International taxation 16.05.2015

International Taxation : CA Mehul Shah | 1

Non-Resident Tax Withholding

Section 195 – Overview and Revised Form 15CA and 15CB Updated upto 10.05.2015

CA MEHUL SHAH (PARTNER ) RASESH SHAH AND ASSOCIATES

[email protected]

Section 195(1) : Key Phrases

• Any person responsible for paying to a; (payer)

• A Non resident, not being a company or to a foreign company ;

(payee)

• Any Interest (not being interest referred to in section

194LB or section 194LC or section 194LD) or other sum

chargeable (not being income chargeable under the head Salaries)

under the provisions of the Act;

• Shall at the time of credit or payment whichever is earlier;

• Of the subject payment;

• Shall deduct the tax at rates in force.

| 2 International Taxation : CA Mehul Shah

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Features of section 195 as compared to other TDS provisions

Unlike personal payments exempted in section 194C etc;

no exclusion for the same in section 195 (all payments

covered excl salaries) eg payment to foreign architect for

residential house construction etc

Unlike threshold criteria specified in section 194C etc, no

basic limit in section 195; even Re 1 payment is covered.


Features of section 195 as compared to other TDS provisions

All payers covered irrespective of legal character HUF; Individual etc

Multi-dimensional Section as it involves understanding of DTAA/Treaty

Unlike other provisions in Chapter XVII (TDS provisions), section 195

uses a special phrase chargeable to tax under the Act

Hence the crux of the Section is that the Payer has to step in the shoes of

the Assessing Officer and know whether the income is chargeable to tax

or not ?



• The person referred to in sub-section (1)

• shall furnish the information relating to payment of any

sum

• in such form and manner as may be prescribed by the

Board


Rule 37BB

The information under sub-section (6) of section 195 shall be furnished by the person

responsible for making the payment to a non-resident, not being a company, or to a

foreign company, after obtaining a certificate from an accountant as defined in the

Explanation to section 288 of the Income-tax Act, 1961

CBDT vide notification 67/2013 revised the rules and procedures for payment to a non-

resident, not being a company, or to a foreign company. The amended rule came into force

from 1st October, 2013.

Revised rule provides that the person responsible for making any payment to a non-resident,

not being a company, or to a foreign company including any interest or salary or any other

sum chargeable to tax under the provisions of the Act shall be required to furnish

details in prescribed form.


Section 195(6) as amended by Finance Bill, 2015


With effect from 1st June, 2015, Section 195(6) is substituted by following

Provision:

The person responsible for paying to a non-resident, (not being a company), or to a

foreign company, any sum, whether or not chargeable under the provision of this

Act, shall furnish the information relating to payment of such sum, in such form and

manner, as may be prescribed.

Revenue and Non-resident

Payee

Payer

Section

195

Chartered

Accountants



Resident & Ordinarily Resident [Section 5(1)]

Global Income Taxable

Resident But Not Ordinarily Resident [Section 5(1) read with Proviso

to Section 5(1)(c)]

Income received or deemed to be received in India or

Income accrues or arises or deemed to accrue or arise in India OR

Income derived from a business controlled in or a profession set up in India

Non Resident [Section 5(2)]

Only income received or deemed to be received in India or accrues or arises or

deemed to accrue or arise in India

RESIDENTIAL STATUS & TAXABILITY

Income Deemed to accrue or arise in India

Section

Reference

Income

9(1)(i) a. Any income out of business connection in India.

b. Any income through -

1. From any property in India

2. From any assets or source of income in India

3. Transfer of capital assets situated in India.

9(1)(ii) Any Salary income if it is earned in India.

9(1)(iii) Any Salary payable by the government to an Indian citizen for

service outside India


Income Deemed to accrue or arise in India

Section

Reference

Income

9(1)(iv) Dividend paid by an Indian company outside India.

9(1)(v) Interest payable by government or resident or non resident.

9(1)(vi) Royalty payable by government or resident or non resident.

