(‘TDS’) Payment to Non-Residents

1 May 16, 2007

Tax Deduction at Source (‘TDS’)

- Payment to non-residents

Akhil SambharAbhishek Chawla

Tax Deduction at Source (‘TDS’)

- Payment to non-residents

Akhil SambharAbhishek Chawla

2 May 16, 2007

Need for TDS

3 May 16, 2007

Withholding Tax

Why TDSWhy TDS??

Ensure regular flow of income for the Revenue

Collect tax in advance

Minimizes cases of tax evasion or avoidance

Minimizes incidence of interest costs for the recipient

Place responsibility on the persons other than payees

Overview Overview

Pay as you earn scheme

Deduction at the time of payment or credit whichever earlier

Deposit within one week from end of month of deduction

Income credited/ paid on last day of financial year, tax

withheld deposited within period of two months from last

day

Default attracts

─ Disallowance of expenses

─ Penal Interest

─ Penalty

─ Prosecution

4 May 16, 2007

Payment to Non Residents

5 May 16, 2007

Section 195 deals specifically with payments to foreign companies and other non-residents.

Non-ResidentsForeign Cos

Section 195 – Payment made to Non Residents

6 May 16, 2007

Nature of payment Responsibility to deduct tax

Rate of TDS Time of deduction of tax

• All payments (except salary) chargeable under the Act

• Any person • Rates in force

• It means rate under the Act or DTA, whichever is more beneficial to the assessee to be applied

• Date of payment or credit, whichever is earlier


7 May 16, 2007

Points for consideration

Form for making application to AO seeking authorizing for payments to a non-resident– Refer circular No 695

Lower withholding orders – Only for payer; if the payer considers that the whole of such sum would not be chargeable to tax , an application can be made to the AO to determine the proportionate amount so chargeable (sub-section 2)

Person to whom interest or other sum is payable, may make an application in Form 13 and obtain certificate for receiving payment of income without deduction of tax (sub-section 3)

Validity of certificate – the certificate shall remain in force till the expiry of the period specified therein or on cancellation, whichever earlier (sub-section 4)

The payment to non resident also permitted by obtaining CA certificate – Refer circular No 759, read with circular No 10/2002 dated 9-10-2002

Conditions for Non-resident (Recipient) making an application u/s 195

• Person has been regularly assessed to income tax in India and furnished all returns which became due

• He is not in default in respect of any tax, interest, penalty, fine or other sum payable under the Act

• He has not been subject to penalty under section 271

• Person other than a banking company has carried on business in India for a period for not less than 5 years and the value of assets as on the previous year for which accounts were last drawn exceeds 50 lakhs


8 May 16, 2007

Section 195A - Agreements for payment of income – Net of Tax

Tax to be deducted after grossing up of the net payment to be made

Points for consideration

Payer is under legal obligation to furnish certificate for the tax deducted at source within time prescribed to the

payee

Tax withheld and deposited shall be income in the hands of recipient as per section 198

Section 195A - Income Payable “Net of Tax”

9 April 7, 2023

Section 195 vs Section 197

• 195(2) provides that if a payer of any sums considers that any portion would not be liable to tax, he can make an application to AO to determine the proportion liable

• Section 195 determines the portion of income liable to tax withholding

• Application under section 195(2) is to be made by the payer, and under section 195(3) by the payee

• Order under section 195(2) can be appealed under section 248, provided the payer is liable to bear the taxes and have paid such taxes

• Section 197 provides that a payee( non-resident), if he considers that tax withholding can be at the ‘nil’ or lower rate, can approach the AO to determine the rate.

