You are on page 1of 36

Withholding tax on Foreign Remittances u/s.

195
Presentation by: Vispi T. Patel 13 February 2009

Bombay Chartered Accountants Society

Withholding tax obligation under Section 195
Section 195 (1)
Any person responsible for making payment to a non-resident shall withhold tax Only in respect of interest or other sum chargeable under the Income Tax Act, 1961 At the time of credit or payment whichever is earlier At the ¶rates in force·

Does not apply to salaries and exempt dividends

Objective of section 195
The objective of section 195 is to ensure, as far as possible, that the tax liability on the income element of the amount paid is deducted at source itself, so that the Department is not put through the hassles of recovering it from a non-resident whose connection with India may be transient or whose assets in India may not be sufficient to meet the tax liability

v DCIT) (99 ITD 91)(Mum) Provisions of Section 195 encompass payment made by HO overseas AAR (1995) 228 ITR 487: Bechtel Ruling Any person includes Non-resident .Non residents included Definition of person under the Act includes non residents/foreign company Jurisdiction to issue show cause notice for non-withholding of tax on capital gains in relation to transfer of controlling interest in the Indian company ² (Vodafone International)(311 ITR 46)(Bom) Liability to deduct tax at source from the payments made by the Foreign TV channels to the Foreign Transponder owner is fastened on them by virtue of the provisions of section 195 (Asia Satellite v DCIT) (85 ITD 478)(Del) Purchase of Ad Airtime to Foreign TV Channels ² (Satellite Television Asia Region Ltd.Whether includes non resident Any person .Not Included Provision of the Act cannot have extra territorial jurisdiction Commentary ¶¶Kanga.whether includes non resident Conflicting views :Favourable View .Any Person . Palkhivala and Vyas·s the Law & Practice of Incometax· Ninth Edition ² Page 2105 Contrary View .

(267 ITR 727)(AAR) No tax withholding if amount neither credited nor paid CJ International Hotels Ltd v ITO (79 ITD 506) (Delhi) Even after credit. tax to be deducted when sum becomes unconditionally available to the payee ² Debatable Motor Industries Company (249 ITR 141) (Kar) Creation of an enforceable debt essential to trigger tax withholding Ericsson Communication (81 ITD 77) (Delhi) Right to receive/pay enforced only after receipt of Regulatory Approval Pfizer Corp. (231 ITR 849)(Bom) . v CIT (259 ITR 391)(Bom) CIT v Kirloskar Tractors Ltd. v ACIT (211 ITR 256)(Kar) Flakt (India) Ltd.Time of deduction At the time of credit or payment whichever is earlier United Breweries Ltd.

11. Fee for technical services and interest given as not to exceed a specified percentage in DTAA Treaty rates normally inclusive of surcharge . and Rates of tax for royalty. rates as per DTAA to be applied where they are more favorable to the assessee Conditions for applying beneficial rate laid down u/s.Rates of deduction At the rates in force:Section 2(37A) defines ¶rates in force· as rates as per Finance Act or Treaty whichever is applicable Reference to rates as per DTAA included from 1.1992 CBDT vide Circular No.95 .6. 728 dated 30. 115A Issue ² Whether surcharge to be levied on Treaty rates If tax Treaty defines tax include surcharge.

v. v. (India) (P) Ltd. Ltd. Samsung Electronics Co.C. (185 Taxman 313)(Kar) . Ltd. CIT (239 ITR 587) P. DCIT (80 TTJ 120)(Mum)/MSEB v. ITO (36 ITR 365)(Cal) Raymonds Ltd. v. Ray & Co.µSum chargeable· under the Act Transmission Corporation of A.P. DCIT (90 ITD 793)(Mum) CIT v.

engaged in the business of export of software for computer application. or for use of. such systems software will not be liable to tax in India as payment by way of royalty or otherwise.1974  Where the person responsible for paying any sum to a nonresident considers that the whole amount thereof would not be income chargeable under the Act in the case of the recipient non-resident. 195(2) to the ITO for the determination of the appropriate portion of such payment which would be taxable and in respect of which tax is to be deducted u/s.1. 152 dated 27. henceforth. 195(1) . 588 dated 2. Such lump sum payments will. 195 Circular No. 195(1) Circular No.11. the lump sum payment made to the foreign supplier for acquisition of any right in relation to.Circulars issued on S. imports any systems software.1991  Where a taxpayer. be allowed to be made without deduction of tax at source u/s. alongwith the hardware itself. supplied by the manufacturer of the computer hardware. he may make an application u/s.

