TDS Payments Non Residents Deliotte

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    K SubramanianDeloitte Haskins & Sells

    September 2010

    Tax Deduction at Source

    on payments toNon Residents

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    Contents

    2

    Section 195 & Objective

    Issues

    Capital Gains

    Quantum

    Chargeability

    Rate 112 vs. rates in force anomaly

    Cross Border M&A

    Reimbursements

    Inter Corporate Loans

    Payments to partnership firms / pass thru entities

    Permanent Account Number

    OthersCA Certificate

    Payments to Branches / Head Office

    E-Commerce Transactions

    Gross Sum vs. Income element

    Determining residential status

    Other issues

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    Section 195 & Objective of Tax Deduction at Source (TDS)

    Regular inflowof revenue forGovernment

    Checking oftax evasion

    Widening oftax base

    To ensure that the tax due from non-resident is secured at the earliest point of time

    To avoid difficulty in collection of tax subsequently at the time of regular assessment

    Failure to deduct tax at source may result in loss of revenue as the non-resident may nothave assets in India from which tax could be collected at a later stage

    - Circular No. 152 dated 27 November 1974

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    Issues

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    Capital Gains

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    TDS on what amount

    Cost of acquisition = Rs 5000

    Sale consideration = Rs 8000

    At the time of remittance by Y Co India,

    section 195 comes into play

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    Capital Gains Quantum Case Study 1(a)

    X Co

    Ind Co

    USA

    India

    10 shares

    Y Co

    Transfer ofshares inInd Co

    ISSUE:TDS on what amount?Rs 8000 (sale consideration) OR Rs 3000 (capital gain)

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    Determination of cost of acquisition

    Capital Gains = Sale Consideration lessCost of acquisition

    How does Y Co India determine the cost ofacquisition of shares in the hands of X Co

    US?

    Does Y Co obtain FIRCs or other supportingdocuments from X Co?

    What if the supporting documents are not

    available?

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    Capital Gains Quantum Case Study 1(b)

    X Co

    Ind Co

    USA

    India

    10 shares

    Y Co

    Transfer ofshares inInd Co

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    Brought forward losses

    Ind Co 100% subsidiary of X Co US

    Ind Co buys back part of its shares from XCo resulting in capital loss to X Co

    Next year, Ind Co again buys back a partof its shares from X Co this time, X Cohas a gain

    Overall, if capital gain is set off against thebrought forward capital loss, net position

    is a loss

    Can Ind Co set off the brought forwardcapital loss against the current capitalgains to determine withholding taxliability?

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    X Co

    Ind Co

    USA

    India

    100%

    Capital Gains Quantum Case Study 1(c)

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    Brought forward losses Contd.

    Section 197

    Application by payee

    To AO

    For grant of certificate for receipt of

    income without deduction of tax at sourceor for deduction at lower rates

    Issues

    In the previous example, can X Co make

    an application to AO u/s 197 on theground of brought forward losses?

    197 application only to determine rate oftax

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    X Co

    Ind Co

    USA

    India

    100%

    Capital Gains Quantum Case Study 1(c) Contd.

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    197 Application Alternatives

    Section 195 (2)

    Application by payer

    To A.O.

    To determine the appropriate portion of the sumchargeable to tax

    Section 195(3)

    Application by payee

    To A.O.

    For the grant of a certificate for receipt ofincome without deduction of tax at source

    Subject to certain conditions Rule 29B

    Alternative

    In the previous example,

    Can Ind Co make an application u/s 195(2)?

    Can X Co make an application u/s 195(3)?

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    X Co

    Ind Co

    USA

    India

    100%

    Capital Gains Quantum Case Study 1(c) Contd.

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    Rule 29B Conditions for 195(3) application

    Has been regularly assessed to Income-tax in India

    Has furnished the returns of income for allassessments years

    Not in default or deemed to be in default in respect of

    any tax, interest, fine or any sum payable under theAct

    Has not been subjected to penalty for concealment ofparticulars of income

    Where not a banking company:

    Has been carrying on business or profession inIndia continuously for at least 5 years

    Value of Fixed Assets in India > Rs. 50 Lacs

    Certificate issued by the AO valid only for the FinancialYear mentioned therein

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    X Co

    Ind Co

    USA

    India

    100%

    Capital Gains Quantum Case Study 1(c) Contd.