• Section 197 determines the rate for tax withholding

• Application under section 197 is to be made by the non- resident payee

• Application to be made before the payment/ credit, whichever is earlier

• There is no provision under Chapter XX of the Act, to appeal against the order under section 197

10 May 16, 2007

• TDS deemed to be the income received

• Tax paid on non monetary perquisites not deemed income

• Tax deducted treated as payment on behalf of person• Credit available for TDS deducted• No requirement to furnish TDS certificate on or after 01/04/2008

Tax deducted is income received

Section 198

Credit for Tax deductedSection 199

Is excess payment can be refunded

Section 198 and 199

11 May 16, 2007

Controversies

12 May 16, 2007

ISSUES

Whether agreement which is void in law give rise to an enforceable debt and consequently there is an obligation on the part of the payer to deduct taxes on crediting such income

Does Section 195 cover payments made by non-resident to another non- resident outside India


13 May 16, 2007

ISSUES Is refund possible?

If after withholding and depositing TDS u/s 195

• The contract with non-resident is cancelled and no remittance is to be made to the non-resident, or

• Remittance is made to the non-resident and thereafter the contract is cancelled and remitted amount is returned;

Additional conditions to be fulfilled:

• Prior approval of jurisdictional CCIT is required;

• Undertaking is furnished to AO that no TDS certificate is issued or the certificate so issued has been taken back from the non-resident payee


14 May 16, 2007

“Trading receipts” are subject to TDS [Transmission Corporation Ltd & other v CIT] (239 ITR 587) (SC)

Facts Assessee entered into 2 contract with various non-residents for:

supply of machinery and equipment

assembling, erection, testing and commissioning of machinery and equipment

Assessee did not deduct TDS on payments made to non residents

Assessee contended that “any other sum chargeable” do not contemplate the inclusion of trade receipts in their ambit and section 195 applies only to cases where the sums paid are “pure income profits”

Issue Whether section 195 is applicable only where the sums paid are “pure income profits” and not where the

gross sum includes other costs

Whether trading receipts subject to TDS?

15 May 16, 2007

Decision

“…The scheme of tax deduction at source applies not only to the amount paid which wholly bears "income" character such as salaries, dividends, interest on securities, etc., but also to gross sums the whole of which may not be income or profits of the recipient, such as payments to contractors and sub-contractors and the payment of insurance commission.

The consideration would be — whether payment of the sum to the non-resident is chargeable to tax under the provisions of the Act or not ? That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum, what would be the income is to be computed on the basis of various provisions of the Act including provisions for computation of the business income, if the payment is a trade receipt. However, what is to be deducted is income-tax payable thereon at the rates in force…”

Whether trading receipts subject to TDS?

16 May 16, 2007

Issue: Whether to deduct taxes in case of outright sale of software

In view of judgments discussed earlier, whether it can be said that there is no liability to deduct taxes in transactions involving sale of software

Alternative courses of action available:

• Application to AO to obtain a “Nil” withholding tax rate order/ order for lower withholding tax rate

• Application to AAR for determining liability to withhold tax in such transaction

Sale of software: Whether subject to TDS

17 May 16, 2007

Appropriate alternative: Withholding Tax order? No need to approach AO every time [Indopel Garments (P) Ltd V CIT (86 ITD

102) (Madras ITAT)]

Facts Assessee engaged in the business of exports makes certain payments as sales commission abroad.

The amount was disallowed by AO u/s 40(a)(i) on account of non-deduction of tax

Decision Commission paid to non-resident for services rendered abroad does not accrue or arise in India and is not

liable to deduction of tax u/s 195.

No disallowance was to be made u/s. 40(a)(i), since no income chargeable to tax in India arose to the Non-Resident.

It was not necessary to make an application u/s. 195(2) to the AO.

An application u/s. 195(2) will be necessary where the payer considers that portion of the payment will be chargeable to tax in India.

18 May 16, 2007

Appropriate alternative: Withholding Tax order? Withholding tax order is a must [Cheminor Drugs Ltd. Vs ITO (76 ITD 37)

(Hyderabad ITAT)]

Facts Appellant engaged in the business of exports makes certain payments as legal expenses as well as sales

commission abroad.

AO treated the appellant as assessee in default u/s 201 on account of non-deduction of tax

Decision AO justified in treating the appellant as assessee in default.

If the appellant had genuine belief that the payments are not chargeable to tax in India, the appropriate course of action for him would have been to make an application before the AO to obtain a “Nil” withholding tax order.

