Foreign Remittances Tax Implications U/S 195 Speaker : Talluri Rajendra Prasad (RP) Date: 10 th Dec 2015
Types of payments covered U/S 195 Any Interest [Not being interest referred to in Sec 194LB/194LC/194LD] Or any other sum [Not being salaries] chargeable to tax Scope of Sec 195 Wider in scope - all types of payers (Deductors) are covered No threshold exemption for the purposes of Sec 195 Explanation added w.r.e.f 1 st April 1962 (Non Resident is expressly covered as deductor) (Fall out of Vodafo e s case)
Time when TDS is to be done At the earliest of credit or payment to the payee Where Interest is by the Govt /PSB/PFI, TDS shall be at the time of payment
Time for remittance of TDS U/S 200 read with Rule 30 Deducted by an office of the Government On the same day (Tax paid without challan) Within 7 days from the end of the month in which the TDS is done or tax is due U/S 192(1A)(Tax paid with Challan) Deducted by others Sums of Apr to Feb month : Within 7 days from the end of the month in which the TDS is done or tax is due U/S 192(1A). Sums of Mar month: Within 30 th April Note: AO may permit quarterly remittance in special cases with prior approval of JCIT.
Cases where no TDS is to be done Few Statutory Exceptions Dividends covered U/S 115-O [2 nd Proviso to Sec 195] Deposits by / Borrowings From NRs/RNORs with Off Shore Banking Units [Sec 197A(1D)]
Consequences of non-deduction of tax / Non Remittance Disallowance U/S 40a(i) Results in Sec 201 Assessee-In-Default. Hence, the Tax Defaulted shall be liable for recovery. Additionally o Liable for interest [U/S 201(1A)] [1% or 1.5% per month as the case may be] o Liable for Penalty [U/S 221 or U/S 271C] o Prosecution U/S 276B is attracted (Min 3 months; Max: 7 Years + fine.)
Rate at which TDS is to be done [General] The TDS is to be done at the rates in force [Sec 2(37A)] Where DTAA contains a beneficial rate, apply the same [TRC]
Some TDS Rates w.r.t sums payable to Non-Residents Section Particulars TDS rate* Sec 194E Sec 194LB Sec 194LBA (2) Sec 194LBA(3) Sec 194LC Sec 196B Sec 196C Sec 196D Sums payable to Non Resident Sportsmen, entertainers, Non Resident Sports Associations towards the sums covered U/S 115BBA. Interest on infrastructure debt fund referred to in Sec 10(47) payable to non-resident non corporate assesses or foreign companies. Distributed income payable by a Business Trust of the nature referred to in Sec 10(23FC) to its Non-Resident Corporate or Non-Corporate Unit Holders [i.e Int from SPV recd by Business Trust when distributed to Non-Resident Unit Holders invite concessional TDS] Distributed income payable by a Real Estate Investment Trust which derived income by way of renting or leasing or letting out any real estate asset owned directly by such business trust [Fin Act, 2015] Interest on foreign currency borrowings payable by Indian Companies / Business Trusts under an approved loan agreement / on Long Term Infrastructure Bonds or Long Term Bonds [Fin Act 2014] [Rate is 5% even if PAN is not available.] Income in respect of units referred to in Sec 115AB or by way of LTCG from transfer of such units payable to an offshore fund. Any income [i.e interest / dividend (including LTCG)] payable in respect of bonds or GDRs referred to in Sec 115AC to a non-resident. Any income other than any dividend referred in Section 115-O in respect of securities referred to in Section 115AD(1)(a) to a FII. [No TDS on capital gains] *To the above said rates, surcharge and education cess needs to be added. 20% 5% 5% Rates in Force 5% 10% 10% 20%
Rates of TDS [Special] Special Rates given Sec 94A [Transactions with persons located in notified jurisdictional area] Rate is Higher of : Rates in force Rate specified in the relevant provisions of the Act 30% Special Provisions of Sec 206AA: [Cases where PAN number is not available] Rate is Higher of : Rates in force Rate specified in the relevant provisions of the Act 20%
Special Issues # 1: Whether TDS is to be recalculated and once again done on account of foreign exchange fluctuations Sol: No; [Sandvik Asia Ltd Vs JCIT] [2012] [18 Taxmann.com 22] [Pune Trib.] # 2: Can the deductor effect TDS at a lower rate or nil rate Sol: Sec 195(2): Payer Approaches the dept and seeks the portion of the sum liable for TDS Sec 195(3): Payee Approaches the dept and obtains Nil TDS Certificate Sec 197: Payee Approaches the Dept and obtains Nil TDS Certificate / TDS at Lower Rate Certificate
Special Issues (Continued---) # 3: There is a non taxable sum proposed to be remitted to the Non-Resident. Is it necessary to approach the AO before remitting the sum to the Non-Resident? Sol: Generally No. However, in the cases notified U/S 195(7), one needs to approach the AO and get an order specifying the Appropriate Portion of the sum chargeable under the Act. Thus, even if the assessee is fairly certain about the non-taxability of a sum, yet approaching is mandatory in the notified cases U/S 195(7). The C s judgment in GE India Technology Cen (P) Ltd Vs CIT [2010] [193 Taxman 234] got nullified.
