Tax Withholding - Section 195 and CA Certification Withholding - Section 195... · • Cheque/ Demand Draft/ in kind or any other mode Time of • Payment or credit, whichever is

Tax Withholding – Section 195 and CA certification

October 1, 2011

Bijal Desai

Presentation Outline

Non-resident payments – Withholding tax

Lower or ‘NIL’ withholding of tax

CA CertificationCA Certification

Consequences of non-deduction of tax under Section 195

Summing up

Slide 2October 2011Tax Withholding - Section 195 and CA Certification

Non-resident payments – Withholding tax


Most common Payments to Non-residents

• Import of Goods

• Services availed (technical, management services, consultancy

services, others)

• Use of Brand Name/ Trademark/ Copyright• Use of Brand Name/ Trademark/ Copyright

• Cost Allocations by Group entities

- Eg. IT Allocations/ Use of Servers / Accounting or Management Fees

• Interest Payments


Obligation of Payer

• Determining whether tax deductible under Section 195 of the Act

• If yes, appropriate tax withholding

• Furnishing of CA Certificate or Assessing Officer’s (‘AO’) order under Sections 195 / 197 of the Act to the Authorised Dealer for remittance purposespurposes

• Deposition of tax


Tax Deduction under Section 195...

Payee• Non Resident / Foreign Company

• Includes branch of a foreign company

• Any person responsible for payingPayer

• Any person responsible for paying

• Includes individuals and HUFs

Nature of Payment

• Chargeable to tax under the provisions of the Act (other than salaries)


...Tax Deduction under Section 195

Mode of Payment

• Cheque/ Demand Draft/ in kind or any other mode

Time of • Payment or credit, whichever is earlierTime of Deduction

• Payment or credit, whichever is earlier

Nature of Payment

• “rates in force” – Section 2(37A)(iii)- Rates Specified in the Act (Section 115A)

- Part II of Schedule I to Finance Act- Relevant Article of the treaty


Nature of payments covered

Any sum chargeable - Chargeability to tax governed by provisions of Act / DTAA

Nature of Income Section of the Act* DTAA (OECD model convention)

Business / Profession 9(1)(i) Article 5 & A.7

Salary Income 9(1)(ii), S.9(1)(iii) Article 15

Dividend Income 9(1)(iv), S.115A Article 10

Interest Income 9(1)(v), S.115A Article 11

Royalties 9(1)(vi), S.115A Article 12

FTS 9(1)(vii), S.115A Article 12

Capital Gains 9(i)(i) Article 13

*Apart from Section 5, wherever applicable


Act/ DTAA, whichever is beneficial prevails

Key issues…

Payee

• Payments made by Branch to its Head Office/ Branch abroad

• Payments to ‘agents’ of non-residents held taxable

• Residential status different under domestic law and treaty

PayerPayer

• Payments made by NR to NR

- Section 1(2) provides that Act extends to whole of India – whether NR payer is covered within the scope of the Act?

- P-13 of 1995 (228 ITR 487) (AAR)

- Satellite Television Asian Region Ltd (99 ITD 91) (Mum ITAT)

- Vodafone International Holding BV (311 ITR 46) (HC) (Mum.)

Clarity awaited from Supreme Court in case of Vodafone


…Key issues…

Nature of Payment

• Payments not taxable in India

• Reimbursements

• Freight Charges

• Cost Allocation

Mode of PaymentMode of Payment

• Commission agent remitting revenue net of commission to Non-resident

Time of Deduction

• Advance payments

• Year end provision in books of accounts – adhoc/ certain

• Regulatory approval


…Key issues

Rates of Tax

• Is surcharge or education cess to be added when Treat rates are applied?

