Payments to non-residents
Obligations, compliances and issues –
Section 195
29 November 2012
Presentation at ICAI – Hyderabad Branch
Introduction
“195. (1) Any person responsible for paying to a non-resident, not being a
company, or to a foreign company, any interest, not being interest referred to
in section 194LB or section 194LC 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”
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Obligations, compliances and issues u/s 195 of the Act
Introduction
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Section 195 of the Act deals with deduction of tax at source on payments
made to non-residents and foreign companies
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Objective of Section 195 is to ensure tax collection at source, where a nonresident’s income is taxable in India
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No threshold limit prescribed – tax deductible even on a negligible amount of
credit/ payment
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Does not apply to salaries, dividends, interest on infrastructure debt fund and
interest paid by Indian company on loan borrowed by it under a agreement
approved by the Government of India
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Deductor has option to approach the Assessing Officer (‘AO’) to determine
the quantum of income on which tax is deductible
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Benefit of tax treaty would be available to the non-resident
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Obligations, compliances and issues u/s 195 of the Act
Obligations
Obligations – Applicability
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Who is responsible ?
Any person responsible for making payment to a non-resident (including
individuals and HUF payers)
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What is the nature of payment ?
Any sum chargeable to tax under the Act
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When to deduct ?
At the time of payment or credit, whichever is earlier
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What rate to apply ?
Lower of the two rates:
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Rates in force prescribed by the Finance Act; or
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Rates under tax treaty*
*Subject to Section 206AA of the Act
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Obligations, compliances and issues u/s 195 of the Act
Obligations – Applicability (contd…)
Amendment in Section 195 – Finance Bill 2012
►
The scope of withholding tax obligation on payment of income to non-resident
expressly 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
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Effective 1 July 2012, payment to non-residents by specified persons or in
specified cases (to be notified) to require an application to be made to the
Tax Officer for determination of withholding tax, irrespective of whether such
payment is taxable in India or not – Section 195(7).
Obligation to withhold the tax will be applied
regardless of absence of any territorial nexus.
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Obligations, compliances and issues u/s 195 of the Act
Obligations - Sum chargeable to tax under the Act
►
Payments to non-residents (other than salaries), which are chargeable to tax
under the Act, are covered u/s 195 of the Act
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Chargeability under the Act – Scope of total income: Sec 5 & Sec 9
►
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Received or deemed to be received in India
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Accrue or arises or deemed to accrue or arise in India
Income deemed to accrue or arise – Section 9
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Salary Income [Section 9(1)(ii)]
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Interest Income [Section 9(1)(v)]
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Royalty Income [Section 9(1)(vi)]
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Fees for technical services [Section 9(1)(vii)]
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Income through or from any business connection in India or from any property in
India or from any asset or source of income from India [Section 9(1)(i)]
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Obligations, compliances and issues u/s 195 of the Act
Obligations - Sum chargeable to tax under the
Treaty (contd…)
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Chargeability under tax treaty:
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Article 7 (Business profits)
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Article 11 (Interest)
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Article 12 (Royalty and FTS)
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Article 13 (Capital gains)
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Article 22 (Other income)
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The Finance Act, 2012, introduced sub-section 4 to section 90, mandating non resident
taxpayers to furnish TRC from the country of residence containing prescribed
particulars to avail the benefits of tax treaties.
