Section 195 of the Income-tax Act, 1961Withholding Tax on Foreign Remittances

Provisions and Issues

Susan Dias

Intent behind Sec 195

Regular inflow of revenue for Government

Checking of tax evasion

Collection of taxes at

earliest point of time

Importance of Sec 195 today

Increased international transactions

Department’s focus on cross border payments

Heightened vigilance through Forms 15CA, 15CB

What the section says…

Liability on payer to deduct tax on payment to non resident

Application by payer for lower/ NIL withholding

Application by payee for NIL withholding

195(1)

195(2)

195(3)

195(4) Validity of certificate of lower/ NIL withholding

…What the section says

195(5)

195(6)

Empowers CBDT to notify rules for 195(3)

Empowers CBDT to provide the manner for furnishing information

195(7) Empowers CBDT to notify class of payers mandated to furnish application to tax officer for determination of WHT rate

Sec 195 (1) – Scope and chargeability

Who is responsible to deduct tax?

Any person (As defined u/s 2(31))

Who should the payee be? All non residents whether having presence in India or not Does not include RNOR

Status of non resident ? Under sec 6 In case of dual residence if tie breaker clause exists - DTAA is

applied

Payments covered? Any sum chargeable under the IT Act Except salaries and dividend u/s 115O

Point of deduction? At the time of credit or payment whichever is earlier

Rate of TDS? Relevant rate in force

Sec 195 (1) – Recent amendment

Scope of WHT obligation u/s 195 extended to all persons including non residents irrespective of them having a residence or place of business or business connection or any other presence in India

Obligation to withhold tax even without any territorial nexus

Sec 195 (2) – Payer’s application for lower/ NIL WHT certificate

Application to be made to tax officer by the payer to determine portion of payment chargeable to tax

Sec 195 (3) – Payee’s application for lower/NIL WHT certificate

On payee’s application AO on determination to grant lower/ NIL WHT certificate

Form No 15C prescribed in case of banking companyForm No 15D in other cases

Conditions for grant of certificate prescribed under Rule 29B

Sec 195 (4) & (5) – Validity and rules for grant of certificate

Certificate granted u/s 195(3) valid till specified period or till cancellation by AO whichever is earlier

CBDT empowered to make rules for grant of a certificate u/s 195(3)

Sec 195 (6) – Furnishing information

Introduced in 2008

Rule 37BB introduced* Information to Department – Form 15CA CA Certificate to be obtained before payment – Form 15CB

Requires the payer to furnish payment related information

*Circular No 4/2009 gives manner for submitting and processing payments

Sec 195 (7) – Notification of class of persons

Introduced in 2012

Board empowered to notify class of persons (payees) required to apply to tax officer for determination of WHT, irrespective of whether payment is taxable in India or not

No class of persons notified yet

Rates of tax

Rates of tax specified in the Finance Act or rates specified in the DTAA, whichever is beneficial – Sec 2(37A)(iii)

Sec 206AA to apply

RBI’s TT buying rate on day on which TDS is required to be deducted to be considered

Sec 195A – Grossing up of taxes

Grossing up required in case of net of tax payments

Tax payable by non resident to be added to income remitted

Particulars Amount

Amount payable to non-resident (net of tax) INR100

Tax rate applicable 20%

Gross-up income: 100 * 100 . (100-20) INR 125

Tax payable (INR 125 * 20%) INR 25Net amount paid to non-resident (INR 125 – INR 25) INR 100

Tax payable by non resident determined on gross figure

Applicability at a glance

Taxable under IT

Act

DTAA available

DTAA rates

beneficial

Income taxable under DTAA

Deduct tax @ IT Act prescribed rates

Deduct tax @ DTAA prescribed rate No tax deducted

NoYes

No

No

Yes

Yes

Yes

No

Payment to Non Resident

Chargeability under IT Act or DTAA

Nature of Income IT Act DTAA

Business/Profession Section 9(1)(i) Article 7 &14 rw 5

Salary Section 9(1)(ii) Article 15

Dividend Section 9(1)(iv), section 115A Article 10

Interest Section 9(1)(v), section 115A Article 11

Royalties Section 9(1)(vi), section 115A Article 12

Fees for technical services/FTS

Section 9(1)(vii), section 115A Article 12

Capital Gains Section 9(1)(i), section 45 Article 13

Documents to be relied on by CA before issuing Form 15CB

Agreements Invoices Payment details Correspondences Technical advice Proof of services actually rendered in group company transactions Remitting bank details Rate of conversion of foreign currency Tax Residency Certificate Payee declaration/certificate (eg no PE, tax residency, beneficial

ownership, treaty entitlement etc)

Some focus areas in issuing Form 15CB

Nature of the income – FTS, royalty etc

Whether payee has a PE in India? If yes, attributable profit

TRC sufficient evidence for claiming treaty benefit?

