on TDS. CA N. C. Hegde, Deloitte Haskins & Sells. 17 April Borivli Kandivali (East) Study Circle

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1 Updates on TDS CA N. C. Hegde, Deloitte Haskins & Sells 17 April 2011 Borivli Kandivali (East) Study Circle

2 Contents Overview of TDS provisions Sections 192, 194A, 194C, 194H, 194I, 194J Sec 195 Non-residents & TDS Sec 197 Certificate for deduction of tax at lower/nil rate Sec 40(a)(i) Consequences of failure to deduct TDS Sec 199 Tax credit Other developments Recent Amendments

3 Sec 192 TDS on Salary

4 Extra-Territorial Jurisdiction of Provisions of the Income Tax Act Facts: Expatriates were seconded to the Indian JV by the foreign enterprise. The JV had deducted tax at source on the salary payable in India u/s 192 but did not deduct tax on the home salary paid to expatriates. The department took a position the JV/BO should have deducted tax on the home salary as well.the department also initiated penal proceedings for non-deduction of tax at source. The tribunal and the High Court ruled in favour of the JV Issue: Whether the JV is liable to deduct Indian tax on home salary and whether provisions dealing with TDS which are in nature of machinery provisions for collection of taxes are independent of the charging provisions, which determines chargebility of income under the head Salaries in the hands of the expatriates. 4 Decision: The Supreme Court held that the provisions relating to TDS, which are in nature of machinery provisions to enable collection and recovery of tax forms an integrated code with the charging provisions which determines charge to tax in the hands of expatriates. The Supreme Court ruled that an Indian company is responsible for withholding tax on remuneration paid to its expatriates by a foreign company outside India if the services are rendered solely in India. Section 192 has extra-territorial jurisdiction when salaries taxable u/s 9(1)(ii) are payable outside India. CIT vs. M/s Eli Lilly & Co. (India) P. Ltd.[(312 ITR 225)(SC)]

5 Payment of tax deducted on salaries Facts: The assessee paid salary to its employees during the relevant assessment year ("AY") but did not deduct tax in each month The assessing officer ("AO") imposed interest on the assessee under section 201(1A) of the Incometax Act ("ITA") The CIT(A) upheld the order of the AO. However, the Tribunal held in favour of the assessee Issue: Is the assessee an assessee in default u/s 201 because it did not deduct tax in each month? Decision: Subsection (3) to section 195 of the ITA states that the person responsible for making payment under subsection (1), (1A), (2), (2A) and (2B) may at the time of making any deduction, increase or reduce the amount to be deducted for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct tax during the financial year Subsection (3) makes it abundantly clear that if there is a failure to deduct in a financial year, the same can be deducted by way of adjustment during the financial year Accordingly, the mandate to deduct tax u/s 192 stands extended to the end of the financial year. Accordingly, the assessee is not an assessee in default 5 CIT v. Enron Expat Services Inc. [2011] (330 ITR 496) (Uttarakhand)

6 Payment to doctors under fixed salary and guarantee money scheme Facts: The assessee engaged doctors on fixed salary and guarantee money scheme (FCG). The AO took the view that these doctors were employees of the assessee in view of the stipulation of the agreements between the assessee and the doctors The AO held that the assessee could have deducted TDS on the payments as per the provisions of section 192. Accordingly,, the AO levied interest u/s 201(1A) No provident fund, profession tax or ESI was deducted from payments to these consultant doctors. Whereas these deductions were made from payments made to the full time resident doctors of the assessee Consultant doctors were not eligible for gratuity whereas the resident doctors were eligible for the same These doctors filed their individual returns and paid taxes on their income from the assessee. In case of consultants where professional fees exceeded Rs.10 lakhs, accounts were subject to tax audit The AO held that the retainership agreement was for rendering services and that was in the manner of an employer/employee relationship. The CIT (A) allowed the appeal of the assessee Issue: Does payment to consultant doctors constitute salary or payment for professional services? 6

7 Payment to doctors under fixed salary and guarantee money scheme Decision: There are two types of agreements. One of the covenant is stated to be in the nature of employer/employee agreement and the other is stated to be FGC contract. The distinction between the two inter alia include: In case of the employee doctors, there is a list of allowances (basic, HRA, etc). The consultant doctors are paid a lumpsum fee The employee doctors agreement had a clause for leave entitlement unlike the FGC contract Employee doctors are not entitled for any other full time employment Consultant doctors were not employed by service rules but were expected to follow the code of conduct The terms and conditions in respect of the doctors under FGCs are not akin to the salaried employees. Their relationship with the hospital cannot be said to be an employer-employee relationship. Tax ought to have been deducted u/s 194J The contract between the two parties cannot be said to be in the nature of a service contract but a contract for medical service When there is a specific clause provided in the agreement for payment as fee for services, then there is no reason to read the said clause as fees of services and then there should not be any reason to treat the said payment by the assessee as payment of salary ITO (TDS-1), Ahmedabad v. Apollo Hospitals International Ltd (2011-TIOL-59-ITAT-MUM) 7

8 Responsibility of correctness of employee claims Facts: The AO held that an employer should check whether the amounts were actually spent and be responsible for not having deducted tax at source on the amount additionally liable on the savings, if any made by the employee Decision: SC held that the employer is not under any statutory obligation to check that the employees had actually utilized the amount paid towards travel concession or conveyance allowance CIT vs. Larsen & Toubro Ltd [2009] (313 ITR 1) (SC) 8

9 Conveyance allowance vis-à-vis free transport service by the employer Facts: The AO contended that employees cannot enjoy double benefit by way of conveyance facility and transport allowance and such use of transport facility would be in the nature of perquisite liable to tax under section 17(2) (iii) of the ITA Issue: Whether an employee can claim benefit of both conveyance allowance and by the employer? transport facility provided Decision: It is not possible to compute the value of the facility attributable to each employee since it is provided collectively throughout the year. Computation mechanism fails and hence the employer cannot be treated as assessee in default for failure to deduct tax at source. Transworks Information Services Ltd. vs. ITO (126 TTJ 900)(Mum ITAT) 9

10 Sec 194A TDS on Payments of Interest

11 Do discounting charges fall under the definition of interest? Facts: The tax payer, an Indian company, gets its sales bills discounted from its Singapore associate companies. These companies charge discounting charges for undertaking these transactions Issue: Whether the discounting charges are to be disallowed under section 40(a)(ia) since they are in the nature of interest and tax is not withheld by the Indian taxpayer? Decision: Interest is sum payable in respect of money borrowed or debt incurred. The bill discounting is a process in which the sale consideration receivable on sale of goods is discounted, which is not debt incurred or money borrowed. The Interest Tax Act, 1974 specifically includes discounting charges in the definition of interest. However interest defined under ITA does not include discounting charges. Wherever the legislature was conscious of the fact that even the discount of bills of exchange is to be included within the definition of interest, the same was basically so provided for, hence the omission of these words in the definition provided under the ITA, enumerates the intention of the legislator to keep the same out of the ambit of interest under the ITA. 11

12 Do discounting charges fall under the definition of interest? The same rationale is also laid down in the Circular no. 65 issued by Central Board of Direct Taxes in relation to section 194A of ITA. Therefore, discounting charges are not in the nature of interest. Hence in the absence of Singapore company's PE in India, the Indian payer is not under obligation to deduct tax at source u/s 195. Accordingly, the same amount cannot be disallowed by invoking section 40(a)(i) of the ITA. DCIT v. Cargill Global Trading (I) (P) Limited [2009] 34 SOT

