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Withholding tax on Foreign Remittances u/s.

195
Presentation by: Vispi T. Patel 13 February 2009

Bombay Chartered Accountants Society

Withholding tax obligation under Section 195


Section 195 (1)
Any person responsible for making payment to a non-resident shall withhold tax Only in respect of interest or other sum chargeable under the Income Tax Act, 1961 At the time of credit or payment whichever is earlier At the rates in force

Does not apply to salaries and exempt dividends

Objective of section 195


The objective of section 195 is to ensure, as far as possible, that the tax liability on the income element of the amount paid is deducted at source itself, so that the Department is not put through the hassles of recovering it from a non-resident whose connection with India may be transient or whose assets in India may not be sufficient to meet the tax liability

Any Person - Whether includes non resident


Any person - whether includes non resident Conflicting views :Favourable View - Not Included
Provision of the Act cannot have extra territorial jurisdiction Commentary Kanga, Palkhivala and Vyass the Law & Practice of Incometax Ninth Edition Page 2105

Contrary View - Non residents included


Definition of person under the Act includes non residents/foreign company Jurisdiction to issue show cause notice for non-withholding of tax on capital gains in relation to transfer of controlling interest in the Indian company (Vodafone International)(311 ITR 46)(Bom) Liability to deduct tax at source from the payments made by the Foreign TV channels to the Foreign Transponder owner is fastened on them by virtue of the provisions of section 195 (Asia Satellite v DCIT) (85 ITD 478)(Del) Purchase of Ad Airtime to Foreign TV Channels (Satellite Television Asia Region Ltd. v DCIT) (99 ITD 91)(Mum) Provisions of Section 195 encompass payment made by HO overseas AAR (1995) 228 ITR 487: Bechtel Ruling

Any person includes Non-resident

Time of deduction
At the time of credit or payment whichever is earlier
United Breweries Ltd. v ACIT (211 ITR 256)(Kar) Flakt (India) Ltd. (267 ITR 727)(AAR)

No tax withholding if amount neither credited nor paid


CJ International Hotels Ltd v ITO (79 ITD 506) (Delhi)

Even after credit, tax to be deducted when sum becomes unconditionally available to the payee Debatable
Motor Industries Company (249 ITR 141) (Kar) Creation of an enforceable debt essential to trigger tax withholding Ericsson Communication (81 ITD 77) (Delhi)

Right to receive/pay enforced only after receipt of Regulatory Approval


Pfizer Corp. v CIT (259 ITR 391)(Bom) CIT v Kirloskar Tractors Ltd. (231 ITR 849)(Bom)

Rates of deduction
At the rates in force:Section 2(37A) defines rates in force as rates as per Finance Act or Treaty whichever is applicable
Reference to rates as per DTAA included from 1.6.1992 CBDT vide Circular No. 728 dated 30.11.95 , rates as per DTAA to be applied where they are more favorable to the assessee Conditions for applying beneficial rate laid down u/s. 115A

Issue Whether surcharge to be levied on Treaty rates


If tax Treaty defines tax include surcharge, and Rates of tax for royalty, Fee for technical services and interest given as not to exceed a specified percentage in DTAA

Treaty rates normally inclusive of surcharge

Sum chargeable under the Act

Transmission Corporation of A.P. Ltd. v. CIT (239 ITR 587) P.C. Ray & Co. (India) (P) Ltd. v. ITO (36 ITR 365)(Cal) Raymonds Ltd. v. DCIT (80 TTJ 120)(Mum)/MSEB v. DCIT (90 ITD 793)(Mum) CIT v. Samsung Electronics Co. Ltd. (185 Taxman 313)(Kar)

Circulars issued on S. 195


Circular No. 152 dated 27.11.1974
 Where the person responsible for paying any sum to a nonresident considers that the whole amount thereof would not be income chargeable under the Act in the case of the recipient non-resident, he may make an application u/s. 195(2) to the ITO for the determination of the appropriate portion of such payment which would be taxable and in respect of which tax is to be deducted u/s. 195(1)

Circular No. 588 dated 2.1.1991


 Where a taxpayer, engaged in the business of export of software for computer application, imports any systems software, supplied by the manufacturer of the computer hardware, alongwith the hardware itself, the lump sum payment made to the foreign supplier for acquisition of any right in relation to, or for use of, such systems software will not be liable to tax in India as payment by way of royalty or otherwise. Such lump sum payments will, henceforth, be allowed to be made without deduction of tax at source u/s. 195(1)