11.1997.1998 and No.2002  To dispense with the requirement of submission of a No Objection Certificate from IT Authorities for remittance to a non-resident as required by the RBI  Alternate procedure is to obtain a Chartered Accountant·s certificate  In order to streamline the procedure as well as to ensure the correct deduction of tax at source.Circulars issued on S. Form and application for remittance u/s.5. 767 dated 22. No. 10/2002 dated 9. 759 dated 18. 195 have been revised to provide the basis on which the tax is to be deducted . 195 Circular No.10.

held to be not taxable in India. no part of his income arises in India. No tax is therefore deductible u/s.Circulars issued on S. 23 dated 23. 195 Circular No.2. 786 dated 7. . it cannot be held to have been received by or on behalf of the agent in India.2000  As clarified earlier in Circular No.7. 195 from export commission and other related charges payable to such a non-resident for services rendered outside India. This clarification still prevails in view of the fact that the relevant sections 5(2) and 9 have not undergone any change in this regard.1969 where the non-resident agent operates outside the country. Such payments were therefore. and since the payment is usually remitted directly abroad.

Ltd. which are not ´pure income profitsµ .P. without deduction of tax at source. v. CIT (239 ITR 587)(SC) « Facts The assessee made certain payments to nonresidents. towards purchase of machinery/ equipment and also for erection and commissioning of such machinery/equipment ITAT Ruling The provisions of section 195 are not applicable to payments of sums to a non-resident.Transmission Corporation of A.

P. CIT (239 ITR 587)(SC) « High Court Ruling  The assessee was under an obligation to deduct tax at source u/s. 195 is limited only to the appropriate proportion of income chargeable under the Act forming part of the gross sums of money paid to non-residents  The ITO was correct in determination of tax u/s. Ltd. the ITO was in error in determining tax deductible u/s. 195 in respect of payment made towards purchase of equipment as well as erection of such equipment. 195 in respect of purchase of machinery/equipment .« Transmission Corporation of A. 195  The obligation to deduct tax u/s. However. v.

v. tax is required to be deducted  The scheme of tax deduction at source applies not only to the amount paid which wholly bears ´incomeµ character. but the gross sum.«Transmission Corporation of A.(2) and (3) of s. 197 leaves no doubt that the expression ´any other sum chargeable under the provisions of this Actµ would mean ¶sum· on which income tax is leviable  If the sum that is to be paid to the non-resident is chargeable to tax. 195 and s.P.(1). the whole of which may not be income or profit of recipient . CIT (239 ITR 587)(SC) « Supreme Court Ruling  The scheme of sub-ss. Ltd.

Ltd. 195(3) and 197 . in any manner. CIT (239 ITR 587)(SC) « Supreme Court Ruling  The purpose of sub-s. which is chargeable under s. the payee should deduct tax. 4 of the Act for levy and collection of income-tax. if the amount is to be paid to a non-resident  The said provision is for tentative deduction of tax subject to regular assessment and by the deduction of tax rights of the parties are not. v.(1) of s.«Transmission Corporation of A. adversely affected. the rights of payee or recipient are fully safeguarded under ss. Further.P. 195 is to see that the sum. 195(2).

P. . income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ¶sum· to deduct tax thereon before making payment. Ltd. or for grant of certificate authorising recipient to receive the amount without deduction of tax. or for determination of appropriate proportion of such sum so chargeable.«Transmission Corporation of A.  If no application is filed . On such determination. CIT (239 ITR 587)(SC) Supreme Court Ruling  Only thing which is required to be done by them is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of recipient. tax at appropriate rate would be deducted at source. v. or deduction of tax at any lower rates or no deduction. He has to discharge the obligation of tax deduction at source.