13 TDS from payment of interest on time deposits by banks using CBS Software CBDT vide Circular number 3/2010 dated 2 March 2010 has clarified on the issue of deduction of tax at source from payment of interest on time deposits by banks using Core-Branch Banking Solutions (CBS) software No tax is required to be withheld where: Interest on time deposits is calculated on daily or monthly basis and for macro monitory purpose only No constructive credit is given to the depositor s/ payees account Tax is required to be withheld on the income (exceeding limits specified under section 194A) where: Interest is accrued at the end of the financial year or at periodic intervals as per practice of the bank or as per the depositor's / payee's requirement or on maturity or on encashment of time deposits; whichever event takes place earlier 13

14 Sec 194C TDS on Payments to Contractors

15 Is payment for hiring of vehicles a contractual payment or rent? Facts: AO held that the assessee has deducted the TDS on payment made for hiring of vehicles for transportation of its employees under the provisions of section 194C, whereas this arrangement falls within the provisions of section 194I for rental of motor vehicles On appeal, the CIT(A) held that the assessee should not be treated the assessee is in default u/s 201(1) as well also not liable for any levy of interest under section 201(1A) Issue: Is payment for hiring of vehicles for transportation of employees liable to TDS under section 194C or 194I of the ITA? 15 Decision: The provisions of section 194Cshall apply to all types of contracts for carrying out work including transport contract, service contract etc. Transport contract would also include contract for loading and unloading of goods and also cover contracts for plying buses along with the staff The CBDT has, after examining the terms and conditions of the agreement between State Road Transport Corporation and the owners of the private buses only, clarified that in such cases the provisions of section 194C are applicable Provisions of section 194C do not apply to the payments made to the airline or the travel agents for purchase of tickets for air travel of individual. The provisions shall, however, apply when the payments are made for chartering an aircraft for carriage of passengers or goods

16 Is payment for hiring of vehicles a contractual payment or rent? Provisions of section 194I is confined to the payment for rent on hiring of land or building, furniture but not for the transport vehicle particularly when the same is in the nature of providing and availing the transport services The expression plant and machinery used in the explanation to section 194I refers to only the plant and machinery used by the assessee in its business by hiring them but not the hiring of transport service The Tribunal also held that there was a force in the alternative contention of the assessee that the AO cannot demand u/s 201(1) when the entire tax has been paid by the recipient of the amount by way of advance tax and TDS to the revenue (number of decisions relied on) ACIT (TDS) vs Accenture Services P Ltd.(2010-TIOL-618-ITAT-MUM) Provisions of section 194-I is confined to the payment for rent on hiring of land or building, furniture but not for the transport vehicle particularly when the same is in the nature of providing and availing the transport services 16

17 Whether hire of trucks without contract for carriage is covered under Sec 194C? Facts: The assessee hired trucks and made payment for transportation. The AO held that the assessee was liable to deduct tax u/s 194C, in absence of which deductions had to be disallowed u/s 40(a)(ia) The above view taken by the AO was upheld by the CIT(A) but the Tribunal decided the matter in favour of the assessee. As a result appeal was filed by Revenue before the High Court contending the that total freight payments exceeded the amount stipulated u/s 194C(3) and TDS was liable to be deducted Decision: The provisions of Section 194C come into play only where either a written or oral contract between the parties for transportation and carriage of goods is established. A GR is equivalent to a contract which is envisaged for the purpose of Section 194C. However, in order to prove the applicability of Section 194C, it is further to be seen whether the contract in question has resulted in payment exceeding the prescribed limits in a financial year There is no material on record brought by the AO to prove that there was any written or oral agreement between the assessee and the transporter for carriage of goods. There is no material to establish that any payment exceeded the prescribed limits during the financial year. As per the decision of the HC in case of United Rice Mill Ltd (322 ITR 594) laid down that Section 194C cannot be invoked to hold the assessee liable for deduction of tax only on the assumption that assessee was having agreement with the parties through whom transportation of goods was carried out 17 T L Verma & Co. Pvt. Ltd. (2011-TIOL-170-HC-P&H-IT)

18 Do hire charges with respect to hire equipment automatically call for TDS u/s 194C? Facts: As per revenue, hire charges in respect of equipment hired by the assessee contained a portion of labour charges incurred by the owners towards operation of the same. Hence it was a composite contract of hiring of vehicles/machineries along with labour. Consequently, Section 194C would apply CIT (A) took the view that, out of the total hire charges if 10% was treated as charges paid towards labour element involved and TDS had not being deducted as required, the whole sum was to be disallowed The Tribunal, on the other hand, found that the total sum paid by the assessee was only by way of hire charges for the equipment taken on hire and therefore, the relevant TDS provision applicable was only Section 194I (section 194I was not applicable in AY ; the AY under considertaion) Decision: The HC held that neither the AO nor the CIT(A) could assert that there was any material to suggest that there was any contract between the assessee and those individuals, by way of a composite contract for labour as well as hiring of the vehicles In the absence of any such acceptable material, the conclusion of the AO in treating the hiring of equipment as one falling under the category of sub-contract for provision of labour or the conclusion of the CIT(A) that at least 10% of the total payment would have been incurred by way of labour charges by the respective owners, cannot be accepted Section 194I came to provide for TDS on respect of machinery/ equipments only with effect from and not applicable to his case since it relates to AY D Ranthinam (2011-TIOL-150-HC-MAD-IT)

19 Do facilities provided by hotels fall under the term carrying out work Facts: The assessee offers various facilities to its guest apart from boarding and lodging The question before the Bombay High Court was whether the same should be subject to TDS u/s 194C Decision: The word carrying out work u/s 194C is limited to any work which on being carried out culminates into a product or result (reliance was placed on the decision of the SC in case of Associated Cements) Circular 681 dated 3 March 1994 to the extent it applies to a customer availing the services of a hotel, should be held contrary to section 194C The word work has to be understood in the limited sense and would extend only to the service contracts specifically included in (the then) Explanation III to section 194C East India Hotels Ltd and another v. CBDT and another (320 ITR 526) All service contracts do not automatically fall under the purview of section 194C. 19

20 Sec 194H - TDS on Commission, Brokerage, etc

21 Can discount on supply of SIM cards and recharge coupons be termed as commission? Facts: Taxpayer has appointed distributors for rendering services, such as, getting customers for the taxpayer, collection of documents, delivery of SIM cards, collection of charges, etc Taxpayer has two types of transactions 1) Providing prepaid connections and 2) Providing post paid connections Under the post paid scheme, the taxpayer pays commission to distributors for services rendered, after withholding tax under the ITA Under the prepaid scheme, the taxpayer supplies SIM cards and recharge coupons to distributors at a discounted price The taxpayer is neither paying nor crediting any commission or charges in the account of the distributors Distributors are not bound to sell the SIM cards or recharge coupons at the Maximum Retail Price. Thus, discount cannot be treated as charges or commission. Hence, no taxes are required to be withheld from the discount given to distributors Tax cannot be recovered from the discount, as it is not paid but is reduced from the price Issues: Whether discount for supply of SIM cards and recharge coupons is commission liable to withholding of tax under the ITA? 21