Circulars issued on S. 195


Circular No. 759 dated 18.11.1997, No. 767 dated 22.5.1998 and No. 10/2002 dated 9.10.2002
 To dispense with the requirement of submission of a No Objection Certificate from IT Authorities for remittance to a non-resident as required by the RBI  Alternate procedure is to obtain a Chartered Accountants certificate  In order to streamline the procedure as well as to ensure the correct deduction of tax at source, Form and application for remittance u/s. 195 have been revised to provide the basis on which the tax is to be deducted

Circulars issued on S. 195


Circular No. 786 dated 7.2.2000
 As clarified earlier in Circular No. 23 dated 23.7.1969 where the non-resident agent operates outside the country, no part of his income arises in India, and 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. This clarification still prevails in view of the fact that the relevant sections 5(2) and 9 have not undergone any change in this regard. No tax is therefore deductible u/s. 195 from export commission and other related charges payable to such a non-resident for services rendered outside India.

Transmission Corporation of A.P. Ltd. v. CIT (239 ITR 587)(SC)

Facts
The assessee made certain payments to nonresidents, without deduction of tax at source, towards purchase of machinery/ equipment and also for erection and commissioning of such machinery/equipment

ITAT Ruling
The provisions of section 195 are not applicable to payments of sums to a non-resident, which are not pure income profits

Transmission Corporation of A.P. Ltd. v. CIT (239 ITR 587)(SC)

High Court Ruling


 The assessee was under an obligation to deduct tax at source u/s. 195  The obligation to deduct tax u/s. 195 is limited only to the appropriate proportion of income chargeable under the Act forming part of the gross sums of money paid to non-residents  The ITO was correct in determination of tax u/s. 195 in respect of payment made towards purchase of equipment as well as erection of such equipment. However, the ITO was in error in determining tax deductible u/s. 195 in respect of purchase of machinery/equipment

Transmission Corporation of A.P. Ltd. v. CIT (239 ITR 587)(SC)

Supreme Court Ruling


 The scheme of sub-ss.(1),(2) and (3) of s. 195 and s. 197 leaves no doubt that the expression any other sum chargeable under the provisions of this Act would mean sum on which income tax is leviable  If the sum that is to be paid to the non-resident is chargeable to tax, tax is required to be deducted  The scheme of tax deduction at source applies not only to the amount paid which wholly bears income character, but the gross sum, the whole of which may not be income or profit of recipient

Transmission Corporation of A.P. Ltd. v. CIT (239 ITR 587)(SC)

Supreme Court Ruling


 The purpose of sub-s.(1) of s. 195 is to see that the sum, which is chargeable under s. 4 of the Act for levy and collection of income-tax, the payee should deduct tax, if the amount is to be paid to a non-resident  The said provision is for tentative deduction of tax subject to regular assessment and by the deduction of tax rights of the parties are not, in any manner, adversely affected. Further, the rights of payee or recipient are fully safeguarded under ss. 195(2), 195(3) and 197

Transmission Corporation of A.P. Ltd. v. CIT (239 ITR 587)(SC)

Supreme Court Ruling


 Only thing which is required to be done by them is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of recipient, or for determination of appropriate proportion of such sum so chargeable, or for grant of certificate authorising recipient to receive the amount without deduction of tax, or deduction of tax at any lower rates or no deduction. On such determination, tax at appropriate rate would be deducted at source.  If no application is filed , income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source.

MSEB v. DCIT (90 ITD 793)(Mum)

ITAT Ruling
 These observations do give a prima facie impression that, in the esteemed views of the SC, whenever an application under s. 195(2), is not filed, the assessee tax deductor is under a statutory obligation to deduct tax at source computed on the entire payment to nonresident treating the same as income. However, such an interpretation will be fallacious  The ratio of SC judgement in the case of Transmission Corporation of A.P. Ltd. do not affect the position that in a case where no portion of payment is exigible to tax, the question of application of s. 195(2) does not arise, because, as the section itself categorically provides that it comes into play where the person responsible for paying any sum chargeable under this Act to a nonresident considers that whole of such sum would not be chargeable in the case of recipient

MSEB v. DCIT (90 ITD 793)(Mum)

ITAT Ruling
 It is thus a settled position that when an income is outside the scope of income taxable under the Act, the question of application of s. 195, which is in material respects pari materia with s. 18(3B) of the 1922 Act that High Court [P.C. Ray & Co. v. ITO (36 ITR 365)(Cal)]was in seisin of, does not arise.  It is neither desirable nor permissible to pick out a word or a sentence from the judgement of the SC, divorced from the context of question under consideration and treat it to be the complete law declared by the SC [CIT v. Sun Engineering Works (P) Ltd. (198 ITR 297)(SC)]

MSEB v. DCIT (90 ITD 793)(Mum)

