Withholding tax u/s 195 and filing of Form 15CA/ 15CB - Key issues April 2017
Section 195 Overview Section Provisions 195(1) Scope and conditions for applicability 195(2) Application by the Payer for determination of sum chargeable 195(3) Application by the Payee for nil withholding 195(4) Validity of certificate issued by the AO u/s 195(3) 195(5) CBDT empowered to make Rules in respect of Section 195(3) 195(6) CBDT empowered to provide forms in which information to be furnished 195(7)* CBDT empowered to specify class of persons or cases (where recipient is NR) who will be mandated to furnish application to AO for determination of withholding rate 195A Grossing up of Tax * Inserted by Finance Act, 2012 2
Liability for TDS on payments to NRs - Sec. 195(1) 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 [Sec. 2(37A)] Part II of 1st Sch to FA Credit to any account by whatever name called. The obligation to comply with WHT provisions arises irrespective of whether - The payer is a resident or NR; and - NR has a residence, a place of business, a business connection or any other presence in India No Threshold limit prescribed * Not being interest from Infrastructure debt fund (194LB), interest on loan borrowed in foreign currency (194LC) and interest on rupee denominated bonds of an Indian Co and Govt. Securities (194LD) 3
Meaning of any sum chargeable under the provisions of the Act Taxability to be determined under Section 5 and Section 9 - Nature of payment to be determined from payee s point of view - Subject to beneficial provisions of the DTAAs with respective countries - Sums not chargeable to tax in India on account of DTAA - outside ambit of Sec. 195 GE India Technology Centre (P) Ltd. vs CIT {[2010] 327 ITR 456 (SC)} A person paying interest or any other sum to a non-resident is liable to deduct tax under section 195 only if such sum is chargeable to tax in India and not otherwise 4
Basis of Taxability for Non Resident Payee Relevant Articles of Relevant Sections of the Nature of Income Basis of Tax general OECD Act Treaties Business / Profession Taxable if Business Connection in India or property or asset or source of income in India or transfer of a capital asset situated in India Section 9(1)(i) Articles 7 & 14 read with Article 5 Salary Taxable if services are rendered in India (TDS u/s 192) Section 9(1)(ii) Article 15 Dividend Exempt (if subject to DDT u/s 115-O) Section 9(1)(iv) r.w.s. 10(34) / 10(35) Article 10 Interest Section 9(1)(v) Article 11 Royalty Section 9(1)(vi) Article 12 Taxable, if source in India Fees for Technical Services Section 9(1)(vii) Article 12 If FTS clause not in treaty?? Capital Gains Taxable if situs of shares / property in India Section 9(1)(i) Article 13 5
Key issues - Scope and applicability At the time of credit/ payment Withholding of tax required on payment or credit, whichever is earlier. Tax withholding on payments in kind? Yes {Kanchanganga Sea Foods vs CIT [2004] 265 ITR 644 (AP)} Tax withholding on inter-adjustment of dues? Yes {J.B.Boda vs CBDT [1996] 223 ITR 271 (SC)} 6
Section 195(2) - Application by the Payer for Lower or Nil Withholding Order Applicant? The application to be made by the payer before the jurisdictional AO When to apply? When payer considers that the whole sum is not taxable in India -SC in Transmission Corporation of A.P. Ltd, 239 ITR 587 (SC) Rights of assessee safeguarded u/s 195(2) on application for determination by the AO of the appropriate sum to be chargeable to tax. Process Consequence Payer may approach the AO to determine the taxable portion of income in India. Rule 10 may be followed by the AO, however, no form has been prescribed AO may issue a certificate, determining the portion of income chargeable to tax The permission is valid for the period specified No specified time limit available to pass the order under Section 195(2) Appropriate systems in place to issue certificates in online mode Challengeable? Appealable before the CIT (A) u/s 248 where tax borne by payer and deposited (DCIT (IT) vs. Abu Dhabi Ship Building PJSC {[2016] 70 taxmann.com 224}) 18
Section 195(3) - Application by Payee for Nil Withholding Certificate Applicant? The application to be made by the payee before the jurisdictional AO Why to apply? Avail NIL withholding tax certificate for interest / other sum chargeable to tax Process Application in Form 15C (for Banking Co.) and 15D (all others) to the AO, read with Rule 29B AO may issue a NIL withholding tax certificate Consequence The permission is valid for the period specified unless cancelled No specified time limit available to pass the order under Section 195(3) Appropriate systems in place to issue certificates in online mode Revision Application before the CIT u/s 264?? Challengeable? Writ petition before the High Court?? 18
