ca. pankaj shah |f.c.a.|c.s.|llb(hons.)|b.b.a.| foreign remittances u/s 195 of income tax act may...

CA. PANKAJ SHAH|F.C.A.|C.S.|LLB(Hons.)|B.B.A.|

Foreign Remittances u/s 195 of Income tax Act

May 10, 2014

FEMA - Foreign Remittance Current Account remittances like Trading

remittances, Rent, Dividend, Interest, etc are freely remittable unless prohibited

Capital Account transactions like Investment in Shares, Property, Sale proceeds of Assets are generally restricted unless specifically allowed

NRI/PIO are allowed to remit upto USD One Million p.a. out of funds in NRO Account

G.J. Shah & Company.2

Remittance Procedure as per RBI

RBI has in A.P. (DIR Series) Circular No. 56, dated November 26, 2002 has instructed the Authorised Dealers (Banks) to make Remittance abroad after obtaining following:

Declaration from the Remitter in Form A2 (FEMA) specifiying nature and purpose of remittance

Income tax Clearance


Income tax Clearance Under Income tax following facilities

are available for Income tax Clearance

Sec. 195(2) - Application by payer to A.O. for lower deduction

Sec. 195(3 & 4) - Application by payee to A.O. for lower deduction of Tax

Sec. 195(5) - Powers to CBDT to make Rules (Rule 37BB)Eg. Travel for Pilgrimage, Student Education, Equity Investment

Section 195(6) – C.A. Certificate in Form 15CB


Tax Determination

Under Income tax if Remittance amount is

Taxable in hands of NR – Clearance after tax is paid Taxable If income is Received in India Taxable if income is accrued in India

Not taxable – Clearance on determination that no tax payable


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Section 195 (1)

“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”

G.J. Shah & Company.

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Objective of S. 195

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 not have assets in India for subsequent recovery


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Scope of S. 195 Person responsible to deduct tax - Person as defined in section 2(31) - Includes non-residents and foreign companies

• Satellite Television Asia Region Ltd (99 ITD 92)(Mum)• 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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Scope of S. 195 What are the payments covered?

- Any sum chargeable under the Act- Except Salary and dividends referred to in section 115-O

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


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Section 4 and 195

Section 4(2) – “chargeable”

Section 195 not a charging but a machinery provision to give effect to Section 4(2). Eli Lily’s case (312 ITR 225)(SC)

Withholding tax is an offshoot of chargeability - not independent of it.

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

G. E. India Technologies v. CIT (327 ITR 456)(SC) Cooper Engineering v CIT (68 ITR 457) (Bom) Transmission Corporation’s case (239 ITR 587) (SC). Vijay Ship Breaking Corporation v. CIT (314 ITR 309) Maharashtra State Electricity Board v. DCIT (90 ITD 793)


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Section 5 and Section 9

Section 5(2)(b) defines ‘Total Income’ of ‘non-resident’ to include income which ‘accrues’ or ‘arises’ or is ‘deemed to accrue or arise’ in India.

Section 9 explains the meaning of the words “deemed to accrue or arise in India’ used in section 5(2)(b)

Right to tax – some reasonable nexus with India Residence; or Source

[Wadia v. CIT (17 ITR 63)(PC)]


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Impact of DTAA

Section 90(2) provides that where a DTAA exists beneficial of

Income tax Act or DTAA

shall apply

However for availing benefit of DTAA it is compulsary to obtain TRC of the Payee Non Resident


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Accrue or Arise – Business Income

Sale of Goods or Service in India.

Through a Fixed place of Business / PE in India

Profits attributable to Indian operations taxable in India

Eg. HSBC Bank (Branch of HSBC Bank Singapore)


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Accrue or Arise – Capital Gains

Subject Property located in India

Transferred and Gains accrue to NR

Taxable in India as Income generates in India

However, Treaty with Tax Havens like Mauritius, Singapore provide that gains are taxable in Country of Residence. Azadi Bachao Andolan versus Union of India (SC)


Deemed to accrue or arise in India – meaning

Section Sources Of Income

Description

9(1)(i) Business Income

Income from a business connection in India or through or from any property or capital asset or source of income or transfer of capital asset situated in India.

9(1)(ii) Salaries Salaries for services rendered in India.

9(1)(iii) Salaries Salaries by Govt. for services outside India.

9(1)(iv) Dividend Dividend paid by an Indian Company outside India. (now Exempt)

9(1)(v) Interest Interest by Govt. or by a resident (unless for a business or source outside India)

9(1)(vi) Royalty ‘Royalty’ by Govt. or a resident (unless for a business or a source outside India).

