a) Scope and applicability
Finance Act, 2012 extended the obligation to withhold taxes to non- residents irrespective of whether the non-resident has –
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.
The aforesaid amendment was introduced with retrospective effect from 1 April 1962.
The amendment results in a significant expansion in the scope of withholding provisions under the Act and will cover all non-residents, regardless of their presence/ connection in India.
The Supreme Court in the case of Vodafone International Holdings B.V. had observed that the provisions of Section 195 of the Act would not apply to payments between two non- residents situated outside India. The Supreme Court also referred to tax presence as being a relevant factor in order to determine whether a non-resident has a withholding obligation in India under Section 195 of the Act.
Keeping in view the observations of the Supreme Court, it is suggested that the amendment should be modified to restrict the applicability of withholding tax provisions to residents and non-residents having a tax presence in India.
At least, it should be clarified that the amendment will not have retrospective application.
b) Time limit for Issuance of “general or special order”
Section 195(2) provides where a payer considers that whole of the sum being paid to a non-resident is not chargeable to tax, he may make an application to the Assessing Officer to determine by general or special order, the appropriate portion of the sum so chargeable. It may be noted that no time limit of passing such order has been prescribed in the Act, which causes undue hardship in genuine cases.
It is suggested that an appropriate time limit say thirty (30) days may be imposed for passing such general or special order by the Assessing officer.
Further, where an application is rejected, the Assessing Officer may be required to pass a speaking order after providing a reasonable opportunity of being heard to the applicant.
(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)
c) Withholding tax on reimbursements [Section 195 of the Act]
Cross border transactions may result in reimbursements of expenditures / costs incurred on behalf of the Indian company by the foreign parent/group company.
Contrary positions have been taken by various judiciaries on the issue of withholding tax on reimbursements made by an Indian company to its foreign parent / group company.
There is no clear view with respect to the same. Further, noncompliance with withholding tax provisions will attract dis allowance under section 40(a)(i) of the Act including interest and penal proceedings.
It is suggested that a clarification, perhaps by way of a CBDT circular, stating that withholding tax would not be applicable for specific cases of reimbursements, would help reduce undue litigation in this regard.
d) Consequential amendment required in section 204
Section 195(6) is amended w.e.f. 01.06.2015 to provide that the person responsible for paying to a non-resident (not being a company) or a foreign company, any sum, whether or not chargeable under the provisions of the Income-tax Act, 1961, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed.
However, consequential amendment has not been made in section 204(iii), defining “person responsible for paying” in case of credit, or, as the case may be, payment of any other sum chargeable under the provisions of this Act, to mean the payer himself, or, if the payer is a company, the company itself including the principal officer thereof.
The above definition of “person responsible for paying” given in section 204(iii) is in relation to credit or payment of any sum chargeable under the provisions of this Act, and is hence, relevant in the context of section 195(1). However, the said definition has to be amended to make the same relevant in the context of section 195(6) also.
Further, in section 204, the “person responsible for paying” has been defined for the purposes of the foregoing provisions of Chapter XVII and section 285. Since section 285 is in respect of submission of statement by a non- resident having liaison office, the definition of “person responsible for paying” given in section 204 is not relevant in the context of section 285.
Consequently, taking into consideration the above issues, section 204 needs to be appropriately amended.
A penalty of Rs. 1 lakh is leviable under section 271-I for failure to furnish information or for furnishing inaccurate information under section 195. The penalty is quite high, considering that the reporting requirement may be relating to a transaction which is not be chargeable to tax.
Also, while the meaning of “person responsible for paying” has been defined under the Act, “person responsible for collecting” has not been defined anywhere in the Act. The meaning of “person responsible for collecting” may be incorporated in the Act for clarity.