Special Issues (Continued---) # 4: Surcharge and Education Cess with regard to TDS If TDS rates are as per DTAA: No surcharge and No E.Cess [K.Srinivasan Vs CIT] [1972][83 ITR 346] [SC] No surcharge and No E.Cess when TDS is as per 206AA [Para 4.8 of Circular No 5/2010.] #5: Can the AO recover from the non-resident if the resident fails to deduct TDS U/S 195? Sol: Yes, results in tax liability of non-resident to pay income tax in respect of such payments but interest U/s 234B cannot be levied on the non-resident. [ADIT Vs Alcatel Lucent USA Inc] [2012] [21 Taxmann.com 302] [Delhi Tribunal]
Special Issues (Continued---) # 6: Whether TDS is required on the gross amount of remittance? Sol: No, it is attracted only on the u Chargeable Under the A t as Sec 195 is not a Charging Section. The Apex Court overruled the Karnataka HC s judgment in Samsung Electronics Co. ltd 185 Taxman 313 [2010]. #7: Whether TDS is applicable on Reimbursement of expenses like Travelling,Lodging, etc? Sol: The courts held that as there is no income element embedded in such pure reimbursements, no TDS needs to be done in those cases. [Clifford Chance, UK Vs DCIT] [2002][82 ITD 106] [Mumbai]; [Transmission Corporation of AP Ltd Vs CIT] [1999] 239 ITR 587 / 105 Taxman 742 (SC); Contrary ruling given by Kerala High court in [Cochin Refineries Ltd Vs CIT] [1996] [222 ITR 354]
Special Issues (Continued---) # 8: Whether TDS is attracted on Reimbursement of cost of services of a third party engaged by the non-resident? Sol: Such services would be part of FTS as the services were utilized for a business carried on by the resident client in India. Hence, such sums are liable for TDS. [Wallace Pharmaceuticals (p) ltd] [2005][278 ITR 97/148 Taxman 347] [Delhi] # 9: Whether TDS is attracted on allocated R&D Costs? Sol: The assessee company had paid its share of costs and expenses in relation to sharing the fruits of research and development. The Kolkatta HC held that the amount received by the foreign company from the Indian company did not constitute income assessable under the IT Act. Hence, no TDS in such cases. [CIT Vs Dunlop Rubber Co Ltd] [1983][142 ITR 493]
Special Issues (Continued---) # 10: TDS on certain allocated costs (like insurance charges and use of web area network) charged by the parent company Sol: As the payments are pure reimbursements of expenses incurred outside India, nothing can be taxed in India. Hence, no TDS. [DCIT Vs Lazard India (p) ltd] [2010] [6 taxmann.com 30] [Mum ITAT]; The Tribunal followed the decision of the Delhi HC in VAN OORD ACZ India (p) ltd [2010] [323 ITR 130]
Special Issues (Continued---) # 11: TDS on reimbursement of Salary, living allowance etc, of a person deputed to India by the Non-Resident: [Resources are at the disposal of the Indian Entity] Sol: The technicians were at the disposal of the Indian company during the deputation period and the Indian company was not only liable to bear their salaries but also TDS on salaries. TDS U/S 195 is attracted w.r.t fees for technical services and TDS U/S 192 is attracted so far as the salaries of the employees concerned. [DIT Vs HCL Infosystems Ltd] [2005] [274 ITR 261/144 Taxman 492] (Delhi) [Now the courts are applying Lien Test to determine Economic Employer Relationship]
Special Issues (Continued---) # 12: Reimbursement of salary whether to be taxed in the hands of the technicians or whether the same will be taxed in the hands of the employer as fees for technical services? Sol: When salary is reimbursed, it will be taxable in the hands of the employee who can claim exemption U/S 10(6)(vi) if the entity is not engaged in any other business or profession in India and his stay in India does not exceed a total period of 90 days during the relevant previous year. On the other hand, if the Indian entity is paying the foreign entity any fees for technical services, the same are taxed at the rates provided in the Act or DTAA whichever is more beneficial. [CIT Vs BHEL (2001) 252 ITR 218 (Delhi)]
Special Issues (Continued---) # 13: Whether TDS is attracted on Interest paid by an Indian Branch to its Head Office outside India? Sol: Prior to the Fin Act, 2015, the answer was No as held in [ABN AMRO Bank NV Vs ADIT] [2005] [97 ITD 89] [Kol-SB] Post the Fin Act, 2015, such sums are also liable for TDS. [Expl to Sec 9(1)(v).]
