THE INSTITUTE OF CHARTERED ACCOUNTANTS’ OF INDIA WIRC OF ICAI BY SUSHIL LAKHANI 1 WIRC OF

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THE INSTITUTE OF CHARTERED ACCOUNTANTS’ OF INDIA WIRC OF ICAI BY SUSHIL LAKHANI 1 WIRC OF Powered By Docstoc
					       THE INSTITUTE OF
CHARTERED ACCOUNTANTS’ OF INDIA



 WIRC OF ICAI




                              BY SUSHIL LAKHANI




                                              1
WIRC OF ICAI   18/07/2009   2
      OVERVIEW OF SECTION 195




WIRC OF ICAI                    3
  How this Section is different
   from other TDS provisions ?




WIRC OF ICAI   By SUSHIL LAKHANI   18/07/2009   4
      Snapshot of the Section

      Sec. 195(1) - Scope & conditions for applicability

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

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

      Sec. 195(5) - Powers to CBDT to make Rules




WIRC OF ICAI                 BY SUSHIL LAKHANI   18/07/2009       5
   Section 195(1) : Scope & Conditions

   Wide Scope of the section

   Conditions for application of Section 195
   a)“any person” - Includes a person having no taxable
   income

   b) “a non-resident” - Includes NRIs
                - does not include R but NOR

   c) “sum chargeable to tax (other than Salaries)”



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  Section 195(2) : Application by Payer to AO for lower
  deduction of tax:

  Difference between Section 195(2) & Section 197
  Form for this application ?
  •Appeal against order u/s. 195(2)
         (Section 248)
  within 30 days of payment of tax.
  Only if the payer bears the tax liability & not of receiver
  bears the tax
  Refund to deductor of tax deducted ? (Circular 790)
  •Revision possible u/s 263 against order u/s. 195(2)
            (BCCI Vs. DIT (96 ITD 263)

WIRC OF ICAI                 BY SUSHIL LAKHANI   18/07/2009      12
 Section 195(3) : Application by payee for lower deduction of tax ?

 •Rule 29B(2) – conditions
 •“Certificate” by AO.\


 •Consequences of non / short deduction of TDS
 •Disallowance u/s. 40(a)(i) or Section 58(1)(a)(ii)
 •Can deprecation be disallowed, if, TDS on capital expenditure not
 deducted? (3 SOT 798 (2005))
 •If the Indian Co. has not deducted the Tax at source u/s 195,Can the
 dept proceed to recover the tax from both?. i.e. Indian Party and
 Foreign party. (Explanation to Sec. 191 r.w. Section 205)



WIRC OF ICAI                       BY SUSHIL LAKHANI    18/07/2009       13
    Interest u/s. 201(1A)

   Cannot be levied if recipient has paid full tax (296 ITR 226
     (SC))


    Penalties - (Section 221; Section 271C)(Refer
     Hindustan Coca Cola (293 ITR 226 (SC))


    Prosecution - (Section 276 B)




WIRC OF ICAI                 BY SUSHIL LAKHANI   18/07/2009       14
         SCOPE OF INCOME OF A
               NON-RESIDENT



WIRC OF ICAI       BY SUSHIL LAKHANI   18/07/2009   15
  1. Business Profits          Taxable if Business Connection in India or
                               property or asset or source in India or trf.
                               of a capital asset situated in India.
  2. Salaries                  Taxable if services are rendered in India
                               [Section 9(1)(ii)] (Refer Eli Lilly (SC))
  3. Dividends                 Taxable if paid by an Indian Company
                               [Section 9(1)(iv)]- (At present exempt)
  4. Capital Gains on Shares / Taxable if situs of Shares / Property in
     Property                  India
  5. Rental from Properties    Taxable if situs of Property in India

  6. Interest/Royalty/FTS      Taxable if sourced from India




WIRC OF ICAI                    BY SUSHIL LAKHANI        18/07/2009       16
WIRC OF ICAI   BY SUSHIL LAKHANI   18/07/2009   17
  w.e.f.1st July, 2009 :
  CA Certificate to be obtained in Form
      No. 15CB

  Form 15CA to be furnished
  electronically by the assessee



WIRC OF ICAI        BY SUSHIL LAKHANI   31/05/2008   18
       Clause A – “name & address of beneficiary”
          • “Beneficiary” – meaning of – “Beneficial
            Owner” or “Recipient”?
       Clause B(13)– determination of a PE and
        profits of PE:
          • Whether CA duty bound to ascertain the
            existence of PE?
          • Determination of “attributable to PE” ?