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In this regard, CBDT, on 17 September 2012 notified Rule 21AB in the Rules providing
the details that are required to be included in TRC submitted by a non-resident
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Obligations, compliances and issues u/s 195 of the Act
Obligations – Facilitation
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Option to determine charaterisation of income and quantum of income chargeable to
tax in India :
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Authority of Advance Rulings (‘AAR’)
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Application u/s 195(2)
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Application u/s 197
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Obligations, compliances and issues u/s 195 of the Act
Obligations - 206AA implications
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Section 206AA to apply to any person entitled to receive any sum on which
tax is deductible under the Act
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Deductee to furnish his PAN to the deductor
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On failure in providing PAN, the deductor is required to withhold taxes at
higher of the following rates:
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Rates provided under relevant provisions of the Act or
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Rate or rates in force (i.e. rate provided under the Act or the tax treaty)
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Rate of 20 percent
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Applicable with effect from 1 April 2010
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The above provision will be applicable to all payments made to residents/
non-residents on which tax is required to be deducted under the Act
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Further, the certificate for deduction at lower rate or nil rate of deduction shall
not be given by the AO unless the application bears PAN of the applicant/
deductee
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Obligations, compliances and issues u/s 195 of the Act
Obligations – Section 195A – Grossing-up
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For the purpose of deduction of tax, income to grossed-up (proportionately
increased) when tax chargeable on that particular income is to be borne by
the payer of the income
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The proportionate increase in the income should be such an amount as
would, after deduction of tax thereon at the rates in force be equal to the net
amount payable under such agreement or arrangement.
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Section 195A not applicable to:
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income referred to in Section 192(1A)
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profits when computed under presumptive sections – Section 44B, Section 44BB,
Section 44BBA and Section 44BBB of the Act [ONGC, 264 ITR 340 (Uttaranchal)]
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Obligations, compliances and issues u/s 195 of the Act
Compliances
Compliances – Furnishing of information
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Furnishing of Information – Rule 37BB
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Furnishing of information to the tax department – Form 15CA
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To obtain CA certificate before making payment to non-resident – Form 15CB
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Circular no. 4/2009 dated 29-06-2009 providing the manner for submitting
and processing the details of payment
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Filing of e-TDS returns in Form 27Q
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Documentation to be maintained – TRC, PE declaration, documentation to be
maintained for assessment
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Obligations, compliances and issues u/s 195 of the Act
Compliances – Chartered Accountants’ Certificate
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Circular No 10/ 2002 dated 9 Oct. 2002 – Authorizes remittance of money on
the basis of a CA certificate
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Circular requires an undertaking in the prescribed format from the assessee
(payee) and the CA certificate to be issued to Banker
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Assessee not absolved from penalty/ prosecution if found that tax deducted
was lower than what was required
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This procedure does not apply where a general/ specific order has been
passed by the AO
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Whether a particular payment made to a non resident is chargeable to tax in
India or not, the payer may approach an Accountant as opposed to
approaching the Revenue Authorities - amounts to sufficient compliance of
law [Millenium Infocom Technologies Ltd, 21 SOT 152 (Del. ITAT);
Prasad Productions, ITA No. 663/Mds/2003 (Chennai ITAT)]
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Obligations, compliances and issues u/s 195 of the Act
Compliances – Determination of tax quantum
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Section 195(2)
“195. (2) Where the person responsible for paying any such sum chargeable
under this Act (other than salary) 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, by general or
special order, 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.”
►
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Payer applies to determine appropriate portion of sum chargeable to tax and liable
for withholding
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‘NIL’ withholding application are not maintainable
Section 195(3)
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Non-resident’s application to AO for appropriate determination
Section 197
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Payee’s application to AO for appropriate determination, lower or Nil withholding
order
Obligations, compliances and issues u/s 195 of the Act
Compliances – Determination of tax quantum
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Payee satisfying certain conditions can make an application for receipt of any
amount without deduction of tax at source
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Prescribed conditions include (Rule 29B):
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The non-resident has been regularly assessed to Income-tax
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Not in default or deemed to be in default in respect of tax, interest, fine or any sum
payable under the Act
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Has not been subjected to penalty for concealment of particulars of income.
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Where not a banking company:
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Has been carrying on business or profession in India continuously for atleast 5 years
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Value of fixed assets in India exceeds Rs. 50 Lakhs
Certificate issued by the AO valid for the financial year mentioned therein
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Obligations, compliances and issues u/s 195 of the Act
Issues
Issues – Extra territorial operation
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The provisions of the Act has extra-territorial operation in respect of the
subject-matters and the subjects which are permissible under Article 245 of
the Constitution and the provisions are enforceable within the area where the
Act extends through the machinery provided under it
►
Machinery provisions are not independent of charging provisions
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The Act is an integrated code in which one cannot segregate the computation
machinery from the collection and recovery machinery [Eli Lilly and Co.