22 Can discount on supply of SIM cards and recharge coupons be termed as commission? Decision: Supply of SIM card is only for the purpose of rendering continued services by the taxpayer to the subscriber of the network. SIM card has no intrinsic value or use to the customer Distributor acts as a middleman by arranging for customers, collecting documents, etc. on behalf of the taxpayer The taxpayer renders services to the subscribers based on contracts entered into between subscribers and distributors. Thus, the distributor is an agent who canvasses business for the taxpayer In substance, discount given at the time of supply of SIM Cards or recharge coupons to the distributors is payment received by the distributor for services rendered to the taxpayer Income earned by the distributor is not in course of purchase / sale of goods, but it is a consideration received for services rendered to the taxpayer Terminology used is immaterial and payment received by the distributor is payment for services rendered, which falls within the purview of commission as per section 194H Tax needs to be withheld under section 194H even though the discount is not paid but is reduced from the price Vodafone Essar Cellular Limited (332 ITR 255) Discount may not paid but is reduced from the price paid to the distributor. This discount takes the form of brokerage and should be subject to TDS 22

23 Whether difference between commercial price and published price can be classified as commission or not? Facts: Airlines had an agreement with agents to sell tickets at the minimum fixed commercial price which was lower than the published price However, agents could sell at a higher price subject to a maximum of published price at their discretion As per IATA rules, agents were entitled to commission at 9% on the published price Airlines deducted tax on the payment of this 9% commission. However, Revenue contended that the difference between commercial price and published price was also in the nature of commission and liable to TDS Decision: The agents of the assessee (airline) were entitled to sell tickets at any price between the fixed commercial price and the published price. As a result the assessee would have no information regarding the final rates at which tickets were sold It would be impracticable and unreasonable to accept the assessee to collect feedback from its numerous agents on the prices at which tickets are sold Thus, it was held that the difference between the commercial price and the published price could neither be considered as commission or brokerage in the hands of the agents and hence was not liable to TDS CIT v. Qatar Airways (332 ITR 253) 23

24 Commission and Supplementary Commission received by travel agents It was held that tax should be deducted at source under Section 194H on amount available to agents being difference between airfare fixed by Airlines and price at which agents are enabled to sell tickets Around the World Travels & Tours Pvt. Ltd. vs. UOI (141 Taxman 53) (Mad.) Held that supplementary commissions retained by the travel agents over and above the net fare made over to Airlines is liable to tax deduction at source under Section 194H as commission and interest under Section 201(1A) is leviable in case of default Air tickets sold by airlines company to the travel agent at a concessional rate held to be a sale transaction on principal to principal basis, does not amount to commission, not liable to TDS CIT vs. Singapore Airlines Ltd. & Other airlines (22 DTR 129) (Del.) (2009) 24

25 Sec 194I - TDS on Rent

26 Roaming costs technical services/ rent? Facts: AO noticed that the assessee had failed to deduct tax at source on payments made by the assessee company to other mobile service providers towards national roaming costs and observed that payment of national roaming costs made to other cellular service providers for allowing use of their network would amount to payment made for technical services within the meaning of section 194J and the assessee ought to have deducted tax from such payments u/s 194J Alternatively, the AO also contended that these payments should be treated in the nature of hiring of plant and machinery and, therefore, section 194I would apply CIT (A) stated that section 194I was applicable and the national roaming charges paid by the assessee to other cellular service providers should be treated as payment of rent for the use of the equipment of the other cellular service providers. It is not necessary that the payer of the roaming charges or the rent should be in exclusive domain and control of the asset Issue: Should the payment by one service provider to another towards roaming charges be considered towards usage of services or equipment? 26

27 Roaming costs technical services/ rent? 27 Decision: The explanation of the term rent means any payment by whatever name called under any lease, sublease or tenancy or any other agreement or arrangement for the use of assets mentioned therein. The emphasis of the provision is upon the use of the asset and so long as this condition is satisfied the payment would be classified as rent The intention appears to rope in payments under a lease, sub-lease, or tenancy all of which involve a transfer of interest in the property even if such payments are termed differently by the parties. Further, the Tribunal observed that the assessee is placed in a position of a mere facilitator between its subscriber and the other service provider, facilitating a roaming call to be made by the subscriber. The assessee cannot be said to have used the equipment which is involved in providing the roaming facility. The assessee collects the roaming charges from its subscriber and passes it on to the other service provider. The Tribunal also relied on the clarification issued by the CBDT in Circular No.715 dated 8th August 1995 wherein the board stated that section 194I would not apply to rate-contract agreements. The Board itself has recognized that rent is something which is paid for earmarked premises, and in the case of roaming charges, a subscriber does not get any earmarked service provider and the assessee also does not commit itself to the subscriber to provide for any particular service provider. The choice of the service provider who will provide the roaming facility to the subscriber is left to the subscriber. Therefore, the payment of roaming charges by the assessee to the other service providers cannot be considered as rent within the meaning of section 194I and there was no liability on the part of the assessee to deduct tax from the same under that section.

28 Roaming costs technical services/ rent? Decision: The CIT(A) had not decided the issue of applicability of section 194J. Hence the AO should examine the issue afresh in light of the decision of the Supreme Court in case of Supreme Court in CIT vs. Bharti Cellular Ltd (330 ITR 239) Finally, the Tribunal also stated that after the judgment of the Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd. vs. CIT (293 ITR 226), there is no merit in the contention that taxes can be recovered from the deductor even though taxes were paid by the deductees. If upon verification it is found that the taxes have been paid by the payees fully in respect of the roaming charges received by them from the assessee, nothing survives Vodafone Essar Ltd. (9 taxmann.com 31) (Mumbai ITAT) Payment by of roaming charges by one service provider does not fall under the definition of rent as defined u/s 194I of the ITA. If complete tax payment has been done, then there is no merit in the contention that taxes are to be recovered from the deductor. 28

29 Infrastructure claims paid to franchisees vs. Rent u/s 194I Facts: The assessee company is engaged in the business of providing computer education and training and for that purpose, it had entered into various agreements with the franchisees for running the education centres at various metro cities. The assessee company for the purpose of convenience, had categorised the fees shared (i) as marketing claim and (ii) as infrastructure claim AO treated the infrastructure claims paid to the franchisees as rent paid and held that the assessee company was liable to deduct tax u/s 194I Decision: Held that the agreement was in fact a franchisee agreement and it could not be said that the rent was being paid by the assessee company to the licensee franchisee. There was no payment of rent by the assessee company to the licensees/franchisees and hence the provisions of section 194I cannot be made applicable CIT vs. NIIT Ltd. (184 Taxman 472) (Del.) 29

30 Sec 194J - TDS on Fees for Professional or Technical Fees

31 Meaning of the term of technical services Facts: The assessee-company is a shipping agent handling vessels at various Indian ports Assessee made payment to NSICT NSICT entered into technical service agreement with P & O Australia under which P & O Australia was to provide technical know-how to the assessee AO opined that NSICT was rendering / providing technical and specialized services to its customers including the assessee along with machines and technical manpower and hence tax was deductible u/s 194J Issues: Whether the payment would be covered u/s. 194J and liable for TDS? 31