WIRC OF ICAI                BY SUSHIL LAKHANI   18/07/2009   19
 CERTIFICATE BY A CA FOR REMITTANCE

    Some Issues:

       Consequence of difference of opinion between a CA and AO

       Consequence of change in the view due to an amendment or a
        judicial decision or circular subsequent to issue of certificate.

       Determination of any “special relation” between payer and payee.

       Tax residency certificate – if not available?

       Tax residency certificate—not sufficient -- dual residency?

       Validity period of tax residency certificate / undertaking /
        declaration from the payee – for a year or for single payment?


WIRC OF ICAI                       BY SUSHIL LAKHANI      18/07/2009       20
     Some Issues (Cont…):

          Whether CA certificate is an alternative to
           Order u/s 195(2)?
          “Non resident” status of the receiver – at what
           point of time to be considered?
            • at the time of signing of agreement or
            • the prior financial year or
            • making of remittance
          In absence of address in the agreement is the
           payer obliged to determine the status of
           purchaser for purchase of capital gains?


WIRC OF ICAI                BY SUSHIL LAKHANI   18/07/2009   21
  RBI Circular No. AP (DIR) Series
   Circular No. 03 dated 19th July,
   2007

  However, withdrawn through
  RBI’s letter



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WIRC OF ICAI   BY SUSHIL LAKHANI   18/07/2009   23
   Business (Connection) Receipts of a non-resident:


   Taxability under the Act, U/s 9(1)(i)
  •   Taxability if “business connection” exists or if asset or source in
      India.(Vodafone (Bom)(HC) & E-Trade Mauritius (Bom) (HC))
  •   Specific exclusions – Explanation 1(b); 1(c) & 1(d) of Section
      9(1)(i)




WIRC OF ICAI                     BY SUSHIL LAKHANI     18/07/2009       24
    BUSINESS INCOME (of NR) (Cont…)
    Section 9(1)(i) - (Cont…..)
    Specific inclusions – Explanation 2 to Section 9(1)(i)
    •Treaty concept of dependent agent introduced in Act
    •Agent need not be in India but must Act in India.

    •“Business Connection” – Interpretation of:
    •CIT Vs. R.D. Aggarwal & Co. (56 ITR 20)
    •Circular 23 of 1969 & Circular 786 (Commission on exports - 125 ITR 525;
    267 ITR 725) (Controversial view (278 ITR 97), (271 ITR 193)(AAR))

    •From other judicial rulings
          •existence of some organisation in India (223 ITR 416; 108 ITR
            874; 274 ITR 501(AAR))
    •Agency in India (239 ITR 879; 36 ITR 418; 120 ITR 887; 268 ITR 156 (AAR);
    etc)
    (Note: Explanation 2 now introduced to Section 9(1)(i))
    (refer Speciality Magazine (274 ITR 310 (AAR))



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BUSINESS INCOME (of NR) (Cont…)
“Business Connection” Interpretation of
From other judicial rulings (Cont…)

•Close relationship in India - (119 ITR 986)
•Asiasat’s case (85 ITD 478)
•Gutal Trading Est. in re (278 ITR 643)(AAR) (LO not “BC”)
•Taxation of BPO units (Circular 5 of 2004)
•Difference between Business Connection & Permanent
Establishment ?