Sections 195(2), 195(3) & 197 Compared Particulars 195(2) 195(3) 197(1) Applicant Payer Payee Payee Purpose Determination of appropriate proportion of sum chargeable to tax No deduction of tax Deduction of tax at Lower / Nil rate Validity Valid for transaction/period covered in order Up to currency of certificate Prospective and up to currency of certificate Output Order Certificate Certificate Whether appealable under Section 248? Yes on deposit of tax & if borne by payer No No Revision of Order / Certificate u/s 264 Whether Writ can be filed before High Court Yes No? (Order / certificate) No? (Order / Certificate) N/A Yes? Yes? 9
Tax Residency Certificate (TRC) Section 90(4) provides that to avail treaty benefits, NRs must obtain a TRC TRC to be issued by the Government Authority of the country of residence TRC would be sufficient evidence for substantiating tax residency in a country Form 10F also required in conjunction with TRC [Sec. 90(5) r.w.r 21AB] Form 10F is a self-declaration by the non-resident 10
Rigours of section 206AA Section 206AA If the payee does not furnish PAN to deductor, TDS is higher of : - Rate specified under the relevant provision of the Act; - Rates in force; - 20% Scenarios where Section 206AA may pinch Payments to NRs where applicable tax < 20% Cases where tax is borne by payer (195A cases) 3. Income of recipient (NRI Individual) < taxable threshold, but payment is tax deductible 4. Recipient not required to obtain PAN Scenarios where Section 206AA may not apply A transaction is not chargeable to tax under the Act [e.g. import of goods] Sum is not at all chargeable to tax as per tax treaty [e.g. FTS under India-Thailand tax treaty] Whether treaty rate overridden by section 206AA? 11
Relaxation of Sec. 206AA vide Rule 37BC Provisions of Sec 206AA, not to apply in case of: - Payments in the nature of Interest, Royalty, FTS and transfer of any capital asset; - In order to avail benefit, the non-resident deductee to furnish the following : Name, e-mail id, contact number; Address in the country of residence; Tax Residency Certificate (if law of country of residence provides for such certificate); Tax Identification Number (TIN) in the country of residence; To report the details specified in notification, corresponding changes have been made in quarterly TDS return Form 27Q The aforesaid provision is applicable with effect from 1 June 2016. 12
Section 206AA Applicability scenarios Sr. No Particulars WHT requirement under section 195 206AA applicability (assuming PAN is not available) Rate of withholding (A) DTAA country 1 Sum is not chargeable to tax under the Act X X NA 2 Income is chargeable to tax in the Act X X NA however, not chargeable to tax under DTAA 3 Sum is chargeable to tax under the Act as well as the tax treaty: (a) Tax treaty provides for rate lower than 20% Treaty (b) Tax treaty provides for rate greater than 20% 20%, however, rate as per Act is lower (c) Tax treaty rate greater than 20% * Treaty or Act w.e. is beneficial 13
Section 206AA Applicability scenarios (cont d) Sr. No Particulars WHT requirement under section 195 206AA applicability (assuming PAN is not available) Rate of withholding (B) Non-DTAA country 1 Sum is not chargeable to tax under the Act X X NA 2 Sum is chargeable to tax under the Act (a) Tax rate under the Act is less than 20% 20% (b) Tax rate under the Act is more than 20% * Rate under the Act Whether withholding tax rate u/s 206AA is required to be increased by surcharge and cess? * May not be of consequence since normal WHT as per the Act/ DTAA is greater than 20% 14
Penalty and prosecution proceedings Section Default Exposure 40(a)(i) TDS not deposited on payment made for expenses Disallowance of (30%) 100% expense 201(1) Default in making payment of tax Interest u/s 220 and penalty upto 100% of tax arrears u/s 221 271C Failure to deduct tax Penalty equal to 100% of tax, as applicable 276B Failure to pay to the CG, tax deducted under the provisions of Chapter XVII-B or the tax payable by him, as required by (i) section 115-0(2); or (ii) second proviso to section 194B Prosecution of 3 months to 7 years No limit specified for a fine 271-I Default in furnishing of information or furnishing incorrect information u/s 195(6) Penalty of INR 1 lakh (Applicable per transaction or p.a.?) 40(a)(ib) Equalisation Levy not deducted / deducted but not paid Disallowance of 100% expense 15