32 Meaning of the term of technical services Decision: Payments made to NSICT were for container movement and there were no professional or technical services involved in the movements of containers The contention was restricted only to the technical services and not towards managerial or consultancy services. AO has not pressed the later part of the Expl. 2, which deals with provision of services of technical or other personnel The expression other personnel in this provision must fall within the category of `services of technical personnel. It cannot be considered as any personnel unrelated to the managerial, technical or consultancy services NSICT personnel, may not have possessed some technical expertise, and hence cannot be considered as `other personnel Both the `managerial and `consultancy services are possible with human endeavor, the word `technical should also be seen in the same light. There should be direct and live link between payment and receipt/use of technical services/information Merchant Shipping Services Pvt. Ltd. [2011] (9 taxmann.com 17) (Mum.) To qualify u/s.194j, payment for technical services should be a consideration for acquiring or using technical know-how, simpliciter provided or should be made available by human element 32

33 Payments to NSE towards leaseline/vsat/transaction charges Facts: While making the assessment, the AO made disallowance u/s 40(a)(ia) for non-deduction of tax on payment made to NSE for lease line charges, VSAT charges and transaction charges AO stated that the services rendered by the stock exchange are technical in nature and therefore section 194J is applicable In appeal, CIT (A) allowed the appeal of the assessee following the decision of the I.T.A.T Mumbai in the case of Kotak Securities Private Limited Decision: CIT (A) has rightly deleted the addition applying the decision of Kotak Securities Private Limited and Angel Broking observing that transaction fees paid to the stock exchange could not be said to be fees paid in consideration of stock exchange rendering any technical services to the assessee. Therefore, provisions of section 9(1)(vii) and section 40(a)(ia) are not applicable Vinod K Nevatia (2011-TIOL-65-ITAT-MUM) Alchemy Share & Stock Brokers Pvt. Ltd. (2011-TIOL-49-ITAT-MUM) Ashok Kumar Damani (2011-TIOL-10-ITAT-MUM) 33

34 Third Party Administrator s(tpa s) Scope u/s 194J Facts: The TPA provides services such as hospitalization services, cashless access services, processing and settlement of claims The TPA makes payment to hospitals for rendering medical services to the policy holders Decision: Though a hospital by itself, being an artificial entity, is not a medical professional, it provides medical services by engaging the services of doctors and qualified medical professionals. These are services rendered in the course of the carrying on of the medical profession The TPA is required to deduct tax at source under section 194J Circular No. 8/2009 dated is applicable The circular is set aside to the extent it states that a failure to deduct tax on payments made by TPAs to hospitals u/s 194J will necessarily attract a penalty u/s 271C Dedicated Health Care Services TPA vs. ACIT (324 ITR 345) (Bom.) 34

35 Sec 195 Withholding Tax on Payments to Non Residents

36 Payments to non-residents would be subject to withholding tax only if the income is chargeable to tax Facts: The revenue authorities raised an additional contention before the High Court that unless the payer makes an application to the tax officer under Section 195(2) and has obtained a permission for nondeduction of the tax at source, it was not permissible for the payer to contend that the payment made to the non-resident did not give rise to income taxable in India and that there was no need to deduct any tax Issues before Supreme Court: Whether the HC was right in holding that the moment there is remittance the obligation to deduct tax at source arises Whether merely on account of such remittance to the non-resident abroad by an Indian company, could it be said that income chargeable to tax under the ITA arises in India 36 Decision: Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the ITA, to deduct income tax at the rates in force. Section 195 contemplates not merely pure income payments, but also covers composite payments which has an element of income embedded or incorporated in them A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the ITA

37 Payments to non-residents would be subject to withholding tax only if the income is chargeable to tax Decision: Sums chargeable under the provisions of the ITA would refer to such amounts, which should have an element of income in them as required under the provisions of the ITA, and the treaty provisions, and hence would be liable to tax under the ITA The expression sum chargeable under the provisions of the ITA has to be read in conformity with the charging provisions, i.e., Sections 4, 5 and 9 Where the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application The application of Section 195(2) pre-supposes that the person responsible for making the payment to the non-resident considers that tax is payable in respect of some part of the amount to be remitted to a non-resident, but is not sure as to what should be the portion so taxable or the amount of tax to be deducted The obligation to deduct tax at source is limited to the appropriate proportion of income chargeable under the ITA forming part of the gross sum of money payable to the non-resident The SC rejected the contention of the department, that the assessee make an application in every case of remittance even when the income has no territorial nexus with India or is not chargeable in India GE India Technology Centre P.Ltd. v. CIT and another (327 ITR 456) (Supreme Court) 37 A payer making a remittance to a non-resident, could make an application to the tax officer, if he not sure as to what should be the portion so taxable or is not sure as to the amount of TDS

38 Refund of tax deducted u/s 195 to the deductor liable to interest u/s 244A? Facts: The assessee is a company based in Singapore. It made payments for obtaining a right from G to broadcast various cricket matches in various countries including India and did not withhold any tax from the payments made The revenue held that the payments made to G are in the nature of Royalty and hence liable to tax in India. The assessee was held to be assessee in default for non deduction of tax at source. The CIT(A) and the Tribunal held that the payment are not liable to tax Pursuance of the Tribunal order, the assessee applied to the AO for NIL withholding tax certificate u/s 195(2). The AO directed the assessee to withhold in respect of payments made to GCC. The assessee accordingly deduced the tax at source Aggrieved by the order of the AO, the matter carried to CIT(A) and the CIT(A) by following its own order held that the assessee is not liable to withhold tax at source in respect of payments made to G. The Tribunal confirmed the order passed by the learned CIT(A) While giving effect to the first appeal late order, the assessee was given refund of the taxes withheld without any interest u/s 244A. Against this order the assessee appealed before the CIT(A) who held that the assessee is entitled to get interest on refund u/s 244A 38

39 Refund of tax deducted u/s 195 to the deductor liable to interest u/s 244A? Decision 1: Firstly the payer is not a resident of India and secondly the liability to pay such Royalty has not been incurred in connection with and was not borne by the PE of the payer in India. Therefore, there being no economic link between the payment of Royalty and Indian PE, the royalty does not arise in India having regard to the provisions of Article 12(7) of the Treaty Hence even if it is assumed that the payment for broadcasting cricket constitutes Royalty, such royalty does not arise in India within the meaning of provisions of Article 12(7) of the Tax Treaty 39 Decision 2: The deduction of tax is not voluntarily on the part of the assessee but as a result of the order passed by the AO u/s 195. When the deduction was made by the assessee in pursuance of the order of the AO passed u/s 195 and the refund was made as a result of the order passed by the CIT(A) and falls under the provisions of section 240 It is clear from the order of this Tribunal in case of Star Cruise that it had decided this issue after considering the decision in the case of Godrej Industries L td V/s DCIT and held that the payment made by the assessee on demand under the provisions of the ITA and the refund also become due to the assessee under the provisions of the ITA. When it has been held that the refund become due as per the provisions of ITA, the provisions of section 244A are applicable on the refund made to assessee and accordingly the assessee is entitled for interest u/s 244A DDIT (International Taxation) v. MSM Satellite Satell i te (Singapore) P Ltd Set Satellite (2010-TII-159-ITAT-MUM-INTL)

40 Payment of daily overseas allowances to foreign company Facts: The taxpayer had entered into a technical assistance agreement with Mazda Motor Corporation ( Japanese company ) envisaging transfer of rights to assemble and manufacture vehicles in India As per the agreement, the Japanese company provided training to the engineers of the taxpayer. The consideration paid by the taxpayer was by way of daily overseas allowance on account of stay of the personnel of the Japanese company. The taxpayer filed an application under section 195(2). No Objection Certificate was granted permitting no deduction of tax in respect of the payments made to the Japanese company. The AO held that the payment made to the Japanese company was assessable to tax as fees for technical services and that the taxpayer was liable to deduct tax at source.. Issues: Whether the payment of daily overseas allowance by the taxpayer to the Japanese company and the expenses incurred by the taxpayer on the Japanese engineers during their stay in India were in the nature of fees for technical services? 40