P. the assessee tax deductor is under a statutory obligation to deduct tax at source computed on the entire payment to nonresident treating the same as income. because. whenever an application under s. DCIT (90 ITD 793)(Mum) « ITAT Ruling  These observations do give a prima facie impression that. However. 195(2). do not affect the position that in a case where no portion of payment is exigible to tax.MSEB v. Ltd. 195(2) does not arise. the question of application of s. such an interpretation will be fallacious  The ratio of SC judgement in the case of Transmission Corporation of A. as the section itself categorically provides that it comes into play where the person responsible for paying any sum chargeable under this Act to a nonresident considers that whole of such sum would not be chargeable in the case of recipient . in the esteemed views of the SC. is not filed.

v. 195. divorced from the context of question under consideration and treat it to be the complete law declared by the SC [CIT v.C. 18(3B) of the 1922 Act that High Court [P. Ray & Co. (198 ITR 297)(SC)] .« MSEB v. DCIT (90 ITD 793)(Mum) « ITAT Ruling  It is thus a settled position that when an income is outside the scope of income taxable under the Act. ITO (36 ITR 365)(Cal)]was in seisin of. does not arise. the question of application of s.  It is neither desirable nor permissible to pick out a word or a sentence from the judgement of the SC. which is in material respects pari materia with s. Sun Engineering Works (P) Ltd.

which are in the nature of payment of income simpliciter. in our considered view.in the nature of ¶amounts of a mixed composition.« MSEB v. and. in the matter of Transmission Corpn. DCIT (90 ITD 793)(Mum) ITAT Ruling  It was not even the case of the Revenue. that tax at source was also required to be deducted from the payments made to non-residents were not exigible to tax in India. cannot be applied in the case of sums no part of which are exigible to tax in India The SC decision should not be used as a blind man¶s walking stick without examining the facts of the situation . The observations made in this context. their Lordships· concern was confined to two categories of payments : first. a part of which only may turn out to be taxable income· on account of income embedded or hidden therein. second .

office appliances. was engaged in development of software for telecommunication system. computer system and mobile devices. an Indian branch of the Korean Company. 201 for non-withholding of tax . Samsung Electronics Co. Ltd. 195(2)  AO initiated proceedings u/s. The software developed by the assessee was for in-house used by the parent company  The assessee imported software product which was readily available in the market  The assessee made the payment for import of software without deduction of tax at source and also without making an application u/s. & Others (185 Taxman 313)(Kar) « Facts  The assessee.CIT v.

& Others (183 Taxman 313)(Kar) « ITAT Ruling  It was not incumbent on the assessees to deduct tax u/s. Samsung Electronics Co. Ltd. proceedings u/s.« CIT v. 195 as payments were not in the nature of royalty in terms of respective DTAAs  Consequently. 201 would not arise Basic Issue before the HC  Whether there was an obligation to deduct and remit the amount in terms of section 195 ? .

the assessees were required to deduct tax at source as per s.« CIT v. 9(1)(vi) of the Act and as such. 195 (Reliance placed on Transmission Corpn) . the payments were in the nature of royalty and not out-right sale  Reliance was placed on the Amex Ruling (238 ITR 296)(AAR)  The SC Ruling in the case of Tata Consultancy was in the different context and therefore. interpretation therein has no relevance for the Income tax purpose  The assessee was bound to deduct tax at source u/s. Ltd. 195  Definition of royalty under the Act and as per the DTAAs with USA and Sweden were one and same and therefore. & Others (183 Taxman 313)(Kar) « Revenue·s Contention  Payments made by the assessees to the supplier of the software were in the nature of royalty u/s. Samsung Electronics Co.

thus not chargeable to tax in India  If a person is not liable to be charged to tax. 200  The SC Ruling in Transmission Corpn. Ltd. the assessee cannot be construed as a person in default u/s. & Others (183 Taxman 313) (Kar) « Assessee·s Contention  Application to deduct tax at source u/s. does not restrict the right of the assessee to challenge the liability /demand based on chargeability . Samsung Electronics Co. 195 would arise only in the event of chargeable to tax  Sale of software is goods and is a trading receipt.« CIT v.