9(1)(vii) Fees for technical services payable by government or

resident or non resident


Section 90(2)


Where the Central Government has entered into an agreement with the

Government of any country outside India under sub- section (1) for

granting relief of tax, or as the case may be, avoidance of double

taxation, then, in relation to the assessee to whom such agreement

applies, the provisions of this Act shall apply to the extent they are more

beneficial to that assessee.

Thus, in case of remittance to non-residents, the tax should be deducted

at the rate provided in the Finance Act of the relevant year or at the rate

provided in the DTAA if any, whichever is more beneficial to the

assessee.

Overview- Section 195

Nature Of Income Act Treaty

Business/profession Section 9(1)(i): Concept

of

Business Connection

Article 5;7; 14: Concept of

PE or

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


Meaning of Any sum chargeable”


• Where the person responsible for paying any such sum chargeable

under this Act

• to a non-resident considers that the whole of such sum would

not be income chargeable in the case of the recipient

• he may make an application to the Assessing Officer to determine

• the appropriate proportion of such sum so chargeable,

• and upon such determination, tax shall be deducted under sub-

section (1) only on that proportion of the sum which is so

chargeable.



• Any person entitled to receive any interest or other sum on which income-tax

has to be deducted under sub-section (1)

• may make an application in the prescribed form to the Assessing Officer

• for the grant of a certificate authorising him to receive such interest or other sum

without deduction of tax under that sub-section,

• and where any such certificate is granted,

• every person responsible for paying such interest or other sum to the person to

whom such certificate is granted shall,

• so long as the certificate is in force,

• make payment of such interest or other sum without deducting tax thereon

under sub-section (1).



• A certificate granted under sub-section (3) shall remain in force till the

expiry of the period specified therein

or

if it is cancelled by the Assessing Officer before the expiry of such

period, till such cancellation



• The Board may, having regard to the convenience of assessees

• and the interests of revenue, by notification in the Official Gazette,

• make rules specifying the cases in which, and the circumstances under which,

• an application may be made for the grant of a certificate under sub-section (3)

and the conditions subject to which such certificate may be granted and

providing for all other matters connected therewith


Overview of section 195

Section 195(3)

Certificate by Revenue for NIL Withholding

Application by Payee – Rule 29B Form 15C and Form 15D

Section 195(2)

Certificate by Revenue for LOWER withholding

Application from Payer No Format

Section 195(1)

As good as Charging Section Territorial Operation


Overview of section 195

Section 195(6)

Rule 37BB & Form 15CA and Form 15CB Scope of provision vis a vis Main

Provision 195(1)

Section 195(5)

Power of CBDT

Section 195(4)

Validity of certificate by Revenue


Overview- Section 195

Factor Section 195(2) Section 195(3) Section 197

Applicant Payer Payee Payee

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


Difference between 195(2), 195(3) and Section 197

Appeal by a person denying liability to deduct tax in certain

cases. (Section 148 of Income Tax Act, 1961)

• Where under an agreement or other arrangement, the tax deductible on any

income, other than interest, under section 195 is to be borne by the person by

whom the income is payable, and such person having paid such tax to the credit

of the Central Government, claims that no tax was required to be deducted on

such income, he may appeal to the Commissioner (Appeals) for a declaration that

no tax was deductible on such income.


Taxability - Steps


206AA Compliance

Section 90A Tax Resident Certificate(TRC)

DTAA Exempt from tax Lower Rate

Section 5 Deemed to be received Deemed to accrue or arise

Section 195 Chargeable to tax


CONCERN 1 :

INTEREST,

ROYALTY,

FEES FOR TECHNICAL

SERVICES

Explanation as inserted by the Finance Act 2007, read as under:

-it is hereby declared that for the purposes of this section ,

where income is deemed to accrue or arise in India under

clause (v), (vi) and (vii) of sub section 1, such income shall be

included in the total

income of the nonresident,

- whether or not the non resident has a residence or place of

business or business connection in India.


Ishikawajima Harima 288 ITR 408

In accordance with the judgment of the SC

in Ishikawajima Harima 288 ITR 408 a non-

resident is taxable on income for services only if

the services are rendered within India and are

part of a business or profession carried on by such

person in India. Both the above conditions have to

be satisfied simultaneously.