Special Issues (Continued---) # 14: Payment made by a Resident to an Indian Branch of a Foreign Bank: Whether TDS is attracted U/S 195 or U/S 194 Series? Sol: TDS is attracted U/S 195 # 15: Payment by the branch of an Indian company located offshore to the offshore branch of an Indian Bank: Whether TDS is attracted U/S 195 or U/S 194 Series? Sol: This is nothing but payment by a resident to another resident but payments are done on foreign soil. Sec 195 has no application. Sec 194A applies in this situation. Sec 194A which exempts such payments from the purview of TDS to Indian banks can be availed. Thus, no TDS even if 194A is applicable.
Special Issues (Continued---) # 16: Payment of interest on listed Indian Corporate Bonds held by a FII in dematerialized form: Sol: Securities listed in DEMAT form do not suffer TDS on their interest payments U/S 193. Sec 193 covers only the securities held by residents. Hence, Securities held by FII will be out of the purview of Sec 193 and hence Sec 195 is applicable on all such payments. Hence, TDS is must in those cases. # 17: Non-Resident in India is paying interest to the Indian branch of a foreign bank: Whether TDS is attracted? Sol: This is squarely hit by Sec 195. Please note that if a resident is paying interest to a bank then no TDS is attracted U/S 194A. There is no such relaxation with regard to sums covered U/S 195. Hence, TDS is required in such cases.
Special Issues (Continued---) # 18: Payment to a resident agent of a non-resident shipping company: Sol: Sec 172 will apply in case of payment to agents of non-resident ship owner but not Sec 195 (special provision will always override a general one). Sec 172 is a self contained code for levy and recovery of tax, and requires the filing of the return within a maximum time of 30 days from the date of departure of the ship. When NR himself is paying tax in advance, no need to effect TDS (Sec 172 >194C &195)
Special Issues (Continued---) # 19: Seminars, workshop and programme fees Pure Teaching = No TDS; Imparting Training = TDS. [Sri Ramachandra Educational & Health Trust] [2009] [181 Taxman 74] # 20: Training Held that training and other assistance provided in connection with transfer of technology / know-how would be fees for technical services. [AAR (New Delhi) in International Tire Engg Resources LLC [2009]] #21: Payment made in Kind Tax is required to be deducted at source where a payment contemplated U/S 195 is made in kind i.e sharing the fish caught. [Kanchanganga Sea Foods Ltd. 136 Taxman 8 (A.P)]
Special Issues (Continued---) # 22: Sample Analysis outside India on ore collected from India: Is TDS attracted? Sol: Services of sample analysis on Ore collected from India and tested in lab in Canada by non-residents is to be treated as rendered in India and liable to TDS. [South West Mining Ltd [2005] TIOL 5 (AAR)] # 23: Whether section 206AA would override the provisions of DTAA in a situation where non-resident taxpayer did not furnish PAN, thereby necessitating a minimum withholding tax rate of 20% irrespective of the rate provided in DTAA? Sol: Where tax had been deducted on the strength of the beneficial provisions of DTAAs, the provision of section 206AA cannot be invoked to insist on the tax deduction rate of 20%. Section 206AA is not a charging section but a part of procedural provisions dealing with collection and deduction of tax at source. It was held that even the charging sections 4 and 5 are subordinate to the principle enshrined in section 90(2). [Dy DIT Vs Serum Institute of India Ltd] [2015] [68 SOT 254 ][Pune Trib]
Special Issues (Continued---) # 24: TDS on Capital Gains Resident firm which buys house property from NRI cannot escape consequences of non-deduction of TDS u/s 195 from payments made to NRI-vendor by claiming the long-term capital gains from sale of house property by NRI are tax-exempt under Chapter-XIIA; Chapter XIIA provides exemption only with regard to certain types of financial assets [Viz Shares in Indian Companies, Debentures / Deposit Certificates in Indian Public Companies, CG Securities] but not all types of capital gains. [New Vistas Constructions v. ITO-I] [2015] [59 taxmann.com 213 (Hyd. Trib.)]
