Tuesday, April 7, 2015

FAQ's: Section 195: TDS on Incomes of Non-Residents

Q1. Who is liable to deduct tax?
Any person (whether resident or non- resident) responsible for making payment to a non-resident (other than company) or a foreign company.

Q2. On what type of payment is TDS deducted?
Any interest (other than interest referred to in section 194LB or 194LC or 194LD), professional or technical fee, royalty or any other sum (other than salary) chargeable under the Income Tax Act, 1961.

Q3. When must the tax be deducted?
At the time of credit of such income or at the time of payment, whichever is earlier.

Q4. At which rate must the tax be deducted?
TDS has to be deducted at the rates specified in this regard in the Finance Act of the relevant year or as per the rates specified in the DTAA.

Q5. Whether TDS has to be deducted on whole amount or only the income portion?
General Criteria: TDS has to be deducted on the whole amount before making payment.
Relevant Case Laws: Transmission Corporation of A.P. Ltd. vs. CIT (1999) 239 ITR 587(SC), Headstart Business Solutions (P) Ltd (2006) (285 ITR 530) (AAR)

Special Case (Sec 195(2)):   In case the person responsible for payment (Payer) considers that the whole of such sum would not be income chargeable in the hands of the non-resident in India, he may make an application to the Assessing Officer to determine by general or special order, the appropriate portion of such sum so chargeable and upon such determination, tax shall be deducted by him, accordingly.

Q6. Is it obligatory to approach AO for non-withholding of taxes?
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 is obtained.
Relevant Case- GE India Technology Centre (P) Ltd. vs CIT (327 ITR 456) (SC)

Q7. Whether an application can be made u/s 195(2) for Nil withholding order?
No, Payer cannot make application for NIL withholding of Tax. However, payee may apply u/s 195(3) to the Assessing Officer in Form 13 and obtain NIL Withholding Tax Certificate. 
Relevant Case: Czechoslovak Ocean (81 ITR 162) (Cal HC); 
Graphite Vicarb India Ltd. (18 ITD 58) (Kolkata ITAT)

Q8. Who can apply for NIL withholding Tax Certificate u/s 195(3)?
1. Where the person concerned is a banking company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment or dividends within India, and which carries on operations in India through a branch: any income by way of interest, or any other sum, not being dividends in so far as such interest or other sum is receivable by such branch on its own account and not on behalf of its head office or any branch situated outside India, or any other person.
2. In the case of any other person who carries on a business or profession in India through a branch: any sum, not being interest or dividends in so far as such sum is receivable by such branch on its own account and on behalf of its head office or any branch situated outside India, or any other person.

Q9. When can the application be made?
If the payee considers that tax withholding can be at NIL or lower rate.

Q10. What is the duration of Certificate u/s 195(3)?
Certificate u/s 195(3) shall remain in force for the financial year in which it is issued or until cancelled by AO before expiry of the Fin. Year.

Q11. When can subsequent application for the certificate be made?
Subsequent application can be made after expiry of the earlier certificate or within 3 months before the expiry thereof.

Q12. What is the basic difference between Certificates issued u/s 195(2), 195(3) and 197?

Application by
Payee under Rule 29B
To determine the appropriate proportion of sum chargeable
No deduction of tax
No deduction at lower rate
Whether appealable
Appeal u/s 248
No appeal
No appeal

Q13. What if the payment to be made to the non-resident is exempt from tax?
Section 195 does not apply if the sum paid to the NR is exempt from tax.
Relevant Case- Hyderabad Industries Limited (188 ITR 749) (Kar HC), GE India Pvt Ltd (327 ITR 456) (SC))

Q14. Is there any case where benefit of Sec 195(2) cannot be availed?
The benefit of Sec 195(2) cannot be availed in the following cases as in these cases the entire amount shall be subject to a special rate of income-tax as per section 115A, 115AB, 115AC, 115AD, 115BBA and 115E.