19 May 16, 2007

Appropriate alternative: Withholding Tax order?

The assessee must apply to the AO to obtain a withholding tax order

Satellite Television Asian Region ltd. Vs CIT (99 ITD 91) (Mumbai ITAT)• Appellant engaged in the business of sale of air time meant for advertisement acquired from television

channel companies like Star Plus, Star Movies, Star World, Star News, Channel V, etc through its advertising agent in India.

• AO disallowed the sum paid by the assessee company to various channel companies towards the cost of Ad Airtime purchased from them u/s 40(a)(i) for non- deduction of TDS u/s 195

Held:

• Channel companies are liable for taxation in India for that part of income earned by them.

• Assessee company was obliged to deduct tax u/s 195 while making payments to the channel companies against the purchase of "Ad Airtime".

• In the circumstances, the assessing officer is justified in disallowing those payments u/s 40(a)(i) of the Income-tax Act, 1961.

• Alternative of making application to AO seeking withholding tax rate is always available to the appellant.

20 May 16, 2007

Appropriate alternative: Withholding Tax order?

The assessee must apply to the AO to obtain a withholding tax order

ITO, Chennai vs. Poompuhar Shipping Corpn Ltd (Madras ITAT)• Appellant engaged in business of transport of coal from various ports in India.

• For the transportation of coal the assessee charters vessels from India as well as from Foreign Shipping Companies.

• While remitting the charter payments to the foreign shipping companies, the appellant did not make deduction in respect of withholding tax, which was later on disallowed by AO u/s 40(a)(i) for non-deduction of tax u/s 195.

Held:

• Assessee cannot suo moto presume that a payment is not taxable as there is a provision in the law to seek direction from the Revenue.

• Revenue's decision to treat the assessee in default u/s 201 upheld.

• Alternative of making application to AO seeking withholding tax rate is always available to the appellant.

21 May 16, 2007

TDS to be deducted from gross payments for rendering services – Element of profit not relevant - (Danfoss Industries Pvt Ltd.) (268 ITR1)(AAR)

Facts The applicant, an Indian company has proposed to enter into an agreement with Danfoss Singapore (‘DS’), a

foreign company which provided services to a group of companies including the Indian company.

The consideration for availing of those services was a service fee based on the portion of the services it received in relation to the total costs of DS in providing such services.

Issue Whether the payment to be made to the foreign company as fee for services would be subject to withholding tax

under section 195 of the Act.

Decision …that in the absence of break-up of the cost incurred by DS in providing services and the fees payable by each

individual company, the only possible conclusion was that there was no direct nexus between the actual cost incurred by the foreign company in providing the services to a company of the group of companies and the fees payable by each individual company which availed of the services; therefore,, the payments towards the service charges would be subject to the withholding taxes.

Reimbursement of cost allocation

22 May 16, 2007

TDS to be deducted from gross payments fro rendering services – Element of profit not relevant [Timken India Limited in re (273 ITR 67 (AAR)]

Facts The applicant, an Indian company, was engaged in the business of manufacture and sale of bearings and other

ancillary products and is a subsidiary of Timken-USA, a foreign company

Under the agreement, the foreign company was to render services in USA which included management services, system development and computer usage, communication services, engineering services process in tool design services, and manufacturing services, etc.

The agreement provided that the compensation payable by the applicant to the foreign company for services would cover only the cost actually incurred by it and that no profit element or mark-up on the cost would be added to it

Decision It was ruled by the Authority that irrespective of there being a profit or income in the hands of the foreign

company, the amounts payable by the Indian company would be subjected to tax in India and it was obliged to withhold tax at the appropriate rate under the Act or the Treaty, whichever was lower, under sec. 195 of the Act. Here also, the plea that the payment was nothing but reimbursement of expenditure was not accepted. There relying upon Danfoss case, the plea of the applicant that there was absence of profit element and that payments represented the reimbursement of actual expenditure, was rejected. Thus, this ruling also does not advance the case of the Revenue.