Samsung Electronics Co. 4 will have to be borne in mind while reading s. 195 [CIT v. is not an authority for the present case . the SC Ruling in Transmission Corpn. & Others (183 Taxman 313)(Kar) « Assessee·s Contention  Charging provision u/s. Ltd. 201. Eli Lilly (312 ITR 225)(SC)]  Prior to amendment to s.« CIT v. Therefore. 201 is bad in law  If the sum is not at all chargeable. what are the consequences is not a question answered in Transmission Corpn. the assessees did not come within the ambit of deemed defaulter  Consequential order passed u/s.

& Others (183 Taxman 313)(Kar) « HC Ruling/Observation  All the assessees are quite aware that it is not actually an exercise for determination of tax liability of a nonresident. or even to contend that the judgement can only be an authority only to the limited extent where some part of payment partakes the character of income . 195  This obligation cannot be otherwise got rid of or can be wriggled out  Valiant attempts have been made to either distinguish the SC Ruling in Transmission Corpn.« CIT v. Samsung Electronics Co. but is only in the context of the obligation of a resident assessee making payments to the non-resident as contemplated u/s. Ltd.

& Others (183 Taxman 313) (Kar) « HC Ruling/Observation  Binding nature of the judgement of the SC cannot in any way be diluted or diminished as the SC directly involved in the exercise of interpreting the provision of s. 9 of the Act. Samsung Electronics Co. 195(1) that the payment to the recipient prima-facie bears the character of an income and therefore. There is absolutely no scope for the HCs even to examine an alternative arguments  We cannot lose sight of the fact that section 195(1) of the Act is not a charging section or provided for determination of the tax liability of a non-resident nor as to whether u/s. but by simply accepting the operation of the mandate u/s.« CIT v. the obligation u/s. 195. 195(1) springs up . Ltd.

. Ltd. 195(2). An answer for this can be obtained only by going through procedure envisaged u/s. & Others (183 Taxman 313) (Kar) « HC Ruling/Observation  An exercise of determination of tax liability cannot be resorted even for the purpose of determining the extent of obligation on part of the payer and to ascertain as to whether there is any scope for relieving the payer totally from the obligation to deduct. the appellate authorities are precluded from going to the question or exercising its appellate powers to decide the question whether the sum is chargeable to tax. 195(2)  In the absence of such application u/s.« CIT v. Samsung Electronics Co. especially in the wake of the binding judgement of the SC in the case of Transmission Corpn.

who has not filed an application u/s. & Others (183 Taxman 313)(Kar) « HC Ruling/Observation  As regards the pre-amended law in relation to s. later.« CIT v. 201. Samsung Electronics Co. 195(1) . section 200 and heading of section 201 clearly cover the case of the total failure of deduction also  The resident payer. it cannot be said that there was any failure on the part of the payer in fulfilling its obligation u/s. Ltd. 195(2) cannot. after having failed to deduct and remit the amount turn around and contend that no part of the payment had resulted in any taxable income in the hands of the non-resident recipient and therefore.

no further questions arises for examination in so far as the liability of the resident payer in terms of s. 201 by merely contending that the payment did not result in any taxable income. & Others (183 Taxman 313) (Kar) « HC Ruling/Observation  It is not open to a resident payer to invite the AO to embark upon the exercise of determining the tax liability of a non-resident recipient on a mere filing of objections to a demand u/s. As far as the resident payer is concerned. . 195(1) is concerned  All such contentions urged on the merits of the question of actual taxability are to be ignored as irrelevant and are not productive. 195(2)  Admittedly in all these appeals the assesses having not made any such application u/s. Ltd. This exercise can be undertaken by AO only on filing of actual return of income by the non-resident recipient. the limited option is to have applied to the AO as per s.« CIT v. 195(2). Samsung Electronics Co.

there can arise conflicting decisions and versions in so far as the tax liability of the non-resident is concerned at the time of 195(2) and on actual filing of return by such non-resident . an incorrect computation or to call in aid the actual determination of the tax liability of the non-resident . there is no other way of the resident payer avoiding the obligations cast on it by s. & Others (183 Taxman 313)(Kar) « HC Ruling/Observation  The only limited way of either avoiding or warding off the guided missile (obligation to withhold tax) is by the resident payer invoking the provisions of s. Ltd. the AO cannot embark on an exercise as though it is meant to determine the actual tax liability of the non-resident recipient. 195(2) and even here to the very limited extent of correcting an incorrect identification. 195(1)  Even in a situation where an application is made u/s.« CIT v. 195(2). Except for this method. Samsung Electronics Co. If such a situation is permitted to take place.

