TDS on payments to Non-Residents & Residents

NIHAR JAMBUSARIA, BDO India

11 August, 2010

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Contents:

TDS on Payments to Non-Residents & Residents

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 Objective of Section 195 of the Act

TDS on Payments to Non-Residents & Residents

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 Objective of Section 195 of the Act

 Circular No. 152 dt. 27-11-74

 Tax is collected at the earliest point of time

 No difficulty in collection of tax at the time of assessment

 To avoid loss of revenue as the non resident may sometimes have no assets in India from
which subsequent recovery can be made

 Examples of nature of payments covered in the circular – royalty / fess for technical
services

TDS on Payments to Non-Residents & Residents

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 Overview of S.195 of the Act

TDS on Payments to Non-Residents & Residents

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Provision of section 195 of the Act

“Any Person responsible for paying to a non-resident, not being a company, or to a

foreign company, any interest or any other sum chargeable under the provisions of
this Act (not being income chargeable under the head “Salaries”) shall, at the time of
credit of such income to the account of the payee or at the time of payment thereof in
cash or by the issue of a cheque or draft or by any other mode, whichever is earlier,
deduct income tax thereon at the rates in force…………….”

“Provided further that no such deduction shall be made in respect of any dividends
referred to in section 115-O”

TDS on Payments to Non-Residents & Residents

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 Overview of S.195 of the Act

S.195

S.195(1) S.195(2) S.195(3) S.195(4) S.195(5)

Application by Application by
Scope and payer for lower payee for Validity period Power of the
Conditions for or nil lower or nil of the CBDT to issue
Applicability withholding withholding Certificate notifications
certificate certificate

TDS on Payments to Non-Residents & Residents

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 S.195(1)- Scope & Conditions for applicability

TDS on Payments to Non-Residents & Residents

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 S.195(1)- Scope & Conditions for applicability

 Who is responsible to deduct tax at source?

- Any person – Person as defined in section 2(31)
- Includes non-residents and foreign companies
• Satellite Television Asia Region Ltd (99 ITD 92 – Mum ITAT)
• Vodafone B.V. (SC)
• E-trade Mauritius Ltd (Mum HC)

 On Payments made to non residents

- Includes all non residents having presence in India or not
- It does not include RNOR

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 S.195(1)- Scope & Conditions for applicability

 What are the payments covered?

- Any sum chargeable under the Act
- Except Salary and dividends referred to in section 115-O
- Income not taxable in India (Exempt Income)
• Hyderabad Industries Ltd (188 ITR 749 – Kar HC)

 When to deduct tax

- At the time of payment or credit whichever is earlier

 What rate to apply?

- Lower of the two rates
• Relevant rates in force; or
• Rates under the Tax Treaty – sec 2(37A)(iii) – Circular No. 728 dt. 30-10-1995

TDS on Payments to Non-Residents & Residents

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 S.195(1)- Scope & Conditions for applicability

Issues:

 Whether payment made by Branch to HO / other branch is subject to TDS?

 CBDT Circular No 740 dt 17.4.1996, Dresdner BankAG 108 itd 375 Contrary ABN Amro
Bank 97 ITD89

 Whether tax required to be deducted where -

- Payment has been made to the representative assessee or agent of a non resident
- Payment made by Representative assessee or Agent of a Non Resident to a Non resident
- Payment made to agent of a Non Resident on his instructions – 35 ITR 134 (Bom)- Narsee
Nagsee v/s CIT
- Assessee treating himself as agent of Non Resident – 200 ITR 441 (Cal) – Grindlays bank
Ltd v/s. CIT

 Are the rates prescribed under the DTAA required to be increased by surcharge and
education cess?

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 S.195(1)- Scope & Conditions for applicability

 Whether tax under section 195 is required to be deducted in following situations

- On void agreements – Erricsson Communications Ltd (81 ITD 77)

 What about payments made to non resident partner?

 What about payments made in kind?

- Kanchanganga Sea Foods Ltd (265 ITR 644)

 What about payments pending FERA/FEMA approval?