Reimbursement of cost allocation

23 May 16, 2007

Reimbursement of salary costs 'Reimbursement' of salary cost to non-resident company for assigning employees

to Indian operations is taxable as fees for technical services - AT&S India Private Limited (287 ITR 421)(AAR)

24 May 16, 2007

Taxability of Offshore supply of equipments

Offshore supply of equipment is a contract of sale and not taxable in India

[Ishikawajima-Harima Heavy Industries Ltd. vs DIT (2007) (SC)

• Appellant entered into a turnkey contract with an Indian company for setting up a LNG receiving and storage facility, which involved various activities including Offshore supply of equipments, wherein the sale was executed outside India and payment for such equipments was made outside India.

• The apex court ruled that since all parts of the transaction [transfer of property in goods as well as the payment] were carried on outside India, the transaction cannot be taxed in India.

Supply of equipment including installation is a contract of sale and not a turnkey contract [A.P. Power Generation Corporation Ltd v ACIT (107 TTJ 685) (Hyd)

• Assessee entered into a contract with a Japanese company for supply of equipment and supervisory charges of such machinery

• Assessee did not deduct TDS on remittance made to the supplier.

• The tribunal observed on the basis of clauses in the contract, that the power project was constructed by the assessee itself and only certain plant and machinery were purchased from Jaspanese company. It further held that more than 80 percent of the activities had been undertaken in Japan and the contract in essence was sale of equipments and therefore no income could be deemed to accrue or arise in India.

Supply of equipments: Whether subject to TDS

25 May 16, 2007

Issue: Whether to deduct taxes in case of offshore supply of equipments

In view of judgments regarding non-taxability of offshore supply of equipments, whether it can be said that there is no liability to deduct taxes in transactions involving such offshore supply

Alternative courses of action available:

• Application to AO to obtain a “Nil” withholding tax rate order/ order for lower withholding tax rate

• Application to AAR for determining liability to withhold tax in such transaction

Supply of equipments: Whether subject to TDS

26 April 7, 2023

Supply of software as part of hardware Lucent Technologies (ITAT Bangalore): Facts Assessee is a limited company engaged in the business of manufacture and sale of electronic switching

systems required for telecommunication industry.

During the relevant financial years, assessee imported certain hardware and software from its non-resident

group companies without deduction of tax at source.

Consequently, assessee was treated as assessee in default for failure to comply with the provisions of

section 195 of the Act

Decision Acquisition of software was inextricably linked to acquisition of hardware and one cannot function without the

other - thus this is purchase of an integrated equipment

Assessee had purchased a copyrighted article and not copyright of the rights; therefore, it is wrong on part of

Revenue to treat purchase of software as an independent transaction, therefore payments cannot be

regarded as royalty

Therefore no TDS under section 195 of the Act is required to be deducted

27 May 16, 2007

100% WOS

USA

Independent distributors

Lotus Development Corporation

(“LDC”) , USA

Branch

Singapore

IndiaMarket support services

Lotus Development International Corporation

(“LDIC”) , USA

Lotus Development (Asia Pacific) Pte Ltd. (“LDPL”) , Singapore

100% WOS

International Business Machines Corporation

(“IBM”)

Rights to license and distribute IBM and

Lotus programs

Distribution of shrinked wrapped

software

End Users

End Users

End Users

Sale of shrink wrapped software

Sale of shrinked wrapped softwareLotus Development (Delhi ITAT): Facts

28 May 16, 2007

Sale of shrinked wrapped softwareStand of Revenue Authorities - Sale of shrinked wrapped software is ‘Royalty’ Computer software is licensed and not sold

Computer programme is a secret process and consideration for the same is ‘Royalty’

Software could also be considered as ‘information concerning scientific experience’ the consideration of

which would be in the nature of Royalty

Software can also be treated as Invention the consideration of which would be in the nature of Royalty

Revenues from distribution of shrink wrapped software are ‘business profits’ and cannot be considered as ‘royalty’ under the Act or DTAA for reasons as under

End user of software does not get any license to duplicate software and there is no transfer of intellectual property

rights in the software to the end users. The original knowledge in the software (used in developing the software)

remains protected and is not transferred to the end users (Special Bench judgment of Delhi ITAT in case of Motorola

relied)

Sale of computer software cannot be considered as transfer of copyright in secret formula, process, information

containing scientific experience as in this case the end user does not get access to knowledge to develop or

manufacture the software (OECD Commentaries relied).

