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Withholding u/s 195 - Key issues

Withholding u/s 195 - Key issues. Agenda. 1. Overview. 2. Analysis of Section 195 – Key Issues. 3. Grossing up of taxes – Section 195A. 4. Other considerations. 5. Key Takeaways. Why discuss Section 195?. Scope expanded in recent times – Finance Act, 2012 added Explanation 2

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Withholding u/s 195 - Key issues

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  1. Withholding u/s 195 - Key issues

  2. Agenda 1 Overview 2 Analysis of Section 195 – Key Issues 3 Grossing up of taxes – Section 195A 4 Other considerations 5 Key Takeaways

  3. Why discuss Section 195? • Scope expanded in recent times – Finance Act, 2012 added Explanation 2 • Retrospectively – w.e.f. 1 April 1962 • Extraterritorial Operation • Stringent consequences for all parties to the transaction • Tax Department’s eye on international payments • Nokia & Cairn Energy • Revised Remittance Procedures (Rule 37BB revamped) • Note: Though amendment may have been ‘retrospective’ or ‘clarificatory’, it may be difficult to make a deductor liable for non-deduction in earlier years

  4. Section 195 – Overview * Inserted by Finance Act, 2012

  5. Analysis of Section 195 slide 5 1/2/2020

  6. Liability for Withholding tax on payments to non-residents (Section 195) * * Not being interest referred to in S. 194LB or S. 194LC or S. 194LD • No WHT in respect of any dividends referred to in S.115-O • Payment of salary to non-resident is excluded from the scope of section 195 • WHT obligation arises even where any interest or other sum is credited to any account called “Interest Payable Account” or “Suspense Account” • The obligation to comply with WHT provisions arises irrespective of whether • The payer is a resident or NR; and • NR has a residence, a place of business, a business connection or any other presence in India

  7. Section 195(1) – Scope and applicability slide 7 Withholding tax provisions – Section 195 1/2/2020

  8. Section 195(1) - Scope and applicability • Section 195(1) deals with deduction of tax at source from payments to non-residents, not being a company or to a foreign company, • Unlike other provisions in Chapter XVII (TDS provisions), Section 195 uses a special phrase “any sum chargeable under the provisions of this Act” • All payments covered (excluding salaries) – eg, payment to foreign architect for residential house construction • All payers covered irrespective of legal character (including Individual, HUF, etc) • No threshold limit prescribed • Tax to be deducted at the rates in force Key issues - Withholding tax provisions - Section 195

  9. Meaning of ‘Any sum chargeable under the provisions of the Act’ • Taxability to be determined under Section 5 and Section 9 • Nature of payment to be determined from payee’s point of view • Subject to beneficial provisions of the DTAAs with respective countries • Sums which are not chargeable to tax in India on account of DTAA shall continue to remain outside the ambit of Section 195 • The position taken by the SC in the GE ruling has been followed in the following cases: • Anand Transport (Pvt) Ltd v Assistant Commissioner of Income Tax [2015] 370 ITR 0524 (Madras HC) • Commissioner of Income Tax v Faizan Shoes Pvt Ltd [2014] 89 CCH 0213 (Madras HC) GE India Technology Centre (P) Ltd. vs CIT [2010] 327 ITR 456 (SC)} A person paying interest or any other sum to a non-resident is liable to deduct tax under section 195 only if such sum is chargeable to tax in India and not otherwise Withholding tax provisions – Section 195

  10. Meaning of ‘Rates in force’… ‘Rate in force’ • Rates specified in this behalf in the Finance Act of the relevant year (refer Part II of the First Schedule to the Finance Act); or • Rates specified in a DTAA entered with respective country, whichever is more beneficial • In the period that the Finance Bill is pending approval, rate in force for the preceding year or rate proposed for the current year, whichever is more favourable will be applicable (Section 294) • Rates prescribed by DTAA generally inclusive of surcharge and education cess{CIT vs. Arthusa Offshore Co. [2008] 169 Taxman 484 (Uttarakhand HC)} Applicability of surcharge and cess?

