Professional Documents
Culture Documents
on payments to
Non Residents
K Subramanian
Deloitte Haskins & Sells
September 2010
Contents
• To ensure that the tax due from non-resident is secured at the earliest point of time
• Failure to deduct tax at source may result in loss of revenue as the non-resident may not
have assets in India from which tax could be collected at a later stage
- Circular No. 152 dated 27 November 1974
Regular inflow
of revenue for
Government
Widening of Checking of
tax base tax evasion
3
Issues
Capital Gains
Capital Gains – Quantum – Case Study 1(a)
10 shares
Ind Co Y Co
6
Capital Gains – Quantum – Case Study 1(b)
7
Capital Gains – Quantum – Case Study 1(c)
8
Capital Gains – Quantum – Case Study 1(c) – Contd.
X Co Section 197
Issues
9
Capital Gains – Quantum – Case Study 1(c) – Contd.
Section 195(3)
• Application by payee
• To A.O.
• For the grant of a certificate for receipt of
Ind Co income 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)?
10
Capital Gains – Quantum – Case Study 1(c) – Contd.
11
Capital Gains – Chargeability – Case Study 2(a)
10 shares
Ind Co
Ind Co
• Vodafone ruling
A Co Transfer of
shares in X Co
X Co Y Co
USA
India
Ind Co
14
Reimbursements
Reimbursements
• Technical services availed. Reimbursement of incidental expenses also held as fees for
technical 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)
16
Reimbursements – Case Study 1
17
Reimbursements – Case Study 2
Ind Co
X Co Service provider
• X Co enters into agreements with service
providers centrally
Debit notes raised
• Invoice raised by service providers on X Co
Y Co
• X Co, in turn, allocates the cost to the
subsidiaries in ratio of the utilization of
USA
services and raises debit notes on subsidiaries
India for cross charge of such cost – no mark up
Ind Co 1 Ind Co 2
Ind Co 1 Ind Co 2
Ind Co
Ind Co 1 Ind Co 2
• No payment / credit to the account of non
resident shareholder
Loan
ISSUE: Whether taxes are to be withheld u/s 195 at the time of remitting the loan to
Ind Co 2?
23
Pass thru entities
Payments to partnership firms / pass thru entities
Ind Co
ISSUE: Whether the partnership firm is eligible to avail the benefit of Indo UK
DTAA?
25
Payments to partnership firms / pass thru entities – Contd.
Issues
India
Services
rendered • What if the partners are residents of different
contracting states? – Which DTAA would
apply?
26
Permanent Account Number
Permanent Account Number (PAN)
• Recent provisions introduced by the Finance Act, 2009 with regard to furnishing of PAN by
the 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 tax
fails to furnish its PAN, the deductor of tax will be required to withhold taxes at higher of
the following rates:
‒ At the rate specified under the Income-tax Act; or
‒ At the rates in force; or
‒ At the rate of 20%
• No certificate for lower rate of withholding taxes u/s 197 shall be issued by the Revenue
authorities to the deductee, unless the PAN of the deductee is furnished
28
PAN – Issues
Particulars Rate under the Rate under the Applicable rate In absence of
Income Tax DTAA w.e. is PAN, will
Act, 1961 beneficial higher rate of
20% u/s 206AA
get attracted?
29
PAN – Issues – Contd.
• Tax deducted at the higher rates u/s 206AA – Can payee claim refund of the tax in excess
of his actual liability?
• Foreign tax credit for higher taxes deducted by virtue of Section 206AA?
30
Others
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 Circular
No. 10/2002 dated 9 October 2002
32
Others – Payments to Branches / Head Office (HO)
• Branch – separate entity – Interest payment to HO liable to TDS – Circular 740 dated 17
April 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)
33
Others – E-Commerce transactions
a) Software
‒ Copyright v. Copyrighted article
‒ Samsung
‒ Sonata Software
‒ Recent Karnataka HC decision – overruled by SC
c) Bandwidth charges
34
Others – Gross sum vs. Income element
• Base to be adopted for TDS – Gross amount or net amount which 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.
• The obligation of the assessee to deduct tax u/s 195 limited only to the appropriate
proportion of the income chargeable under the Act forming part of the gross sums of
money paid to the non-residents – CIT vs. Superintending Engineer, Upper Sileru – 152
ITR 753 (HC, AP)
35
Others – Determining residential status
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
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 ?
ISSUE: Indian partnership firm – control and management wholly outside India –
How does the payer come to know ?
36
Other issues
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)
• The assessee is liable to deduct tax at source u/s 195, even under an arrangement where
he receives only net payment from other party after deducting commission/ management
fees etc.
Raymond Ltd. v. DCIT – 86 ITD 791 (HC, Mum)
Mahindra and Mahindra Ltd. V. DCIT – 30 SOT 374 (ITAT, Mum)
37
Thank you