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    Non resident to non resident transfer

    Shares in an Indian Company chargeable tocapital gains tax in India

    Triniti Corporation165 Taxman 272 (AAR)

    Satellite Television Asian Region Ltd. v. DCIT

    99 ITD 91 (ITAT, Mum)

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    Capital Gains Chargeability Case Study 2(a)

    X Co

    Ind Co

    USA

    India

    10 shares

    Y Co

    Transfer of shares

    in Ind Co

    ISSUE:Whether Y Co (non resident) to withhold taxes on payment made to X Co(another non resident)?

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    Proviso to Section 112

    In the previous example, Y Co has to withholdtaxes on payments made to X Co

    Non resident eligible to benefit of proviso toSection112

    Proviso to Sec 112 20% if indexation benefit availed i.e. on Sale

    Consideration less Indexed Cost of acquisition

    10% of indexation benefit not availed i.e. onSale Consideration less Cost of acquisition(without indexation)

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    Capital Gains Rate Case Study 2(b)

    X Co

    Ind Co

    USA

    India

    10 shares

    Y Co

    Transfer of shares

    in Ind Co

    ISSUE:At what rates should Y Co withhold taxes?Can it apply proviso to Section 112?

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    Vodafone ruling

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    Capital Gains Cross Border M&A Case Study 3

    X Co

    Ind Co

    USA

    India

    Y Co

    ISSUE:Transfer of X Cos shares to Y Co whether taxable in India?

    A Co Transfer ofshares in X Co

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    Reimbursements

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    Reimbursement of actual expenses Not in the nature of income

    CIT v. Industrial Engineering Projects Pvt. Ltd. 202 ITR 1014 (HC, Del)

    Decta 237 ITR 190 (AAR)

    CIT v. Fortis Health Care Ltd 181 Taxman 257 (HC, Del)

    Bangalore International Airport Ltd v. ITO 307 ITR 295 (ITAT, Bang)

    CIT v. Dunlop Rubber Co Ltd 142 ITR 493 (HC, Cal)

    Should be backed up with supporting documentation and evidence of such expenses

    Technical services availed. Reimbursement of incidental expenses also held as fees fortechnical services

    Cochin Refineries Ltd. v. CIT 222 ITR 354 (HC, Ker)

    Steffen, Robertson and Kirsten Consulting Engineers And Scientists v. CIT 230 ITR

    206 (AAR) Hindalco Industries Ltd v. ACIT 278 ITR 125 (ITAT, Mum)

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    Reimbursements

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    Employees on the payrolls of X Co

    Seconded to Ind Co (subsidiary of X Co)

    Salary cost of seconded employees crosscharged by X Co to Ind Co no mark up

    DCIT v. HCL Infosystems Ltd. 211 Taxation29 (ITAT, Del)

    AT and S India (P) Ltd. v. CIT 287 ITR 421(AAR)

    IDS Software Solutions India (P) Ltd. v. ITO122 TTJ 410 (ITAT, Bang)

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    Reimbursements Case Study 1

    X Co

    Ind Co

    USA

    IndiaSecondmentof employees

    ISSUE:Whether taxes are to be withheld on such reimbursement of salary costs?

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    Ind Co sends its employees to X Co for a

    training

    X Co incurs expenditure on travel,accommodation etc of such employees

    X Co cross charges the expenditure at cost to

    Ind Co

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    Reimbursements Case Study 2

    X Co

    Ind Co

    USA

    IndiaEmployeessent fortraining

    ISSUE:Whether taxes are to be withheld on such reimbursement of expensesincurred by X Co?

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    X Co acts as a global procurement center for

    all subsidiaries

    X Co enters into agreements with serviceproviders centrally

    Invoice raised by service providers on X Co

    X Co, in turn, allocates the cost to thesubsidiaries in ratio of the utilization ofservices and raises debit notes on subsidiariesfor cross charge of such cost no mark up

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    Reimbursements Case Study 3

    X Co

    Ind Co 1

    USA

    India

    ISSUES:Will payments by subsidiaries to X Co attract TDS?Will X Co be the deemed service provider to its subsidiaries?

    Will the payments to X Co be classified as Royalty / Fees for technical services?