  11. Judicialprecedents and CBDT Circulars of relevance • Transmission Corporation of AP Ltd. vs. CIT [1999] 239 ITR 587 (A.P.) • GE India Technology Centre P. Ltd. vs. CIT [2010] 327 ITR 456 (SC) • CIT vs. Chennai Metropolitan Water Supply and Sewage Board [2001] 246 CTR 678 (Mad) Judicial Precedents CBDT Circular/ Instruction • Instruction No. 2 of 2014 • Circular 3 of 2015 Link Notification • Notification No. 93/2015 dated 16 December 2015

  12. Withholding under section 195 to be on gross basis or net basis • S. 195(1) r/w S. 195(2) and Instruction 2 of 2014 suggests withholding tax liability on net basis • Legislative intent cannot be to recover more tax than the payee is actually liable to pay • Decisions in Transmission Corporation1, GE, Eli Lilly2 support that there is due compliance under S. 195 if taxes are withheld with respect to net amount • Instruction 2 of 2014 makes it clear that appropriate portion of chargeable sum can be determined by the payer • Rajagopal (PV) vs. UOI3 - Scheme of TDS cannot be abused by collecting more taxes and driving the assessee indefinitely for refunds • ACC decision not applicable – It was on S. 194C (WHT obligation is wrt ‘sum’ paid), as against S. 195 (WHT obligation is wrt ‘sum chargeable to tax’) Exposure that the tax authority (especially at the lower levels may take a view that the withholding under section 195 is to be made on a gross basis 1 [1999] 239 ITR 587 (SC)2 [2009] 312 ITR 225 (SC)3 [1998] 233 ITR 678 (SC) Key issues - Withholding tax provisions - Section 195

  13. Key issues - Scope and applicability Any person – Payer having no taxable presence in India? Transfer of shares of I Co to F2 Co F1 Co F2 Co Outside India India I Co The clarification by Finance Act 2012 enlarges the scope of section 195 by subjecting transactions carried out between two non-residents outside India to the tax withholding provisions of the Income Tax Act. Retrospective amendment – clarificatory? Key issues - Withholding tax provisions - Section 195

  14. Key issues - Scope and applicability (contd..) Tax exposure on account of amendment introduced vide Finance Act, 2012 Potential tax exposure on account of withholding tax obligations in respect of transactions concluded in past CBDT Instruction1- In cases where assessment proceedings had been ‘completed’ u/s 143(3) of the Act before 1 April 2012 and no notice for reassessment had been issued prior to that date, such cases shall not be opened under sections 147/ 148 of the Act on account of the clarificatory amendments in Finance Act, 2012 1F. No. 500/111 12009-FTD-l (Pt.) Key issues - Withholding tax provisions - Section 195

  15. Key issues - Scope and applicability (contd..) • At the time of credit/ payment • No tax withholding required on mere accrual of income unless it is credited or paid. • Tax withholding on ‘payments in kind’? • Yes {Kanchanganga Sea Foods vs CIT [2004] 265 ITR 644 (AP)} • Tax withholding on ‘inter-adjustment of dues’? • Yes {J.B.Boda vs CBDT [1996] 223 ITR 271 (SC)} • Royalty/ FTS payments taxable under DTAA - Time of withholding u/s 195(1)? Since royalty/ FTS becomes taxable under DTAA on payment basis, tax to be withheld at the time of payment {National Organic Chemicals Industries Ltd vs DCIT [2004] 96 TTJ 765 (Mumbai ITAT) & DCIT vs UhdeGmbh [1996] 54 TTJ 355 (Mumbai ITAT)} • Tax withholding on year-end provisions? In cases where it is possible to suggest that the right to receive amount has not been crystallized in favour of an identified person, there is no obligation to deduct tax at source. The obligation will need to be discharged as soon as the right is crystallized - conflicting decisions Key issues - Withholding tax provisions - Section 195

  16. Case study – Tax withholding on reimbursements F Co Outside India Invoice raised (service charge + reimbursement of direct cost) Payment against invoice India Associated enterprises Provision of services I Co Issue : Where F Co provides service to an Indian resident company, whether while remitting the sum (including reimbursement of expenses) any tax is required to be withheld under Section 195 in India?