The above explanation was Substituted by finance Act 2010, now read as

under:

it is hereby declared that for the purposes of this section , where income is

deemed to accrue or arise in India under clause (v), (vi) and (vii) of sub

section 1, such income shall be included in the total income of the non

resident ,

-whether or not the non resident has a residence or place of business or

business connection in India

OR

- whether or not the non resident has rendered services in India.

Utilization of Service in India is enough to attract taxability.



CONCERN 2 :

ENACTMENT OF SECTION

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 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.


In a nut-shell-

Section 206AA introduced with effect from April 1,2010

Recipients of payment on which tax is deductible needs to provide PAN

In the absence of PAN WHT at higher rate of interest in force or 20%

applicable

Constitutional validity challenged but upheld.

Applicable even to non-residents.

Application for LOWER WHT cannot be made.



CONCERN 3 :

TAX RESIDENCY

CERTIFICATE (TRC)

TAX RESIDENT CERTIFICATE (TRC)

As per the provisions of section 90(2), in case of remittance to non-residents,

the tax should be deducted at the rate provided in the Finance Act of the

relevant year or at the rate provided in the DTAA if any, whichever is more

beneficial to the assessee.

In Finance Act, 2012 the government had introduced a mandatory

requirement of furnishing Tax Residence Certificate (TRC), for non-residents

seeking tax treaty benefits vide Section 90(4)

The rationale was to Refrain third party residents, from claiming unintended

Treaty benefits

Subsequently, the particulars required in the TRC were also notified in Rule

21AB.



However, experience showed that

In some Treaty partner countries, obtaining a TRC with India

prescribed particulars was a tedious exercise.

In some cases , there was reluctance to issue the desired TRC, due

to the fact that such countries had their own formats.

Further, there were countries where there was no mechanism to

issue TRCs.


TAX RESIDENT CERTIFICATE (TRC) – Necessary but not sufficient ?

While the non-residents were still grappling with these concerns, the

Finance Bill 2013 proposed to insert in tax law that TRC would be a

necessary but not sufficient condition for availing the benefits of

the Treaties.



This proposal created a lot of concerns.

It was feared that the tax department would ask additional questions and

Treaty benefit could be at risk.

Investing communities which have invested into India particularly Mauritius

were worried.



In this context , it is important to note that in the year 2000, the CBDT had issued

Circular 789 dated 13th April 2000, to clarify that whenever a TRC is issued by Mauritius

Government, such TRC would constitute sufficient evidence for accepting the residence

as well as beneficial ownership.

The Apex Court in case of Union of India v. Azadi Bachao Andolan [ 2003] 132 taxmann

373 (SC) upheld the legal validity of this beneficial Circular.

It was felt that the amended provisions would enable the tax authorities to disregard the

beneficial Circular.

Some sections of professionals apprehended and opposed that it was a unilateral

approach to circumvent a Bilateral Treaty.



After undergoing a few changes, it has now been provided that in order to

avail Treaty benefit, the non-resident would have to provide a Certificate of

his being a resident as against the earlier requirement of TRC with India

prescribed particulars .


In accordance, the Income Tax Rules, 1962 have been amended to include Rule 21AB which states that the non resident shall provide the following information in Form No. 10F.

Name of the Tax Payer

Status (Individual, Company, Firm, etc.) of the taxpayer

Nationality (for individuals) Taxpayer s tax identification number in the country or specified territory of

residence or, in cases where there is no such number, a unique number by

which the person is identified by the government of the country or the

specified territory

Period for which the certificate is applicable.

Address of the applicant for the period for which the certificate is applicable


Tax Resident of India can also obtain Certificate from Indian Government.

Rule 21AB of the Rules also prescribes specified forms for tax residents of

India to obtain a Certificate from the respective AO.

A taxpayer who is a resident of India, and who wishes to obtain a certificate of

residence for the purposes of a tax treaty, shall make an application in Form

No. 10FA to the AO.

The AO on receipt of an application from the taxpayer shall issue certificate of

residence in Form No. 10FB.