Q15. How to determine sum chargeable to tax?
Sum chargeable to tax can be determined using the provision of following:
Charging Section- Sec 4
Scope of Total Income- Sec 5
Accruing or deemed to accrue
Received or deemed to receive
Residential Status- Sec 6

Nature of Income
Section 9(1)(i): Concept of Business Connection
Article 5; 7; 14: Concept of PE or Fixed Base
Salary Income
Section 9(1)(ii)
Article 15
Dividend Income
Section 9(1)(iv) and section 115A
Article 10
Interest Income
Section 9(1)(v) and section 115A
Article 11
Section 9(1)(vi) and section 115A
Article 12
Section 9(1)(vii) and section 115A
Article 12
Capital Gains
Section 9(1)(i) and section 45
Article 13

Q16. Whether tax is to be withheld on payments in kind?
Yes. Tax is to be withheld on payments in kind.
Relevant Case- Kanchanganga Sea Foods (325 ITR 540) (SC)

Q17. Whether tax is to be held when no remittance on adjustment of dues?
Yes. Tax to be withheld even when no remittance on adjustment of dues.
Relevant Case- Raymond Ltd. – (86 ITD 791) (Mum) (ITAT)

Q18. Whether With-Holding Tax is to be deducted in the case of advance payment?
If Non-Resident Payee follows accrual system- possible view- no chargeable income arises so as to attract WHT u/s 195. However, contradictory observations have been made in Flakt (I) Ltd., In re [AAR at 267 ITR 727]

Q19. Whether TDS is deductible on Interest Income Tax Refund?
Yes. Withholding of Tax is applicable u/s 195.
Dispute- Whether such income covered under Article 12 (Interest income) or Article 7 (business income)?
Held by Del ITAT in Pride Foramer 116 TTJ 369 covered under Article 12.

Q20. Whether rate or rates of tax specified by the DTAA is inclusive of surcharge and education cess?
The term ‘taxes’ used in DTAA is “Income tax including surcharge” thereon. However, education cess is levied as additional surcharge @3%. 

Q21. Which exchange rate is applicable to convert amount to be remitted in INR?
SBI’s buying TT rate (Rule 26).


Q22. How will the tax be calculated if withholding tax (u/s 192-195) is to be borne by the payer?
In such a situation, withholding of tax shall be made on the income increased to amount after deduction of tax thereon at the rate applicable, be equal to the net amount payable under such agreement.

For e.g. Amount payable to non- resident: Rs. 1000/-
Tax Rate applicable: 20%
Gross- up income 1000/80% = Rs. 1250/-
Tax Payable 1250*20% = Rs. 250/-
Net Amt payable to Non- Resident = Rs. 1000/-


Q23. Whether Sec 206AA is a Procedural Section or Charging Section?
According to the ITAT, Pune, Sec 206AA is a procedural section and not a charging section.
Relevant Case- Dy. Director of Income Tax vs. Serum Institute of India Ltd (2015) (ITAT)

Q24. In which situation is Sec 206AA attracted and how is tax calculated under provisions of Section 206AA?
Section 206AA is attracted or triggered when the payee:
a) Does not have PAN
b) Discloses wrong PAN to the payer

Tax shall be calculated at the rate higher of the following sec 206AA:
a) at the rate prescribed in the relevant provision of this Act; or
b) at the rate or rates in force; or
c) at the rate of 20%.


Sec 206AA overrides the DTAA provisions
Sec 206AA does not override the Treaty provisions
1.       Sec 206AA starts with a non- obstante clause.
2.       Primary purpose of providing elementary satisfaction to the country of source as to treaty residency of NR is served by allotting PAN.
3.       Tax so deducted can be claimed as refund by filing Return.
4.       CBDT vide press release had clarified in case of Qualified Foreign Investor that they need to obtain PAN to claim lower rate under the Tax Treaty.
1.       Sec 206AA is a procedural section and not a charging section. [Dy. Director of Income Tax vs. Serum Institute of India Ltd (2015) (ITAT)]
2.       The Treaty(DTAA) is a self contained code and is a mini legislation as accepted by Supreme Court in the case of UOI vs. Azadi Bachao Andolan(263 ITR706)
3.       The object behind insertion of Sec 206AA as stated in the Explanatory Memorandum is that 'non quoting of PANs by deductees is creating problems in the processing of returns of income and in granting credit for TDS, leading to delays in issue of refunds.
4.       The object behind insertion of Sec206AA nowhere talks about facilitating verification of treaty residency.