WIRC OF ICAI                  BY SUSHIL LAKHANI   18/07/2009   26
  BUSINESS INCOME (of NR) (Cont…)

  SC observation regarding income arising from business
  connection – (288 ITR 408 (SC))

        Although section 9 of the Act raises a legal fiction, it must
         be construed having regard to the object it seeks to
         achieve (Maruti Udyog Vs. Ramlal (2 SCC 638 followed)

        There is a distinction between existence of a business
         connection and income accruing or arising from such
         business connection




WIRC OF ICAI                    BY SUSHIL LAKHANI     18/07/2009         27
BUSINESS INCOME (of NR) (Cont…)
SC observation regarding income arising from business connection
– (288 ITR 408 (SC))(contd…)
   Mere existence of a business connection may not result in
    income accruing or arising in India;
   Existence of a Permanent Establishment does not necessarily
    mean existence of business connection
   Where severable parts of a composite contract are performed in
    different jurisdictions, the principle of apportionment should be
    applied to determine profits taxable in each Jurisdiction.




WIRC OF ICAI                    BY SUSHIL LAKHANI    18/07/2009         28
  BUSINESS INCOME (of NR)(contd…)
  Situs of the source of income (SC observations (288 ITR 408)
  The source of income need not be the place where income
  accrues or arises (CIT Vs. Ahmedbhai Umerbhai (18 ITR 472
  (SC)) & CIT Vs. Kirk (1900) AC 588 (HL), Anglo-French Textile
  Co. Ltd. Vs. CIT (25 ITR 27 (SC)), Carborandum Co. Vs. CIT (108
  ITR 335 (SC), ITO Vs. Sriram Bearings Ltd. (224 ITR 724 (SC)).




WIRC OF ICAI                   BY SUSHIL LAKHANI   18/07/2009       29
 BUSINESS INCOME (of NR) (Cont…)
 Turnkey   Contracts:
 SC   Observation in 288 ITR 408;
           “The mere fact that contract is a turnkey contract would
            not itself mean that for the purpose of taxability the entire
            contract must be considered to be an integrated one;”
           “The very fact that supply and service segments were
            specified separately indicates that the liability of the
            assessee would also be different;”




WIRC OF ICAI                     BY SUSHIL LAKHANI      18/07/2009          30
   BUSINESS INCOME (of NR) (Cont…)

   TURNKEY CONTRACTS (Cont…)

   SC Observation in 288 ITR 408;(Cont….)

   “The payment for offshore supply and services was clearly

   demarcated – cannot be held to be a complete contract that has to

   read as a whole. (288 ITR 408)”




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  BUSINESS INCOME (of NR) (Cont…)

  Off-shore Supply: (288 ITR 408)
  If   title to goods passed outside India & payment outside India not taxable.
  Signing    in India not relevant.
  Performing     of certain activities in India (loading, unloading, inland transportation) not
  relevant.

  Payments to Foreign Agents

  Operation outside India ( CBDT Circulars 23 & 786)
          Not taxable in India – (125 ITR525),(267 ITR725)

          Contrary view taken by AAR in case of Wallace Pharma (278
  ITR 97) & Rajiv Malhotra 284 ITR 564 (AAR)



WIRC OF ICAI                                  BY SUSHIL LAKHANI             18/07/2009             32
  BUSINESS INCOME (of NR) (Cont…)
  Payment for supply and installation etc of equipment (CBDT circular 23)
        (243 ITR 459), (259 ITR 248) (229 ITR 735) (AP)

  Consideration for design & drawings
         Outright purchase of design and drawing is not royalty
         (190 ITR 626), (243 ITR 459),(94 ITD 211)(kol)




WIRC OF ICAI                     BY SUSHIL LAKHANI      18/07/2009          33
 Issues arising u/s. 195 in respect of certain specific
 payments.
 Royalties & FTS:
 Sec. 9(1)(vi) & Section 9(1)(vii):
 Payment in nature of Royalty & FTS:

