1 WIRC Pune Camp CPE Study Circle January 19, 2013 SECTION 195 OF THE INCOME TAX ACT,1961 PROVISIONS, AMENDMENTS AND CONTROVERSIES CA JIGER SAIYA jigersaiya@mzsk.in
Contents Introduction Recent Amendments CA Certificate in Form 15CB Issues & Controversies 2 MZSK & Associates
WIRC Pune Camp CPE Study Circle January 19, 2013 Section 195 of the Income Tax Act,1961 Provisions, Amendments and Controversies Introduction 3 MZSK & Associates
Objective of Section 195 The objective is to ensure, as best as possible, that the tax liability on the income element, on the amount paid is got deducted at source itself so that the Department is not put to the hassles of recovering it from a nonresident whose connections with India may be transient or whose assets in India may not be sufficient to meet the tax liability - XYZ, In Re: P No 18 of 1995, 238 ITR 575 (AAR) 4 MZSK & Associates
Section 195 Gateway to International Taxation 5 MZSK & Associates
Overview of Section 195 Sec 195(1) Liability for Deduction from Sec 195(2) Application by Payer for lower/nil Sec 195(3) Application by Payee for lower/nil payment withholding withholding Sec 195(4) Validity of the Certificate Sec 195(5) CBDT empowered to notify Rules for 195(3) Sec 195(6) Obligation on Payer to furnish information as prescribed 6 MZSK & Associates
Liability for Deduction under Section 195 Payer Payee Amount Payable Time of Deduction Rate of Deduction Any Person responsible for paying Non Resident (not a Company) OR Foreign Company Interest or any other sum (other than Salaries) AND Chargeable under provisions of the IT Act Payment or Credit whichever is earlier Rates in Force 7 MZSK & Associates
Liability for Deduction under Section 195 Person responsible for paying (Sec. 204) If payer is a Company the Company itself, including the principal officer thereof Consideration for transfer of foreign exchange assets (other than short term capital asset) to NRI Authorised Dealer In other cases Payer himself Payment to Non-Resident [Sec 2(30), Sec 2(42) read with Sec 6] Foreign Company [Sec 2(23A), Sec 2(22A)] 8 MZSK & Associates
Liability for Deduction under Section 195 Any sum chargeable to tax Chargeability governed by provisions of IT Act and DTAA Nature of Income IT Act DTAA Business / Profession Sec 9(1)(i) Article 7 & 14 rw 5 Salary Sec 9(1)(ii) Article 15 Dividend Sec 9(1)(iv), Sec 115A Article 10 Interest Sec 9(1)(v), Sec 115A Article 11 Royalties Sec 9(1)(vi), Sec 115A Article 12 FTS Sec 9(1)(vii), Sec 115A Article 12 Capital Gains Sec 9(1)(i), Sec 45 Article 13 9 MZSK & Associates
Liability for Deduction under Section 195 Time of deduction Payment or credit, whichever is earlier Conversion rate to be applied TT Buying Rate on the date which tax is required to be deducted [Rule 26] Rates in Force [Sec 2(37A)] Rates of income-tax specified in the Finance Act or the rates specified in the DTAA, whichever is applicable by virtue of Section 90 or Section 90A - Circular No. 728 of October 30, 1995 Applicability of Sec 206AA w.e.f April 1, 2010 10 MZSK & Associates
No Deduction of Tax in Certain Cases No deduction of tax if income does not involve credit or payment No deduction under section 195 when section 172 applies Circular No. 723 No deduction from income by way of Capital Gain to FII referred in 115AD NR Payee cannot furnish declaration in form 15G / 15H for non-deduction of tax at source TDS on payment basis under proviso to section 195(1) when interest is paid by Government, public sector bank or public financial institution Exemption from withholding on dividends referred to in section 115 O 11 MZSK & Associates
Difference Between 195 and Other TDS Provisions Factor Other TDS Provisions Section 195 Payer Specified Person Any Person Payee Resident Non-Resident Nature Specific Payments, whether Income or not Income chargeable under IT Act Threshold Specified No Threshold Certificate for Remittance Not Required Mandatory 12 MZSK & Associates
Difference Between 195(2), 195(3) and 197 Factor Section 195(2) Section 195(3) Section 197 Applicant Payer Payee Payee Purpose To determine appropriate Application for Nil Lower or Nil withholding portion of sum chargeable withholding in specified to tax and liability for cases withholding tax Application Form Appeal No Prescribed form Form No. 15C or 15D Form No. 13 Order appealable under section 248 of IT Act Order not appealable- Writ petition to High Court Order not appealable- Writ petition to High Court 13 MZSK & Associates
Grossing Up of Tax Sec 195A Grossing up mandatory in cases of payments made net of tax Higher effective withholding rate Prescribed Rate* Effective Rate* 10% 11.11% 15% 17.65% 20% 25% 40% 66.67% * Surcharge & Education Cess not considered Grossing up rate when provisions of Sec 206AA are applicable 14 MZSK & Associates