9(1)(vii) FTS ‘Fees for Technical Services (FTS)’ by Govt. or a resident (unless for a business or a source outside India).G.J. Shah & Company.15

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BUSINESS CONNECTION Taxability of a Business Income of Non-Resident Sec. 9(1)(i)

Taxability if “Business Connection“ exists or if asset or source in India. (Vodafone)

R.D. Agarwal (56 ITR 20(SC)); Cir. 23 of 1969 & Cir. 786)

Taxable only to the extent “reasonably attributable” to operations in India.

Morgan Stanley-292 ITR 416 (SC);


Import Payments

Remittance for Import Purchases to overseas supplier

Proceeds are Business Income of the Supplier NR

If the Supplier does not have a Permanent Establishment in India then No tax

However 15CB required for remittance of Import ProceedsA.P. (DIR SERIES) (2007-08) CIRCULAR NO. 3, DATED 19-7-2007


Overseas Commission to NR Agent

NR Agent provides services to locate buyers for Export

The same is business income of NR

In absence of PE/ Business connection in India – Not taxable

DCIT v Eon Technology ( P) Ltd ( 2011) 46 SOT 323, Dy. CIT v Devi’ s Laboratories Ltd ( 2011) [140 TTJ 746]


19

CIT Vs. TELCO (245 ITR 823 (Bombay)) CIT Vs. Industrial Projects (202 ITR 1014-Delhi) Clifford Chance 82 ITD 106-Mumbai) Mahindra & Mahindra Ltd. (10 SOT 896 (Mum)

Against: Cochin Refineries (222 ITR 354 (Ker) Hindalco (278 ITR 125 (AT)

Reimbursement of Expenses:

TAXABILITY OF REIMBURSEMENT OF EXPENSES


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Explanation to S.9(1)(v), (vi) &(vii)Interest, Royalty, FTS

Taxable whether or not, —(i) the non-resident has a residence or place

of business or business connection in India; or

(ii) the non-resident has rendered services in India.”

Nullified Jindal Thermal Power Company Ltd. vs. DCIT (TDS) (182

Taxmann 252) Bombay High Court in Clifford Chance vs. DCIT (176

Taxmann 458)G.J. Shah & Company.

Case Studies

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Interest Loan taken from a Foreign Bank abroad for

Indian Project Overseas Project

Interest is being paid to Lender Bank abroad

Taxable or Not?

Interest paid to Bank resident in Mauritius ?


23

Royalty Payment for “right to use” an Asset

Whether or not used in India or located in India

Imported Software?


24

Fees for Technical Services Includes payment in consideration for the services of

managerial, technical or consultancy nature

Whether or not PE or received in India DTAA – “make available”

USA, Netherlands, U.K. Rate of Tax – 25%


25

Fees for Technical Services Fees for Due Diligence carried out in South Africa?

Fees to Foreign Recruitment Agency in Resident of South Africa Ressident of USA

Fees for Repair of Imported Machinery to USA Co.

Fees for technical service paid to UAE Company which does not have clause of ‘FTS’?


Golden Rules (as per ACT)


Income Received in India – Taxable Income Accrued in India - Taxable

Nature of Remittance TAXABILITY

BUSINESS INCOME PE MUST

INTEREST PE IRRELEVENT

ROYALTY PE IRRELEVENT

FEES FOR TECHNICAL SERVICES

PE IRRELEVENT

CAPITAL GAINS ASSET OR BUSINESS IN INDIA

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C. A. Certificate Reasoning for nil/lower deduction.

Determination of residence for deduction

Precautions Representation – No PE Copies of Back-up papers. Certificate of Fiscal Residence must for Treaty Benefit


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“Rates in Force” & S. 206AA

Section 2(37A)

Effect of DTAA

CBDT Circular No. 728 dated 30.10.95

Whether surcharge leviable if DTAA rates adopted.

Effect of 206AA


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Consequences of non-deduction

Deductor deemed “assessee in default” – S. 201(1)

Interest @ 15% p.a. Section 201(1A).

Penalty u/s. 221

Penalty u/s. 271C.

Prosecution u/s. 276B.

Section 40(a)(i)

Section 163


**Certificate No.2

Date: April 18, 2014 Signature:____________________

Form 15CA

Part A: To be filled up if

the remittance is chargeable to tax and

does not exceed fifty thousand rupees and

the aggregate of such remittances made during the financial year does

not exceed two lakh fifty thousand rupees

Part B: To be filled up if

the remittance is chargeable to tax and

exceeds fifty thousand rupees and

The aggregate of such remittances made during the financial year

exceeds two lakh fifty thousand rupees

THANK YOUPankaj G. Shah|F.C.A.|C.S.|LLB(Hons.)|BBA|

G.J. Shah & CompanyChartered Accountants

Mob-969 189 [email protected]

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