41 Payment of daily overseas allowances to foreign company 41 Decision: The High Court referred to the following observations of the Tribunal: Imparting of training does not find any mention either in clause (vi) or (vii) of section 9(1) of the ITA The payments made by the taxpayer to the Japanese company were to meet out-of-pocket expenses of the engineers sent by the Japanese company for training the workers and technicians of the taxpayer. Such payments do not partake of the character of royalty or fees for technical services There was no evidence on record to substantiate the assumption that part of the remittance was retained by the Japanese company as a surplus which amounted to commercial profits. In the absence of any evidence on record, it would not be appropriate to assume that the entire money received from the taxpayer was not dispersed among the Japanese engineers. The High Court observed that the certificate granted under section 195(2) of the ITA was never cancelled under section 195(4) of the ITA, in absence of which the taxpayer was not required to deduct tax at source and could not be treated as assessee in default. If the taxpayer was not required to deduct tax at source and could not be declared assessee in default, the question whether the payment was in the nature of fees for technical services or in the nature of reimbursement for the expenses incurred or whether the Tax Treaty overrides the provisions of the ITA, need not be gone into Swaraj Mazda (10 taxmann.com 178 ) (Punjab & Haryana HC) If the assessee is freed from the responsibility to deduct tax on a certain payment, the nomenclature of that payment is irrelevant

42 Prior approval of AO not mandatory if a valid CA certificate is obtained Facts: On the basis of a CA certificate, the assessee made payment to a US based company without deducting tax at source and without ascertaining from the A.O u/s 195(2) as to whether tax was required to be deducted or not The assessee submitted that payment for 'off the shelf' software did not have any tax implications since what was purchased was only a copyrighted article and not copyright in the software; hence he submitted that no tax was required to be deducted at source 42 Decision: Copyright article is distinct from copyright per se and payment for copyright article, therefore, cannot be treated as payment of copyright, which could be brought to tax Liability to deduct tax is a vicarious liability and it can be invoked only when primary liability survives. Since the US company itself did not have any tax liability in respect of the payments, the vicarious tax liability did not survive either In any event, in accordance with the procedure stipulated by the CBDT, the assessee had duly obtained the CA certification regarding applicability of tax withholding and based on the certification, made the remittance for deduction at source When no tax is indeed payable by the recipients of the income, a demand u/s.201(1a) cannot be raised on the assessee merely because he had not obtained prior approval of the AO u/s 195(2) ADIT Mumbai vs Tata Communications (2010-TII-157-ITAT-MUM-INTL)

43 Payment towards equipment hired from overseas entity Facts: The assessee was engaged in the business of marine dredging and port construction. It was awarded a contract at Visakhapatnam Port Trust. For the purpose of executing the contract of dredging the assessee hired equipment from MA, Netherlands. During the relevant AYs, the assessee made payments to MA in respect of usage of the equipment The AO was of the view that the equipment hired by the company constituted PE of the Netherland entity, MA in India. The AO held the assessee to be in default within the meaning of section 201 since it had not deducted tax at source u/s 195 On appeal, the Commissioner (Appeals), however, set aside the order of the AO Issues: What is the characteristic of the payment made to the overseas entity? 43

44 Payment towards equipment hired from overseas entity Decision: The Tribunal held that the payment made by the assessee to the Netherlands company was nothing but hire charges Section 195 provides for deduction of tax at source when the payment is made to non-resident which is chargeable to tax under the ITA. Therefore, if the payment which made to foreign company was chargeable to tax, the assessee had to deduct tax at source For the purpose of taxing to income of the foreign company, the foreign company shall have a PE in India. Hiring equipment in the territory of India on could not be construed as a PE of a foreign company. For the purpose of PE of a foreign company, the foreign company should have a permanent place in order to control its business activity. Merely because the equipment was equipped with place for residence of its crew and operator and installed with the latest communication facilities, it does not mean that it was a PE In the absence of any PE, the payment made by the assessee to MA was not liable to be taxed in India, and, therefore, there was no requirement of deduction of tax under section 195 DDIT v. Dharti Dredging & Infrastructural Ltd (9 taxmann.com 327) (Hyd ITAT) Equipment hired from an overseas entity as such cannot be held to be the PE of the entity. 44

45 Sec 197 Certificate for Lower Deduction

46 Certificate u/s 197 Facts: The assessee is a consortium consisting of Larsen and Toubro Ltd (L&T), an Indian entity and Scomi Engineering, a Malaysian entity It has been awarded a contract by MMRDA The profit sharing ratio between the two members is 60 (L&T):40 (Scomi) taxable at the rate of 33.99% and 42.23% respectively It filed an application under section 197 requesting revenue to issue a certificate authorizing MMRDA to deduct tax at the rate of 0.11% The Revenue rejected the application by holding that the calculation mechanism under Rule 28AA failed since past three years profit figures were not available and because the assessee had not filed e-tds returns The assessee moved the Commissioner of Income-tax (TDS) ( CIT ) for revision u/s 264. The CIT(A) rejected the plea on the grounds that when an AO rejects an application u/s 197, he does not pass an order as envisaged u/s 264 and hence a revision of the same is not maintainable Issue: If the profits of the past 3 years are not available, will the mechanism under Rule 28AA fail? Can an application u/s 197 rejected by the AO never be revised? Does non filing of e-tds returns result in rejection of an application u/s 197? 46

47 Certificate u/s 197 Decision: The CIT was in error in holding that the rejection of an application by the AO did not result in an order. The AO was in error in coming to the conclusion that the mechanism contemplated under Rule 28AA would break down in the case of the assessee since financials of the past three years were not available Sub clause (i) of Rule 28AA (1) refers to the average rate of tax as determined by the total tax payable on estimated income as reduced by advance tax and TDS as a % of the payment referred to in section 197 for which application has been made. Sub clause (ii) refers to the average of the average rates of tax paid by the assessee in the last 3 years. Hence in the present case sub clause (ii) will not apply and sub clause (i) will apply Failure of assessee to file e-tds return may result in independent consequence in law including penal consequences under section 271 but does not justify rejection of an application filed for lower deduction of tax under sec 197 Larsen & Toubro Ltd. v ACIT (326 ITR 514) 47 Non availability of financial statements of the past 3 years cannot result in failure of the mechanism under Rule 28AA. Rejection by the AO of an application u/s 197 is eligible for revision u/s 264 of the ITA.