    Service provider

    Ind Co 2

    Invoice raised for allservices rendered to

    various subsidiaries

    Y Co

    Debit notes raised

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    Reimbursements Case Study 4

    X Co(R&D centre)

    Ind Co 1

    USA

    India

    Ind Co 2

    Y Co

    Debit notes raised forservices rendered

    X Co has a centralized research and

    development (R&D) unit

    The research done at the unit benefits all thesubsidiaries

    Cost contribution agreement between X Co

    and subsidiaries entire costs sharedbetween the entities

    X Co cross charges proportionate costs to allthe group companies who benefit from suchresearch

    ISSUE:Whether taxes are to be withheld on such reimbursement of expensesincurred by X Co?

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    X Co renders services to Ind Co in USA

    No services rendered in India

    X Co recovers the expenses incurred atactuals from Ind Co no markup

    Timken India Ltd 143 Taxman 257 (AAR) Danfoss Industries 268 ITR 1 (AAR)

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    Reimbursements Case Study 5

    X Co

    Ind Co

    USA

    India

    ISSUE:Whether taxes are to be withheld on such reimbursement of expensesincurred by X Co?

    Servicesrendered inUSA

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    Inter Corporate Loans

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    Ind Co 1 gives loan to Ind Co 2 (resident group

    company) in which non resident shareholder(X Co) has substantial interest

    Deemed dividend u/s 2(22)(e)

    Does not attract dividend distribution tax

    Taxable in the hands of non residentshareholder

    No payment / credit to the account of nonresident shareholder

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    Inter Corporate Loan Case Study

    X Co

    Ind Co 1

    USA

    India

    ISSUE:Whether taxes are to be withheld u/s 195 at the time of remitting the loan toInd Co 2?

    Loan

    Ind Co 2

    100%

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    Pass thru entities

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    Payments to partnership firms / pass thru entities

    Partnership firm fiscally transparent entities

    not liable to tax profits taxed in the hands ofthe partners

    Entitlement to the benefits of DTAA whetherincluded in the definition of resident as given

    in DTAA

    Indo-UK DTAA Resident defined to meanany person who, under the law of that State, is

    liable to taxation therein by reason of his .

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    X Co(Partnership Firm)

    Ind Co

    UK

    India

    ISSUE:Whether the partnership firm is eligible to avail the benefit of Indo UKDTAA?

    Servicesrendered

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    Payments to partnership firms / pass thru entities Contd.

    Partnership firm eligible to treaty benefits even

    when the firm is taxable in respect of its profitsnot in its own right but in the hands of thepartners Linklaters LLP v. ITO 132 TTJ 20(ITAT, Mum)

    Issues

    What if the partners are residents of differentcontracting states? Which DTAA wouldapply?

    Can the partners take credit of such taxeswithheld?

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    X Co(Partnership Firm)

    Ind Co

    UK

    IndiaServicesrendered

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    Permanent Account Number

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    Permanent Account Number (PAN)

    Recent provisions introduced by the Finance Act, 2009 with regard to furnishing of PAN bythe deductee to the tax deductor also applies to tax deducted u/s 195

    As per the new provisions, w.e.f. FY beginning 1 April 2010, where the deductee of the taxfails to furnish its PAN, the deductor of tax will be required to withhold taxes at higher ofthe following rates:

    At the rate specified under the Income-tax Act; or

    At the rates in force; or At the rate of 20%

    PAN to be indicated in all correspondence, bills, vouchers and other documentsexchanged between the deductor and deductee

    No certificate for lower rate of withholding taxes u/s 197 shall be issued by the Revenueauthorities to the deductee, unless the PAN of the deductee is furnished

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    PAN Issues

    Particulars Rate under the

    Income TaxAct, 1961

    Rate under the

    DTAA

    Applicable rate

    w.e. isbeneficial

    In absence of

    PAN, willhigher rate of20% u/s 206AAget attracted?

    Situation 1 X Greater than X Act i.e. X Yes

    Situation 2 X X X Yes

    Situation 3 X Less than X DTAA i.e. lessthan X

    Yes

    Situation 4 X Not taxable i.e.Nil

    DTAA i.e. Nil ?

    Situation 5 No TDSrequired X Act i.e. Nil No

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    PAN Issues Contd.

    Would Section 206AA apply where taxes are to be borne by payer?

    Whether 206AA rates to be increased by surcharge and cess?

    Tax deducted at the higher rates u/s 206AA Can payee claim refund of the tax in excessof his actual liability?

