Section 195 Related-TDS payment to non residents · PDF fileT.G. Suresh Chartered Accountant...

T.G. Suresh Chartered Accountant

Section 195 Related-TDS payment to non

residents

Presentation Overview

• Section Analysis

• Tax rates• Tax rates

• PAN Mandate/206AA

• Procedural Aspects (Form 15CA and Form 15CB)

• Consequences of Non Compliance of TDS

Overview- Section 195

Section Provisions

195(1) Liability for deduction from payment

195(2) Application by Payer for lower/ NIL

withholdingwithholding

195(3) Application by Payee for lower/NIL

withholding

195(4) Validity of the Certificate

195(5) CBDT empowered to notify rules for 195(3)

195(6) Obligation on Payer to furnish information as

prescribed

195(7) CBDT empowered to notify class of persons


Difference between 195 and other TDS sections

Subject Section 195 Other TDS provisions

Nature Income Chargeable under

Income Tax Act

Specific Payments, Whether

Income or not.Income Tax Act Income or not.

Sum Any Sum Above threshold

Applicability Any persons Specified persons in the

sections

Certification for remittance Mandatory Not required


Difference between 195(2), 195(3) and Section 197

Factor Section 195(2) Section 195(3) Section 197

Applicant Payer Payee Payee

Purpose To determine appropriate sum Application for Lower or NIL Purpose To determine appropriate sum

chargeable to tax and liability

for withholding tax

Application for

Lower/nil withholding

in specified cases

Lower or NIL

withholding

Application Form No prescribed form Form No 15C or 15D Form No 13

Appeal Appealable under section 248 Order not appealable-

Writ petition to high

court

Order not

appealable- Writ

petition to high

court


• Sec 195 (1) - Scope - Deduction on the earlier of credit or payment of sum

chargeable at the rates in force

− Person includes non-resident having place of business or residence in India

or not – Finance Act , 2012 or not – Finance Act , 2012

• Exception:

− Sec192 - Salary

− Sec194LC - Interest on approved foreign currency loans obtained by an

Indian company

− Sec115-O - Dividend referred in Dividend Distribution Tax

• Very wide – any sum, including reimbursements, chargeable under the Income

Tax Act


Meaning of “Any sum chargeable”

Any sum Chargeable to tax means

• Amount paid which wholly bears the character of income

• gross amount, the whole of which may or may not represent income or • gross amount, the whole of which may or may not represent income or

profits

• Section 15 does not apply of the sums paid to non resident is exempt

from tax [Hyderabad Industries Limited Kar (HC)]



• Sums chargeable to tax in India to be read with:

‒ Sec 4 – Charge of income tax

‒ Sec 5 – Scope of total income

‒ Sec 6 – Residence in India

‒

‒

‒ Sec 6 – Residence in India

‒ Sec 9 – Income deemed to accrue or arise in India

• Sec. 195(2) – Application by payer to AO for determination of the

portion of sum chargeable

• Sec. 195(3 & 4) – Application by payee to AO for no deduction of tax

read with Rule 29B

• Sec. 195(6) – Information in form 15CA and 15CB

• Sec. 195(7) – CBDT to specify class of persons or cases where application

to AO is compulsory

• Sec. 195A – Income payable “net of tax”



Nature Of Income Act Treaty

Business/profession Section 9(1)(i): Concept of

Business Connection

Article 5;7; 14: Concept of PE or

Fixed BaseBusiness Connection Fixed Base

Salary Section 9(1)(ii) Article 15

Dividend Section 9(1)(iv) and section 115A Article 10

Interest Section 9(1)(v) and section 115A Article 11

Royalties Section 9(1)(vi) and section 115A Article 12

FTS Section 9(1)(vii) and section 115A Article 12

Capital Gains Section 9(1)(i) and section 45 Article 13


• Rates in force –

- the rates specified in the Finance Act of the relevant year

- or the rates specified in DTAA

� whichever is beneficial� whichever is beneficial

• Circular no. 728 dated 30th October 1995

• DTAA rate includes surcharge and education cess

• DTAA rate is specified for pure income streams viz., dividend, interest,

royalties, FTS

• DTAA adopts domestic law rate for composite payments viz., business profits,

professional fees, capital gains, other sums etc.,

• TRC to be obtained by the non-residents if benefit of DTAA is to be availed


• Finance Act 2012 mandated non-residents to obtain TRC (in prescribed format)

from resident tax authorities.

