TDS on payments to Non-Residents: An Overview of Section 195

As we are in the era of digital economy, where BEPS action plans has been issued by OECD to tax digital transactions. With the increase in global transactions, Income tax department is also keeping their bird’s eye to the payments made to a non-residents. There has been substantial increase in foreign remittances from India. Indian Income tax act levy’s withholding taxes on remittances made to non-residents. In this article I’ll broadly detail section 195, where a wider scope has been given for any payments made to non-residents. Let us understand applicability of section 195.

Indian Income Tax Act, 1961:

Any person responsible for paying to a non-resident, not being company, or to a foreign company, any interest (Other than covered u/s 194LB & 194LC) or any other sum chargeable under the provisions of this Act 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 an account payee Cheque or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

General Issues:

1. When Taxes are required to be withheld u/s 195?

• Withholding u/s 195 is attracted only in cases where;
  Remittances are made to non-residents and Such sum is chargeable under the act as per Section 5 read with Section 9.
• Chargeability as per DTAA needs to be taken into consideration for following incomes:
  1. Royalty Income or FTS
  2. Business Income
  3. Independent Personal Services
  4. Dependent Personal Services
  5. Other Income
• Judicial Reference: In case of GE India Technology Cen. (P) Ltd. (2010), Supreme Court held that any payments to non-residents will be subject to withholding tax only when such payments are chargeable to tax in India as per sec. 5 & 9 of the act.

2. If a Non-resident while making payment to another Non-resident will be required to withhold taxes as per Indian Income Tax Act, 1961?

• As Per Explanation 2 inserted by Finance Act, 2012 it has been specifically clarified that Any Person (As mentioned in the Act) shall be deemed to have always include all persons, Residents as well as Non-residents.
• Section 195 will be attracted in case if a NR is making payment to another NR, therefore a careful tax planning is needed while NR is remitting funds in respect of business connections in India.
• Judicial Reference: In famous Vodafone case where the entities involved in the transaction were Non-residents (NR), question was raised before SC on the applicability of Section 195 on the offshore selling of shares by two NR entities. Although SC took the stand that Section 195 would mean any person who is resident of India and it would not be applicable on extra territorial jurisdiction. Post SC decision Explanation 2 has been inserted by Finance Act, 2012.

3. On what amount taxes to be withheld?

• As per section 195, taxes to be withheld from Any Sum which is Chargeable under the ITA. From the act it can be interpreted that TDS is required to be deducted on Income Component instead from Gross Payment. Also act specifically outlines words “at the time of Credit of Such Income” which clears the standing of the act. On the other hand while requiring to deduct TDS for domestic payments deductor is required to deduct TDS on Gross payments.
• Professional while advising their clients should ensure that their Non-Resident clients while raising invoices to a resident, carefully differentiate the amount of reimbursement of expenses and markup over it. In order to avoid TDS deduction on the gross amount.
• Judicial Reference: In case of Coca Cola India Inc. vs DCIT (2016), Delhi tribunal held that where reimbursement of expenses are made along with markup, only markup amount is liable to be considered for tax deduction purposes.
• Recently Delhi ITAT in case of DLF Projects Ltd., wherein it has been held that only the markup under manpower supply agreement is subject to withholding tax and not the actual cost/ reimbursement for secondment. Also the facts of the case made clear that there should be clear distinction between the amount of reimbursement and amount of markup in the invoice being raised by service provider.

4. Circumstances where Payer is not able to determine on what amount taxes to be withheld?

• The Income Tax Act, 1961 has provided a remedial measure wherein, under cases where payer is not able to determine amount of income which is chargeable to tax in India on which taxes to be withheld, can make an application to AO. Wherein Payer can ask AO for determining appropriate portion of sum chargeable to tax.
• Such application can be made on a plain paper. No specific format has been provided for the same.
• It should be noted that Act has been provided remedial measure wherein application can be filled only for determination of sum chargeable to tax and not for the determination of rate of tax.

5. Remittances made by a mode other than Cash or through Bank Transfers??

• There are times where it has been noted that Payer and Payee enters into contractual obligations wherein conditions are drafted in such a manner that payer might not be required to make payments in cash or through bank transfers.
• In such situations it should be noted that Income Tax Act has specifically included “any other mode of payment” under section 195. Hence professionals should take care of such transactions while issuance of FORM 15 CA/CB.
• Judicial Reference: In Kanchanganga Sea Foods vs CIT [2010], Supreme Court held that realization of sale consideration in kind shall not mean that there was no receipt in India. Assessee was thus liable to deduct TDS u/s 195 of the Act on the payment made to non-resident.
• Judicial Reference: In another ruling of Right Tunneling Co. Ltd. Delhi ITAT held that mere adjustment of book entries to settle down an account would amount to constructive payment for the purpose of applicability of the provisions of section 195 of the Income Tax Act, 1961.

6. Some unique features of Section 195

• No threshold limits have been specified for section 195.
• Unlike personal payments are exempted u/s 194C etc., no exclusions for the same have been made under section 195. (All payments to Non-residents are covered except salaries).
• No distinction has been made among different legal characters of entities. Individual, HUF, Firm, Company or any other form of entity all will be covered
  under section 195.
• Section 195 covers only Non-resident entities and not RNOR’s.

Documentation:

1. Every payer while making payment of any sum to a non-resident, whether or not chargeable to tax under the provisions of this Act, shall be required to furnish information in Form 15 CA/CB as per section 195(6).

2. Procedure for filling of Form 15CA/CB has been separately prescribed under Rule 37BB of the Income Tax Act.

3. In cases where the remittances are made to a NR entity and PE of such entity doesn’t exists in India. It is advised to ask for a “NO PE Certificate” from Payee. The document will be helpful for future references.

4. It is also advised to ask for a “Tax Residency Certificate (TRC)” from the payee, to ensure applicability of relevant DTAA and its provisions.