FUNDAMENTALS OF INTERNATIONAL TAXATION
& TDS ON PAYMENT TO NON-RESIDENTS U/S 195
Sanjay Jhanwar
Advocate
B.Com, LLB, FCA
24-January-2015
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Basis of International Taxation
Residence
Based
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Source
Based
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Jurisdictional Clash
International
Double Taxation
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Economic Double
Taxation
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International Double taxation
 One legal entity is subject to tax, on same income, in 2 countries for same
taxable year.
 Arise because most countries:
 tax residents on global income (i.e. regardless of source); and
 tax non-residents on domestic-source income.
Company A
resident in
Country X
Branch

Country X
Country Y
Company A’s branch profits are subject to tax in two countries:

in Country X due to residence; and

In Country Y, due to source.
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Economic Double Taxation
 2 legal entities are subject to tax, on (economically) the same income, in
two (or more) countries.
 Arises where one country applies its transfer pricing rules
Taxable profits
= US$ 10 million
Loan ($100
Million)
Taxable profits
= $ 2 million
Company A
Interest @ 5% p.a.
Country X
($ 5 million)
Company B
Country Y
 If Country Y considers that the arm’s length rate of interest on the loan should be 4%
p.a., it will reduce Company B’s interest deduction by $1 million
 Company B’s taxable profits increase by $ 1 million to $ 3 million
 Unless Country X provides some relief for Company A, economic double taxation
will occur in respect of the $ 1 million.
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Aspects of International Taxation
Multi country taxation injures flow of cross border transactions
Double Tax Avoidance Agreement (DTAA) eliminates or mitigates hardship caused by
multi country taxation
Home country tax is obligation; host country tax is a cost (if credit not allowed)
• Home country is country of residence (COR)
• Host country is country of source of income (COS)
Usual for COR to provide relief
Mitigation can result in relief from double taxation, but, no refund by COR/COS
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Double Tax Avoidance Agreement (DTAA)
OECD
Model
UN
Model
US
Model
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Double Tax Avoidance Agreement
Organization for Economic Co-operation & Development (OECD) Model
• Emphasis on the Residence Principle
• OECD Model Double Taxation Convention [approved by the 30 OECD
member countries]
• India not a member, observer status
United Nations Model
• More weight to the Source Principle against the Residence Principle
• UN Model Double Taxation Convention
US Model
• No Tax Sparing Clause
• US Model Double Taxation Convention,1996
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General Structure of DTAAs
Article 6 to 22
Article 1 to 2
Article 3 to 5
Applicability
Definitions
Categories of
Income
Article 24 to 29
Article 30 to 31
Miscellaneous
Provisions
Final Provisions
Article 23
Elimination of
Double
Taxation
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Comparative Analysis
Article
UN model
(Source rule)
OECD model
(Residence rule)
Indian Treaties
Article 5
Permanent
Establishment
Installation PE
Service PE
Agency PE
• Includes supervisory
• Supervisory
• Mostly include
activities
• Threshold: 6 months
activities excluded
• Threshold: 12
months
supervisory activities
• Mostly follow UN
time threshold
No such provision
Service PE found in
one third of treaties
Rendering of services by
employees for over 6
months within 12 month
period
• Resulting from habitual
maintenance of stock of
goods or merchandise for
delivery
No such provision
Insurance PE occurs
in 20 treaties
No such provision
• Deemed PE in case of
insurance enterprise
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Comparative Analysis
Article
UN model
(Source rule)
OECD model
(Residence rule)
Force of attraction rule
– attribute to PE profits
from sale of same /
similar goods or
same / similar business
activity or associated
enterprises
No ‘force of attraction
rule’
Article 8
Shipping, Inland,
Waterways
Transport and Air
transport
In certain
circumstances, profits
from operation of ships
may be taxed in the
source State
Profits taxable only in
the state where the
place of effective
management is
situated
Two-third of treaties make
departure from OECD rule
Article 11
Taxation of
Interest
Tax rate in source
country to be
established through
bilateral negotiations
Tax rate in the source
country not to exceed
10 percent of gross
amount
• OECD - 36 treaties
• UN - 27 treaties
• Libya, Mauritius, Greece
Article 7
Attribution of
Profits
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Indian Treaties
• UN - 15 treaties
• OECD - 25 treaties
• OECD or UN with
variants - 27 treaties
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and Egypt -no cap on tax
withholding
Comparative Analysis
Article
UN model
(Source rule)
OECD model
(Residence rule)
Article 12
Royalties
• Includes income from
• Does not include
use of equipment
• Source state may also
tax royalty
rental income
• Taxing right
exclusively with
state of residence
Article 13
Capital Gains
Capital gains from sale of
stock
in certain circumstances
may be taxed in the state
where the company
issuing shares is resident
Capital gains from
sale of stock shall be
taxed only in the
state where
alienator is resident
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Indian Treaties
UN convention followed
Exceptions - Belgium,
Greece, Israel, Namibia,
Netherlands and Sweden
Diverse approaches – no
pattern discernible
Singapore, Cyprus,
Mauritius and
Thailand – OECD
approach
OECD Model
Article
Content
Taxation
Article 6
Income from Immovable Property.
Full tax in COS
Article 7
Business Income.
Taxable in COR
In case of PE
COS to levy full tax
Article 8
International Shipping & Airline
Article 10
Dividends
Article 11
Interest
Article 12.
Royalty
ONLY to country of Place of Effective
Management
•TDS in COS
•Final tax in COR
•TDS in COS
•Final tax in COR
Right to tax given ONLY to COR
Article 13
Capital Gains:
Immovable Property
COS – Full tax
PE
COS – Full tax
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OECD Model
Article
Content
Taxation
Shares in Company
primarily having
immovable Property
Other Properties
Full tax by COS
Article 15
Salary
•Primarily taxable in COR
•If services are exercised COS  COS
Article 16
Director’s fees
Country where the Company is resident
Article 17
Artists & Sportsman
COS
Article 18
Pensions
Only COR
Article 21
Other income
Only COR
Article 22
Capital tax or Wealth
tax
COR
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COR
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Indian Perspective
Taxability of Non-resident in India
Indian Resident’s income taxed outside India
Avoidance of Double taxation
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Indian Law Charging Provision
Sec. 4, 5, 6
R & OR
R but NOR
NR
Indian Income:

