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TDS on Payments to Non-Residents & Certification Procedures - CA Rutvik Sanghvi

Learn about scope, applicability, chargeability, deductibility, and certification procedures under Section 195 for non-resident payments. Includes important cases and legislative amendments.

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TDS on Payments to Non-Residents & Certification Procedures - CA Rutvik Sanghvi

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  1. TDS on Payments to Non-Residents & Certification Procedures- CA Rutvik Sanghvi ICAI, Coimbatore Branch 8th February 2013

  2. Contents

  3. Snapshot of Section 195 195(1) Scope & applicability

  4. Scope of Section 195(1) • What is covered? • Payments to NR for business, services & transfer of assets • Incomes taxable in India without any threshold limit • Except for Salaries, Dividends, Interest u/s. 194LB &194LC, Payments to FIIs, Shipping income u/s. 172 • When is it applicable? • On credit or payment whichever is earlier • Who are covered? • Residents – • All types of persons • Non-residents – • Whether or not they have a nexus

  5. Chargeability to Tax in India Provisions of the Act or DTAA, whichever are more beneficial, prevail

  6. Taxability – Interplay between the Act & DTAA

  7. Deductibility of tax • On business income or professional fees paid to NR • In case of ‘business connection’ or PE / Fixed Base in India • On Royalties & FTS • As expanded by Finance Act, 2012 • On reimbursement of expenses • On purchase of shares or property • On gifts to non-relatives • On payments made by a branch to its HO • On payment in kind • On payments to Agent of Non-resident as per Sec. 163

  8. Extraterritoriality • Applies to transactions between Non-residents • The Act applies to the whole of ‘India’ • SC Decisions • GVK Industries • Vodafone • Clarificatory amendment – Explanation 2 to S. 195(1) • Obligation to make deduction applies and is deemed to have always applied to all NRs whether or not NR has any presence in any manner whatsoever in India! • Enforceability

  9. Taxability – on income or on gross sum • Income tax to be deducted from ‘sum chargeable to tax’ • Transmission Corporation - 239 ITR 587 (SC) • The obligation of the respondent-assessee to deduct tax under section 195 is limited only to appropriate proportion of income chargeable under the Act • Karnataka High Court in Samsung Electronics • GE India Technology Centre - 193 TAXMAN 234 (SC) • One cannot read section 195, as suggested by the department, namely, that the moment there is remittance the obligation to deduct TAS arises. • Section 195(7) – Amendment by Finance Act 2012

  10. Timing of Deduction • Deductibility at the time of credit or payment whichever is earlier • Exception for interest payable by Government, Public Sector Bank or Public Financial Institution • Amount adjusted, not paid • Raymond Ltd. (80 TTJ 120) • Treaty Situation?

  11. Rates in force • Section 2(37A)(iii) • Part II to the First Schedule of Finance Act 2012 • DTAA rates • Surcharge to be added? • Education Cess to be added? • Presumptive provisions: 44B, 44BB, 44BBA, 44BBB • Section 44DA r.w. Section 115A

  12. Section 206AA • Non-obstante provision introduced from 1st April 2010 • Requires the NR receiving income to furnish PAN • Circular 5/2010 dated 3rd June 2010 • In absence of PAN, higher of the following rates applicable: • Rate specified in the relevant provision of the Act; • Rate or rates in force; or • Rate of 20% • Treaty Override? • Credit in the other country?

  13. Section 206AA…contd. • Applicable where no tax payable? • No, as provision applicable only on sum or income or amount on which tax is deductible • Refund of higher tax deducted • Surcharge or educational cess not to be added to 20% • Grossing up of tax under Section 206AA • Literal reading of Section 195A refers to ‘rates in force’ • Certificate u/s. 197 will not be issued without PAN • Section applicable also when PAN incorrect or invalid

  14. Tax Residency Certificate • Section 90(4) – Introduced w.e.f 1.4.2013 • NR cannot avail benefit under Treaty without Tax Residency Certificate • Containing such particulars as prescribed of his being Resident in that country • Obtained from the Government • Applies to all NRs without any threshold limit • Not required in case no benefit availed under treaty • Rule 21AB specifies prescribed particulars • Rule applicable from 1.4.2012 or 1.4.2013? • Introduced vide Notification No. 39 dated 17.9.12 • TRC necessary, but not sufficient, for treaty residency • Memorandum to the Finance Bill 2012 • AzadiBachaoAndolan