Therefore, in such a case, there is no need to deduct TDS.

Decision (Delhi ITAT)

29 May 16, 2007

Other issues Where capital gains arising on transfer of shares of Indian company on account of global

reorganization are exempt under the provisions of the Tax Treaty, no taxes are required to be

withheld under section 195 by transferee company

(Vanenburg Group B.V. - A.A.R. No.727 OF 2006)

Periodical payments (being ‘Royalties and fees for included services’), made to the non-resident

person, having no office/establishment in India, in connection with the use of software developed by

him on internet are subject to tax deduction at source, under DTAA with USA.”

(IMT Labs (India) Pvt Ltd (287 ITR 450)

The payments made by the Indian subscriber to a non-resident at Singapore, for providing a

password to access and use the portal hosted from Singapore, are taxable in India and subject to

deduction of tax at source.

(Cargo Community Network Pte Limited (A.A.R. NO. 688 OF 2006)

30 May 16, 2007

Miscellaneous Provisions of TDS

31 May 16, 2007

Filing of quarterly statements - TDS returns in Form 24Q (in case of salaries) and Form 27Q (in cases of

payments to non-residents) to be filed as under :

Quarter ended Form 24Q

June 30

September 30

December 31

March 31

July 15

October 15

January 15

June 15

* Only with respect to provision entries made on March 31

Withholding Tax – Compliance Calendar

Form 27Q

July 14

October 14

January 14

April 14/ June 15 *

Annual Returns of TDS not required to be filed on or after April 1, 2005

32 May 16, 2007

Non deduction or failureto pay TDS

Non deduction or failureto pay TDS

Interest under *Section 201(1A)Interest under

*Section 201(1A)

*Penalty under Section 221

and prosecutionSection 276B

*Penalty under Section 221

and prosecutionSection 276B

Penalty under*Section 271CPenalty under*Section 271C

* Section 201(1A) – Consequences of failure to deduct or pay

Section 221 – Penalty payable when default in payment of tax demand

Section 271C – Penalty for failure to deduct tax at source

Section 276B – Prosecution for failure to deduct tax at source (3 months – 7 years)

Consequences of Failure to Deduct or Pay

Disallowance of expenses u/s 40(a)(i)

Disallowance of expenses u/s 40(a)(i)

33 May 16, 2007

Section No

Nature of defaults Penalty Officer who shall impose the penalty

271C Failure to deduct the whole or any part of tax at source

Sum equal to the amount of tax Joint Commissioner

272A(2)(c) Failure to file the return of TDS under section 206

Rs 100 for every day of failure but limited to tax deductible

Joint Commissioner

272A(2)(f) Failure to deliver in time a copy of declaration in Form No. 15G/15H

Rs 100 for every day of failure but limited to tax deductible

Chief Commissioner

272A(2)(g) Failure to issue TDS Certificate Rs 100 for every day of failure but limited to tax deductible

Joint Commissioner

272A(2)(i) Failure to furnish a statement as per section 192(2C)

Rs 100 for every day of failure Joint Commissioner

272A(2)(k) Failure to deliver copy of the quarterly statement within the time specified under section 200(3)


272A(2)(l) Failure to deliver the quarterly statement within the time specified under section 206A(1)


272BB Failure to apply for allotment or false quoting TAN/ TCN

Rs. 10,000 Assessing officer

276B Failure to pay TDS to the credit of central government

Punishable with imprisonment term between 3 months to 7 year

Previous sanction of Commissioner

Penal Provisions

34 May 16, 2007

Thank You!

(‘TDS’) Payment to Non-Residents

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