Accrued / sourced in India
Taxable
Taxable
Taxable

Received in India
Taxable
Taxable
Taxable
Foreign Income :

Accrued outside India but
deemed to accrue in India by
virtue of Section 9
Taxable
Taxable
Taxable

Accrued outside India - First
receipt in India
Taxable
Taxable
Taxable

Any other income accruing
outside India and received
outside India
Taxable
Not taxable
(Taxable if
from business
controlled in
India)
Not taxable
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Double Taxation relief provisions in Indian Tax Law
Chapter IX
Section 90
• Regulates a case where India has a tax treaty
• Taxpayer has the option to be taxed as per tax treaty
or domestic tax laws, whichever is more beneficial
• Subject thereto, domestic law has full force
Section 91
• Relief from double taxation if India has no tax treaties
• Person resident in India is allowed credit of foreign
taxes paid against amount of Indian taxes
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Effectiveness of Treaty

If there is no tax liability under domestic law – treaty cannot impose it

Treaty, to the extent it is more beneficial in any respect, can override the
domestic law

Payer can consider lower withholding rate in terms of treaty

Treaty need not always be more favourable than the domestic law

Use of treaty by taxpayer is optional
 Choice could be qua each source of income
 Choice available on year on year basis
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Treaty Interpretation: Vienna
Convention on Law of Treaties
Article 26
: Every treaty in force is binding upon the parties to it and must
be performed by them in good faith
Article 31(1)
: A treaty shall be interpreted in good faith in accordance with
the ordinary meaning to be given to the terms of the treaty in
their context and in the light of its object and purpose
Article 31(2)
: Context is defined to include texts and subsequent
agreements/instruments related to the treaty
Article 31(4)
: Special meaning only if specifically intended by parties
Article 32
: Supplementary means to be used only to confirm the
meaning
Article 34
: A treaty does not create either obligations or rights for a third
state without its consent
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Treaty Interpretation: Vienna
Convention on Law of Treaties
Ram Jethmalani vs. Union Of India , 4 July, 2011
• While India is not a party to the Vienna Convention, it contains many
principles of customary international law, and the principle of interpretation,
of Article 31 of the Vienna Convention, provides a broad guideline as to what
could be an appropriate manner of interpreting a treaty in the Indian context
also.
• The words ( in the treaty) are to be given their general meaning, general to
lawyer and layman alike. The meaning of the diplomat rather than the lawyer.
• The fact that such treaties are drafted by diplomats, and not lawyers, leading
to sloppiness in drafting also implies that care has to be taken to not render
any word, phrase, or sentence redundant would lead to a manifestly absurd
situation, particularly from a constitutional perspective. “
• The Government cannot bind India in a manner that derogates from
Constitutional provisions, values and imperatives.
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Applicability of DTAA