• Finance Act 2013 which did away the format, stated that it would be enough if

tax payer obtains TRC and maintains prescribed documents/information tax payer obtains TRC and maintains prescribed documents/information

• Notification No. 57 of 2013 (applicable w.e.f 1 April 2013) - additional

documents and information – Form 10F

• Issues

- Stage/time limit to obtain TRC

- Different tax years

- TRC not obtainable / delay


• Section 195(2) : Application by payer for lower or NIL withholding certificate

• Application by the Payer to the AO for determining (by general or special

order) appropriate portion of such sum chargeable, upon such determination, order) appropriate portion of such sum chargeable, upon such determination,

tax shall be deducted under sub-section (1) only on that proportion of the sum

which is so chargeable.


• Section 195(3) : Application by payee for lower or NIL withholding certificate

• Payee can make an application for a certificate.

• Application can be made in prescribed format :-

- form No. 15C in case of banking company

- form No. 15D in any other cases

• Condition for issue of certificate u/s 195(3) of the Act (Rule 29B).


• Section 195(4) : Validity of the Certificate

• A certificate granted under sub-section(3) shall remain in force till the expiry

of period specified therein or, if it is cancelled by the Assessing Officer before of period specified therein or, if it is cancelled by the Assessing Officer before

the expiry of such period, till such cancellation.


• Section 195(5) : Power of CBDT to issue Notifications

• The Board may make rules specifying the cases in which, and the

circumstances under which, an application may be made for the grant of a circumstances under which, an application may be made for the grant of a

certificate under sub section (3) with the specified conditions.


• Section 195(6) : Information to be furnished

• Requires the person making the payment to the Non Resident to furnish the

information relevant to the paymentinformation relevant to the payment

• Furnishing of information- Rule 37BB

• Form 15CA and Form 15CB

Few Common Issues

• Leased line charges, Mobile, telephone etc.

• Copyright V/s Copyrighted Articles

• Concept of Make Available

• Reimbursement Model v/s Cost plus model

TAX Rates

• Rates prescribed under the Act has to be increased by Surcharge and

Education Cess at the prescribed rates.

• If the payment is as per DTAA rates, No requirement to increase by Surcharge • If the payment is as per DTAA rates, No requirement to increase by Surcharge

or Education Cess.

• TRC made mandatory for claiming relief under DTAA.

PAN MANDATE/206AA

Section 206AA(1)

(1) Notwithstanding anything contained in any other provisions of this Act, any

person entitled to receive any sum or income or amount, on which tax is person entitled to receive any sum or income or amount, on which tax is

deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish

his Permanent Account Number to the person responsible for deducting such tax

(hereafter referred to as deductor), failing which tax shall be deducted at the

higher of the following rates, namely:—

(i) at the rate specified in the relevant provision of this Act; or

(ii) at the rate or rates in force; or

(iii) at the rate of twenty per cent.

PAN MANDATE/206AA

Section 206AA(1): salient Features

• Word used is “entitled to receive”

• Overrides the whole Act incl Finance Act• Overrides the whole Act incl Finance Act

• Applies when tax is deductible under any of the provisions of Chapter XVII-B

• One leg: “Rates in Force” is defined u/s 2(37A)(iii): DTAA/Act which ever is

beneficial applies read with CBDT Circular No 728 30/10/1995 (also applies

to same term used in section 195(1)

• Inserted by the Finance (No. 2) Act, 2009, w.e.f. 1-4-2010

PAN MANDATE/206AA

Objectives behind 206AA

Statutory provisions mandating quoting of Permanent Account Number (PAN) of

deductees in Tax Deduction at Source (TDS) statements exist since 2001 duly deductees in Tax Deduction at Source (TDS) statements exist since 2001 duly

backed by penal provisions. The process of allotment of PAN has been

streamlined so that over 75 lakh PANs are being allotted every year. Publicity

campaigns for quoting of PAN are being run since the last three years. The

average time of allotment of PAN has come down to 10 calendar days. Therefore,

non-availability of PAN has ceased to be an impediment. In a number of cases, the

non-quoting of PANs by deductees is creating problems in the processing of

returns of income and in granting credit for tax at deducted at source, leading to

delays in issue of refunds…..