 These sub-sections override Sec. 9(1)(i) (167 ITR 884)
 Difference between “Royalty” & “FTS”
 “Royalty” - Act Vs. Treaty
 “FTS” - Act Vs. Treaty
 “Make available” definition of FTS
 TDS where FTS Article is missing in Treaty


WIRC OF ICAI                          BY SUSHIL LAKHANI   18/07/2009   34
  Royalties And FTS
  Sec. 9(1)(vi) & Section 9(1)(vii):

  Place of Accrual
  •Accrue where service are utilized (SRK(230 ITR 206(AAR))
  •Accrue where the payer is situated(238 ITR 296)
  •Accrue where right to receive income arose (Rajiv Malhotra 284 ITR 564(AAR))




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          Royalty / FTS income is taxable in India if service is used / utilised in India
                            Place of rendering service not relevant

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               • Is the ratio of the decision of the SC still valid in the light of above explanation?



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  Royalties And FTS (contd…)
  Place of Accrual (contd…)
  SC in 288 ITR 408
     For being covered U/s. 9(1)(vii) two conditions to be fulfilled:
           Services should be rendered in India; and
           Services should be utilized in India.
       Section 9(1)(vii) must be read with Section 5 which takes within its purview the
            territorial nexus”
             Sufficient nexus between the rendering of services and territorial limits of
             India necessary to make the income from offshore services taxable
             Even after insertion of (vi) & (vii) in Section 9, the provisions of 9(1)(i)
             continue to govern such cases
             To be covered in Sec. 9(1)(vii) the services should have a “live link” with
             India.
           Ratio of IHHI Ltd. (SC)may not apply to Composite contracts.(Refer
            Ansaldo Energia SPA Vs. ITAT ,(2008), 115 TTJ (Chennai), 942)
       (Caution:- Ratio of IHH (SC) may not apply to composite contracts (Refer
                      Ansaldo Energia SPA (Chennai)
WIRC OF ICAI                             BY SUSHIL LAKHANI               18/07/2009     39
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 Royalties And FTS (contd…)

 Consideration for designs & drawings
 outright purchase not royalty (190 ITR 626) (Pfizer’s Case (271 ITR 101(AAR))
 contrary (94 ITD 211)
 when it forms part of composite contract for supply of machines (243 ITR 459; 259
 ITR 248; 255 ITR 354) (contrary – 271 ITR 193(AAR) & 279 ITR 165 (AAR))
 Services provided in course of business not FTS (237 ITR 142) (contrary – 271
 ITR 193(AAR) & 279 ITR 165 (AAR))
 Payment for initial know-how rendered from abroad (148 ITR 774; 145
 ITR 84; 143 ITR 720; 164 ITR 419 & 224 ITR 724 (SC))
 “information” – meaning
       HEG (263 ITR 230)
       Dun and Bradstreet Espana (272 ITR 99(AAR))
       Wipro Ltd. (94 ITD 9 (Bangalore)) & STPI (3 SOT 529 (Bang))



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WIRC OF ICAI   BY SUSHIL LAKHANI   18/07/2009   44
  Royalties And FTS (contd…)
   Software / E-Commerce Payments

     License to use Software or for electronic downloading of computer programs
     / digital content may give rise to use of “copyright” as per Copyright Act.
     Is it, thus, covered in “royalty”?

  The Test (OECD / IRS View) : What is the consideration for ?
   if for rights to use copyright then royalty;

   if use of copyright only incidental, then business profits;

   if for a copyrighted article then business profits;




WIRC OF ICAI                            BY SUSHIL LAKHANI         18/07/2009       45
  Royalties And FTS (contd…)

  The Test (OECD / IRS View) : What is the consideration
  for ? (Cont)

  if for rights in the copyright i.e. for transfer of ownership
  then Business Income or Capital Gains.
  if for rights in relation to copyright – to use & make
  copies for operation only within its business – then
  business profits.
  if Capital Gains a Mixed Payment i.e. sale of hardware
  with embedded software then break-up unless one part is
  the dominant part & other parts are ancillary.