(India) P. Ltd (2009) 312 ITR 225 (SC)]
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Obligations, compliances and issues u/s 195 of the Act
Issues –Chargeability
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‘Any sum chargeable to tax’ includes income or profit element embedded in
gross sum payable [Transmission Corporation of A. P. Ltd., 239 ITR 587
(SC)]
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Question whether payment is wholly in the nature of income or not is
irrelevant – important point is the sum to be chargeable to tax in India
[Headstart Business Solutions (P) Ltd., 285 ITR 530 (AAR)]
►
Tax is required to be withheld only where the payments are chargeable to tax
in India [GE India Technology Center – Civil Appeal No. 7541-7542]
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Obligations, compliances and issues u/s 195 of the Act
Issues - Applicability
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No income accrued in India when the payment is made by one non-resident
to other non-resident situated abroad resulting in an off shore deal [Vodafone
International Holdings B.V. vs UOI and Anr., 341 ITR 1]
►
Payment of interest by Branch to Head Office
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CBDT Circular No 740 dated 17 April 1996 – Branch of a foreign company in India
is a separate entity and liable to deduction of tax at source from payments of
interest to Head Office or any other branch outside India
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CBDT Circular No 649 dated 31 March 1993 – Technical fees received by head
office from its branch in India shall be taxable in accordance with Section 115A
read with section 44D of the Act
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ABN Amro Bank, 97 ITD 89 (Kol. ITAT) – Branch of a foreign bank making
payment of interest to head office is not liable to deduction of tax at source
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Obligations, compliances and issues u/s 195 of the Act
Issues – Royalties
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Withholding tax applicable if payment satisfies the definition of ‘Royalty’ under
the Act or the treaty
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Instances where payment not held as ‘Royalty’
►
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Payment for publicly available information, not leading to any imparting of skill or
expertise [HEG Ltd., 263 ITR 230 (MP)]
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Payment made for standardized products or services accessible to any subscriber
willing to pay - not taxable as ‘Royalty’ [Dunn & Bradstreet Espana, S.A. 272 ITR
99 (AAR)]
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Outright sale of know-how [Davy Ashmore India Ltd., 190 ITR 626 (Cal.) and
Pro-quip, 255 ITR 354 (AAR)]
Payment held as ‘Royalty’
►
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Subscription fees paid for accessing information from a website is ‘Royalty’ under
the Act and the India-UK treaty [ONGC Videsh Ltd ITAT Delhi]
Obligations, compliances and issues u/s 195 of the Act
Issues – Royalties
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Payment for supply of computer software with hardware not taxable as royalty
– The definition of royalty only amended in the Act but not treaties [Nokia
Networks OY (Delhi HC) TS-700-HC-2012(DEL)]
►
Software payments
►
Acquisition of software inextricably linked with hardware - [Lucent Technologies
Hindustan Ltd., 82 TTJ 163 (Bang. ITAT)]
►
Payment for use of copyrighted article as against use of copyright
►
Royalty and FTS income taxable on receipt basis and not when the payee is
credited in the books of accounts of the payer – [Siemens
Aktiengesellschaft (Bombay HC) TS-795-HC-2012(BOM)]
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Obligations, compliances and issues u/s 195 of the Act
Issues – Fees for Technical Services
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Fees for Technical Services
►
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Tax deductible if payment satisfies the definition of ‘Fees for technical services’
(‘FTS’)
Instances where payment not held as FTS
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Treaties having ‘make available’ clause - Restricted definition in tax treaties with
USA, UK, Singapore
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Services rendered for earning a source of income outside India or utilized in a
business outside India [Aktiengesellschaft Kuhnle Kopp and Kausch, 262 ITR
513 (Mad)]
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Obligations, compliances and issues u/s 195 of the Act
Issues – Fees for Technical Services
►
Provision of transponder capacity by a satellite company to a broadcaster
amounts to providing technical services [Asia Satellite
Telecommunications Ltd., 319 ITR 269]
►
Provision of bandwidth facility for transmission of data and software does not
result into technical services
►
Wipro Ltd., [80 TTJ 191 (Bang.)]