Special Issues (Continued---) # 25: TDS on Online Subscriptions of Journals: If these subscriptions were in the nature of having access to a database, then TDS is attracted. CIT (Intl Taxation) Vs WIPRO Ltd [2011][16 Taxmann.com 275][Karnataka]; On the other hand, If these subscriptions were towards purchasing journals / magazines whereby the payment is made through online and the hard copy of the books are received by the payer, then TDS is not attracted. [ CIT Vs HEG Limited [263 ITR 230][2003][MP-HC]
Taxation of Interest, Royalty and FTS [Sec 9(1)(v)/(vi)/(vii)] & TDS thereon
Principles of Taxing Interest, Royalty and Fees for Technical Services [Sec 9(1)(v)/(vi)/(vii)] : Situation # 1: Interest/Royalty/Fees for technical services received from the Central Govt or State Govt: Deemed to accrue or arise in India and hence taxable in India Situation # 2: Interest/Royalty/Fees for technical services received from a resident in India: Generally such incomes arise in India. However, if these considerations are attributable for carrying out any business/profession/any other source of income OUTSIDE INDIA then they arise OUTSIDE INDIA and hence such incomes are not taxable in the hands of the Non-Resident
Principles of Taxing of Interest, Royalty and Fees for Technical Services [Sec 9(1)(v)/(vi)/(vii)]: Situation # 3: Interest/Royalty/Fees for technical services received from a non resident: Generally such incomes arise outside India. However, interest will be deemed to accrue or arise in India, if and only if, such amounts are used for the purpose of carrying on any BUSINESS OR PROFESSION in India. [Note the omission of any other source.] Similarly, Royalty/Fees for technical services will be deemed to accrue or arise in India, if and only if, such payments are in respect of any business or profession or any other source of income in INDIA. [Note the inclusion of the word any other source.]
Meaning of Royalty after the amendments vide the Fin Act, 2012 w.r.e.f 1/4/1976 Software is included in the definition of oyalty Delhi HC s judgment in DIT v. Ericsson AB [2012] 204 Taxman 192 is nullified. [Explanation 4 to Sec 9(1)(vi) is introduced vide the Fin Act, 2012] Royalty includes consideration paid or payable in respect of A y Right, Property or I for atio even if the possession and control of such right is not given to the payer Thus, after the amendment the ruling in Asia Satellite Telecommunication Co. Ltd. v. DIT [2010] [38 SOT 158] is overruled. [Explanation 5 to Sec 9(1)(vi) is introduced vide the Fin Act, 2012] oyalty includes consideration towards bandwidth provided for down-linking signals (say in USA): Thus, the judgment in Infosys Technologies Ltd. v. CIT [2011] 145 SOT 157 (Bang.) was overruled. [Explanation 6 to Sec 9(1)(vi) is introduced vide the Fin Act, 2012]
Royalty accrues where Patent is exploited : Qual o s Case Royalty paid by a non-resident to another non-resident, such sum wo t be taxable unless such sum is a consideration for towards Business / Profession / Any other Source of Income in India. The Source of o alt would be deemed to be the place where patent is exploited viz., where the manufacturing activity takes place which is outside India in the instant case. Hence, o alt received by Qual o (Non-Resident) from the OEMs (Original Equipment Manufacturers) who carry out the manufacturing activities outside India is not taxable in India even if the CDMA handsets are sold to Indian Parties. [Qualcomm Incorporated Vs ADIT] [2013] [30 Taxmann.com 30] [Delhi- Tribunal]
Legal Position Post amendment to the definition of oyalty No Disallowance U/S 40a even after the amendment: Sec 9 has been amended by the Finance Act, 2012 by introducing Explanations # 4, 5 and 6. However, Sec 10(6A), 10(6B), 40a(i), 40a(ia), 44D, 44DA, 194J, 195 which deal with royalty are not amended. They still contain a reference to only Explanation # 2 to Sec 9(1)(vi) [i.e Definition as per the old law only.] [Sonata Information Technology Ltd Vs DCIT] [2012] [25 Taxmann.com 125] [Mumbai Tribunal] Sums already paid without TDS cannot be disallowed: If there is any payment made without deducting TDS prior to the amendment, then the same cannot be disallowed post amendment as it is impossible to perform such an action. It is in view of the legal maxim Le Non Cogit Ad Impossibilia [Which means that law cannot possibly compel a person to do something which is impossible to perform.] [Channel Guide India Ltd Vs ACIT] [2012] [25 Taxmann.com 25] [Mumbai-Tribunal]