Frequently asked questions

Whether tax is to be deducted by agent when making remittance to foreign principal

Whether transactions between Branch and HO attract sec 195

Whether tax is to be deducted u/s 195 in cases of payment in kind, barter transactions or adjustment against receivables

Frequently asked questions

Do forms 15CA and 15CB absolve payer from penal consequences

When is the payer required to deduct tax

What exchange rates are to be used while deducting tax

Frequently asked questions

Is TDS Certificate to be issued when tax is borne by payer as per Sec 195A

By what time is tax deducted required to be deposited

Do you need to issue TDS Certificate to non residents

Is NIL TDS Return to be filed in the quarter when no TDS is deducted u/s 195

Whether tax officer can take a contrary view than adopted while issuing certificate u/s 195

Is there a time limit for disposal of application u/s 195

Whether order under section 195(2) can be revised u/s 263

Frequently asked questions

Frequently asked questions

Whether Surcharge & Cess are to be added when treaty rates are applicable

Can payee claim credit for excess tax deduction due to sec 206AA

Whether Surcharge & Education Cess leviable if higher rate under 206AA applied

Some issues

Taxability of royalty and Fees for Technical Services (‘FTS’)

CA Certificate as alternative to Sec 195(2)

Applicability of Sec 195 to reimbursement of expenses

Key takeaways

In case of doubt and to determine attribution of income – Advisable to obtain WHT order u/s 195(2)

Sec 195 also applies to non residents payers on payments to residents and non residents

CA certificate route - where strong judicial precedents exist

Precautions to be taken while issuing Form 15CB – eg. Certificate cum-undertaking to be obtained from payee (such as no PE declaration)

Thank you

Consequences of non compliance

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 payment

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

Refund of tax deducted u/s 195

Situation Condition for refund

Contract is cancelled No remittance is made to the non resident

Contract is cancelled No remittance is made to the non resident

Remittance is duly made to the non resident but contract is cancelled

Remitted amount is duly refunded to the payer by the payee

Contract cancelled after partial execution No remittance is made to the non resident for the non executed part

The contract is cancelled after partial execution and remittance related to non executed part is made to the non resident

Amount refunded to the payer or no remittance was made but tax was deducted and deposited when amount was credited to the account of the non resident

Reference: Circular No 7/2007 and Circular No 7/2011

Refund of tax deducted u/s 195

Situation Condition for refund

Amendment in law or by notificationunder the IT Act

There occurs exemption of the remitted amount from tax

Order passed under section 154 or 248 or 264 of the Act

Tax deduction liability of payer is reduced

Double deduction of tax amount Same amount deducted twice by mistake

Other than discussed above Grossing up not required or payment of tax at higher rate under domestic law while a lower rate is prescribed under DTAA

Reference: Circular No 7/2007 and Circular No 7/2011

Reimbursement of expenses – Judicial precedents

Nature of Expense Case Laws in favour of taxpayer Case laws against the Taxpayer

Reimbursement of cost of services of a third party engaged by non resident

Nathpa Jhakri Joint Venture - 37 SOT 160 (Mum)Modicon Network P Ltd – 14 SOT 204 (Del)

Wallace Pharmaceuticals P Ltd – 278 ITR 97 (AAR)

Reimbursement of allocated cost (ie cost sharing arrangements)

Dunlop Rubber Co - 142 ITR 493 (Cal) Danfoss Industries (India) Ltd - 268 ITR 1 (AAR)

Payment for services rendered at cost

Timken India Ltd - 273 ITR 67 (AAR) AT&S P Ltd – 157 Taxman 198 (AAR)

Reimbursement of expenses – Judicial precedents

Nature of Expense Case Laws in favour of taxpayer Case laws against the Taxpayer

Reimbursement of incidental expenses in addition to payments of royalty & FTS

Telco Ltd - 245 ITR 823 (Bom)Industries Engg Project (P) Ltd - 202 ITR 1014 (Del)Clifford Chance - 82 ITD 106 (Mum)Mahindra and Mahindra Ltd - 1 SOT 896 (Mum)Fortis Healthcare Ltd - 45 SOT 190 (Chd)

Cochin Refineries Ltd - 222 ITR 354 (Ker)SRK Consulting - 230 ITR 206 (AAR)Ashok Leyland - 120 ITD 14 (Chennai)Bovis Land Lease – 36 SOT 166 (Bang)CSC Singapore Pte Ltd - 2012-TII-35-ITAT-DEL-INTL (Del)

Reimbursement of living allowance, etc of a person deputed to India by the non resident

Morgenstern Werner - 233 ITR 751(All) Goslino Mario - 241 ITR 3 12 (SC) BHEL - 252 ITR 218 (Del)

Danfoss Industries (India) Ltd - 268 ITR 1 (AAR)