48 Sec 40(a)(i) Consequences of failure to deduct TDS

49 Applicability of section 40(a)(i) to payment towards offthe-shelf software Facts: Assessee, a dealer of Microsoft products, purchased software from Microsoft and sold the same in the local market. The AO treated the payment as royalty and on failure to deduct tax from the same, disallowed the expenses in terms of section 40(a)(i) The CIT(A) confirmed the AO's order but the Tribunal deleted the addition Decision: The High Court held that the ITAT dealt with the transaction of the assessee by examining the true nature of it. The assessee has been purchasing the software from Microsoft and sold it further in Indian market. By no stretch of imagination it would be termed as "royalty" The assessee acted as a dealer of Microsoft and hence Section 40 (a)(i) has no application at all Dynamic Vertical Software (2011-TII-08-HC-DEL-INTL) 49

50 Payment towards off-the-shelf software a twist in the tale Facts: MS Corp entered into agreement with its subsidiary G to grant exclusive license for marketing MS products. G, in turn, entered into a license agreement with M in Singapore under which M (a group enity) was granted non-exclusive licence to: Decision: reproduce MS software in Singapore and distribute them to retailers or to MS Corp or to subsidiaries of MS Corp and license or sublicense the right to reproduce Microsoft software to certain end users for their internal use, for which M paid consideration to G for each copy. The Delhi Tribunal in the case of Ms Corp held that income for the right to use ( RTU ) of packaged software should be regarded as royalty income taxable in India. It held that the real transaction of the granting of the licence in respect of copyrights in computer programmes had been camouflaged by entering into a chain of the agreements between MS Corp and the group entities. On an in-depth analysis, it was evident that the end users made payments in respect of the granting of licence of copyright in computer programmes. Hence, the payments made by end-users were taxable as royalty in the hands of G. 50 Gracemac Corporation, M/s. Microsoft Corporation, M/s Microsoft Regional Sales Corporation I. T. vs Asstt. Director of Income-tax ([2011] 8 ITR (Trib) 522)

51 Applicability of section 40(a)(i) to overseas payments and provision for expenses Facts: The assessee is a public limited company. It is engaged in the business of software development. During the year, the assessee claimed the following deductions: Bandwidth charges paid to foreign companies for data communication. Subscription charges to foreign companies Provision for warranty for post sales customer support The AO disallowed the above on the grounds that they were covered u/s 40(a)(i) and the assessee was liable to deduct tax on the same. The CIT(A) upheld the action of the AO. Issues: The contention of the assessee before the AO. Was that the above mentioned payments made tare not in the nature of royalty, fees for technical services or relate to any item of expenditure covered u/s 40(a)(i) 51

52 Applicability of section 40(a)(i) to overseas payments and provision for expenses Decision: The payments towards bandwidth charges are not in the nature of managerial, consultancy or technical services nor is it for the use of or right to use industrial, commercial or scientific equipment. The service provides only ensure that the sufficient bandwidth is available on an ongoing basis to the ultimate users to uplink and downlink the signals As regards the subscription charges, the Tribunal relied on its own decision in the assessee s own case where it was held that the information was available on subscription to anyone willing to pay.it was copyrighted information and could not be passed on to anyone else. There was no license granted to the assessee to use in any manner or quote to anyone else. The access was restricted to specific individuals named by the assessee. The recipient did not have any PE in India. Further such an access to data base could not fall within the scope of Article 12(3)(a), as found in the DTAA with USA. As regards the provisions for warranties, the Tribunal relied on its own decision in the assessee s own case where it was held that the assessee is required to render post sales customer services in the nature of claims within the warranty period. Though no precise base is indicated by the assessee, yet it can be considered to be reasonable having regard to the claim made in the part. provision made for the warranty liability was an ascertained liability and that it could not be treated as a contingent liability. Infosys Technologies Ltd. v. DCIT (10 taxmann.com 1) (Bang ITAT) 52 Payments to foreign entities towards bandwidth and subscription charges are not covered under the purview of section 40(a)(i) of the ITA. Provision for warranties is not a contingent liability

53 Sec 199 Tax Credit

54 Does the method of accounting impact the year of TDS credit? Facts: The assessee is a firm and engaged in business of financing and follows cash system of accounting It gave a loan to a company on interest. The borrower while crediting the interest deducted TDS and issued TDS certificate The assessee claimed the credit of TDS without offering the corresponding income to tax. The AO disallowed the claim of the assessee.the CIT (A) allowed the appeal of the assessee Issue: When should be TDS credit be allowed to the tax payer? Decision: As per the provisions of the ITA tax deduction has to match in time the earlier of payment or accrual Hence TDS need not march alongside the corresponding income which may be offered to tax by the tax payer on accrual or receipt as the case may be As a result there is a time mismatch between the tax deduction and the accrual of tax liability. However, section is very clear. It provides for availability of tax credit in the year for which the corresponding income is assessable. ITO Business Ward II (4) v. M/s Shri Anupallavi Finance & Investments (2011-TIOL-78-ITAT-MAD) 54

55 Credit for TDS to the deductee if refund has been granted to the deductor Facts: The assessee a tax payer of the USA, was in the business of supply of copyrighted software for telecommunication projects. It received consideration from R for the supply of software R made an application to the AO to make remittance without TDS since the payment was for copyrighted article and not a copyright. This request was declined. R deducted tax as per the directions of the AO and deposited it with the govt. R issued a TDS certificate to the assessee R was successful in appeal for NIL TDS and was granted full refund of taxes paid The assessee claimed credit for the said tax deducted by R in its return of income. The AO held that since the tax had been refunded to R, the TDS certificate was not valid and the assessee would not get credit for the tax. Issue: Can the lawful implications of a valid TDS certificate can be declined if R has been refunded the taxes deposited with the govt? 55

56 Credit for TDS to the deductee if refund has been granted to the deductor Decision: The Tribunal held that all the requirements for grant of TDS had been complied with. The fairness of the procedures was not questioned by the AO The refund to the deductor is not prescribed under the law, but appears to be an administrative exercise. Approval from the assessee was not taken before granting refund to R. This cannot curtail the rights of the assessee Since the taxes have been deducted from the payment made to the assessee and it is also in receipt of TDS certificate, the credit for TDS cannot be declined on the basis of an administrative action of refund which is neither envisaged by the provisions of the ITA nor in the control of the assessee. Tribunal directed the AO to grant credit to the assessee on the basis of original TDS certificates produced and in accordance with the provisions of the ITA uninfluenced by any refunds subsequently granted to R The Tribunal observed that the above directions should not be construed to affect the remedies that the tax department may pursue qua the tax deductor Lucent Technologies GRL LLC v DCIT (9 taxmann.com 182) (Mumbai ITAT) Refund made to tax deductor, even if wrongful, has no adverse impact on rights of a person from whose income taxes are so deducted and to whom tax deduction certificate under section 203 is already issued 56

57 When the payer and receiver of an income is the same person Facts: In the return of income file by the assessee - a non- resident bank, the head office had credited the interest received from the branch as income and offered the same for taxation while the branch had debited the same in its accounts and claimed as expense The A.O noticed that while interest paid by the Indian branch to the head office was not assessed as income of the foreign Bank on the ground of payment to self, credit was given for the tax deducted at source by the branch. Accordingly, through a rectification order u/s 154, he held that that the assessee was not eligible for credit of tax deducted on interest payment made to Head Office In appeal, the CIT(A) decided against the AO Aggrieved, the Revenue appealed to the Tribunal and submitted that the consolidated return filed for the head office and branch office was assessed as such and, as no income on account of interest was taxed, the benefit of TDS also could not be granted in terms of the existing section 199 Issues: Payment of interest by the Branch Office to the Head office was nothing but a payment to self. Should the resultant tax deducted on such payment be considered as payment of tax by the assessee? 57