Refund of Tax Deducted u/s 195 Sr Scenario Criteria 1 Contract is cancelled No remittance is made to the non-resident 2 Remittance is duly made to the non- Remitted amount is duly refunded to the payer by resident, but contract is cancelled the payee 3 Contract cancelled after partial execution 4 The contract is cancelled after partial execution and remittance related to non-executed part is made to the nonresident No remittance is made to the non-resident for the non executed part Amount refunded to the payer or no remittance was made but tax was deducted and deposited when amount was credited to the account of the nonresident 15 MZSK & Associates
Refund of Tax Deducted u/s 195 Sr Scenario Criteria 5 Amendment in law or by notification under the Act 6 Order passed under section 154 or 248 or 264 of the Act There occurs exemption of the remitted amount from tax Tax deduction liability of the payer is reduced 7 Double deduction of tax amount Same amount deducted twice by mistake 8 Other than discussed above Grossing up not required or payment of tax at higher rate under domestic law while a lower rate is prescribed under DTAA 16 MZSK & Associates
Consequences of Non/ Short Deduction Non Deduction/ Short Deduction Assessee deemed to be Assessee in Default Disallowance of Expenditure Recovery of Tax and Interest under section 201 Penalties Prosecution under section 276B Under section 40(a)(i) Business Expenditure Under section 58(1)(a)(ii) Expense against other Income Under section 221 Tax in default Under section 271C Failure to deduct tax at source 17 MZSK & Associates
WIRC Pune Camp CPE Study Circle January 19, 2013 Section 195 of the Income Tax Act,1961 Provisions, Amendments and Controversies Recent Amendments 18 MZSK & Associates
Amendments to Section 195 Amongst other judgements, the Supreme Court in case of Vodafone International Holdings BV v UOI held there was no liability on Vodafone to deduct tax under section 195 as transaction was between two Non Residents Explanation 2 inserted to cover Payment made by a Non Resident to another Non Resident For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder 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 person has (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. As the amendment is in form of an Explanation, it may be applied to past transactions 19 MZSK & Associates
Amendments to Section 195 In case of GE India Technology Cen P Ltd v CIT the Supreme Court held that section 195 gets attracted when payment has an element of 'income' chargeable to tax in India Subsection 195(7) inserted to make application mandatory in notified cases Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable. Notified transactions would be key to determine resulting implications 20 MZSK & Associates
Other Relevant Amendments Amendment to definition of Capital Asset Indirect transfers (even those effected outside India) taxable retrospectively Definition of the term Royalty under section 9(1)(vi) widened retrospectively Government empowered to notify meaning of terms not defined under the IT Act or DTAA Amendment to section 201 Payer not considered Assessee in Default if Payee pays tax Filing Fee & Penalty on delay in filing TDS Return Penalty for furnishing incorrect information in the TDS Statement 21 MZSK & Associates
WIRC Pune Camp CPE Study Circle January 19, 2013 Section 195 of the Income Tax Act,1961 Provisions, Amendments and Controversies CA Certificate in Form 15CB 22 MZSK & Associates
Furnishing of Information Relating to Payments Furnishing of Information Section 195(6) read with Rule 37BB Furnishing of Information to Tax Department Form 15CA CA Certificate before making payment Form 15CB Form 15CA Part A: Information of Remitter, Information of Account, Particulars of Remittance & TDS Part B: Nature of Remittance (64 Categories Specified) 37 Mandatory Fields (marked with * ) Circular No 4/2009 dated June 29, 2009 provides the manner for submitting and processing the payments 23 MZSK & Associates
CA Certificate Practical Issues Charecterisation challenges: Royalty, FTS, etc Whether TRC is sufficient evidence for claiming Treaty relief Does the Payee have a PE in India? No books of accounts in India What is the profit attributable to PE in India? Issuance of certificate in absence of complete information 24 MZSK & Associates
CA Certificate Best Practices In the certificate, state specific agreements/ documents examined Declaration/ Undertaking/ Note about the recipient being beneficiary Tax Residency Certificate/ Tax Return/ Declaration for Payees Residential Status & Country Representation/ Note about Permanent Establishment Attach Notes/ Assumptions/ Basis/ Workings, etc Maintain Technical Advice prove bonafides 25 MZSK & Associates
WIRC Pune Camp CPE Study Circle January 19, 2013 Section 195 of the Income Tax Act,1961 Provisions, Amendments and Controversies Issues & Controversies 26 MZSK & Associates