  17. Case study – Tax withholding on reimbursements • Tax to be withheld where the respective income is chargeable to tax under the provision of the Act. Thus, tax need not be withheld on income which is not chargeable to tax • Section 195(1) - “any …sum chargeable under the provisions of this Act” clarifies that TDS obligation limited to remittances which are taxable in India • SC in GE India Technology Services [2010] 327 ITR 456 (SC) - Tax withholding mandate under section 195 of the Act is only on the component which is chargeable to tax and not otherwise • No ‘income’ component on payments made by Service Recipient (SR) against actual expenditure incurred by service provider (SP) - No requirement of TDS on “reimbursement” component under section 195 • SB of Mumbai ITAT in Mahindra & Mahindra [2014] 122 TTJ 577 (Bom.) – When expenditure is incurred and that sum reimbursed as such, same not considered as having any part of it in nature of income • Tribunal also held that the expenditure incurred by the SP is reimbursed as such by SR without having any element of income in the hands of the SP thus, it cannot assume the character of income deemed to accrue or arise in India • In the following cases it has been held that taxes are required to be withheld under section 195 on the entire sum irrespective of the payment having some component which comprises of “reimbursement”: • Cochin Refineries Ltd [1996] 222 ITR 354 (Kerala HC) • Karnataka Urban Infrastructure Development Finance Corporation [2009] 308 ITR 297 (Kar HC)

  18. Case study – Deemed Dividend • Tax withholding on payments in the nature of deemed dividend u/s 2(22)(e) • Facts: • S1 Co and S2 Co, tax residents of India, are sister concerns having a common parent H Co • S1 Co provides loan/ advances to S2 Co • Issue: • Can loan to S2 Co be deemed to be dividend under section 2(22)(e) on account of the common parent (i.e. shareholders of S1 Co are also substantially interested in S2 Co)? • Is S1 Co liable for withholding tax u/s 195 while on payments to S2 Co? H Co S1 Co S2 Co Loan • Analysis • Providing loans/ advances to S2 Co will be deemed dividend taxable in the hands of H Co • S1 Co not responsible for making payment to non-resident (H Co) • Neither payment nor credit to non-resident • Income incapable of being credited to the account of non-resident Key issues - Withholding tax provisions - Section 195

  19. Way forward • Practical considerations – • Where a doubt arises as regards the applicability of Section 195 provisions to a particular payment, advisable to obtain clarity by • Obtaining a lower or Nil withholding order from the AO • Obtaining an advance ruling from the Authority for Advance rulings (would need to be evaluated having regard to the facts of each case) Key issues - Withholding tax provisions – Section 195

  20. Section 195(2) - Application by the ‘Payer’ for Lower or Nil Withholding slide 20 1/2/2020 Key issues - Withholding tax provisions - Section 195

  21. Section 195(2) - Application by the ‘Payer’ for Lower or Nil Withholding • If any person at the time of payment to a non-resident of a sum chargeable under this Act considers that the whole of such sum is not chargeable to tax, he at his option can file an application with the AO to determine the appropriate sum chargeable and thereafter deduct tax at such rates • The above is optional and not mandatory • The language of the section creates ambiguity as to whether an application for Nil Withholding can be made under section 195(2) of the Act • If order under section 195(2) is not obtained by the assessee on the belief that the amount is not chargeable to tax and order under section 197 is also not available, the payer may expose himself as an assessee in default From a practical perspective, one may apply for a nil tax withholding order under section 195(2). However, risk of such order being denied needs to be factored in. Earlier where the 195(2) certificates were issued by the AO in paper format, the same were not considered by the CPC while processing the TDS statements thereby leading to hardships to the taxpayers who had already obtained the certificate under section 195(2). In order to correct this, appropriate systems have been put in place for the AO to issue 195(2) certificate online.