58 When the payer and receiver of an income is the same person Decision: The Tribunal held that the Head Office and Branch Office filed a consolidated return of income and assessment was done accordingly. Therefore the inter se transactions have to be considered as having not actually taken place The deduction and payment of tax at source by the Branch Office in such circumstances will constitute payment of tax by the assessee as there is no outside recipient of the interest Section 199 provides that the benefit of TDS shall be allowed to the recipient of the income in the year in which the income on which such tax was deducted, is assessable If the department s contention was accepted that the assessee should not be allowed the benefit of TDS against its tax liability it would mean that the tax actually paid by the assessee to the Central Government would never be adjusted against any tax liability Every deduction of tax at source pre-supposed, the existence of two distinct persons and the taxability of income in the hands of the recipient. If the payer and receiver of an amount was the same person, naturally the amount of tax deducted and paid by the assessee would partake of the character of tax paid by the assessee against its tax liability. Thus the AO was not justified in initiating rectification proceedings on this count ADIT, Mumbai Vs M/s Antwerp Diamond Bank If the payer and receiver of an amount is the same person, tax deducted and paid by the payer would be considered as tax paid as against its tax liability 58

59 When the payer and receiver of an income is the same person Principles of taxation vis-à-vis payments by branch to HO The Kolkata High Court was required to adjudicate on the issue of tax deductibility of the interest paid by the Indian branch of ABN to its HO, under the provisions of the India Netherlands tax treaty. The Kolkata High Court indicated that there were principally two issues that needed to be considered in the appeal: First, whether the interest paid was to be allowed as a tax deduction in computing the profits of the Indian branch?; and Second, whether the Indian branch was required to withhold tax under section 195 of the Act, while paying the interest to the HO? The Kolkata High Court has held that the interest paid by the Indian branch of ABN to its HO was tax deductible in the hands of the branch while computing the profits of the branch, and the branch was not required to withhold tax on the interest paid to the HO as the interest was not chargeable to tax in India under the provisions of the India-Netherlands tax treaty. ABN AMRO Bank NV (Kolkata High Court) 23 Dec,

60 Other Developments

61 Payments to overseas agent Facts: Assessee was engaged in the business of entertainment, event management and marketing and organized performances of renowned foreign artistes in India For engagement of international artistes the assessee had entered into an agreement with two proprietary concerns of C, a UK resident, who acted as an agent to and in coordination with several worldwide event management companied offered artiste management services across the world For various international artistes engaged by the assessee, it paid remuneration for their services rendered in India and reimbursed expenses in connection with their visit and performances in India such as travel cost, visa etc It also paid commission charges to C for services rendered by it in engaging various artistes The assessee deducted tax at source in respect of payments made for remuneration of foreign artistes but not on expense reimbursement of artistes and commission payment to C The AO took the view that all payments were to be looked as a single consideration for payment to artistes and the bifurcation was to avoid taxes. As a result, AO contended that tax is liable to be deducted on all payments. However, CIT (A) ruled in favour of the assessee Issues: Whether payment of commission charges to C and reimbursement of expenses of artistes were liable to tax deducted at source 61

62 Payments to overseas agent Decision: The Tribunal noted that agreements with C showed that C had authority to enter into an agreement with the assessee on behalf of the artiste. It stated that the agent acted with acumen and skills to negotiate with such performers. Based on the nature of deals, time and effort involved C was entitled to commission was his services and there was nothing on record to prove that commission payable to C was in fact payment for performance of artistes Further, it was held that payment of commission was not covered under article 18 of the DTAA between India and UK as C had neither taken part in any events performed in India nor engaged in any personal activities in India Also, it was not liable to tax under article 7 of the DTAA between India and UK as C had no permanent establishment in India Tribunal also held that reimbursement of expenses to artistes was also not liable to have tax deducted at source ADIT (International Taxation) v. Wizcraft International Entertainment P. Ltd. ( [2011] 8 ITR (Trib) 334) Payment made to overseas agent of overseas artistes does not take the character of payment to the artistes but is taxable as business income of the agent 62

63 Payment of statutory obligation would not constitute a business expenditure Facts: The assessee claimed a deduction in respect of TDS paid on foreign remittance by F, which had merged in it The amount represented the demands raised by the ITO under section 201, in respect of alleged non deduction of tax at source from remittances made by the assessee to Hansons Pacific (S) Pte Ltd, Singapore The assessee claimed deduction of this amount, which was an additional payment by the assessee in respect of remittances to Hansons, as expenses in the AY The assessee claimed that the aforesaid payment is not a payment of tax liability of the appellant but a payment to avail services from Hansons which, as per the understanding with Hanson, the appellant was liable to bear Decision: Law is well settled that a tax withholding liability raised under section 201, in respect of remittances made abroad, cannot be allowed as a deduction. Reliance placed on the decision of the Supreme Court in the case of India Aluminium Co Ltd Vs CIT (79 ITR 514) where it was held that whether a payment made under statutory obligation because assessee was in default could not constitute expenditure laid out for purposes of its business and hence, same was not allowable under that section 63 RMC Readymix India Pvt. Ltd. (2011-TIOL-81-ITAT-MUM)

64 Interest u/s 234B due to lower deduction as per an order issued u/s 195 Facts: Assessee a non-resident company received royalty from its Indian subsidiary and offered the same to tax. It had also received income from the subsidiary for providing IT infrastructure supply services and IT support On an application u/s 195(2) by the Indian subsidiary the A.O directed that 20% of the same was chargeable to tax in India. Accordingly, the subsidiary deducted 20% of the gross receipts AO concluded that not only the gross receipts were chargeable to tax in India but also the other payments including employee salaries and equipment and maintenance charges were taxable in India as royalty at the rate of 15 %. AO raised a demand for tax as well as interest on the advance tax payable but not paid. CIT(A) confirmed the order of the AO. CIT(A) held that if its plea were to be accepted, the deductee would not be required to pay interest u/s 234B and would also not be liable to pay interest u/s 201(1A) because it has acted in compliance with the withholding order u/s 195(2), thereby causing loss of revenue to the exchequer Issue: Is the assessee liable to interest u/s 234B for the difference in tax payment due to lower deduction under a 195 order? 64

65 Interest u/s 234B due to lower deduction as per an order issued u/s 195 Decision: The assessee has not approached the deductor to deduct the tax at lower rate. It is the deductor who approached the department claiming that the payments to be made to the assessee are not chargeable to tax in India and to determine the chargeability. where all payments made to non-resident are subject to deduction of tax at source u/s 195, the interest u/s 234B is not leviable on the non-resident. M/s Texas Instruments Incorporated v DDIT (International Taxation) (2011-TII-16-ITAT-BANG-INTL) When tax has been deducted at the rate specified in an order u/s 197, the assessee cant be held liable to pay interest u/s 234B on account of short deduction as may be held at the time of assessment 65

66 TDS on reimbursements Amounts received towards reimbursement of expenses can, under no circumstances, be regarded as a revenue Receipt and is not chargeable to income-tax (Reliance was placed on the decisions of the Kolkata HC in the case of Dunlop Rubber Co. Ltd and that of the Delhi HC in the case of Industrial Engineering Projects) CIT v. Siemens AG (310 ITR 320) In case of Danfoss Industries the AAR held that was held that payments to a foreign company under a cost sharing arrangement was tax deductible as the same was a consideration for rendering of service and not a reimbursement. The AAR also held that an element of profit is not essential ingredients of receipt to be taxable as income and even assuming that fees charged by an overseas entity from the resident entity is equivalent to the expenses incurred by the resident entity in providing the services, it would then be a case of quid pro quo for the service fees and not a case of reimbursement of expenses. Danfoss Industries Pvt.Ltd (268 ITR 1) and Timken India Limited (273 ITR 67) 66