  15. Tax Residency Certificate…contd. • Particulars include • Name of the assessee; • Status (individual, company, firm etc.) of the assessee; • Nationality (in case of individual); • Country of incorporation or registration (in case of others); • Assessee’s tax identification number in the country of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country; • Residential status for the purposes of tax; • Period for which the certificate is applicable; and • Address of the applicant for the period for which the certificate is applicable; Certificate should be verified by the Government of that country

  16. Grossing up of tax • Section 195A - Income payable “net of tax” • Not applicable to Presumptive tax provisions? • CIT vs. ONGC (264 ITR 340)

  17. Applications by the Payer - 195(2) vs. 197

  18. Section 197 – Rules and Form • Rule 28A • Form 13 • Rule 28AA – Conditions applicable • Determination of existing and estimated tax liability based on • Tax payable on estimated income of previous year • Tax payable on assessed/returned income of past 3 years • Existing tax liability • Advance tax payment & Tax deducted at source • Certificate valid for such period of the previous year as specified • Will be issued direct to the person responsible for deduction of tax at source

  19. Mandatory application - Section 195(7) • New provision brought in by Finance Act 2012 • Mandatory application to AO for determination of sum chargeable to tax • Even if sum is not chargeable to tax as per provisions of the Act • Specify a class of persons or cases by notification • No notification yet • General or special order of the AO • Once order provided, deduction of tax from such sum • No provision for appeal?

  20. Application by Payee -195(3) • Payee eligible as per Rule 29B can only apply • Indian Branch of a Foreign Bank • For interest or any other sum not being dividends • Indian Branch of a Foreign Company • For any sum not being interest or dividends • Conditions • Income receivable on its own account • Regularly assessed to tax • Not in default of any tax, interest, penalty or fine • For a non-banking company, further conditions of • Carrying on business since last five years • Value of fixed assets exceeds Rs. Fifty Lakhs • Application in Form 15C for Banks & Form 15D for others • No prescribed format for issue of certificate, valid for that FY • Certificate not appealable

  21. Reporting u/s. 195(6) • Person making payment to NR to furnish prescribed information online • Rule 37BB applicable from 1.7.2009 • Information & Undertaking – Form 15CA • CA Certificate – Form 15CB • Applicable for every remittance • Separate certificate for each type of income

  22. CA Certificate • RBI mandate for No Objection Certificate from IT Department in case of remittance to NR • Objective of CBDT circular to dispense with NOC requirement • CA certificate not a substitute for 195(2) or 195(3) • Not required where order u/s.s 195(2) or 195(3) available • Typical transactions • Transfer of funds from own bank account in India to Foreign • Transfer from NRO to NRE accounts • Payment of Expenses • Form uploaded online – but apparent mistakes

  23. Form 15 CB • CA certificate to be provided in physical form • Information to be uploaded online in Part B of Form 15CA • Clause-wise analysis - • Certification clause - Documents that should be reviewed • Certified copy of signed Contract • Certified copy of signed/stamped invoice • Certified ledger account • Correspondence on which reliance is placed including emails • Supporting vouchers in case of reimbursements a must • Print out of website details of Payee • Physical certificate should be amended for documents reviewed

  24. Form 15 CB…contd. • Clause A - Name and address of the beneficiary of the remittance • ‘Beneficiary of Remittance’ not to be confused with Beneficial Owner of Income • Clause B(6) & (7) – Amount & Rate of TDS • Documentary backup for determination of rate • Tax Residency Certificate

  25. Form 15CB…contd. • Clause B(10) - Nature of remittance as per agreement/document • Important for determining classification of income • Documents reviewed must enable determination of nature of remittance – otherwise call for more documents • Many options provided in the form – one can use as reference • Clause B(11) - In case the remittance is net of taxes, whether tax payable has been grossed up? If so computation thereof may be indicated. • Provide computation on a separate sheet