Case study Tax withholding on reimbursements SC in GE India Technology Services [2010] 327 ITR 456 (SC) - Tax withholding mandate u/s 195 of the Act is only on the component which is chargeable to tax and not otherwise Calcutta HC in Dunlop Rubber Co. Limited [1982] 10 taxman 179 Amount received by way of recoupment of expenses were merely reimbursement of part of large expenditure at actuals, shared jointly in connection with the research work Mumbai ITAT (SB) in Mahindra & Mahindra [2014] 122 TTJ 577 (Bom.) When expenditure is incurred and that sum reimbursed at actual cost, same is not income TDS required on entire sum irrespective of payment comprising of reimbursement : Cochin Refineries Ltd [1996] 222 ITR 354 (Kerala HC) Karnataka Urban Infrastructure Development Finance Corporation [2009] 308 ITR 297 (Kar HC) Practical considerations When in doubt on applicability of Sec. 195 provisions to a particular payment, advisable to obtain clarity by - Obtaining a lower or Nil withholding order from the AO - Obtaining an advance ruling from the AAR (to be evaluated having regard to the facts of each case) 16
Section 206AA Key decisions M/s Nagarjuna Fertilizers and Chemicals Limited vs ACIT {[2017] TS-67-ITAT (Hyd)} Higher rate of 20% cannot override beneficial treaty rates. DDIT vs Serum Institute of India Ltd {[2015] 68 SOT 254 (Pune)} Higher rate prescribed under the Act would not prevail over the lower rate under the DTAA DCIT vs Infosys BPO Ltd {[2015] TS 408 ITAT (Bang)} No scope of deduction of tax @ 20% as per section 206AA when benefit under DTAA is available to the assesse. M/s. Wipro Ltd. vs. ITO {[2013] TS 1547 ITAT (Bang)} The provisions of TDS has to be read along with DTAA for computing the tax liability and therefore no scope for deduction of tax at source @ 20% u/s 206AA of the Act. Bosch Ltd vs ITO {[2012] 141 ITD 38 (Bang)} Tax needs to be deducted at the higher of the rates specified in the Act (i.e., 20% u/s 206AA will apply). However, the grossing up need not be done @ 20% specified u/s 206AA 17
Royalty and FTS Scenario 1 Scope similar to domestic tax legislation Scenario 2 Scope of DTAA is restrictive compared to domestic legislation Scenario 3 - Scope of DTAA or Rate is restricted through use of MFN Scenario 4 Royalty and FTS is effectively connected with PE in India Particulars Directly Managerial MFN FIS under Royalty Country Australia, Canada, Cyprus, Malta, Netherlands, Portugal, Finland, Singapore Singapore covered, USA Not covered Belgium, France, Israel, Kazakhstan, Spain, Sweden Australia Scenario 1 Taxable in the year in which payment is made Scenario 2 Taxable in the year of accrual 18
FTS Clause not in Treaty Key decisions Bangkok Glass Industry Co. Limited vs ACIT {[2013] 34 taxmann.com 77(Madras HC)} Royalty and FTS cannot be taxed under residual Article -22 of India Thailand DTAA, unless item of income does not fall under any other express provisions of the DTAA. ABB FZ - LLC {[2016] 75 taxmann.com 83 ITAT (Bang)} Once DTAA does not recognize any income as FTS or Royalty, then classification to be done as per Article 7 (Business Profits) and in absence of PE in India, income not chargeable to tax in India. 19
Glimpse of Taxability as per Treaty A) Capital Gains Nature of Asset Immovable Property Moveable Property i.r.o PE/fixed base in Other Country Ships and Aircraft Shares of a co. with principal immovable property Shares of other cos Incidence of Tax Location of Immovable Property Other Country Place of Residence of transferor Location of principal immovable property Place of Residence of Co/Situs of shares. Any other property other than above Place of Residence of transferor B) Dividend Paid by a Co. resident in India to a resident of other country tax in the other country If beneficial owner is resident of other country dividend taxable in accordance with Domestic Laws of the country of which the Co. paying the dividend is a resident 20
Grossing-up of taxes In cases where tax payable on payment to a NR is to be borne by the payer: - Such tax borne by the payer also forms part of NR s income; - Payment to NR to be grossed up which would, after withholding taxes, be equal to amount Particulars payable to NR Amount (in INR) Amount payable to non-resident (net of tax) 100 Tax rate applicable 10% Gross-up income: 100 * 100. (100-10) Tax payable (INR 111 * 10%) 11 Net amount paid to non-resident (INR 111 INR 11) 100 111 Grossing up also at 20% in case of no PAN? 21