Article 1
 Application of tax treaty to persons resident of one or both the
Contracting States
 Does not apply to person who is not resident in both the Contracting
States

Permanent Establishment (e.g. branch) is not a person
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Article 4: Residence

A person is a resident of a country if it is ‘liable to tax’ in the country by
virtue of :
 Domicile
 Residence
 Place of management
 Any other criterion of a similar nature

In case a person is resident of both countries
 In case of an individual – tie breaker rule determines residency
 In any other case – the place of effective management
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Article 4 : Residence
Tie Breaker Rule is to be applied in the following order:
Permanent Home
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Vital Personal &
Economic Interest
Habitual Abode
Mutual
Agreement
Nationality
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Article 5: Permanent Establishment

PE means a fixed place of business through which business of an
enterprise is wholly or partly carried on.
Place of
Management
Branch
Factory
Office
Workshop
Mine, Oil,
Gas well etc.
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Article 5 : Permanent Establishment
 Difference between OECD and UN Model
 Duration of presence of non-resident is essential in both models
 UN Model prescribes conditions for becoming a PE more liberally
so that in more circumstances a business establishment will be
treated as a PE
 UN Model, duration becomes irrelevant provided large value
addition
 UN Model had 6 months duration test for building sites
 OECD Model prescribes 12 month duration test for building sites
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Article 7: Business Profits

The profits of an enterprise of India shall be taxable only in India.