  22. Key issues • Is it obligatory to approach AO for non-withholding of tax? • Once sum is ascertained to be even partially chargeable to tax in India, tax is required to be withheld at full rates, unless an order u/s 195(2) or a certificate u/s 197 obtained – {GE India Technology Centre (P) Ltd. vs CIT [2010] 327 ITR 456 (SC)}. Therefore it is not obligatory • Whether the order passed u/s 195(2) is conclusive and can tax authorities take a contrary view in the assessment proceedings of the payee? • Order u/s 195(2) not conclusive. Department may take a contrary view {CIT vs. Elbee Services Pvt. Ltd. [2001] 247 ITR 109 (Bom)} • Whether order passed u/s 195(2) challengeable before higher authorities? • Appeal can be filed before the Commissioner of Income (Appeals) [‘CIT(A)’] under Section 248 where tax is to be borne by the payer and such taxes have been deposited • Revision application before the Commissioner of Income tax (‘CIT’) u/s 264 {Board of Control for Cricket in India vs DIT [2005] 278 ITR 83 (Mum ITAT)} Key issues - Withholding tax provisions - Section 195

  23. Key issues (contd..) • Writ petition before the jurisdictional High Court • Whether any time limit for passing order u/s 195(2)? • No time limit {Blackwood Hodge (India) Pvt. Ltd. [1969] 81 ITR 807 (Cal)}; {Central Associated Pigment Ltd. [1971] 80 ITR 631 (Cal)} Key issues - Withholding tax provisions - Section 195

  24. Section 195(3),(4),(5) - Application by the ‘Payee’ for Lower or Nil withholding slide 24 1/2/2020 Key issues - Withholding tax provisions - Section 195

  25. Key elements and issues • Payee can make an application in prescribed form (Form 15C and 15D) to the AO for non withholding of tax at source • Review restricted to the specified receipt, total income of the payee not under scrutiny • Payee to satisfy the conditions prescribed under Rule 29B before making any application • Validity of certificate issued u/s 195(3) • Valid till expiry of period mentioned therein unless cancelled [Section 195(4)] • CBDT empowered to notify rules in connection with Section 195(3) - circumstances for making an application, condition for grant of certificate and any other related matters [Section 195(5)] • Order passed under Section 195(3) challengeable before higher authorities? • Revision application before the CIT u/s 264 • Writ petition before the jurisdictional High Court • 195(3) certificate to be issued online Key issues - Withholding tax provisions - Section 195

  26. Sections 195(2), 195(3) & 197 – A comparative analysis slide 26 1/2/2020

  27. Section 195(6) - Certification for remittances slide 27 1/2/2020 Key issues - Withholding tax provisions - Section 195

  28. Overview • Any payments made to non residents would need to be made in the prescribed form and manner as per Rule 37BB1 • Form 15CA - Prescribes the information to be furnished by the Remitter • Form 15CB - Prescribes the format of the Certificate to be obtained from a CA by the Remitter • As per the amended notification, Form No. 15CA split into 4 parts: • Part A – Applicable where payments are chargeable to tax and the same do not exceed INR 5 Lakh • Part B - Applicable where payments are chargeable to tax , the same exceed INR 5 Lakh and an order u/s 195(2)/195(3)/ 197 certificate has been obtained • Part C – Applicable where payments are chargeable to tax, the same exceeds INR 5 Lakh and certificate in Form No 15CB is obtained from a CA • Part D – Applicable where the payments are not chargeable to tax 1w.e.f. 1 June 2015 slide 28

  29. Overview • Applicability of Form 15CB – Only in respect of transactions reported in Part C of Form 15CA. • Form 15CB to be furnished electronically • Form 15CC - New addition to the reporting requirements which requires, furnishing of information of all remittances made by the Authorised Dealer. To be submitted quarterly. slide 29