- United Breweries (211 ITR 256)
- Motor Industries Co (249 ITR 141)
- Pfizer Corporation (259 ITR 391)

 On adjustment against dues?

- Raymond Ltd (80 TTJ 120) / (86 ITD 179)

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 S.195(1)- Scope & Conditions for applicability

 What happens if a particular source of income is chargeable to tax under the Act,
but not under the DTAA? Is tax required to be deducted?

 Is tax required to be deducted from reimbursement of expenses?

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S.195(1)- Scope & Conditions for applicability
Nature of Expense Case Laws in Favor of assessee Case laws against the assessee
Reimbursement of cost of Wallace Pharmaceuticals P. Ltd (278
services of a third party ITR 97)
engaged by Non resident
Reimbursement of allocated Dunlop Rubber Co (142 ITR 493) Danfoss Industries (India) Ltd (268
cost (ie. cost sharing ITR 1)
arrangements)
Payment for services rendered Timkin India Ltd (273 ITR 67)
at cost
Reimbursement of incidental Telco Ltd (245 ITR 823) Cochin Refineries Ltd (222 ITR 354)
expenses in addition to Industries Engg. Project (P) Ltd (202 SRK Consulting (230 ITR 206)
payments of FTS? royalty ITR 1014) Hindalco Industries Ltd (278 ITR (AT)
Clifford Chance (82 ITD 106) 125)
Mahindra and Mahindra Ltd (1 SOT
896)

Reimbursement of living BHEL (252 ITR 218) HCL Infosystems Ltd (274 ITR 261)
allowance, etc of a person Morgenstern Werner (233 ITR 751)
deputed to India by the non- Goslino Mario (241 ITR 312)
resident
Hyderabad Industries Ltd (188 ITR 749)

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 S.195(1)- Scope & Conditions for applicability

 Whether payer is under obligation to withhold tax , even if the receipt is not taxable
in the hands of the payee?

- Prasad Production ITA No. 663/MDS/2003 Chennai ITAT – Special Bench

- Van Oord Acz India (P) Ltd – 2010 –TIOL – 187-HC- Del – IT
- Samsung Electronics 2009- TIOL – 629 – HC- KAR- IT

TDS on Payments to Non-Residents & Residents

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 S.195(2)- Application by Payer

TDS on Payments to Non-Residents & Residents

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 S.195(2)- Application by Payer

 Deals with a scenario where payer makes an application for an order

 No prescribed format for an application

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 S.195(2)- Application by Payer

Issues:

 Where a work involves multiple phases, in such scenario, Is it sufficient if order under
section 195(2) is obtained for phase I of the work or whether order is to be obtained
for all the phases of the work?

 Whether order passed under section 195(2) is appealable?

 Whether order under section 195(2) of the Act is subject to revision under section
263 of the Act?
 BCCI 97 TTJ751 (Mum)

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 S.195(3)- Application by Payee

TDS on Payments to Non-Residents & Residents

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 S.195(3)- Application by Payee

 Payee can make an application for a certificate

 Application can be made in prescribed format:

o Form No. 15C in the Case of Banking Company
o Form No. 15D in any other case

 Condition for issue of Certificate under section 195(3) of the Act (Rule 29B)

 Validity of Certificate

 Whether “certificate under section 195(3) of the Act is appealable?

TDS on Payments to Non-Residents & Residents

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Bird eye view of Section 195 of the Act
Payment made to non
resident

Taxable under the Act Not Taxable No

under the
Act

DTAA not-accessible DTAA accessible

No
TDS

Income not exempt Income exempt under

under DTAA DTAA

Remittance of
payment to
Deduct
Non-Resident
TDS
TDS on Payments to Non-Residents & Residents
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 Refund

TDS on Payments to Non-Residents & Residents

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Refund of sum deducted- under different scenario

Sr. Scenario Criteria

no
a Contract is cancelled No remittance is made to the non-
resident
b Remittance is duly made to Remitted amount is duly refunded to
the non-resident, but the payer by the payee
contract is cancelled
c Contract cancelled after No remittance is made to the non-
partial execution resident for the non executed part
d The contract is cancelled Amount refunded to the payer or no
after partial execution and remittance was made but tax was
remittance related to non- deducted and deposited when amount
executed part is made to the was credited to the account of the non-
non-resident resident