WIRC OF ICAI                   BY SUSHIL LAKHANI   18/07/2009      46
 Royalties And FTS (contd…)

 Softwares:
 Favorable:
 •Samsung Electronics (94 ITD 91 (Bangalore)
 •Lucent Technologies (82 TTJ 163)
 •TCS (271 ITR 401)
 •Nokia, Erricson and Motorola (95 ITD 269)
 •Sonata Information Technologies (103 ITD 324 (Bang))
 •Motorola Inc (95 ITD 269 (Delhi-SB)

 Against:
 •Head Start (285 ITR 530 (AAR))
 •IMT Labs (287 ITR 450 (AAR))



WIRC OF ICAI                       BY SUSHIL LAKHANI   18/07/2009   47
WIRC OF ICAI   BY SUSHIL LAKHANI   18/07/2009   48
  Royalties And FTS (contd…)
  Sec. 9(1)(vi) & Section 9(1)(vii) (Cont…):
  Payments for repairs
  • Sahara Airlines (79 TTJ 268)
  • Lufthansa Cargo (91 ITD 133 (Delhi))
  • Airport Authority of India (273 ITR 437)
  • Contrary view – Mannesmann Demag (26 ITD 198)

  Payments for testing charges
  • South West Mining Ltd (278 ITR 233)
  • Wallace pharmaceutical Pvt. Ltd (278 ITR 97)

  Payments to Credit Rating Agency – Taxable as royalty under the Treaty as
  held in (Essar Oil)(4 SOT 161 / Mum)
  Payment for services related to GDR Issue(80 TTJ 120)
  Connectivity payment
  -Standard facilities - (Wipro (80 TTJ 191); Skycell (251 ITR 53))
  -Satellites (Asiasat (85 ITD 478)(Del), & (Raj TV (Unreported)

WIRC OF ICAI                         BY SUSHIL LAKHANI    18/07/2009           49
WIRC OF ICAI   BY SUSHIL LAKHANI   18/07/2009   50
 Royalties And FTS (contd…)

 Sec. 9(1)(vi) & Section 9(1)(vii) (Cont…):

 Payments for Services to Airlines:
 • British Airways (73 TTJ 519)
 • Lufthansa German Airline (83 TTJ 113)

  Payments to agent of a shipping company:
 • Circular 723 dated 19/09/1995


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   Reimbursement of incidental expenses in addition to fees.

   Reimbursement of allocated / shared costs.

   Payment for services at cost or cost plus basis

   Reimbursement of cost of third party.

   Reimbursement      of   salaries        &     living   allowance    of
   deputees.




WIRC OF ICAI                  BY SUSHIL LAKHANI            18/07/2009        58
   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))

   CIT Vs. Dunlop (142 ITR 493 (Cal))

   Danfoss Ind. (268 ITR 1 (AAR))



WIRC OF ICAI                         BY SUSHIL LAKHANI   18/07/2009   59
   Reimbursement of allocated or shared cost
   Danfoss Ind. (268 ITR 1 (AAR))

   Reimbursement of services at cost or cost plus basis
   Timkin (273 ITR 67 – AAR)




   Reimbursement of cost of third party:

   •Wallace Pharma (278 ITR 97 – AAR)
   •Reimbursement salaries & living allowances to deputees:

   •Held salaries of technicians:
   HCL Infosystems (274 ITR 261 – Delhi)

   CIT Vs. BHEL (252 ITR 218 – Delhi)


   •Held as FTS & salaries:
   •AT & S India (P) Ltd. (287 ITR 421 (AAR))


WIRC OF ICAI                          BY SUSHIL LAKHANI       18/07/2009   60
SUSHIL LAKHANI
Lakhani & Associates,
Chartered Accountants
4th Floor, Bharat House,
104, Mumbai Samachar Marg,
Fort, Mumbai-400023
Tel: +91-22-40693946
(M) : 9821111852
E-mail : sushil@lakhaniandassociates.com

				
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Description: Tax Residency Certificate, Section 195, Income Tax India document sample