PROVISIONS, AMENDMENTS AND … 195 OF THE INCOME TAX ACT,1961 PROVISIONS, AMENDMENTS AND...

SECTION 195 OF THE INCOME TAX ACT,1961 PROVISIONS, AMENDMENTS AND CONTROVERSIES

1

WIRC – Pune Camp CPE Study CircleJanuary 19, 2013

CA JIGER SAIYA

[email protected]

Contents

IntroductionIntroduction

Recent AmendmentsRecent Amendments

2 © MZSK & Associates

Recent AmendmentsRecent Amendments

CA Certificate in Form 15CBCA Certificate in Form 15CB

Issues & ControversiesIssues & Controversies


Section 195 of the Income Tax Act,1961 Provisions, Amendments and Controversies

© MZSK & Associates3

Introduction

Objective of Section 195

The objective is to ensure, as best as possible, that the tax liability on theincome element, on the amount paid is got deducted at source itself so


income element, on the amount paid is got deducted at source itself sothat the Department is not put to the hassles of recovering it from a non-resident whose connections with India may be transient or whose assets inIndia may not be sufficient to meet the tax liability

- XYZ, In Re: P No 18 of 1995, 238 ITR 575 (AAR)

Section 195 – Gateway to International Taxation


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


Deduction from payment

for lower/NIL withholding

Payee for lower/NIL 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

Liability for Deduction under Section 195

PayerPayer PayeePayeeAmount PayableAmount Payable

Time of DeductionTime of Deduction

Rate of DeductionRate of Deduction


Any Person responsible for

paying

Any Person responsible for

paying

Non Resident (not a

Company)

Non Resident (not a

Company)

Foreign CompanyForeign Company

Interest or any other sum (other than Salaries)

Interest or any other sum (other than Salaries)

Chargeable under provisions of the IT Act

Chargeable under provisions of the IT Act

Payment or Credit

whichever is earlier

Payment or Credit

whichever is earlier

Rates in ForceRates in ForceOR AND


� 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)]


� 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


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


� 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

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


� 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

Difference Between 195 and Other TDS Provisions

Factor Other TDS Provisions Section 195

Payer Specified Person Any Person

Payee Resident Non-Resident


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

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


Purpose To determine appropriate portion of sum chargeable to tax and liability for withholding tax

Application for Nil withholding in specified cases

Lower or Nil withholding

Application

Form

No Prescribed form Form No. 15C or 15D Form No. 13

Appeal Order appealable under section 248 of IT Act

Order not appealable-Writ petition to High Court

Order not appealable-Writ petition to High Court

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%


* Surcharge & Education Cess not considered

� Grossing up rate when provisions of Sec 206AA are applicable

10% 11.11%

15% 17.65%

20% 25%

40% 66.67%

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-resident, but contract is cancelled

Remitted amount is duly refunded to the payer bythe payee


resident, but contract is cancelled the payee

3 Contract cancelled after partialexecution

No remittance is made to the non-resident for thenon executed part

4 The contract is cancelled after partialexecution and remittance related tonon-executed part is made to the non-resident

Amount refunded to the payer or no remittance wasmade but tax was deducted and deposited whenamount was credited to the account of the non-resident

…Refund of Tax Deducted u/s 195

Sr Scenario Criteria

5 Amendment in law or by notificationunder the Act

There occurs exemption of the remitted amount fromtax

6 Order passed under section 154 or 248 Tax deduction liability of the payer is reduced


6 Order passed under section 154 or 248or 264 of the Act

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 athigher rate under domestic law while a lower rateis prescribed under DTAA

Consequences of Non/ Short Deduction

Non Deduction/ Short Deduction


Assessee deemed to be Assessee in Default

Disallowance of Expenditure

Under section 40(a)(i) – Business Expenditure

Under section 58(1)(a)(ii) – Expense against other Income

Recovery of Tax and Interest under section

201Penalties

Under section 221 –Tax in default

Under section 271C –Failure to deduct tax

at source

Prosecution under section 276B




Recent Amendments

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

…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


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

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


� 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




CA Certificate in Form 15CB

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


� 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

CA Certificate – Practical Issues

Charecterisationchallenges:

Royalty, FTS, etc

Whether TRC is sufficient evidence for claiming

Treaty relief


Does the Payee have a PE in India?

What is the profit attributable to PE in

India?

No books of accounts in India

Issuance of certificate in absence of complete

information

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




Issues & Controversies

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

…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 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

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


� 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

� 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

Nathpa Jhakri Joint Venture - 37 SOT 160 (Mum)

Modicon Network P Ltd – 14 SOT 204 (Del)

Wallace Pharmaceuticals P Ltd - 278 ITR 97 (AAR)


(Del)

Reimbursement of allocated cost (ie. cost sharing arrangements)

Dunlop Rubber Co - 142 ITR 493 (Cal) Danfoss Industries (India) Ltd - 268 ITR 1 (AAR)

Payment for services rendered at cost

Timken India Ltd - 273 ITR 67 (AAR) AT&S P Ltd – 157 Taxman 198 (AAR)

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

Telco Ltd - 245 ITR 823 (Bom)

Industries Engg Project (P) Ltd - 202 ITR 1014 (Del)

Cochin Refineries Ltd - 222 ITR 354 (Ker)

SRK Consulting - 230 ITR 206 (AAR)


Royalty & FTS Clifford Chance - 82 ITD 106 (Mum)

Mahindra and Mahindra Ltd - 1 SOT 896 (Mum)

Fortis Healthcare Ltd - 45 SOT 190 (Chd)

Ashok Leyland - 120 ITD 14 (Chennai)

Bovis Land Lease – 36 SOT 166 (Bang)

CSC Singapore Pte Ltd - 2012-TII-35-ITAT-DEL-INTL (Del)

Reimbursement of living allowance, etc of a person deputed to India by the non-resident

Morgenstern Werner - 233 ITR 751(All)

Goslino Mario - 241 ITR 312 (SC)

BHEL - 252 ITR 218 (Del)

HCL Infosystems Ltd - 274 ITR 261(Del)

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


� 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

� 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


� 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

Contact Details

CA Jiger Saiya

E : [email protected]: +91 9323108666

MZSK & Associates, Chartered Accountants

THANK YOU

Pune Office:

Business Bay, Level 3, Plot No 84,Wellesley Road, Near RTO,Pune 411001, INDIAT: + 91 20 26315500

www.mzsk.in

Mumbai Office:

The Ruby, Level 9, North-West Wing,Senapati Bapat Marg, Dadar (W),Mumbai 400028, INDIAT: +91 22 24393600

PROVISIONS, AMENDMENTS AND … 195 OF THE INCOME TAX ACT,1961 PROVISIONS, AMENDMENTS AND...

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