DTAAs still treat sums paid towards software as towards Copyrighted Arti le but not towards Copyright No Disallowance if one opts to be governed by the provisions of DTAA: The Delhi HC in the case of DIT Vs Nokia Networks OY [2012] 25 Taxmann.com 225, held that amendments to the IT Act, whether retrospective or not, cannot be read into the DTAA. Consideration for use of a copyrighted article does not fall within the purview of o alt in Article 12(3)(a) of the India Finland DTAA.
Some Case Laws on oyalty and FT Case Law # 1: Payments made for live telecast of events in India are not taxable as they are not covered within the definition of oyalty : [ADIT (Intl. Taxation) Vs Neo Sports Broadcast (P) Ltd] [2011] [133 ITD 465] Case Law #2: Human Element is a must in order to constitute Fees For Technical er i es : Payments to a German Company for carrying out standard tests on the circuit breakers in order to establish that the design and the product meet the International Standards does not amount to FT as the tests were carried out in a laboratory automatically by machines where human interface was very minimal. [Siemens Ltd Vs CIT] [2013] [30 Taxmann.com 200] [Mumbai-Tribunal.]
Some Case Laws on oyalty and FT Case Law # 3: Income from distribution of Ci e atographi fil s is not royalty as per the provisions of Sec 9. Hence, it is not taxable even though the same amounts to o alt as per the provisions of DTAA. [ADIT Vs Warner Bros Picture Inc] [2012] [17 Taxmann.com 171] [Mumbai Tribunal] Case law # 4: Whether services provided by foreign law firms to their clients whose operations extended to India in connection with projects in India are taxable? Held, Yes. Rendering of services in India / having business connection is not necessary after the amendment. [Linklaters LLP Vs ITO] [2010] [40 SOT 501] After amendment vide the Finance Act, 2010, the C s judgment in Ishikawajma- Harima Heavy Industries Ltd Vs DIT [2007] [158 Taxman 259] [SC] got nullified.
Some Case Laws on oyalty and FT Case Law # 5: Fees for technical services paid by the resident towards a business outside India is not taxable in India. [ITO Vs Bajaj Hindustan Ltd (2011) 13 Taxmann.com 13] Case Law # 5A: Sums paid to Singaporean company for Logisti s er i e whether liable for TDS? Held No, as it did not satisfy Make Available Clause in DTAA. Thus, where a Singaporean company rendered logistics services to the assesse without making available its technical knowledge, experience or skill, there was no liability to deduct tax at source from the impugned payments under I dia i gapore DTAA. [DIT (Intl Taxation) Vs Sun Microsystems India Private Limited] [2014] [48 Taxmann.com 93] [Karnataka HC]
Some Case Laws on oyalty and FT Case Law # 6: In the case of FT covered under DTAA, it needs to be checked whether Make Available Clause is there. Unless the person utilizing the services is able to make use of the technical knowledge, etc,. by himself in his business or for his own benefit and without recourse to the performer of the services in future, it cannot be said that technical services as contemplated in this Article are rendered. [Raymond Ltd Vs DCIT] [2003] [86 ITD 791] [Mumbai]; [Mahindra & Mahindra Ltd Vs DCIT] [2009] [30 SOT 374] [Mumbai SB]; Some of the countries whose DTAAs contain Make Available Clause: Australia; Canada; Singapore; UK; and USA. Some other countries where make available clause is not there in DTAA but is available under MFN (Most Favoured Nation) clause (i.e under Proto ol section of the DTAA). Belgium; France.