    Foreign tax credit for higher taxes deducted by virtue of Section 206AA?

    PAN not available at the time of deduction but furnished subsequently

    Difficulties in obtaining PAN for non residents

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    Others

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    Others C.A Certificate

    Alternative mechanism Certificate of a Chartered Accountant certifying the tax withholding amount

    CBDT Circular No. 759 dated 18 November 1997; Circular No. 767 dated 22 May 1998 and CircularNo. 10/2002 dated 9 October 2002

    Issues regarding Certificate by CA

    Understanding the nature of payments

    How to determine residential status Tax Residency Certificate issued by overseas tax authorities Difficulties in obtaining Residency Certificate (TRC)

    What if TRC not available?

    Dual residency issues

    To examine PE issues Determination of PE is PE certificate sufficient?

    Applicability of DTAA Eligibility to treaty benefits

    Which Article of DTAA to apply

    Name & address of beneficiary meaning Beneficial Owner or Recipient?

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    Despite amendment by Circular No. 10/2002 permitting Managing Directoror anyperson authorized by him in writingto sign the verification in Form 15CA, no

    corresponding amendment to the Form facilitating the same

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    Payment by Indian Branch to HO

    Branch separate entity Interest payment to HO liable to TDS Circular 740 dated 17April 1996

    Dresdner Bank 105 TTJ 149 (ITAT, Mum)

    Legal validity of circular questioned since Branch is not a separate entity under law

    ABN Amro Bank 280 ITR 117 (SB, Kol)

    Fees for Technical services to HO liable to TDS Circular 649 dated 31 March 1993

    Payment to Indian branch of foreign company in India (e.g. Branches of foreign banks)

    Circular 20 (II-4) dated 3 August 1961 Since branch of NR will be NR, deductible

    Foreign branches could obtain Nil TDS certificates u/s 195(3)

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    Others Payments to Branches / Head Office (HO)

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    a) Software

    Copyright v. Copyrighted article Samsung

    Sonata Software

    Recent Karnataka HC decision overruled by SC

    b) Subscription charges for standard service/data

    c) Bandwidth charges

    d) Advertisement procurement and revenue share

    e) Royalty / Fees for technical services

    Services utilized OR rendered in India OR both

    Make available

    If make available not satisfied, should Article on Business Profits be analyzed?

    Business profits not taxable in absence of Permanent Establishment In such a case,should Article on Other Income be analyzed?

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    Others E-Commerce transactions

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    Base to be adopted for TDS Gross amountor net amountwhich may represent income

    Any sum chargeable to tax means sum chargeable to tax and it not only applies to the

    amount paid which wholly bears an income character but the gross sum, the whole of

    which may not be income or profits.

    Transmission Corporation 239 ITR 587 (SC)

    The obligation of the assessee to deduct tax u/s 195 limited only to the appropriateproportion of the income chargeable under the Act forming part of the gross sums ofmoney paid to the non-residents CIT vs. Superintending Engineer, Upper Sileru 152ITR 753 (HC, AP)

    Payments to non-residents would be subject to withholding tax only if the income ischargeable to tax No TDS if there is no income element at all in payments GE IndiaTechnology Centre Private Ltd. Civil Appeal Nos.7541-7542 of 2010 (SC)

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    Others Gross sum vs. Income element

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    Others Determining residential status

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    Case Study

    X Co incorporated in UK Control and management situated wholly in India

    Residential status = Resident

    Payment by Ind Co (resident in India) to X Co whether section 195 applies ?

    Payee Definition

    Non-resident, not being a company Defined in section 6 of the Act

    Foreign company Defined in section 2(23A) of the Act

    ISSUE:Indian partnership firm control and management wholly outside IndiaHow does the payer come to know ?

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    Payments in kind

    The assessee is liable to deduct tax at source u/s 195 on the payment made to the non-resident even though the payment is not made in cash but made in kind

    Kanchanganga Sea Foods Ltd. v. CIT 325 ITR 540 (SC)

    Net payment received

    The assessee is liable to deduct tax at source u/s 195, even under an arrangement wherehe receives only net payment from other party after deducting commission/ managementfees etc.

    Raymond Ltd. v. DCIT 86 ITD 791 (HC, Mum)

    Mahindra and Mahindra Ltd. V. DCIT 30 SOT 374 (ITAT, Mum)

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    Other issues

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    Thank you