section 195 related-tds payment to non residents · pdf filet.g. suresh chartered accountant...
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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
Overview- Section 195
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
Overview- Section 195
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
Overview- Section 195
• 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
Overview- Section 195
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)]
Overview- Section 195
Meaning of “Any sum chargeable”
• 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”
Overview- Section 195
Meaning of “Any sum chargeable”
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
Overview- Section 195
• 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
Overview- Section 195
• 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
Overview- Section 195
• 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.
Overview- Section 195
• 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).
Overview- Section 195
• 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.
Overview- Section 195
• 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.
Overview- Section 195
• 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)
Grossing Up (Section 195A)
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%?
Grossing Up (Section 195A)
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%.
Grossing Up (Section 195A)
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
Procedure for remittance- Form 15CA and
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
Procedure for remittance- Form 15CA and
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
Procedure for remittance- Form 15CA and
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
Form 15 CA AND Form 15CB – revision in rules
•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
Form 15 CA AND Form 15CB – revision in rules
•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.
Form 15 CA AND Form 15CB – revision in rules
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
Form 15 CA AND Form 15CB – revision in rules
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.
Form 15 CA AND Form 15CB – revision in rules
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
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