Frequently Asked Questions Applicability Whether transactions between Branch and HO attract withholding under section 195 Whether tax is required to be deducted under section 195 in cases of payment in kind, barter transactions or adjustment against receivables Whether tax is required to be deducted by Agent when making remittance to Foreign Principal Whether tax is required to be deducted from payment to person not ordinarily resident Deduction When is the Payer required to deduct What exchange rates are to be used while deducting tax Does the Undertaking in 15CA and CA Certificate in 15CB absolve the Payer from penal consequences 27 MZSK & Associates
Frequently Asked Questions Compliances By what time is the tax deducted required to be deposited Do you need to issue TDS Certificate to Non Residents Is TDS Certificate to be issued when tax is borne by payer as per Sec 195A Is NIL TDS Return to be filed in the quarter when no TDS is deducted u/s 195 Order under section 195 Is there a time limit for disposal of application under section 195 Whether order under section 195(2) can be revised under section 263 Whether the Tax Officer can take a contrary view than adopted while issuing certificate under section 195 28 MZSK & Associates
Practical Issues Determination of Residential Status of the payee when payment is made during the year Cases of Dual Residence-where the payee is a resident as per the I T Act but a non- resident as per the treaty Whether Surcharge & Cess are to be added when treaty rates are applicable Time of deduction and Interest chargeability when entry is passed retrospectively Whether tax is required to be deducted while making provision Where the Non Resident does not have a PAN- section 206AA Can Payee claim credit for excess tax deduction due to sec 206AA Whether Surcharge & Education Cess leviable if higher rate under 206AA applied Deduction of tax where net payment is received after deducting commission/brokerage 29 MZSK & Associates Whether grossed up amount allowable as deductible expenditure
Controversies Reimbursement of Expenses Nature of Expense Case Laws in Favor of Taxpayer Case laws against the Taxpayer Reimbursement of cost of services of a third party engaged by Non resident Reimbursement of allocated cost (ie. cost sharing arrangements) Payment for services rendered at cost Nathpa Jhakri Joint Venture - 37 SOT 160 (Mum) Modicon Network P Ltd 14 SOT 204 (Del) Dunlop Rubber Co - 142 ITR 493 (Cal) Timken India Ltd - 273 ITR 67 (AAR) Wallace Pharmaceuticals P Ltd - 278 ITR 97 (AAR) Danfoss Industries (India) Ltd - 268 ITR 1 (AAR) AT&S P Ltd 157 Taxman 198 (AAR) 30 MZSK & Associates
Controversies Reimbursement of Expenses Nature of Expense Case Laws in Favor of Taxpayer Case laws against the Taxpayer Reimbursement of incidental expenses in addition to payments of Royalty & FTS Reimbursement of living allowance, etc of a person deputed to India by the non-resident Telco Ltd - 245 ITR 823 (Bom) Industries Engg Project (P) Ltd - 202 ITR 1014 (Del) Clifford Chance - 82 ITD 106 (Mum) Mahindra and Mahindra Ltd - 1 SOT 896 (Mum) Fortis Healthcare Ltd - 45 SOT 190 (Chd) Morgenstern Werner - 233 ITR 751(All) Goslino Mario - 241 ITR 312 (SC) BHEL - 252 ITR 218 (Del) Cochin Refineries Ltd - 222 ITR 354 (Ker) SRK Consulting - 230 ITR 206 (AAR) Ashok Leyland - 120 ITD 14 (Chennai) Bovis Land Lease 36 SOT 166 (Bang) CSC Singapore Pte Ltd - 2012-TII-35- ITAT-DEL-INTL (Del) HCL Infosystems Ltd - 274 ITR 261(Del) 31 MZSK & Associates
Controversies Treaty Interpretation Taxation under Act in absence of Article under Treaty Denial of Treaty benefit to income not taxed by other state Place of Effective Management situated beyond Board Meetings Broadened concept Permanent Establishment Attribution of Profits to Permanent Establishment Cumulative vs Separate stay/project duration test for Service/Construction PE Expansive interpretation of Agency PE Shipping article only to apply to owner/charterer of Ships Broadened interpretation of Royalties & Fees for Technical Services Make Available condition whether applicable to Managerial services 32 MZSK & Associates Capital Gains ambit widened
Concluding Thoughts Payment to non-residents should be thoroughly examined from tax withholding perspective Payments can be remitted under the alternate mechanism (with CA Certificate) if the case is strongly supported by judicial precedents CA Certificate route legally permissible but not an alternate to order u/s 195 In case of doubt coupled with substantial amount - Advisable to obtain tax withholding order u/s 195 While issuing a certificate, CA not to decide whether the law is good or bad Mitigate grave consequences of non compliance with S.195 33 MZSK & Associates
Contact Details CA Jiger Saiya E : jigersaiya@mzsk.in M: +91 9323108666 MZSK & Associates, Chartered Accountants Pune Office: Business Bay, Level 3, Plot No 84, Wellesley Road, Near RTO, Pune 411001, INDIA T: + 91 20 26315500 www.mzsk.in Mumbai Office: The Ruby, Level 9, North-West Wing, Senapati Bapat Marg, Dadar (W), Mumbai 400028, INDIA T: +91 22 24393600 THANK YOU