(i) Section 204 may be amended as follows –
For the purposes of the foregoing provisions of this Chapter
and section 285, the expression “person responsible for paying” means –
‘(iii) in the case of credit, or, as the case may be, payment of any other sum chargeable under the provisions of this Act, or in the case of furnishing of information relating to payment of any sum to a nonresident (not being a company), or to a foreign company, whether or not such sum is chargeable under the provisions of the Act, the payer himself or if the payer is a company, the company itself including the principal officer thereof.’
(ii) The penalty may be reduced, in case non- furnishing of information relates to a transaction not chargeable to tax.
(iii) The meaning of “person responsible for collecting” may be incorporated in the Act.
e) Section 195- Clarification required
In section 195, Clarification on TDS from payments to non-residents having no Indian branch/ fixed place/ Permanent Establishment in India should be inserted. In various cases, Income-tax department attracts the provision of section 195 and ask the assessee to deduct TDS. For example, when expenses such as commission payment is done by the Indian Residents to Foreign Residents having no branch/fixed place or Permanent Establishment in India and who work outside India and they help in promoting and sales of Indian Goods then the Income-tax department attracts the provision of section 195 and ask the assessee to deduct TDS.
Hitherto, the export commissions paid to foreign agents were never in question of taxation in India. This was fortified by Circular No. 23 dated 23 July 1969 which stated that where a foreign agent of India exporters operates in his own country and his commission is usually remitted directly to him and is, therefore, not received by him or his behalf in India, such an agent is not liable to income tax in India on the commission.
Later Circular No. 786 dated 7 February 2000 emphasized the clarification in the above circular and laid down the law that where non-resident agent operates outside the country, no part of his income arises in India and since the payment is usually remitted directly abroad, it cannot be held to have been received by or on behalf of agent in India. Such payment were therefore, held to be not taxable in India.
In 2009, vide circular No 7, both the above circulars namely Circular No. 23 dated 23-07-1969 & Circular No. 786 dated 07-02-2000 were withdrawn, reasoning that interpretation of the Circular by some of the taxpayers to claim relief is not in accordance with the provisions of section 9 of the Income-tax Act, 1961 or the intention behind the issuance of the Circular.
With the withdrawal of the circulars, it was left to the courts to decide the issue afresh.
In order to avoid litigation it is suggested that a suitable amendment in form of Explanation should be inserted in section 195 of the Income-tax Act or alternatively an appropriate clarification by way of circular may be given
f) Applicability of Rule 37BB read with Section 195 for making remittances outside India
Remittance under Liberalized Remittances Scheme of RBI
Amended Rule 37BB(3)(i) of the Rules exempts remittances as per the provisions of Section 5 of the FEMA read with Schedule-III i.e. only current account transactions.
As per Section 5 of the FEMA, any person may sell or draw foreign exchange to or from an authorized person if such sale or drawl is a current account transaction provided that the Central Government may, in public interest and in consultation with the Reserve Bank of India, impose such reasonable restrictions for current account transactions as may be prescribed.
The Master Direction No. 7/2015-16 dealing with the Liberalized Remittance Scheme (LRS) is a liberalization measure to facilitate resident individuals to remit funds abroad for permitted current or capital account transactions or combination of both.
The press release issued by the CBDT on 17 December 2015 states that Form 15CA and 15CB will not be required to be furnished by an individual for remittances which do not require RBI approval under the LRS. However, it may be noted that LRS does not find any specific mention in the amended Rules.
LRS is a wider term as it includes within its scope both permissible capital and current account transactions. The amended Rules is silent with respect to the capital account transactions under LRS.
Capital account transactions should be specifically included in the exclusion list of Rule 37BB(3)(i) of the Rules read with Section 195(6) of the Act.
g) Penalty for failure to furnish information or furnishing inaccurate information under Section 195
The Finance Act, 2015 has introduced penalty (Section 271-I of the Act) in case of failure to furnish information or furnishing of inaccurate information as required to be furnished under Section 195(6) of the Act, to the extent of INR one lakh.
It is not clear whether the penalty is qua the payment made or qua the transaction or qua the contractual obligations for a specific financial year. Therefore, the same should be clarified in a suitable manner.