  30. Applicability of Section 195(6) Applicability in cases where tax is not required to be withheld u/s 195(1)? slide 30

  31. Rule 37BB: excluded payments • No information to be furnished / no certification required:

  32. Summary YES YES NO YES NO YES NO NO Key issues - Withholding tax provisions - Section 195

  33. Section 195A - Grossing-up of taxes 1/2/2020

  34. Grossing-up of taxes • In cases where tax payable on payment to a non-resident is to be borne by the payer: • Such tax borne by the payer also forms part of non-resident’s income; • Accordingly, payment to non-resident required to be grossed up to an amount which would, after withholding appropriate taxes, be equal to the net amount payable to non-resident • Single or multiple – grossing up slide 34 Key issues - Withholding tax provisions - Section 195

  35. Other related considerations 1/2/2020

  36. Tax Residency Certificate • Section 90(4) provides that in order to avail benefits of tax treaty, non-residents are required to obtain a Tax Residency Certificate (TRC) from the relevant authority in its country • TRC would be sufficient evidence for substantiating tax residency in a country • Section 90(5) provides specific details which are required to be mentioned in the TRC provided by the relevant authority • Rule 21AB specifies prescribed particulars for S. 90(5) • Documents substantiating particulars to be maintained by the non-resident • Details not covered in TRC be mentioned in Form 10F • Form 10F is a self-declaration by the non-resident • In November 2013, vide Notification No. 86/2013, Cyprus had been specified as notified jurisdictional area under Section 94A • Payments made to a Cypriot resident on which tax is deductible at source under the Act are subject to withholding tax at least at the rate of 30% • T Rajkumar v Union of India ([2016] 68 Taxmann.com 182 (Madras HC) Key issues - Withholding tax provisions - Section 195

  37. Relevance of section 206AA • Section 206AA – In case the payee does not furnish a PAN to the deductor, tax shall be withheld at the higher of the following rates: • Rate specified under the relevant provision of the Act; • Rates in force*; • 20% *More beneficial of rate specified in the Finance Act of the relevant year and rate specified in DTAA Key issues - Withholding tax provisions - Section 195

  38. Relevance of section 206AA • Finance Act 2016 provides Provisions of Sec 206AA which prescribe higher rate of withholding on payments to non-residents not having a PAN (except in case of interest on bonds Sec 194LC), not to apply in case of: • Payments to be prescribed and • Subject to such other conditions to be prescribed • The aforesaid provision is applicable with effect from 1 June 2016. Key issues - Withholding tax provisions - Section 195

  39. Section 206AA – Applicability scenarios Particulars * May not be of consequence since normal WHT as per the Act/ DTAA is greater than 20% slide 39 1/2/2020 Key issues - Withholding tax provisions - Section 195

  40. Section 206AA – Applicability scenarios *May not be of consequence since normal WHT as per the Act/ DTAA is greater than 20% # May not be of consequence since normal WHT as per the Act/ DTAA is greater than 20% Whether withholding tax rate u/s 206AA is required to be increased by surcharge and cess? Key issues - Withholding tax provisions - Section 195

  41. Section 206AA – Key decisions • DDIT vs SerumInstitute of India Ltd {[2015] 68 SOT 254 (Pune)} Higher rate prescribed under the Act would not prevail over the lower rate under the DTAA on account of a specific provision which permits an NR to claim benefit under the Act only to the extent it is advantageous. Therefore, the lower tax rate prescribed under the DTAA applies, whether or not the NR furnishes a valid PAN. • DCIT vs Infosys BPO Ltd {[2015] TS 408 ITAT (Bang)} The Bangalore Tribunal in the case of Infosys BPO Limited has held that there is no scope of deduction of tax at the rate of 20% as per section 206AA of the Act when the benefit under DTAA is available to the assesse. • M/s. Wipro Ltd. vs. ITO {[2013] TS 1547 ITAT (Bang)} The provisions of TDS has to be read along with DTAA for computing the tax liability and therefore when the recipient is eligible for the benefit of DTAA then there is no scope for deduction of tax at source @ 20% u/s 206AA of the Act. • Bosch Ltd vs ITO {[2012] 141 ITD 38 (Bang)} The Tribunal held that all recipients of income chargeable under the Act, are required to furnish their PAN, failing which, tax needs to be deducted by the payer at the higher of the rates specified in the Act (i.e., 20% under section 206AA of the Act will apply). However, the grossing up need not be done at the higher rate of 20% specified under section 206AA of the Act.