Some Case Laws on oyalty and FT Case Law # 7 : Payment for online advertisement is not oyalty / FTS : Reasoning: Online advertisement services provided by Google Ireland and Yahoo USA were wholly automated services with no human intervention. Hence, they cannot be taxed as FTS. The payment made to Google / Yahoo cannot be taxed as oyalty as there was no material on record to suggest that any right in IPR / Technical Knowledge / Experience as specified in Sec 9(1)(vi) was transferred to the assessee company. Such amounts constituted business income of Google / Yahoo and in the absence of PE in India, such sums cannot be taxed in India. As per Commentary on OECD Model convention Website does not constitute PE. On the other hand, Server / Computer Equipment can constitute PE. [ITO Vs Right Florists (P) Ltd] [2013] [32 Taxmann.com 99] [Kolkatta Tribunal]
Some Case Laws on oyalty and FT Case Law # 8 : Strategic Consulting Services are not FTS Reasoning: In view of MAP proceedings settled between Government of India and Government of U.S.A., strategic consultancy services provided by assessee [Non Resident] to its clients [Residents] could not be held to be FTS/FIS and hence not taxable in India under article 12 of Indo-US DTAA [Mckinsey & Company INC Italy v. Asstt. DIT][2015][60 taxmann.com 466][Mum Trib.] Case Law # 9 : Arranger Fees are not FTS Arranger's fees paid by an Indian company to HSBC-Hongkong for arranging loan facility, was neither interest under section 2(28A) nor fees for technical service (FTS) under section 9(1)(vii); TDS under section 195 was not deductible. [Idea Cellular Ltd. v. Asstt. DIT [2015] 58 taxmann.com 101 (Mumbai Trib.)]
Some Case Laws on oyalty and FT Case Law # 10 : Supply of equipment and rendering of supervisory services No TDS German Company supplied equipment to Port Trust and also deputed its engineer to supervise. Such activity does not amount to having Per a e t Esta lish e t in India. In the absence of a PE, income does not arise to German Company in India as per the DTAA. Therefore, there is no tax liability. [CIT Vs Vishakapatnam Port Trust] [144 ITR 146] (AP)
Some Case Laws on oyalty and FT Case Law # 11 : No disallowance U/S 40a(i) for non deduction of TDS on Software if the expenditure is capitalized Section 40(a)(i) could not be invoked for disallowance of depreciation on amount capitalized, where assessee had made payment to a non-resident for purchase of software and amount had been capitalized, even though TDS had not been deducted on such payment by assessee. [Kawasaki Microelectronics Inc. v. Dy. DIT [2015] 60 Taxmann.com 256 (Bangalore Trib.)] However, the AO can resort to Sec 201 of the IT Act, 1961. [i.e He can recover the TDS amount from the assesse along with interest and penalty even though there is no disallowance of depreciation at the time of computing PGBP.]