195(2) is only for extending a limited concession in favour of the payer when things are very clear or does not involve any doubt or ambiguity such as in a situation where the AO has actually examined the nature of payment and has indicated in an assessment order on the basis of return filed by the non-resident that no part of the receipt is taxable and if so based on this settled/undisputed factual/legal position.« CIT v. the resident payer by quoting the assessment order passed by AO for any earlier year seek for granting commensurate relief from the obligation for deduction of the percentage of payment to the non-resident . & Others (183 Taxman 313)(Kar) « HC Ruling/Observation  A situation of this nature should be avoided and it can be avoided if we should bear in mind that the exercise u/s. Ltd. Samsung Electronics Co.

« CIT v. Samsung Electronics Co.. without involving the question of actual determination of the tax liability of non-resident alone can constitute the subject matter for appeal u/s. In Prasad Productions Ltd. at variance with the rates as prescribed in the Finance Act or such arithmetical or factual errors committed by the AO. a Special Bench of the Tribunal . Ltd. 246A. & Others (183 Taxman 313)(Kar) « HC Ruling/Observation  Also an erroneous order and demand being raised by the AO u/s. Chennai has been constituted In view of the judgement of the Karnataka High Court in Samsung Electronics . 201 regarding with the incorrect description of the resident payer or incorrect computation of the amount to be deducted either by employing a wrong percentage for deduction.

Determination of tax liability  Significance of the words ´any other sum chargeable under the provisions of this Actµ in section 195(1) Ad-interim stay granted by the SC in GE India Technology . Ltd. 195(2) is must and important  Whether tax is required to be withheld on all types of payments including purchase of goods  Obligation to withhold tax v. Samsung Electronics Co.« CIT v. & Others (183 Taxman 313)(Kar) « Key Takeaways and Side Effects  Compliance u/s.

& Others (183 Taxman 313)(Kar) « Key Takeaways and Side Effects  It seems that HC has not read and understood the SC judgement in the case of Transmission Corpn. HC Ruling  Repercussion on the alternate procedure. i. in its entirety and holistically [CIT v. Ltd. the Role and Scope of a Chartered Accountant while issuing the certificate . Samsung Electronics Co. Sun Engineering Works (P) Ltd.. 195 wherein the thrust is on the chargeability to tax ² Approach of Revenue v.« CIT v. (198 ITR 297)(SC)]  Validity of Circulars issued by the CBDT with reference to s.e.

Samsung Electronics Co. 195 on the foreign remittances  Wrong Signal to international community . 195(2) ² simple issue v. complicated issue  Limited Powers of the Appellate Authorities while disposing the appeal against the order passed u/s. Ltd. & Others (183 Taxman 313)(Kar) Key Takeaways and Side Effects  Leads to mechanical approach of the tax authorities while issuing the certificate u/s. 195(2) and 201(1) ² Arithmetical or Factual Error  Scope and Powers of Authority for Advance Rulings on the ruling sought with regard to the applicability of s.« CIT v.

Application u/s 195(3) by Payee Section 195(3) Payee can also apply for receiving payment without deduction of tax at source Rule 29B permit an application by a non resident only if following conditions are satisfied Non resident has prior track record of assessment in India Non resident has been carrying on business or profession in India continuously for a period of 5 years Value of fixed assets in India exceeds Rs. 50 lakhs Should not have been deemed to be an assessee in default .

Thank You Vispi T. Patel & Associates Contact no : +91 98 6763 5555 Email id : vispitpatel@vispitpatel.com . Patel Vispi T.