PAN MANDATE eg. Payment of Royalty for F.Y 2014-15

TRC PAN Rate

Available Available DTAA Rate

Not Available Available 25%

Available Not Available 20%*

Not Available Not Available 25%


40

Non deduction or failure

to pay TDS

Assessee in

Default

u/s 201 &

Interest under

Section 201(1A)

*Prosecution

Section 276B

Penalty under

*Section 271C

Consequences of Failure to Deduct or Pay

Disallowance of expenses

u/s 40(a)(i)

12 May, 2010 International Taxation : CA Mehul Shah


ISSUE 1 :

IMPORT OF RAW

MATERIALS

Extracts from 15CA-CB:


Clause 9 B

No tax is deductible, mainly because:-

1. The proposed remittance is for import of raw material

made on principle to principle basis which was entirely

concluded outside India.

2. As per declaration obtained from beneficiary, no activity in

connection with sale of rough diamond is carried out by

beneficiary in India and hence there is no business

connection in India.

3. Property in rough diamonds passes outside India, payment

is made to beneficiary which is outside India; No income

accrued to non-resident beneficiary in India for such sale to

<<Client Name>> which can be charged to tax in India.


ISSUE 2 :

INTEREST,

ROYALTY,

FEES FOR TECHNICAL

SERVICES

Extracts from 15CA-CB:


Clause 9 A

If the remittance is for royalties, fee for

technical services, interest, dividend, etc,

please indicate:-

Yes.

Remittance is on account of Fees for Technical

Services.

(a) The clause of the relevant DTAA under

which the remittance is covered along with

reasons

Article 12 of Indo-US Treaty.

(b) Rate of TDS required to be deducted in

terms of such clause of the applicable DTAA

15%


MAKE AVAILABLE CLAUSE


ISSUE 3 :

COMMISSION

ON FOREIGN AGENTS

CBDT Circular No. 23 dated 23rd July, 1969

Foreign Agents of Indian Exporter

A foreign a g gent of Indian exporter operates in his own country and no part

of his income arises in India.

His commission is usually remitted directly to him and is, therefore, not

received by him or on his behalf in India.

Such an agent is not liable for income tax on this commission.


Erstwhile CBDT Circulars

https://buyerscredit.wordpress.com/2012/07/26/buyers-credit-interest-payment/


CBDT Circular No. 786 dated 7/2/2000

The deduction of tax at source under section 195 would arise if the payment of

commission to the non-resident agent is chargeable to tax in India.

In this regard attention to CBDT Circular No. 23 dated 23rd July, 1969 is drawn

where the taxability of Foreign Agents of Indian Exporters was considered

along with certain other specific situations.

It had been clarified then that where the non-resident agent operates

outside the country, no part of his income arises in India.

Further, since the payment is usually remitted directly abroad, it cannot be

held to have been received by or on behalf of the agent in India.

Such payments were therefore held to be not taxable in India.


Erstwhile CBDT Circulars



Circular 7/2009 dated 22nd October, 2009:

Withdrawal of Circular No. 23, dated 23-07-1969, and Circular No. 786,

dated 07-02-2000

It is noticed that interpretation of the Circular by some of the taxpayers to

claim relief is not in accordance with the provisions of section 9 of the

Income-tax Act, 1961 or the intention behind the issuance of the Circular.

Accordingly, the Central Board of Direct Taxes withdraws these Circulars.


Withdrawal of Erstwhile Circulars



The blanket exemptions being claimed under CBDT circulars is removed

Nonetheless, according to my opinion, this does not imply that

commission to non resident agents become automatically

chargeable to tax in India.

Still the principle holds good that the payments to non –resident

are liable for tax in Indian only if they satisfy the test of

chargeability in India.

One has to ascertain from the facts of every case to determine

whether the commission paid to non – resident is chargeable for

tax in India.


Impact of Withdrawal of Circulars



Whether the payment of commission to non –resident agent be taxed as

Fees for Technical Services under Tax Treaty?

Whether the payment of commission to non-resident agent be taxed as

Business Income under Tax Treaty?

Whether the payment of commission to non-resident agent be taxed as

Independent Personal Services under Tax Treaty?