ITAT Ruling
 It was not even the case of the Revenue, in the matter of Transmission Corpn. that tax at source was also required to be deducted from the payments made to non-residents were not exigible to tax in India, their Lordships concern was confined to two categories of payments : first, which are in the nature of payment of income simpliciter, and, second ,in the nature of amounts of a mixed composition, a part of which only may turn out to be taxable income on account of income embedded or hidden therein. The observations made in this context, in our considered view, cannot be applied in the case of sums no part of which are exigible to tax in India

The SC decision should not be used as a blind mans walking stick without examining the facts of the situation

CIT v. Samsung Electronics Co. Ltd. & Others (185 Taxman 313)(Kar)

Facts
 The assessee, an Indian branch of the Korean Company, was engaged in development of software for telecommunication system, office appliances, computer system and mobile devices. The software developed by the assessee was for in-house used by the parent company  The assessee imported software product which was readily available in the market  The assessee made the payment for import of software without deduction of tax at source and also without making an application u/s. 195(2)  AO initiated proceedings u/s. 201 for non-withholding of tax

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

ITAT Ruling
 It was not incumbent on the assessees to deduct tax u/s. 195 as payments were not in the nature of royalty in terms of respective DTAAs  Consequently, proceedings u/s. 201 would not arise

Basic Issue before the HC


 Whether there was an obligation to deduct and remit the amount in terms of section 195 ?

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

Revenues Contention
 Payments made by the assessees to the supplier of the software were in the nature of royalty u/s. 9(1)(vi) of the Act and as such, the assessees were required to deduct tax at source as per s. 195  Definition of royalty under the Act and as per the DTAAs with USA and Sweden were one and same and therefore, the payments were in the nature of royalty and not out-right sale  Reliance was placed on the Amex Ruling (238 ITR 296)(AAR)  The SC Ruling in the case of Tata Consultancy was in the different context and therefore, interpretation therein has no relevance for the Income tax purpose  The assessee was bound to deduct tax at source u/s. 195 (Reliance placed on Transmission Corpn)

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313) (Kar)

Assessees Contention
 Application to deduct tax at source u/s. 195 would arise only in the event of chargeable to tax  Sale of software is goods and is a trading receipt, thus not chargeable to tax in India  If a person is not liable to be charged to tax, the assessee cannot be construed as a person in default u/s. 200  The SC Ruling in Transmission Corpn. does not restrict the right of the assessee to challenge the liability /demand based on chargeability

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

Assessees Contention
 Charging provision u/s. 4 will have to be borne in mind while reading s. 195 [CIT v. Eli Lilly (312 ITR 225)(SC)]  Prior to amendment to s. 201, the assessees did not come within the ambit of deemed defaulter  Consequential order passed u/s. 201 is bad in law  If the sum is not at all chargeable, what are the consequences is not a question answered in Transmission Corpn. Therefore, the SC Ruling in Transmission Corpn. is not an authority for the present case

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

HC Ruling/Observation
 All the assessees are quite aware that it is not actually an exercise for determination of tax liability of a nonresident; but is only in the context of the obligation of a resident assessee making payments to the non-resident as contemplated u/s. 195  This obligation cannot be otherwise got rid of or can be wriggled out  Valiant attempts have been made to either distinguish the SC Ruling in Transmission Corpn. or even to contend that the judgement can only be an authority only to the limited extent where some part of payment partakes the character of income

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313) (Kar)

HC Ruling/Observation
 Binding nature of the judgement of the SC cannot in any way be diluted or diminished as the SC directly involved in the exercise of interpreting the provision of s. 195. There is absolutely no scope for the HCs even to examine an alternative arguments  We cannot lose sight of the fact that section 195(1) of the Act is not a charging section or provided for determination of the tax liability of a non-resident nor as to whether u/s. 9 of the Act; but by simply accepting the operation of the mandate u/s. 195(1) that the payment to the recipient prima-facie bears the character of an income and therefore, the obligation u/s. 195(1) springs up

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313) (Kar)

HC Ruling/Observation
 An exercise of determination of tax liability cannot be resorted even for the purpose of determining the extent of obligation on part of the payer and to ascertain as to whether there is any scope for relieving the payer totally from the obligation to deduct. An answer for this can be obtained only by going through procedure envisaged u/s. 195(2)  In the absence of such application u/s. 195(2), the appellate authorities are precluded from going to the question or exercising its appellate powers to decide the question whether the sum is chargeable to tax; especially in the wake of the binding judgement of the SC in the case of Transmission Corpn.