Q25. At what rate tax will tax be deducted u/s 206AA if rate prescribe in the relevant provision is 25%?

Rate to be applied as per section 206AA is higher of following:
o Rate prescribed under the section 115A of the Act is 25% 
o 25% or 10 % (say the DTAA rate) i.e. 10 % or 
o 20%
This means TDS will be deducted at 25%.

o Rate prescribed under the Act for withholding has been determined as per DTAA (considering provisions per section 90 of the Act)  say 10%;
o 20%
TDS will be deducted at 20%.


Q26. Is 206AA applicable for grossing up under Sec 195A of the Act?
Section 206AA is not applicable for grossing up under sec 195A of the Act:
Relevant Case- Bangalore ITAT in case of Bosch Ltd.
o Section 206AA of the Act was introduced with the object of improving compliance and not to impose any punitive tax incidence on the payee.
o Section 206AA starts with non-obstante clause.
Section 206AA applicable for grossing up under Section 195A of the Act: 
o Section 206AA does not by itself create any withholding obligation.
o Section 206AA supplements the primary withholding section in case of default in PAN.
o Thus, the rate of 20% as provided in section 206AA would be substituted for the rate provided under the respective provisions which creates the withholding tax obligation.


Q27. What is a DTAA and who can avail benefit of DTAA? 
DTAA is an agreement between the governments of two countries to distribute tax on the income earned by any ‘person’ through cross-border activities. The Residents of either country can avail the benefits of the DTAA if they have Tax Residency Certificate.

Q28. Is TRC mandatory to avail treaty benefits?
Furnishing TRC is a mandatory requirement
Furnishing of TRC made mandatory to avail treaty benefits
Notification 57/2013 dated 1 August 2013  issued by CDBT, which mandates submission of following information in Form 10F:
o Status (individual, company, etc) of the assessee   
o Nationality or country or specified territory of incorporation or registration
o Assessee’s tax identification number in the country or specified territory of residence and in case there is no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory of which the assessee claims to be a resident; 
o Period for which the residential status, as mentioned in the certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A, is applicable; and
o Address of the assessee in the country or specified territory outside India, during the period for which the certificate, as mentioned in (iv) above, is applicable. 
Declaration not required, if TRC contains above particulars.

Q29. What important points are to be kept in mind before applying DTAA provisions?
The following basic points must be checked before applying DTAA provisions:
1. Entry into force & termination, 
2. Access to Tax Treaty, 
3. TRC, 
4. Declaration for no Permanent Establishment,  
5. Beneficial owner & payment basis (for few incomes) 

Additional points to be checked: 
6. LOB Clause; 
7. MFN Clause;
8. Protocols and Memorandum of Understanding

9. Technical Explanation to DTAA by treaty partners(eg USA to India-US DTAA) ; Jurisprudence/Case Laws(including foreign courts); OECD Commentary and UN Model Convention Commentary; etc 


Sr. No.
Check if payment is covered by section 195
Payment from Resident  to Non – Resident
Non – Resident  to Non – Resident covered
Verify the factual and basic documents
Like invoice, contract, Legal status of payee, Tax Residency (TRC), No PE Declaration, PAN, etc 
Make Classification of transaction
Business income, FTS, Royalty, etc
Check taxability under the Act
Check taxability as well as rate of tax including applicability of section 195A or 206AA
Check taxability as per DTAA
Ensure special checks discussed in earlier slide
Check if order or certificate for ‘NIL’ or ‘Lower’ rate available
Either by payer or payee (also possibility of obtaining same can be explored)

Contributed by
Ms. Pooja Agarwal
Article Assistant
Sandeep Ahuja & Co.