Issues



Commission Expense Post Withdrawal of Circular No 786/2000 and Circular 23/

"Commission" simpliciter is not Fees For Technical Services u/s 9(1)(vii) of the Act and same being in the nature of "business income" for recipient of income/payee/non resident, is also not taxable in India vide section 9(1)(i) in case of absence of business connection in India.

Therefore, since chargeability for non resident agent providing services to Indian Party is clear as per aforesaid understanding and since there is NIL chargeability under the Act itself for non resident payee, option to approach AAR/AO u/s 195/197, in my considered view, is not required to be exercised, in facts of instant case.

This is supported from SC/other rulings in Shoorji Plaoonji 39 ITR 775

Perofrming rights 106 ITR 11

Cal HC in 5 ITR 216

Further, one would be on much stronger footing, in case relevant DTAA contains in Article 12 (mainly) dealing with royalty and fees for included

services "make available" concept.


Extracts from 15CA-CB…


Clause 9 D

If not, the reasons thereof. No tax needs to be deductible, mainly

because:-

1. The proposed remittance is on account

of commission which is business income

for the beneficiary and the service is

rendered and utilised wholly outside

India

2. The beneficiary does not have any

business connection in India.

3. Payment is made to beneficiary which

is outside India; No income accrued to

non-resident beneficiary in India by

providing such services to <<Client

Name>> which can be charged to tax in

India.


ISSUE 4:

TDS on Buyers Credits

Form 15CA & 15CB Not Applicable to Interest payment to Indian Bank Branches

Residential status of a Company as defined u/s 6 (3) of Income Tax Act.

An Indian Company is always resident in India. A foreign company is

resident in India only if, during the previous year, the control and

management of its affairs are situated wholly in India. However, a foreign

company is treated as non resident if, during the previous year, the control and

management of its affairs are either wholly or partly situated out of India. The

term control and management refers to head and brain which directs

the affairs of policy, finance, disposal of profit and vital things concerning

the management of a company. Usually control and management of a company s affairs is situated at the place where meetings of its board of

directors are held.

Based on above definition, Indian Bank overseas branches becomes a resident

and hence, whenever buyer’s credit interest payment is made to Indian

bank overseas branches Form 15 CA and 15 CB is not required to be

submitted.






ISSUE 5:

HIGHER RATE OF TAX U/S

206AA FOR GROSSING UP

HIGHER RATE OF TAX U/S 206AA FOR GROSSING UP

Section 195A of the Act reads as under:

"In a case other than that referred to in sub-section (1A) of section 192, where under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.“

For Example: Amount payable to Non resident is INR 100, rate of TDS is

10%;

Gross amount for TDS purpose shall be INR 111.11 (100*100/90)




Example :


On account of amendment in 2013, most of the resident payers have to bear the tax burden and are thereby forced to gross up such taxes under Sec. 195A of the Act. The effective tax rate in all grossing up cases is as high as 36.05 per cent.




It is evident from the text of Sec.195A that it refers to foregoing

provisions of Chapter XVII B and it also refers to the rates in force for

the purpose of grossing up. Section 206AA is not a section preceding sec.

195A . Accordingly, it is only rates in force which are applied for

withholding of taxes, are to be considered even for grossing up purpose

under Sec.195A. An issue would arise when provisions of Sec.206AA are to

be applied to a payment made to a non resident by withholding taxes at

higher rate of 20 per cent, whether grossing up is to be done at the same

rate of 20 per cent or as per the rates in force referred in Sec.195A. It is

clear through plain reading of definition of rates in force as per Sec.

2(37A)(iii) that rate prescribed in Sec.206AA is not to be treated as rate in force .





It was held by the Hon’ble bench of Bangalore Tribunal in the case of

Bosch Ltd –vs- ITO ( ITA NO.: 552 to 558/Bang/2011) that the higher

rate of tax deductible under section 206AA of the Income Tax Act, 1961 is

not applicable for grossing up under section 195A of the Act since a literal

reading of section 195A of the Act indicates that income should be

increased at the rates in force for the financial years and not the rates

in which the tax is to be withheld by the taxpayer.




