Section 195 Related-TDS payment to non residents

1 Section 195 Related-TDS payment to non residents Suresh Chartered Accountant Presentation Overview Section Analysis 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. withholding 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 Specific payments , Whether 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.

2 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. chargeable to tax and liability Lower/nil withholding withholding for withholding tax in specified cases Application Form No prescribed form Form No 15C or 15D Form No 13. Appeal Appealable under Section 248 Order not appealable- Order not Writ petition to high appealable- Writ court 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. 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.

3 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 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 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.

4 Overview- Section 195. Meaning of Any sum chargeable . Nature Of Income Act Treaty Business/profession Section 9(1)(i): Concept of Article 5;7; 14: Concept of PE or Business 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 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.

5 , 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 Notification No. 57 of 2013 (applicable 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, tax shall be deducted under sub- Section (1) only on that proportion of the sum which is so chargeable.

6 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 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 certificate under sub Section (3) with the specified conditions.

7 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 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 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 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.

8 (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 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, 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 backed by penal provisions. The process of allotment of PAN has been streamlined so that over 75 lakh PANs are being allotted every year.)

9 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 subject to deduction of tax at source 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.

10 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 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.