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
mehul@aseshca.com

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.
| 2International Taxation : CA Mehul Shah

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
Chartere
d
Accounta
nts

International Taxation : CA Mehul Shah | 9
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
International Taxation : CA Mehul Shah| 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

 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
mehul@raseshca.com

Contact US
84
CA Mehul Shah
Mobile : 9723459572
E-mail : mehul@raseshca.com
Partner
Rasesh Shah and Associates

International taxation 16.05.2015

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