67 Where payments to foreign technicians were made outside India for services rendered outside India and no tax was deducted there from the said payments cannot be disallowed under section 40(a)(i) International Creative Foods (9 taxmann.com 191) (Ker) There is no such requirement in section 199 that credit of TDS is to be allowed only after confirmation is received from the issuer of the TDS certificates Ramakant Singh v. CIT (No.2) (8 ITR 505) (Patna ITAT) 67

68 Recent Amendments

69 Recent amendments Instruction on section 200 Instruction regarding parameters for processing e-tds returns [F.No.275/73/2009-IT(B)] dated In the present system of processing e-tds returns, the returns are processed online and mismatch report showing defaults is generated. Based on these reports, the AO issues show cause notices to the deductors Substantial returns are pending where deducteewise default due to short deduction is less than Rs.10/- It has been decided that where the default on account of short deduction is less than Rs.100/- for each deductor the demand is rounded off to zero; and After considering the above if the deductorwise demand/default of Rs.100/- or less will be ignored for further action However, the officers have been instructed to ensure that the short deduction should not become habitual Instruction No.6/2010 issued by CBDT on 9 August 2010 issued to curb the indiscriminate issuance of 197 certificates Instruction No.8/2006 dated laid down that certificate of lower/nil deduction u/s197 are not to be issued indiscriminately and prior administrative approval of the concerned Range head shall be obtained before issue of each certificate Instruction 7/2009 read with F.No.275/23/2007-IT(B) laid down monetary limits for prior adminitrative approval of the CIT-TDS or DIT- International Taxation. Such certificates are issued manually 69

70 Recent amendments It is now instructed that certificates u/s 197 shall be generated and issued by the AO mandatorily through the ITD system only. In case the certificate cannot be generated on the date of issue, the AO shall upload the data on the system within 7 days of manual issue The manual system of issuing certificates had the following issues: 70 No check as to whether such certificate has been issued by the authorized/competent AO having jurisdiction No information available as regards number of certificates issued or the quantum of revenue involved. No systematic reference number which could be amenable to verification. It is not possible to ascertain the veracity of claim, of the deductor about no/low deduction having been made on the strength of a 197 certificate actually issued by the department Issue of certificates u/s 197 vide the ITD system shall have the following benefits: Complete information of he deductor and deductee will be available with the department This information will be useful in processing e-tds returns The non-deduction defaults detected by the system when processing the TDS returns would reduce substantially There will be a control on the number of certificates issued Amendment under Finance Act, 2011 (insertion of section 194LB) w.e.f. 1 st June 2011, notified infrastructure debt fund will deduct tax at source at the rate of 5% (plus applicable surcharge & cess) on interest payable to a non-resident at the time of credit or payment, whichever is earlier..

71 Recent amendments Amendment to Rule 28AA (Certificate for deduction at lower rates or no deduction of tax from income other than dividends) Now in order to obtain a lower/nil deduction certificate, is it necessary for the AO to be satisfied that the existing and estimated tax liability of the applicant justifies the deduction of tax at lower rate or no deduction of tax. The mechanism of arriving at the rate of tax deduction has been eliminated. The AO shall determine the rate of tax deduction after considering the following: Tax payable on estimated income of the previous year relevant to the AY; Tax payable on the assessed or returned income of the last three previous years; Existing liability under the ITA and Wealth-tax Act,1957; Advance tax payment for the AY relevant to the previous year till the date of making application. Tax deducted at source for the AY relevant to the previous year till the date of making application under sub-rule (1) of rule 28; and Tax collected at source for the AY relevant to the previous year till the date of making application under sub-rule (1) of rule 28. The certificate shall be issued direct to the person responsible for deducting the tax under advice to the person who made an application for issue of such certificate 71

72 Recent amendments Amendment to Rule 31A (Quarterly statement of deduction of tax under sub-section (3) of section 200) The deductor at the time of preparing statements of tax deducted will be required to furnish the following additional particulars besides his PAN, TAN, PAN of deductees, particulars of taxes paid to the Central Government: amount paid/credited on which tax was not deducted in view of the issue of certificate of no deduction of tax under section 197 by the AO of the payee; amount paid or credited on which tax was not deducted on payments made to transporters who have provided their PAN. Notification 41/2010 dated 31 May 2010 w.e.f April 1, Due dates for payment of TDS Amount paid / credited Due date of deposit of TDS Old Provisions On 31 March 31 May On any other day 7 th of the next month New Provisions In the month of March 30 April In other months 7 th of the next month 72

73 Recent amendments 2. In the case of a company or a person (other than a company) to whom the provisions of tax audit are applicable, TDS must be remitted electronically (by way of internet banking facility or debit card) to the RBI or SBI or any authorized bank accompanied by an electronic income-tax challan 3. Quarterly filed of TDS returns Statement of deduction of tax under section 192 Form no. 24Q Statement of deduction of tax under other sections In case of the deductee being a non-resident or a foreign company or resident but not ordinarily resident Form no. 27Q In case of all other deductees Form no. 26Q 4. If the number of deductee s / collectee s records in a statement for any quarter are twenty or more, the statements are required to be furnished electronically Quarter ended Due date Requirements of the forms 30 June 15 July TAN of deductor 30 September 15 October 31 December 15 January 31 March 15 May PAN of deductor PAN of all deductees Particulars of the tax paid to the Central Government, including Challan identification number 73

74 Recent amendments 5. Timelines for issue of TDS certificates Deduction u/s Form No. Requirements of form Time for furnishing the form Valid PAN of the deductee Valid TAN of the deductor Challan identification number in case of payment through bank Receipt number of the relevant quarterly TDS statement(s) Periodicity Annual Due date By 31 May Any other provision 16A Same as above Periodicity Quarterly Due date Within 15 days from the due date for furnishing the quarterly TDS statements 74

75 Recent amendments 6. The deductor may use digital signatures to authenticate Form 16 Once digitally signed, the contents of the certificate are not amenable to change The certificates must have a control number and a log of such certificates must be maintained by the deductor 7. Form 16 now has two parts: Part A dealing with basic information regarding the deductor and employee and the summary of tax deducted of source; If an assessee is employed by more than one employer during the year, each of the employers are required to issue Part A of the certificate; Part B dealing with details of salary and tax deducted / paid. Part B may be issued by each of the employers or the last employer at the option of the assessee 8. The provision for issue of Form 16AA in cases of salaries not exceeding Rs. 150,000 is not contained in the amended rules 75

76 Recent amendments New sub-sections have been added to Section 201 w.e.f (3) No order shall be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of: 2 years from the end of the financial year in which the statement is filed in a case where the statement referred to in section years from the end of the financial year in which payment is made or credit is given, in any other case Provided that such order for a financial year commencing on or before 1 April 2000 may be passed at any time on or before the 31st day of March, (4) The provisions of sub-clause (ii) of sub-section (3) of section.153 and of Explanation to Sec153 shall, so far as may, apply to the time limit prescribed in sub-section(3) 76

77 Recent amendments Finance Act 2010 has increased the interest u/s 201(1A) rate w.e.f. 1 July Interest on late deduction/deposit of tax Existing New Interest from the date when tax deductible to actually deducted Interest from the date when tax actually deducted to actually paid 1% 1% 1% 1.5% 77

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