• Subject to Section 206AA – payee not having PAN

- Rate of 20%, ‘rates in force’ – whichever is higher- Rate of 20%, ‘rates in force’ – whichever is higher

• Section 206AA applicability in case of incomes subject to presumptive taxation


Net of Tax Payments

• Section 195A – Grossing up of tax in such cases

• Example:-

Amount to be remitted to NR Rs. 100

Tax to be withheld and borne by the payee

10%

Grossing up as per Section 195A Rs 111.11 [Rs. 100/0.9]


Section 206AA vis-à-vis Section 195A

Refund of excess TDS

• Circular No. 790 dated 20 April 2000 – refund of tax to deductor in following cases:

- Contract cancelled and no remittance

- Remittance made but contract cancelled

• Circular No. 07 dated 23 October 2007• Circular No. 07 dated 23 October 2007

- Exemption of amount remitted

- Order passed reducing liability of tax deduction

- Tax deducted twice by mistake

- Incorrect grossing-up

- Tax payment at higher rate under Act as compared to tax treaty





By Payer – Order determining quantum of sum chargeable to tax

[Section 195(2)]

• No prescribed format

By Payee – Certificate granting to receive sums without TDS

[Section 195(3)]

• Branch of a foreign bank/ NR having branch in India

• Subject to conditions in Rule 29B

• Prescribed forms

• Alternatively, payee may apply under Section 197

Practically Section 195(2) route is followed


Section 195(2) Order

• Features -- Applicable to specified Assessment year

- May determine quantum of income/ rate of tax

- Applicable to the transaction specified therein

- Provisional in nature – subject to final assessment

• Order appealable under Section 248• Order appealable under Section 248

- Withholding and payment of tax is a must

- Amendment by Finance Act 2007

- Payee cannot file an appeal


CA Certification


Certification by CA (introduced by Finance Act 2008)

• Section 195(6)

- Requires furnishing of information to tax office

• Furnishing of information – New Rule 37BB (w.e.f. 01 July 2009)

- Furnishing of information to the tax department – Form 15CA

- To obtain CA certificate before making payment to Non-Resident – Form 15CB

Whether CA Certificate substitutes AO’s order under Section 195(2) ?


CA Certificate v/s. Order under Section 195(2) of the Act

• CA Certificate route is usually followed where:

- Tax rate is certain and undisputable

- Payments not taxable in India (undisputably)

- Generally, non-PE scenario

• Where the taxability of payee is debatable – advisable to apply for • Where the taxability of payee is debatable – advisable to apply for Section 195(2) order?

- Case involving Attribution of profits to PE cases

• Whether Section 195(2) order mandatory in all cases?

- No (held by Supreme Court in GE India Technology Centre Pvt Ltd)


Key documents to keep on records

• Agreement

• Invoice

• Tax Residency Certificate of payee- If TRC not available

i. Treaty benefits may be denied

ii. payer may be treated as ‘an assessee in default’ for inadequate’/ non-deduction of taxof tax

iii. Interest and penal consequences

• Letter of Representation/ Undertaking- From payer regarding all details of transaction

- From payee regarding tax residency status and non-existence of PE

• Tax Deduction proof

• Payee’s PAN card copy


Consequences of Non-deduction of tax under Section 195


Consequences for non-deduction of tax

• Disallowance under Section 40(a)(i) of the Act

- In case of short deduction of tax – whole amount of tax should be disallowed or proportionate amount?

• Considered as ‘assessee in default’ as per provisions of Section 201(1)

- Interest under Section 201(1A) is also applicable

• Penalties• Penalties

- Section 221 – assessee is in default for non-payment of tax

- Section 271C – for failure to deduct tax

• Prosecution as per the provisions of Section 276B

• In case of appropriate tax deduction as per order under Section 195(2)

- Consequences should be minimal

• CA certificate may or may not immune the payer from interest and penal consequences


Summing up


Summing up

• Payments to Non-residents – important to determine taxability

• CA Certificate vs. Section 195(2) application – case to case basis evaluation

- In cases involving substantial amount – advisable to obtain Section 195(2) order

• Practical difficulties in Grossing up situations

• Grave consequences in case of non-compliance with Section 195


Thank You

© 2011 PricewaterhouseCoopers Private Ltd. All rights reserved. “PwC”, a registered trademark, refers to

PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of PwC

International Limited, each of which is a separate and independent legal entity.

Bijal Desai

Senior Manager

Phone no.: 022-66891407

Mobile : 9820854309

email: [email protected]

Documents

Tax Withholding - Section 195 and CA Certification Withholding - Section 195... · • Cheque/ Demand Draft/ in kind or any other mode Time of • Payment or credit, whichever is