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Software Technology Parks of India, [3 SOT 529 Bang. ITAT]
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Estel Communications Pvt. Ltd. [318 ITR 185 (Del) (HC)]
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Obligations, compliances and issues u/s 195 of the Act
Issues – Reimbursement of expenses
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‘Reimbursement’ not defined in the Act - divergent views expressed by
Tribunals and Courts
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Pure reimbursement should not constitute a reward or a compensation paid
for a service rendered and therefore not to be construed as ‘fee’
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Reimbursement of incidental expenses in addition to payments of FTS:
►
►
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Reimbursement considered not taxable:
►
Tata Engineering and Locomotive Co. Ltd., [245 ITR 823 (Bom)]
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Industrial Engg. Projects (P) Ltd., [202 ITR 1014 (Del)]
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Clifford Chance, United Kingdom, [82 ITD 106 (Mum. ITAT)]
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Bombay Tribunal in the case of Arthur Andersen (unreported)
Reimbursement considered taxable:
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Cochin Refineries Ltd., [222 ITR 354 (Ker)]
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SRK Consulting Engineers & Scientists, [230 ITR 206 (AAR)]
►
Hindalco Industries Ltd., [278 ITR (AT) 125 (Mum. ITAT)]
Obligations, compliances and issues u/s 195 of the Act
Issues – Reimbursement of expenses
►
Cases on reimbursement of cost of services of a third party engaged by the
non-resident
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Reimbursement considered taxable:
►
►
Wallace Pharmaceuticals P. Ltd., [278 ITR 97 (AAR)]
Cases on reimbursement of allocated cost (similar to Cost Sharing)
►
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Reimbursement considered not taxable:
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Dunlop Rubber Co. Ltd., [142 ITR 493 (Cal)]
►
ABB Limited – AAR
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Invensys Systems Systems Inc., In re [317 ITR 438]
Reimbursement considered as provision of service and hence taxable:
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Danfoss Industries (India) Ltd., [268 ITR 1 (AAR)] (where the reimbursement was not
established as pure reimbursement while allocation happens)
Obligations, compliances and issues u/s 195 of the Act
Issues – Reimbursement of expenses
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Cases on reimbursement to non resident of salaries of the foreign technicians
seconded to Indian co's operations as employees
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Reimbursement considered not taxable:
►
HCL Infosystems Ltd., [274 ITR 261 (Del)]
►
BHEL, [252 ITR 218 (Del)]
Obligations, compliances and issues u/s 195 of the Act
Consequences of non-deduction/ short deduction
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Section 40(a)(i) - Any sum chargeable to tax payable outside India or payable
in India to a non-resident is deductible in computing income under the heads
‘business or profession’ or ‘other sources’ only when tax is deducted at
source and paid
►
►
►
Provisions applicable not only to interest or royalty or fees for technical services but are
applicable to any sum chargeable to tax in the hands of non-residents [Jay Container Services,
Unreported (Mum. ITAT) - ITA No. 4769/Mum/2005 ]
Failure to deduct tax or after deducting failure to pay tax:
►
Deemed to be an assessee in default in respect of the tax
►
Simple interest leviable @1% p.m. u/s 201(1A) – on non deduction
►
Simple interest leviable @1.5% p.m. u/s 201(1A) – on non payment after deducting the tax at
source
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Penalty leviable u/s 221/ Section 271C
►
Prosecution u/s 276B
Onus on the CA issuing the Certificate of remittance for justification and held
responsible for his professional judgment
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Obligations, compliances and issues u/s 195 of the Act
Thank you