Provisions and issues under section 195 of the Indian Income-tax Act, 1961 - Withholding tax on foreign remittances.

1. Section 195 of the Income-tax Act, 1961
Withholding Tax on Foreign Remittances
Provisions and Issues
Susan Dias

2. Intent behind Sec 195
Regular inflow of
revenue for
Government
Collection
of taxes at
earliest point
of time
Checking of tax
evasion

3. Importance of Sec 195 today
Increased international transactions
Department’s focus on cross border payments
Heightened vigilance through Forms 15CA, 15CB

4. What the section says…
195(1)
Liability on payer to deduct tax on payment to non resident
195(2)
Application by payer for lower/ NIL withholding
195(3)
Application by payee for NIL withholding
195(4)
Validity of certificate of lower/ NIL withholding

5. …What the section says
195(5)
Empowers CBDT to notify rules for 195(3)
195(6)
Empowers CBDT to provide the manner for furnishing information
195(7)
Empowers CBDT to notify class of payers mandated to furnish
application to tax officer for determination of WHT rate

6. Sec 195 (1) – Scope and chargeability
Who is responsible to deduct
tax?
 Any person (As defined u/s 2(31))
Who should the payee be?
 All non residents whether having presence in India or not
 Does not include RNOR
Status of non resident ?
 Under sec 6
 In case of dual residence if tie breaker clause exists - DTAA is
applied
Payments covered?
 Any sum chargeable under the IT Act
 Except salaries and dividend u/s 115O
Point of deduction?
 At the time of credit or payment whichever is earlier
Rate of TDS?
 Relevant rate in force

7. Sec 195 (1) – Recent amendment
Scope of WHT obligation u/s 195 extended to all persons
including non residents irrespective of them having a residence
or place of business or business connection or any other
presence in India
Obligation to withhold tax even without any territorial nexus

8. Sec 195 (2) – Payer’s application for lower/ NIL WHT certificate
Application to be made to tax officer by the payer to determine
portion of payment chargeable to tax

9. Sec 195 (3) – Payee’s application for lower/NIL WHT certificate
On payee’s application AO on determination to grant lower/ NIL
WHT certificate
Form No 15C prescribed in case of banking company
Form No 15D in other cases
Conditions for grant of certificate prescribed under Rule 29B

10. Sec 195 (4) & (5) – Validity and rules for grant of certificate
Certificate granted u/s 195(3) valid till specified period or till
cancellation by AO whichever is earlier
CBDT empowered to make rules for grant of a certificate u/s
195(3)

11. Sec 195 (6) – Furnishing information
Introduced in 2008
Requires the payer to furnish payment related information
Rule 37BB introduced*
 Information to Department – Form 15CA
 CA Certificate to be obtained before payment – Form 15CB
*Circular No 4/2009 gives manner for submitting and processing payments

12. Sec 195 (7) – Notification of class of persons
Introduced in 2012
Board empowered to notify class of persons (payees) required
to apply to tax officer for determination of WHT, irrespective of
whether payment is taxable in India or not
No class of persons notified yet

13. Rates of tax
Rates of tax specified in the Finance Act or rates specified in the
DTAA, whichever is beneficial – Sec 2(37A)(iii)
Sec 206AA to apply
RBI’s TT buying rate on day on which TDS is required to be
deducted to be considered

14. Sec 195A – Grossing up of taxes
Grossing up required in case of net of tax payments
Tax payable by non resident to be added to income remitted
Tax payable by non resident determined on gross figure
Particulars
Amount payable to non-resident (net of tax)
Tax rate applicable
Amount
INR100
20%
Gross-up income: 100 * 100
.
(100-20)
INR 125
Tax payable (INR 125 * 20%)
INR 25
Net amount paid to non-resident (INR 125 – INR 25)
INR 100

15. Applicability at a glance
Payment to Non Resident
Taxable
under IT
Act
Yes
DTAA
available
DTAA
rates
beneficial
Deduct tax @ IT Act
prescribed rates
Yes
Income
taxable
under
DTAA
Yes
No
No
No
No
Yes
Deduct tax @ DTAA
prescribed rate
No tax deducted

16. Chargeability under IT Act or DTAA
Nature of Income
IT Act
DTAA
Business/Profession
Section 9(1)(i)
Article 7 &14 rw 5
Salary
Section 9(1)(ii)
Article 15
Dividend
Section 9(1)(iv), section 115A
Article 10
Interest
Section 9(1)(v), section 115A
Article 11
Royalties
Section 9(1)(vi), section 115A
Article 12
Fees for technical
services/FTS
Capital Gains
Section 9(1)(vii), section 115A
Article 12
Section 9(1)(i), section 45
Article 13

17. Documents to be relied on by CA before issuing Form 15CB
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Agreements
Invoices
Payment details
Correspondences
Technical advice
Proof of services actually rendered in group company transactions
Remitting bank details
Rate of conversion of foreign currency
Tax Residency Certificate
Payee declaration/certificate (eg no PE, tax residency, beneficial
ownership, treaty entitlement etc)

18. Some focus areas in issuing Form 15CB
Nature of the income – FTS, royalty etc
Whether payee has a PE in India? If yes, attributable profit
TRC sufficient evidence for claiming treaty benefit?