Amendments By Fin. Act 2015
Indirect Transfer of Capital Assets made taxable vide the Finance Act, 2012 As per Sec 9(1)(i) All income arising or accruing, whether directly or indirectly, through the transfer of a capital asset situate in India. The Apex Court in Vodafo e International Holdings B.V Vs UOI [2012] [17 Taxmann.com 202] held that Sec 9 does not cover income arising from indirect transfers. Source in relation to an income is constructed to be where transaction of sale takes place and not where item of value, which was subject to transaction, was acquired or derived from. Section 9(1) is not a Look Through provision, merely because word through is there in the said section. The court held that it is only a Look At provision. The above judgment has been nullified by amending Sec 9 whereby I dire t Tra sfers are also made taxable. [Explanation 5 to Sec 9(1)(i)]
Explanation 5 to Sec 9(1)(i) vide the Fin Act, 2012 [Explanation 5 to Sec 9(1)(i): An Asset or a Capital Asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.] [Fin Act, 2012] What is the meaning of the word u sta tial? Contrary judgments by Mumbai HC in Parle Plastics Ltd. [2011] 196 Taxman 62 and the Delhi HC in Copal Research Ltd, Mauritius [2014] [49 Taxmann.com 125]
The word u sta tial occurring in Explanation 5 to Sec 9(1)(i) is now defined vide Explanation 6 to Sec 9(1)(i) by the Fin Act, 2015 The share or interest, referred to in Explanation 5 to Sec 9(1)(i), shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets a. exceeds the amount of ten crore rupees; and b. represents at least fifty per cent of the value of all the assets owned by the company or entity, as the case may be;
Exemption to Minority Share holders and Exemption in certain cases of Amalgamations / Demergers Thus, indirect transfers are also taxable vide the Fin Act, 2012 clarified vide the Fin Act, 2015. Explanation 7 to Sec 9(1)(i) is introduced exempting from capital gains tax in India in the hands of minority share holders; Also, exemption is provided vide Sec 47(viab) and Sec 47(vicc) in the cases of amalgamation of foreign companies / demerger of foreign companies where capital gains is exempted in the countries where amalgamating company / demerged company is incorporated as the case may be.
Sec 9 is amended but not the DTAAs Hence Indirect Transfers will not be taxable if DTAA provides for exemption Case Law : Shantha Biotechnics Limited (SBL) is a company incorporated in India. 80% of its shares are held by ShanH (a French Company) which is a JV between two French Companies GIMD and MA. GIMD and MA sold their shares in ShanH to another French Company a ofi. The AO invoked Sec 9 to tax the capital gains in the hands of the seller as it amounted to I dire t Transfer of Assets located in India. The AP HC held that vide Article 14(5) of DTAA between India and France, where shares of a company which is a resident of France (i.e shares in ShanH) are transferred, representing a participation (i.e share holding) of more than 10% in SBL (i.e the Indian entity), the resultant capital gains is taxable only in one country being the eller s Country. i.e The Capital Gains would be taxable only in France. Thus, the capital gains is not taxable in India. [Sanofi Pasteur Holding SA Vs Department of Revenue, Ministry of Finance] [2013] [30 Taxmann.com 222]
Interest paid by Branch (PE) in India to HO Bank outside India is liable for TDS [Explanation to Sec 9(1)(v) Introduction of Explanation Sec 9(1)(v): [W.E.F AY 2016-17]: For the purposes of this clause, It is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such nonresident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly;
Fund Mgt Activity in India o t result in BC for Offshore Funds Registered Outside India [Sec 9A] [W.E.F AY 2016-17] (1)Merely because an eligible investment fund carries on fund management activity in India through an eligible fund manager, there o t arise any business connection in India of the said fund (2)Likewise, such eligible investment fund o t be treated as resident in India merely because, the fund manager undertaking the fund management activities is situated in India (3)The eligible investment fund referred to in sub-section (1), means a fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit and fulfils the given conditions.
Who is an Eligible Fund Manager for the purposes of Sec 9A? The eligible fund manager, in respect of an eligible investment fund, means any person who is engaged in the activity of fund management and fulfils the following conditions, namely: Not an Employee/Not connected person Registered as Fund Manager or Investment Advisor He is acting in a ordinary course of his business Earns 20% of profits at max as remuneration
Reporting of payments of any sums to Non-Residents / Foreign Cos [Sec 195(6)] [W.E.F 1 st June 2015] 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 furnish the information relating to payment of such sum, in such form and manner, as may be prescribed. [Thus, payments towards import of goods shall also be reported in appropriate 15CA and 15CB forms read with Rule 37BB. The judgment in L.G.Electronics case resulted in amendment of Sec 195] Insertion of Sec 271-I [W.E.F. 1 st June 2015]: If a person, who is required to furnish information under sub-section (6) of section 195, fails to furnish such information, or furnishes inaccurate information, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one lakh rupees.
Procedure for furnishing of details of remittances to non-residents Note: It may be noted that where there are petty remittances [where 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], then it is not necessary to obtain a certificate from a CA. The assessee can fill the Part A of 15CA in such cases and effect remittance. The forms are not required in certain cases: [28 Cases notified in Rule 37BB]
Thank You Rajendra Prasad Talluri (RP), B.Com; CA; Grad CWA, rpdynamic@gmail.com, +91-98495-79413.