  42. Consequences of non-compliance slide 42

  43. Penalty and prosecution proceedings Key issues - Withholding tax provisions - Section 195

  44. Key takeaways

  45. Key pointers while advising clients • Understand specific facts and review underlying documentation including quantum, frequency, etc • Analyze technical position based on current applicable law • Check if any nil or lower WHT certificate/ order or counsel opinion has been specifically obtained by the payee • Check if any proceedings are pending at any forum [CIT(A), ITAT, etc.] in respect of earlier year payments • Reconcile technical position in CA certificate in case of non-resident payments slide 45

  46. Key takeaways • Golden Rule – • Whenever in doubt - Deduct tax; specifically in cases tax is to be borne by recipient • Different views possible on rates - Deduct on conservative basis • Agreements should be carefully read to ascertain the withholding tax liability • Non-residents payers are also required to withhold tax from payments to residents and non-residents, if the payment made to them is taxable in India • Payment to non residents: In case of doubt and need to determine attribution of income – Advisable to obtain tax withholding order under Section 195(2) • Opt for the CA certificate route where case strongly supported by judicial precedents • Precaution - Certificate-cum-undertaking to be obtained from payee (e.g. No PE declaration) slide 46

  47. Thank You

  48. FCo1 Transmission Corporation of AP Ltd. V/s. CIT Payment • Facts of the case • Transmission Corporation (ICo) entered into contracts with F Co 1, F Co 2 and F Co 3 for purchase of machinery/ equipment as well as against work executed by non-residents in India for erection/ commissioning of the same • Payments to the non-residents was made without withholding tax • I Co was deemed to be assessee in default and AO determined the tax that was deductible at source as per him • The assessee contended that section 195 is applicable only in cases of pure income/ profit and not payment of gross income which includes cost/ expenses • The first appellate authority and Tribunal ruled in favour of the assessee that the words ‘any other sum chargeable under the provisions of the Act’ in section 195 do not contemplate trade receipts and section 195 only applies to pure income profits FCo3 FCo2 2 1 Payment Payment 3 ICo

  49. FCo1 Transmission Corporation of AP Ltd. V/s. CIT (contd..) Payment Conclusion of SC (in concurrence with HC decision) Assessee is under obligation to deduct tax under section 195 on payments to non-residents irrespective of the fact that the whole amount may not be pure income/ profits (like salaries, interest etc). However, the obligation of the assessee is limited only to the appropriate proportion of income chargeable under the Act FCo3 FCo2 2 1 Payment Payment 3 ICo

  50. GE India Technology Centre P. Ltd. V/s. CIT Facts of the case • GE India (I Co) were the distributors of pre-packaged shrink wrapped standardized software imported from Microsoft and other suppliers outside (F Co) India. • I Co made payment towards the software purchase without WHT on the same • The Tax Authority contended that the sale of software included a license to use the same, hence, payments made by I Co to F Co constituted royalty deemed to accrue or arise in India and hence, ICO had an obligation to withhold tax • The SC was concerned with Appeal filed by the taxpayer against decision of Karnataka High Court where the High Court took a view that TDS u/s. 195 is w.r.t. gross amount irrespective of its chargeability to tax FCo Import of Software Payment ICo Distributed Customers

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