19. Frequently asked questions
Whether transactions between Branch and HO attract sec 195
Whether tax is to be deducted u/s 195 in cases of payment in
kind, barter transactions or adjustment against receivables
Whether tax is to be deducted by agent when making
remittance to foreign principal

20. Frequently asked questions
When is the payer required to deduct tax
What exchange rates are to be used while deducting tax
Do forms 15CA and 15CB absolve payer from penal
consequences

21. Frequently asked questions
By what time is tax deducted required to be deposited
Do you need to issue TDS Certificate to non residents
Is TDS Certificate to be issued when tax is borne by payer as per
Sec 195A
Is NIL TDS Return to be filed in the quarter when no TDS is
deducted u/s 195

22. Frequently asked questions
Is there a time limit for disposal of application u/s 195
Whether order under section 195(2) can be revised u/s 263
Whether tax officer can take a contrary view than adopted
while issuing certificate u/s 195

23. Frequently asked questions
Whether Surcharge & Cess are to be added when treaty rates
are applicable
Can payee claim credit for excess tax deduction due to sec
206AA
Whether Surcharge & Education Cess leviable if higher rate
under 206AA applied

24. Some issues
CA Certificate as alternative to Sec 195(2)
Taxability of royalty and Fees for Technical Services (‘FTS’)
Applicability of Sec 195 to reimbursement of expenses

25. Key takeaways
Sec 195 also applies to non residents payers on payments to
residents and non residents
In case of doubt and to determine attribution of income –
Advisable to obtain WHT order u/s 195(2)
CA certificate route - where strong judicial precedents exist
Precautions to be taken while issuing Form 15CB – eg.
Certificate cum-undertaking to be obtained from payee (such as
no PE declaration)

26. Thank you

27. Consequences of non compliance
Applicable
section
Nature of default
Consequence
40(a)
Withholding tax not deducted or Disallowance of expenses in computation of
not deposited within prescribed taxable income of payer; deduction in year of
time
payment
201(1)
Tax not withheld/ deposited
appropriately
Recovery of tax not withheld/ deposited or short
withheld/ deposited
201(1A)
Tax not withheld/ deposited
appropriately
Interest @ 1% per month or part of he month
221
Tax withheld not paid
Penalty, not exceeding the amount of tax not
paid
271C
Tax not withheld or short
withheld
Penalty, not exceeding the amount of tax not
withheld

28. Refund of tax deducted u/s 195
Situation
Condition for refund
Contract is cancelled No remittance is
made to the non resident
Contract is cancelled No remittance is made to the non
resident
Remittance is duly made to the non
resident but contract is cancelled
Remitted amount is duly refunded to the payer by the
payee
Contract cancelled after partial execution
No remittance is made to the non resident for the non
executed part
The contract is cancelled after partial
Amount refunded to the payer or no remittance was
execution and remittance related to non
made but tax was deducted and deposited when
executed part is made to the non resident amount was credited to the account of the non resident
Reference: Circular No 7/2007 and Circular No 7/2011

29. Refund of tax deducted u/s 195
Situation
Amendment in law or by notification
under the IT Act
Condition for refund
There occurs exemption of the remitted amount from
tax
Order passed under section 154 or 248 or
264 of the Act
Tax deduction liability of payer is reduced
Double deduction of tax amount
Same amount deducted twice by mistake
Other than discussed above
Grossing up not required or payment of tax at higher
rate under domestic law while a lower rate is
prescribed under DTAA
Reference: Circular No 7/2007 and Circular No 7/2011

30. Reimbursement of expenses – Judicial precedents
Nature of Expense
Case Laws in favour of taxpayer
Case laws against the Taxpayer
Reimbursement of cost
of services of a third
party engaged by non
resident
Nathpa Jhakri Joint Venture - 37 SOT Wallace Pharmaceuticals P Ltd – 278 ITR 97
160 (Mum)
(AAR)
Modicon Network P Ltd – 14 SOT 204
(Del)
Reimbursement of
allocated cost (ie cost
sharing arrangements)
Dunlop Rubber Co - 142 ITR 493 (Cal) Danfoss Industries (India) Ltd - 268 ITR 1 (AAR)
Payment for services
rendered at cost
Timken India Ltd - 273 ITR 67 (AAR)
AT&S P Ltd – 157 Taxman 198 (AAR)

31. Reimbursement of expenses – Judicial precedents
Nature of Expense
Case Laws in favour of taxpayer
Case laws against the Taxpayer
Reimbursement of
Telco Ltd - 245 ITR 823 (Bom)
incidental expenses in
Industries Engg Project (P) Ltd - 202 ITR
addition to payments of 1014 (Del)
royalty & FTS
Clifford Chance - 82 ITD 106 (Mum)
Mahindra and Mahindra Ltd - 1 SOT 896
(Mum)
Fortis Healthcare Ltd - 45 SOT 190 (Chd)
Cochin Refineries Ltd - 222 ITR 354 (Ker)
SRK Consulting - 230 ITR 206 (AAR)
Ashok Leyland - 120 ITD 14 (Chennai)
Bovis Land Lease – 36 SOT 166 (Bang)
CSC Singapore Pte Ltd - 2012-TII-35ITAT-DEL-INTL (Del)
Reimbursement of living Morgenstern Werner - 233 ITR 751(All)
allowance, etc of a
Goslino Mario - 241 ITR 3 12 (SC)
person deputed to India
BHEL - 252 ITR 218 (Del)
by the non resident
Danfoss Industries (India) Ltd - 268 ITR 1
(AAR)