If the enterprise carries on business through a permanent establishment
situated in Country A, the profits of the enterprise may be taxed in
Country A but only so much of them as is directly or indirectly attributable
to that permanent establishment.
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Methods of Eliminating Double
Taxation
Exemption Method
• Residence country to altogether exclude foreign income from its tax
base.
• COS is then given exclusive right to tax such income.
• Known as complete exemption method and is generally followed in
respect of profits attributable to foreign permanent establishment or
income from Immovable Property.
• Indian tax treaties with Denmark, Sweden and Norway embody the
method in respect of certain income.
Credit Method
• Underline concept that resident remains liable in COR on its global
income
• However, credit of tax paid in COS is given by COR against domestic tax
as if foreign tax were paid to the COR itself.
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Methods of Eliminating Double
Taxation
Tax Sparing
• Tax credit sparing is an extension of the normal rule and
regular tax credit to taxes that are spared by the source
country, i.e. forgiven or reduced due to rebates with the
intention of providing incentives to investments.
• Tax credit is allowed by COR, not only in respect of the
taxes actually paid by it in India but also in respect of
those taxes India forgoes dues to its fiscal incentive
provisions under the Indian Income Tax Act.
• Tax sparing clause is generally not included under the
OECD model
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TDS on Payments to Non Resident u/s 195
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Facets of the Section…
195(1)
Liability for deduction from
payment
195(4)
Validity of the Certificate
195(2)
195(3)
Application by Payer for lower/
NIL
Application by Payee for
lower/NIL
withholding
withholding
195(5)
195(6)
CBDT empowered to notify
rules for 195(3)
Obligation on Payer to furnish
information as prescribed
195(7)
CBDT empowered to notify
class of persons for application
to be made to AO for
determination of appropriate
sum chargeable
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How is it different?
Difference between 195 and other TDS sections
How?
Section 195
Other TDS provisions
Nature
Income Chargeable under
Income Tax Act
Specific Payments,
Whether
Income or not.
Sum
Any Sum
Above prescribed
threshold
Applicability
Any persons
Specified persons in the
sections
Certification for
remittance
Mandatory
Not required
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Birds Eye View : S. 195
Payer
• Any person
responsible
for paying
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Payee
• Non Resident
(not a
company) or
• Foreign Co.
Amount
Payable
Time of
deduction
• Interest or
any other
sum (other
than Salaries)
and
• Chargeable
under
provisions of
Act
• Payment or
credit
whichever is
earlier
• Conversion
rate to be
applied – TT
Buying Rate
on the date
which tax is
required to
be deducted
(R.26)
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Rate of
Deduction
• Rates in force
• Rates of
income-tax
specified in the
Finance Act or
the rates
specified in the
DTAA,
whichever is
applicable by
virtue of Section
90 or Section
90A - Circular No.
728 of October 30,
1995
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An Overview
Payment to NR
Taxable under IT Act
Yes
Whether DTAA exists with the
Contracting State
Yes
No
No
As per IT Act
No
Income Taxable under DTAA
Yes
Rates under DTAA beneficial
Yes
Deduct tax at the rates prescribed
under DTAA
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No deduction
of tax at source
No Tax liability
No
Deduct tax at
the rates
prescribed
under IT Act
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Sum Chargeable to Tax
•
Chargeability governed by provisions of IT Act and DTAA
Nature of Income
IT Act
DTAA
Business/Profession
S. 9(1)(i)
Article 7, 14 r.w. 5
Salary
S. 9(1)(ii)
Article 15
Dividend
S. 9(1)(iv), S. 115A
Article 10
Interest
S. 9(1)(v), S. 115A
Article 11
Royalties
S. 9(1)(vi), S. 115A
Article 12
Fees for Technical Services
S. 9(1)(vii), S. 115A
Article 12
S. 9(1)(i),
S. 45School
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Article 13
Capital
Gains
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Sum Chargeable to Tax
Amount not
chargeable to tax in
India
• Where payment, made by resident to nonresident, was an amount not chargeable to
tax in India, no tax is deductible at source
even though assessee has not made an
application before the AO. GE India
Technology Centre Pvt. Ltd (327 ITR 456) SC
When income is
exempt under DTAA
• The expression chargeable under the
provisions of the Act cannot include an
income which in terms of the specific
provisions of the applicable DTAA, is not
exigible to tax in India. Maharasthra State
Electricity Board v. CIT [2004] 90ITD793
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Section 195 : How to deal with different aspects?
S.No. Nature of Transaction
Applicability
Reason
1.
Payment by branch office of a
foreign company
Yes
Branch of a foreign co. /concern in India is
separate entity. Circular No. 740, dated
April 17, 1996
2.
Payment in kind
Yes
Kanchanganga Sea Food Ltd. v. CIT [2010]
325 ITR 540 (SC)
3.
Agent of NR making payment to NR
No
CIT v. Premier Tyres Ltd. [1982] 134 ITR 17
(Bom.)
4.
Payment to an Indian Agent of NR
Yes
Narsee Nagsee & Co. v. CIT (1959) 35 ITR
134 (Bom.)
5.
Payment made to NOR
No
Payee should be NR
6.
Payee is NR at the time of tax
deduction but Resident at the time
of payment
Yes
United Breweries Ltd. v. Asstt. CIT [1995]
83 Taxman 263 (Kar.)
7.
Money paid into Court under
decree obtained by NR
Yes
Lalta Prasad Goenka v. Biratnagar Juice
Mills Ltd. [1963] 48 ITR 653 (Cal.)
8.
Regular Trading Operations
Yes
CIT v. Superintending Engineer [1984] 19
Taxman 356 (AP)
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Refund of tax deducted under Section 195 (CIRCULAR NO. 7/2007, DATED 23-102007 AND CIRCULAR NO. 07/2011 dated 27.09.2011)
S.No. Situation
Criteria
Cancellation/Partial Execution of the Contract
1.
The contract is cancelled
2.
Contract is cancelled, remittance is Remitted amount has been returned to
duly made
the person responsible for deducting
tax at source
3.
Contract is cancelled after partial No remittance for non executed part
execution
4.
The contract is cancelled after partial
execution and remittance related to
non-executed part is made to the
nonresident
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No remittance is made to the nonresident
Amount refunded to the payer or no
remittance was
made but tax was deducted and
deposited when
amount was credited to the account of
the nonresident
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Refund of tax deducted under Section 195 (CIRCULAR NO. 7/2007, DATED 23-102007 & CIRCULAR NO. 07/2011 dated 27.09.2011)
S.No. Situation
Criteria
5.
Amendment in law or by notification
under the Act
There occurs exemption of the remitted
amount from
tax
6.
Order passed u/s 154 0r 248 0r 264
Tax deduction liability of the payer is
reduced
7.
Double deduction of tax amount
Same amount deducted twice by
mistake
8.
Other than discussed above
Payment of tax at higher rate under
domestic law while a lower rate is
prescribed under DTAA
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Furnishing information relating to payments S. 195(6)
r.w. R. 37BB
Form
Threshold Limit
Requirements
Part A : Form
15 CA
Amount of payment does not exceed Rs.
50,000 and the aggregate of such
payments made during the f.y. does not
exceed Rs. 2,50,000;
Part B : Form Payments other than referred above
15 CA
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 Certificate in Form 15 CB
from CA or
 Certificate from A.O. u/s
197 or
 Order from A.O. u/s
195(2) or 195 (3)
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THANK YOU
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