HIGHER RATE OF TAX U/S 206AA FOR GROSSING UP – An Illustration

Royalty payable : 1,00,000

Rates in force say : 10 per cent

Grossed up royalty : 111111

WHT @ 20 per cent : 22222

Net amount payable : 88888








ISSUE 6:

APPLICABILITY OF

SURCHARGE & CESS ON

TREATY RATE

APPLICABILITY OF SURCHARGE & CESS ON TREATY RATE

It was held by the Hon ble bench of Mumbai Tribunal in the case of Sunil V.

Motiani –vs- ITO (ITA NO.: 276/Mum/2012) that the assessee is not liable to

pay education cess and surcharge in addition to the tax payable under the

provision of the DTAA since the DTAA provision does not say anything about

inclusion of surcharge and education cess for the purpose of deduction of tax.





ISSUE 7:

Withholding Tax

Obligation for the payer

Withholding tax obligation for the payer

A question arises as to whether the payer should be in possession of TRC of

payee at the time of remittance. In other words, is the payer obligated to

disregard treaty benefit while discharging its withholding tax obligation at the

time of remittance, if the payee should be in possession of TRC at that time . In

other words , is the payer obligated to disregard treaty benefits while

discharging its withholding tax obligation at the time of remittance , if the

payee does not hold TRC at that time. One may argue that the TRC

requirement is applicable only when a claim for a treaty benefit is made by the

payee/recipient of income and hence is of no relevance to the payer who has

obligation to withhold taxes . However, given the harsh consequences of

default provisions and disallowance, which may follow, it is likely that the

payer of income would act with caution.





ISSUE 8:

Impact of section 206AA,

on tax withholding

obligation when TRC is

otherwise made available

Impact of section 206AA, on tax withholding obligation when TRC is otherwise

made available

As per Section 206AA of the ITL , the recipient of any sum shall provide his

permanent account number(PAN) to the payer/deductor and in case PAN is

not provided taxes need to be withheld at 20% or higher rate ,as provided in

the respective provisions under which withholding is made . A question may

arise as to whether the presence of TRC will obliterate the requirement of

obtaining a PAN.

The reference under Section 206AA of the ITL should be with regard to PAN as

granted by the tax authorities in India and any tax identification number in

overseas jurisdiction may not be regarded as a sufficient compliance under

Section 206AA.Thus, mere presence of TRC may not be dilute rigor of Section

206AA and the same would continue to govern irrespective of furnishing of

TRC by Non-Resident ,if PAN is not furnished.



Interplay of DTAA,PAN, & TRC

Is the Payment liable to tax under DTAA?

Is TRC Available?

No Tax Deductible, PAN not required

Tax as per ITA Is Payee s PAN

Available?

S. 206AA applicable: Higher of 20% or

Rate as per Rates in Force

S. 206AA not applicable: Rate as per Rates in Force

Is DTAA Rate Beneficial?

Is TRC Available? Is Payee s PAN

Available?

Section 206AA applicable: Higher of 20% or Rate as per

DTAA

Section 206AA not applicable: Rate as

per DTAA


No

Yes

No

No

Yes

Yes

No

Yes

Yes

No

Yes

Section 206AA cannot override section 90(2) of the Act

Whether section 206AA would override the provisions of DTAA in a situation where non-resident taxpayer did not furnish PAN, thereby necessitating a minimum withholding tax rate of 20% irrespective of the rate provided in the DTAA?

It was held by the Hon’ble bench of Pune Tribunal in the case of Serum

Institute of India Limited that section 206AA of the Income-tax Act, 1961

(the Act) would not override provisions of a Double Taxation Avoidance

Agreement (DTAA) to the extent that the latter is more beneficial to a taxpayer.

As per section 90(2) of the Act, provision of the Act are applicable to the extent

of that they are more beneficial to the tax payer. Since section 206AA of the act

prescribed the higher rate of withholding tax, it would not be beneficial to the

tax payer vis-à-vis the rates prescribed in DTAA.