  26. Form 15CB…contd. • Clause B(12) - If the remittance is for royalties, fee for technical services, interest, dividend • DTAA clause and reasons for selecting the clause • Proper reasoning to form part of the physical certificate • Detailed reasoning if rate lower than DTAA rate applied • Finance Act 2012 amendments • Retrospective explanations expanding scope of taxable Royalties • Issues • Software Payments • Online Transactions • “Make Available” • E-commerce transactions • Source Rule u/s. 9

  27. Form 15CB…contd. • Clause B(13) - In case remittance is for supply of articles or things (e.g. plant, machinery, equipment etc.) • Obtain proper declaration from payee for no PE in India • Proper validation of facts, cross-checking • If PE in India, whether CA can issue certificate for profits attributable? • Issues • Offshore supply • Withdrawal of Circular 23 of 1969 • ‘Force of Attraction’ clause in DTAA

  28. Form 15CB…contd. • Clause B(14) - In case the remittance is on account of business income • Liable to tax in India? • Obtain declaration for no ‘business connection’ in case DTAA not applicable • Issues • ‘Business Connection’ • Payment to Foreign Agents • Explanation 4 to Sec. 9(1)(i) – expansion?

  29. Form 15CB…contd. • Clause B(16) - In case of any other remittance, if tax is not deducted at source for any reason, details thereof. • Provide reasons why classified as ‘other remittance’ • In case of remittance other than income – mention the exact nature • Separate certificates for income and non-taxable capital receipts • Issues • Reimbursements – facts, documents and supporting

  30. Form 15CA • Remitter’s details • PAN mandatory • TAN mandatory if deduction of tax at source • Contact and Address Details • AO Code generated from PAN • Recipient’s details • PAN – S. 206AA • Status – does not cover individuals • Separate fields for Principal place of business & Country to which remittance made • Undertaking • Assessee not absolved from interest, penalty or prosecution • AO can call for more details

  31. Objectives • To determine taxability in India • To know the actual overall tax cost • How would it be treated in the residence country • To provide a complete and practical solution • Am I safeguarding myself properly?

  32. The Right questions to ask • Facts • Details about the transaction • Locking down the facts • Residential status of the assessee • Tax Residency Certificate • PE? • Identify the legal status of the tax payer • Determining the Country of Residence of tax payer (CoR) • Determining the Country of Source of income (CoS) • Ascertaining the nature of income and its categorisation • Declaration to be obtained for key facts

  33. Tax treaty • Applicability of treaty • Residential status • Taxes covered • Persons covered • Must check • Technical Explanation (US) • Protocols and Memorandum of Understandings • MFN clause • LOB clause • References • OECD and UN Model Convention Commentary • Commentaries by learned authors • Klaus Vogel • ArvidSkaar

  34. Some practical aspects • Cost benefit analysis • Credit in the home country against tax paid in India • Complex legal structures – Unresolved issues • LLPs / Partnerships • Law is always trying to catch up to business • Eg - E-commerce • Not to make TP adjustments • Foreign Exchange Rate • Rate as on the day on which tax is deducted at source as per Rule 26 • Difference between forex rate on date of deduction and date of remittance • Forex gain or loss – no TDS required

  35. Other laws • Consider for cross-checking • FEMA • Customs • Service tax • R & D cess

  36. Consequences • Disallowance of expense u/s. 40(a)(i) • Assessee in default u/s. 201(1) • Retrospective effect from 1.6.2002 • Penalties • For failure to pay tax deducted – S. 221 • For failure to deduct tax – S. 271C • For failure to file TDS return – S. 272A • Prosecution • For failure to pay tax deducted – S. 276B

  37. Refund of TDS • CBDT Circulars r.w. Section 239 • Application to be made within 1 year from last date of AY • Applicable to cases where: • Contract is cancelled in whole or partially • Change in law, or order, reducing tax liability • Mistakes in payment of tax

  38. THANKS Rutvik Sanghvi Partner, Rashmin Sanghvi & Associates rutvik@rashminsanghvi.com

  39. Section 195(1) – Scope • Any person • Responsible for paying • To a non-resident • Or a Foreign Company • Any interest or • Any other sum chargeable to tax under the provisions of this Act • At the time of credit of such income to the account of the payee or • At the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, • Whichever is earlier, • Deduct income-tax thereon • At the rates in force

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