PAN MANDATE/206AA

Objectives behind 206AA

…………….In order to strengthen the PAN mechanism, it is proposed to make

amendments in the Income Tax Act to provide that any person whose receipts are amendments in the Income Tax Act to provide that any person whose receipts are

subject to deduction of tax at source i.e. the deductee, shall mandatorily furnish

his PAN to the deductor failing which the deductor shall deduct tax at source at

higher of the following rates …………Memorandum Explaining Provisions of

Finance No 2 Bill 2009

PAN MANDATE/206AA

Press Release on 206AA

….All deductees, including non-residents having transactions in India liable to TDS,

are advised to obtain PAN by 31st March 2010 and communicate the same to their are advised to obtain PAN by 31 March 2010 and communicate the same to their

deductors before tax is actually deducted on transactions after that date….REF no.

402/92/2006 MC (04 OF 2010).

PAN MANDATE

Refund available in certain cases

• Circular No. 790 dated 20 April 2000 as modified by Circular no. 7/2007 dated

23rd October 2007– Situation under which tax paid under section 195 can be

refunded to the payer

• Contract cancelled & remittance not made.

• Remittance made, contract cancelled and amount returned

• Partial cancellation of contract

• Order u/s 154/248/264 reducing the withholding liability of the deductor

• Retrospective amendment in law/exemption by the way of notification

making the sum remitted exempt from tax

• tax deducted twice on the same amount by mistake

• Grossing up done when not required to be done so

• Withholding done at higher rate prescribed by the Act when lower rate

prescribed under DTAA.

PAN MANDATE

Refund available in certain cases

• Undertaking to be given by the deductor that no TDS certificate has been

issued or if issued, it has been obtained back.

• Refund should be granted only if the deductee has not filed return of income

and the time for filing of return of income has expired.and the time for filing of return of income has expired.

• No interest payable under section 244A

• Adjustment of refund against existing liability by AO possible after intimating

assessee

• Refund claim must be made within 2 years from the end of F.Y in which the tax

has been deducted

PAN MANDATE

TRC PAN Rate

Available Available DTAA RateAvailable Available DTAA Rate

Not Available Available 25%

Available Not Available 20%

Not Available Not Available 25%

Grossing Up (Section 195A)

• Grossing up for computing TDS to be done in cases where the payer bears the

tax liability

• For Example: Amount payable to Non resident is INR 100, rate of TDS is 10%; • For Example: Amount payable to Non resident is INR 100, rate of TDS is 10%;

Gross amount for TDS purpose is INR 111.11 (100*100/90)


Issues

• Whether grossing up would be required to be done in case payment is made

net of tax to a foreign company which does not have a PAN in India, net of tax to a foreign company which does not have a PAN in India,

considering the provisions of section 206AA??

• Should grossing up be done at applicable rate or at 20%?

• Rate of Withholding of tax; applicable rate or 20%?


View 1

Bosch Ltd. v. ITO (2013) 141 ITD 38/155 TTJ 354 (Bang.)(Trib.)

Facts

• Manufacturing company enters into a repair contract with its foreign suppliers • Manufacturing company enters into a repair contract with its foreign suppliers

for which payments were made net of taxes.

Issues

• Rate applicable for grossing up in absence of PAN for Non resident

Held

• Sec 206AA applies to all income recipients whose income is taxable under

Income Tax Act

• While grossing-up under sec 195A, rates in force apply and not the higher rate

of 20% under section 206AA

• Thus grossing up at applicable rates and deduction at 20%.


View 2

Section 206AA applicable for grossing up under section 195A of the Act:

• Section 206AA does not by itself create any withholding obligation.

• Section 206AA supplements the primary withholding section in case of

default in PAN.