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Refund of sum deducted- under different scenario

Sr. Scenario Criteria

no
e Amendment in law or by There occurs exemption of the
notification under the Act remitted amount from tax
f Order passed under section Tax deduction liability of the payer is
154 or 248 or 264 of the Act reduced
g Double deduction of tax Same amount deducted twice by
amount mistake
h 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

TDS on Payments to Non-Residents & Residents

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Comparison between S.195(2),195(3) & 197 of the Act

S. 195(2) S. 195(3) S. 197

Payer applies to determine Nil withholding- payee Lower or Nil withholding-

appropriate portion of sum applies to the AO Payee applies to the Ao
chargeable to tax and
liability for withholding tax

No Prescribed format for an Prescribed format for an Prescribed format for an

application application (Form No. 15C application (i.e Form No. 13)
or 15D as the case may be)

Order appealable under Order not appealable- Writ Order not appealable-Writ
section 248 of the Act petition to High Court petition to High Court

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Where payment to Non resident is not taxable in his
hands, whether tax required to be deducted at 20%
u/s. 206AA if PAN is not supplied by the payee?

TDS on payments to Non-Residents & ResidentsTDS on Payments to Non-Residents

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 TDS on Payment to Residents

TDS on Payments to Non-Residents & Residents

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TDS provisions covered:

TDS on Payments to Non-Residents & Residents

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 TDS on salary – section 192

TDS on Payments to Non-Residents & Residents

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TDS on Salary- Section 192

Sections Nature Rate of TDS Exemption

192 Payment of  Tax is deducted at the  Entertainment allowance
any sum average rate of income  Professional tax
chargeable tax computed on the  Deduction under section 80C
under the head basis of rate in force for &80CCC
“Salaries”. the financial year
 Deduction under section 80D
 Medical treatment of
handicapped section 80DD
 Basic Slab exemption

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 Issues- TDS on Salaries

 Whether tax is required to be deducted at source on salary paid to non-resident?

 Whether employer has authority to examine source of investments?

 Whether employee is required to maintain records ?

 Whether a foreign Employer is required to deduct taxes?

TDS on Payments to Non-Residents & Residents

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TDS on Contractors & Sub-Contractors-
Section 194-C

TDS on Payments to Non-Residents & Residents

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TDS on Contractors & Sub-Contractors – Section 194C
Sections Nature Rate of TDS Exemption
194C Payment to  In case of Individuals ,  Contract payment not
Resident AOP, BOI & HUF exceeding Rs 20,000 per
Contractor Contractors, contract or aggregate Rs
and Advertisement & 50,000 in a year (w.e.f 1st
Subcontractor Contract, Sub- July,2010- Rs 30000 single
(in respect of contractors:1% contract or aggregate Rs.
any work 75000 during financial year)
including  Subcontractor is individual
 In case of domestic
supply of owning not more than 2
labour for company or firm
goods carriage in business of
carrying out Contractors, plying, hiring or leasing
any work) Advertisement & goods carriages
Contract, Sub-
 Payment exclusively for
contractors:2%
personal purposes of
Individuals and HUF
Note: Individuals and HUF AOP,
BOI required to deduct tax  Contract for sale of goods
only if subject to tax audit
in preceding financial year.

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 Issues-TDS on Contractors & Sub-Contractors

 Whether both oral and written contracts covered?

Circular No.93 dated 26-9-1972

 Whether contracts for rendering Professional services covered?

Chamber of Income Tax Consultants v CBDT [209 ITR 660 (Bom)]

 Whether supply of printed Labels covered?

BDA Ltd V ITO(TDS) (2006) 281 ITR 99 (BOM)

 Outsourcing of fabrication and manufacturing?

CBDT Circular No. 681, 715 and 13/2006

 Reimbursement of actual expenses? Circular No 715 dated 08/08/1995

 Whether payment to a recruitment agency can be covered by s.194C?

