Applicability of TDS on Government Company on International Arbitration

CA Renu Singhal

Any person paying to a non resident, not being a company or foreign company, shall deduct income tax. Payment made outside India is subject to TDS except in payment of Salary or Dividend. This explanation is derived from Section 195(1) of Income tax act which reads as.

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 section 194LD] 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 that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :

Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.

Explanation 1.—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has—

 (i) a residence or place of business or business connection in India; or

 (ii) any other presence in any manner whatsoever in India.

Therefore, payment of Arbitration fees to a non resident is subject to TDS as it is not covered under the exception of Section 195.

However, RNOR is not covered under Section 195.

‘Person’ is defined under Section 2(31) of IT Act and ‘Residential Status’ of a Person can be determined under Section 6 of IT Act.

Point of time when TDS to be deducted

At the time of Credit or Payment of fees whichever is earlier.

Applicability of WHT

♣ Withholding tax is applicable on payment of income to all persons including non-resident, irrespective of the them having a residence or place of business or business connection or any other presence in India.

♣ All Payment to non-resident, not being covered under exceptions, by specified persons/ cases 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.

DTAA RELIEF

Non-Resident who wish to avail benefits of DTAA, are required to obtain Tax Residency Certificate (TRC) to the deductor bank.

TRC is issued by the tax/ government authority of the country where NRI resides.

Section 90(4) of IT Act, reads as

An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless ⁶²[a certificate^62a of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.]

Therefore, an assessee, not being a resident, to whom a DTAA  applies,  shall  not  be  entitled  to  claim  any  relief  under  such  DTAA  unless  a  certificate, containing  prescribed  particulars,  of  his  being  a  resident  in  any  country outside India or specified territory outside India, as the case may be, obtained by him from the Government of  that country.

Royalties and fees for technical services Also Article 13 of UK/INDIA DOUBLE TAXATION CONVENTION,  reads as

  (1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed:

(a) in the case of royalties within paragraph (3)(a) of this Article, and fees for technical services within paragraph (4)(a) and (c) of this Article;

(i) during the first five years for which this Convention has effect;

(aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contracting State or a political subdivision of that State, and

(bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and

(ii) during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and

(b) in the case of royalties within paragraph (3)(b) of this Article and fees for technical services defined in paragraph (4)(b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services.

(4) For the purposes of paragraph (2) of this Article, and subject to paragraph (5), of this Article, the term “fees for technical services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provisions of services of technical or other personnel) which:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph (3)(a) of this Article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph (3)(b) of this Article is received; or

(c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.

It is well settled after reviewing Article 13 that Arbitration services are of the nature of Technical Services and Fees for technical services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services.

Therefore, fees payment against such services outside India to Non Resident is subject to WHT/TDS which in turn can avail benefits of UK/ India DTAA relief.