• Thus, the rate of 20% as provided in section 206AA would be substituted

for the rate provided under the respective provisions which creates the

withholding tax obligation

Procedure for remittance- Form 15CA and

Form 15CB

STEP 1

Check if payment is covered under 195

Step 2

Verify the factual and basic documents

STEP 3

Make classification of transaction


Form 15CB

Step 4

Check Taxability as per DTAA( check applicability of Section 195A check applicability of Section 195A

or 206AA)

STEP 5

Check if order or certificate for “NIL” or “ Lower” rate is available


Form 15CB

• Remitter to obtain certificate of a Chartered Accountant in Form 15CB (Form

available at www.tin -nsdl.com

• Remitter to access the above website and electronically upload the remittance

details in Form 15CA details in Form 15CA

• Remitter to take a print of the filled undertaking (Form 15CA) with system

generated acknowledgement number and sign it

• The duly signed paper Form 15CA (undertaking) and Form 15CB (certificate) is

then submitted in duplicate to the RBI / authorized dealer

• RBI / authorized dealer to remit the amount

• A copy of Form15CA & Form15CB is forwarded by RBI / Authorized Dealer to

the concerned Assessing Officer


Form 15CB

• Application of Section 206AA if remittance is chargeable to tax and PAN of the

recipient is not available

• Details about the Tax Residency Certificate/other particulars of the recipient if

DTAA benefits are claimed DTAA benefits are claimed

• Detailed information on the taxability of payment under the IT Act as well as

tax treaty

• Basis of treating income as not subject to tax as also for non-withholding

Form 15 CA AND Form 15CB – revision in rules

A. Expansion in scope of coverage of nature of foreign remittances

Under the Revised Rule 37BB, compliance requirements have been extended to

the certain additional set of payments made to NRthe certain additional set of payments made to NR

B. Applicability restricted to chargeable payments

Remitter is now obliged to comply with the requirement of furnishing undertaking

in Form 15CA and/or obtaining CA certificate in Form 15CB, only if the

payment is chargeable to tax in India


•Compliance requirement under the Revised Rule 37BB effective 1 October, 2013

•The Revised Rule 37BB prescribes different compliances for the following three

categories of foreign remittances

•Category A : Remittance falling within the specified nature of payments provided•Category A : Remittance falling within the specified nature of payments provided

under Explanation 2 to Revised Rule 37BB

•Category B : Remittance below INR 50,000 per remittance and not aggregating to

more than INR 2,50,000 during the financial year

•Category C : Remittance not covered within the above two categories


•Category A : Remittance falling within the specified nature of payments provided

under Explanation 2 to Revised Rule 37BB

•Certain nature of payments (listed in column 3 of the specified list of Revised•Certain nature of payments (listed in column 3 of the specified list of Revised

Rule 37BB) are exempt from the compliances prescribed under Revised Rule 37BB

•The specified list contains 28 items covering payments for outbound

investments, loans, personal transactions (like donations, gifts, business travel,

travel for medical treatment and education), construction of projects abroad,

refund of taxes, payment towards international bidding etc.


Specific compliances for Category B•Category B : Remittance below INR 50,000 per remittance and not aggregating tomore than INR 2,50,000 during the financial year

•This category covers remittances which are not covered in Category A and where•This category covers remittances which are not covered in Category A and wherethe amount of remittance does not exceed the limit of INR 50,000 per remittanceand INR 2,50,000 in aggregate during the financial year.

•In case a remittance falls under this category, a Remitter is only required toreport the transaction under Part A of revised Form 15CA, provided the paymentis chargeable to tax in India.

•The Remitter is exempt from obtaining CA certificate in Form 15CB


Specific compliances for Category C are explained as follows:

•Category C : Remittance not covered within the above two categories

• A Remitter would be obliged to furnish information in Part B of revised Form

15CA after obtaining CA certificate in revised Form 15CB or an order / certificate

from tax officer under section 195(2) / section 195(3) / section 197 of the Act,

provided the payment is chargeable to tax in India.

Consequences of Non Compliance of TDS

Applicable

Section

Nature of Default Consequence

40(a) Withholding tax not deducted or not

deposited within prescribed time

Disallowance of expenses in

computation of taxable income of

payer; deduction in year of

paymentpayment

201(1) Tax not withheld/ deposited

appropriately

Recovery of tax not withheld/

deposited or short withheld/

deposited

201(1A) Tax not withheld/ deposited

appropriately

Interest @ 1% per month or part of

he month

221 Tax withheld not paid Penalty, not exceeding the amount

of tax not paid

271C Tax not withheld or short withheld Penalty, not exceeding the amount

of tax not withheld

THANK YOU

TG Suresh Chartered Accountant

Section 195 Related-TDS payment to non residents · PDF fileT.G. Suresh Chartered Accountant...

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