TDS on Payments to Non-Residents & Residents

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 TDS on Commission & Brokerage
section 194-H

TDS on Payments to Non-Residents & Residents

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TDS on Commission & Brokerage – Section 194H
Sections Nature Rate of TDS Exemptions
194H Payment to  10%  Aggregate payment during
Resident by the Financial Year does not
way of  Individuals and HUF exceed Rs 2,500( w.e.f 1st
commission or required to deduct tax July 2010 Rs. 5000)
brokerage
only when subject to tax
audit in preceding
financial year  Turnover commission
payable by RBI to Agency
Banks

 Payments of brokerage on
purchase and sale of
securities

 Not being Insurance

commission

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 Issues-TDS on Commission & Brokerage

 Element of Agency required

Govt. Milk Scheme v ACIT (2006) 281 ITR (AT) 38 (Pune Trib.)

 Whether discount given to licensed stamp vendor amounts to brokerage?

Kerala State Stamp Vendors Association v Office of the Accountant General (2005) 150
Taxman 30 (Ker.) / 282 ITR 7

 Whether trade discount is commission / brokerage?

National Panasonic India (P) Ltd. v DCIT [2005] 3 SOT 16 (Del. Trib.) / 94 TTJ 899

 Whether section 194H is applicable where commission is retained by the consignee

and not remitted to the consignor while remitting the sales consideration?

TDS on Payments to Non-Residents & Residents

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 TDS on Rent-section 194-I

TDS on Payments to Non-Residents & Residents

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TDS on Rent- Section 194-I
Sections Nature Rate of TDS Exemptions
194I Payment to  Rent on Plant and  When aggregate payments to
Resident by Machinery:2%* the payee during a financial
way of rent on  Rent on Land and year does not exceed
land/ building/ Building or Furniture or Rs 1,20,000( w.e.f 1st July
machinery/ fittings – 10% 2010 -Rs. 1,80,000)
equipment
and Furniture
 Individuals and HUF
required to deduct tax
only if subject to tax
audit in preceding
financial year.

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 Issues-TDS on Rent

 Whether both oral and written contracts covered? Whether payment made to hotel rooms
covered?

 Rate contract agreements?

 Whether tax is deductible on non refundable deposit?

CIT vs Reebok India Co (2007) (291 ITR 455) (Del)

 Whether limit of Rs 120,000 pa applies separately for each co-owner?

Circular No 715 dated August 8, 1995

 Rented space sublet for putting up hoardings?

Circular 715 dated 08/08/1995

 Tax credit in case of advance rent-Circular no. 5/2001 dt. March 2, 2001

TDS on Payments to Non-Residents & Residents

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 TDS on Professional & Technical Fees
Section 194-J

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TDS on Professional and technical fees
Sections Nature Rate of TDS Exemptions
194J Payment to  Payment exclusively for
Resident –  10% personal purposes of
Fees for Individuals and HUF
Professional  Individuals and HUF
and Technical required to deduct tax  Aggregate payments during a
services only if subject to tax financial year does not
Royalty audit in preceding exceed Rs 20,000(w.e.f 1st
Non financial year. July 2010-Rs, 30000)
competitor
fee
Non sharing
of intellectual
property

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 Issues-TDS on Professional and technical fees

 Whether reimbursement of cost attract TDS obligation?

Circular No. 715 dt. August 8, 1995

 Whether provisions for cellular mobile telephone or fixed phone facility covered?
Skycell Communications Ltd V DCIT [251 ITR 53] (Mad)

 Whether TDS on payment of advertising, broadcasting, telecasting contract is covered

by under section 194J?

 Commission for non-executive directors- whether covered under section 192 or

section 194J or section 194H?

 Whether tax is deducted on the gross amount, including service tax?

CBDT Circular No. 715 dated August 8, 1995

TDS on Payments to Non-Residents & Residents

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TDS on Payments to Non-Residents & Residents
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 Thank You
TDS on Payments to Non-Residents & Residents
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