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

HC Ruling/Observation
 As regards the pre-amended law in relation to s. 201, section 200 and heading of section 201 clearly cover the case of the total failure of deduction also  The resident payer, who has not filed an application u/s. 195(2) cannot, later, after having failed to deduct and remit the amount turn around and contend that no part of the payment had resulted in any taxable income in the hands of the non-resident recipient and therefore, it cannot be said that there was any failure on the part of the payer in fulfilling its obligation u/s. 195(1)

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313) (Kar)

HC Ruling/Observation
 It is not open to a resident payer to invite the AO to embark upon the exercise of determining the tax liability of a non-resident recipient on a mere filing of objections to a demand u/s. 201 by merely contending that the payment did not result in any taxable income. This exercise can be undertaken by AO only on filing of actual return of income by the non-resident recipient. As far as the resident payer is concerned, the limited option is to have applied to the AO as per s. 195(2)  Admittedly in all these appeals the assesses having not made any such application u/s. 195(2), no further questions arises for examination in so far as the liability of the resident payer in terms of s. 195(1) is concerned  All such contentions urged on the merits of the question of actual taxability are to be ignored as irrelevant and are not productive.

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

HC Ruling/Observation
 The only limited way of either avoiding or warding off the guided missile (obligation to withhold tax) is by the resident payer invoking the provisions of s. 195(2) and even here to the very limited extent of correcting an incorrect identification, an incorrect computation or to call in aid the actual determination of the tax liability of the non-resident . Except for this method, there is no other way of the resident payer avoiding the obligations cast on it by s. 195(1)  Even in a situation where an application is made u/s. 195(2), the AO cannot embark on an exercise as though it is meant to determine the actual tax liability of the non-resident recipient. If such a situation is permitted to take place, there can arise conflicting decisions and versions in so far as the tax liability of the non-resident is concerned at the time of 195(2) and on actual filing of return by such non-resident

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

HC Ruling/Observation
 A situation of this nature should be avoided and it can be avoided if we should bear in mind that the exercise u/s. 195(2) is only for extending a limited concession in favour of the payer when things are very clear or does not involve any doubt or ambiguity such as in a situation where the AO has actually examined the nature of payment and has indicated in an assessment order on the basis of return filed by the non-resident that no part of the receipt is taxable and if so based on this settled/undisputed factual/legal position, the resident payer by quoting the assessment order passed by AO for any earlier year seek for granting commensurate relief from the obligation for deduction of the percentage of payment to the non-resident

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

HC Ruling/Observation
 Also an erroneous order and demand being raised by the AO u/s. 201 regarding with the incorrect description of the resident payer or incorrect computation of the amount to be deducted either by employing a wrong percentage for deduction, at variance with the rates as prescribed in the Finance Act or such arithmetical or factual errors committed by the AO, without involving the question of actual determination of the tax liability of non-resident alone can constitute the subject matter for appeal u/s. 246A.

In Prasad Productions Ltd., a Special Bench of the Tribunal , Chennai has been constituted In view of the judgement of the Karnataka High Court in Samsung Electronics

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

Key Takeaways and Side Effects


 Compliance u/s. 195(2) is must and important  Whether tax is required to be withheld on all types of payments including purchase of goods  Obligation to withhold tax v. Determination of tax liability  Significance of the words any other sum chargeable under the provisions of this Act in section 195(1)

Ad-interim stay granted by the SC in GE India Technology

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

Key Takeaways and Side Effects


 It seems that HC has not read and understood the SC judgement in the case of Transmission Corpn. in its entirety and holistically [CIT v. Sun Engineering Works (P) Ltd. (198 ITR 297)(SC)]  Validity of Circulars issued by the CBDT with reference to s. 195 wherein the thrust is on the chargeability to tax Approach of Revenue v. HC Ruling  Repercussion on the alternate procedure, i.e., the Role and Scope of a Chartered Accountant while issuing the certificate

CIT v. Samsung Electronics Co. Ltd. & Others (183 Taxman 313)(Kar)

Key Takeaways and Side Effects


 Leads to mechanical approach of the tax authorities while issuing the certificate u/s. 195(2) simple issue v. complicated issue  Limited Powers of the Appellate Authorities while disposing the appeal against the order passed u/s. 195(2) and 201(1) Arithmetical or Factual Error  Scope and Powers of Authority for Advance Rulings on the ruling sought with regard to the applicability of s. 195 on the foreign remittances  Wrong Signal to international community

Application u/s 195(3) by Payee


Section 195(3)
Payee can also apply for receiving payment without deduction of tax at source

Rule 29B permit an application by a non resident only if following conditions are satisfied
Non resident has prior track record of assessment in India Non resident has been carrying on business or profession in India continuously for a period of 5 years Value of fixed assets in India exceeds Rs. 50 lakhs Should not have been deemed to be an assessee in default

Thank You

Vispi T. Patel
Vispi T. Patel & Associates Contact no : +91 98 6763 5555 Email id : vispitpatel@vispitpatel.com