Impact of section 206AA on tax withholding obligation when TRC is otherwise made

available

Other Judgements which may be relied

Union of India v/s Azadi Bachao Andolan (2003) [263 ITR 706]

CIT v/s R.M. Muthaiah [ 202 ITR 508]

CIT v/s Davy Ashmore India Ltd. [190 ITR 626]



Taxability – An overview


206AA Compliance

Section 90A Tax Resident Certificate(TRC)

DTAA Exempt from tax Lower Rate

Section 5 Deemed to be received Deemed to accrue or arise

Section 195 Chargeable to tax


ISSUE 9:

Software Payments –

whether taxable in India ?

Illustrative Types of Software

Canned Software / shrink wrapped software

Off-the-shelf or packaged software available to all the customers in the same form

without any customisation e.g. Microsoft office.

Embedded Software

Embedded software is built-in to hardware it is supplied with

Generally no seprate value is allocable towards software

Customized off-the-shelf software

An off-the-shelf software modified and customised according to needs of the

customer e.g. customization of ERP software, say SAP

No new software is developed but an already marketable software is mapped

according to the specified needs of the customer

Software Development

Specifically coded/developed for a specific user and for a specific purpose as per the

requirements e.g. specialised billing software for a company, inventory software, etc.

Generally rights in copyright of software are with the customer


Shrink Wrapped Software

Shrink Wrapped Software

Shrink wrapped used for internal purposes

Licensee acquires copyrighted article. No right to use copyright.

It is license to use copyrighted article and not copyright

Licensee cannot copy / reproduce / sell (which are inherent rights covered

by copyright)

Its in the nature of purchase of goods

Comparison with Books which are also copyrighted article providing you the

intense knowledge

Transaction treated as sales

Not royalty

Taxable as business profits

Different mode of delivery / limited period should not make difference in characterization


Embedded Software

• The treatment remains same as

in case of shrink wrapped

software

• The purchaser of the computer

acquires a copyrighted article and

not right to use any copyright in

embedded software

• Copyright remains with the

owner of the software and the

same is not transferred or

licensed to the purchaser

• Accordingly, payment not royalty


Customized off-the-shelf software (1)

• Off-the-shelf software

customized as per the

requirements of the user

• Copyright owner retains

copyright in the software

• Right to copy the software

generally not granted to end

user

• Degree of customization is

relevant


Customized off-the-shelf software (2)


Software Development

• Generally, all the rights in the

software are transferred to the

user and no rights are retained by

the programmer

• Where the software is

customized to the requirement of

the user, such software has often

no value unless the supplier

shares the technical knowledge

etc. with the users and suitably

equips them to handle the

system themselves

• Payment for customized software

falls within the ambit of fees for

technical services


Effect of recent Amendments ????


Disclaimer

These are just my opinion. Opinion are

like wrist watches. All show different times

but all think that their time is correct…


“All is well” if you pay taxes

properly, but the day you deny

taxes, you end up being

discussed in a seminar like this

in the form of Judicial

Pronouncements!



Approaches to looking at International taxation – Services rendered

Client is Resident having foreign

income • Claim Credit under Article 23/ Section 90/91 of WHT in foreign countires and file ITR

Client is Resident Deductor Payer • 15CA and 15CB • Lower Deduction

certificates u/s 195(2) • Appeal u/s 248

Client is Non-resident • File return and

claimRefund • Lower deduction/Nil certificate

Transfer Pricing

• Determination of ALP • TP Report • Assessment Proceedings • Appeals

ABOUT THE AUTHOR

Author, Mr. Mehul Rasesh Shah is a member of the ICAI. He has pursued

certificate Course in International Taxation in the year 2012 conducted by the

ICAI. He has also completed his Diploma in IFRS (ACCA, London) and Advanced

Diploma in Management Accounting (CIMA, London) in the year 2013. Currently

he is handling many Appellate proceedings including representation before the

Tribunal and Settlement Commission. He can be reached at

[email protected]


Contact US

84

CA Mehul Shah

Mobile : 9723459572

E-mail : [email protected]

Partner

Rasesh Shah and Associates


mailto:[email protected]