Overview 1. Form 15CA - Information to be furnished by the Remitter electronically. New Form No. 15CA split into 4 parts vide Notification No 93/2015 dtd 16-12-2015 Part A Payments chargeable to tax and <= INR 5 Lakh or Part B - Payments chargeable to tax, > INR 5 Lakh and order/certificate u/s 195(2)/(3)/ 197 obtained or Part C Payments chargeable to tax, > INR 5 Lakh and Form No 15CB is obtained or Part D Applicable where the payments are not chargeable to tax 3. Form 15CB - Prescribes format of Certificate to be obtained from a CA by Remitter Applicability Only in respect of transactions reported in Part C of Form 15CA. Form 15CB to be furnished electronically 5. Form 15CC Furnish information of remittances made by AD (Bankers) quarterly. Note: A list of 33 specified transactions and remittance by individual under Liberalised Remittance Scheme, excluded from compliance u/r. 37BB(3) 22
Procedure for foreign remittances Make classification of transaction (Business income, Royalty, fees for technical services, etc.) Verify the factual and Basic documents. For e.g. invoice, contracts, legal status, PAN in India. Check if the payment is covered under the Domestic Law Check Taxability as per DTAA (No PE, beneficial Owner, obtain TRC, Form 10F, Protocol to the tax treaty and commentaries) Check if order or certificate for NIL or Lower rate is available u/s 195(2)/195(3)/197 Check if falling within list of 33 excluded transactions e.g. imports of goods, loans given, investments made abroad, business travel, etc. Remitter to obtain certificate of a CA in Form 15CB electronically, if required Remitter to electronically upload the remittance details in Form 15CA (Part A/B/C/D) 23
Applicability of Section 195(6) Applicability in cases where tax is not required to be withheld u/s 195(1)? S. No. Remittance taxable in India Scenarios Payment from India Provisions u/s 195(6) 1 Y Y Applicable 2 Y N Applicable 3 N Y No Form 15CB, Part D of 15CA required* 4 N N Not applicable * Unless falling under list of excluded transactions u/r 37BB(3), e.g. import of goods. 24
Summary Whether payment chargeable to tax YES NO Whether amount > INR 5 Lakh during FY Whether it is specifically excluded? YES NO YES NO Whether 197/195(2)/195(3) obtained? Part A of Form 15CA No Form 15CB No certification required Part D of Form 15CA No Form 15CB YES NO Part B of Form 15CA Part C of Form 15 CA, & Form 15CB 25
List of excluded Remittances U/R 37 BB(3) 1. Indian investment abroad-in equity capital (shares) 2. Indian investment abroad-in debt securities 3. Indian investment abroad-in branches and wholly owned subsidiaries 4. Indian investment abroad-in subsidiaries and associates 5. Indian investment abroad-in real estate 6. Loans extended to Non-Residents 7. Advance payment against imports 8. Payment towards imports-settlement of invoice 9. Imports by diplomatic missions 10. Intermediary trade 11. Imports below Rs.5,00,000-(For use by ECD offices) 12. Payment for operating expenses of Indian shipping companies operating abroad 13. Operating expenses of Indian Airlines companies operating abroad. 14. Booking of passages abroad Airlines companies 26
List of Excluded Remittances (Contd.) 15. Remittance towards business travel. 16. Travel under basic travel quota (BTQ) 17. Travel for Pilgrimage 18. Travel for Medical Treatment 19. Travel for education (including fees, hostel expenses etc.) 20. Postal Services 21. Construction of projects abroad by Indian companies including import of goods at project site 22. Freight insurance relating to import and export of goods 23. Payments for maintenance of offices abroad 24. Maintenance of Indian embassies abroad 25. Remittances by foreign embassies in India 26. Remittance by non-residents towards family maintenance and savings 27. Remittance towards personal gifts and donations. 28. Remittance towards donations to religious and charitable institutions abroad 27
List of Excluded Remittances (Contd.) 29. Remittance towards grants and donations to other Governments and charitable institutions established by the Governments 30. Contributions or donations by the Government to international institutions 31. Remittance towards payment or refund of taxes 32. Refunds or rebates or reduction in invoice value on account of exports 33. Payments by residents for International Bidding. 28
Segment 4 Any Questions? 29
Thank You CA. K. Prasanna email prasskrish88@gmail.com Mobile - +91 98844 82153