Overview of Provisions for Withholding Tax
1.0 The provisions of “chapter XVII-Collection and Recovery of tax” contains provisions of deduction and collection tax at source. The sub-chapter “XVII-B Deduction at source” contains therein 58 sections dealing with provisions of TDS from Section 192 to Section 206AB. In these 58 sections, there are 39 sections between section 192 to section 196D, in which there are reference to deduction of TDS on various types of incomes by various persons as paid. Apart from these, there is sub-chapter “XVII-BB Collection at Source”which contains 5 sections dealing with TCS starting from Section 206C to 206CCA.
1.1 To Implement and accommodate the provisions of withholding taxes as described above, there are 30 rules under Part VI of Income Tax Rules, 1962, starting from Rule 26 to 37BC and 11 rules under Part VIA from Rule 37C to 37J. It also contains various types of forms starting from Form No. 13 to Form No. 27Q , 39 forms in all to comply with the TDS & TCS provisions.
1.2 Therefore, the TDS & TCS provisions are very comprehensive in itself and person who is required to comply with such tedious provisions will have to make optimum efforts. Further, it is also to be noted that the consequences of non-compliance of withholding tax provisions are very drastic, such as
(a) Section 40(a)(i), (ia) – disallowance for non-deduction/non-remittance of TDS
(b) Section 201(1) – assessee will be considered as “assessee in default”
(c) Section 201(1A) – Interest for non-deduction and/or delay in remittance of TDS
(d) Section 221 – Penalty payable when tax in default
(e) Section 271C & 271CA – Penalty for failure for deduction/collection of tax at source
(f) Section 272A(2) – Penalty for non-submission of TDS/TCS returns
(g) Section 276B & 276BB – Prosecution for delay/default in remittance of TDS/TCS
1.3 Considering the above background, it becomes all the more important for one to make sure that proper compliance is carried out as far as provisions of TDS/TCS are concerned and it is apt to state that when there is a doubt about whether or not withhold, do the withholding and when there is uncertainty about rate of deduction, deduct at higher rate. Ultimately, it is only a withholding obligation and mode of payment/collection of taxes and not the ultimate discharge of tax liability.
Withholding Tax provisions for non-residents
2.0 Under chapter XVII-B there are totally 18 sections which apply directly or indirectly for deduction of tax at source on non-residents payees. Out of these 8 sections are generic sections which are applicable to persons irrespective of residential status i.e. applies both to residents as well as non-residents which are listed below
· Section 192 – Salary
· Section 192A – Payment of accumulated balance due to an employee
· Section 194B – Winnings from lottery or crossword puzzle
· Section 194BB – Winnings from horse race
· Section 194G – Commission etc on sale of lottery tickets
· Section 194LBB - Income in respect of units of investment fund.
· Section 194LBC(2) - Income in respect of investment in securitization trust.
· Section 194N - Payment of certain amounts in cash.
And there are also 10 sections as listed below, which are specifically applicable to non-residents.
· Section 194E – Payments to non-resident sportsmen or sports associations
· Section 194LB – Income by way of interest from infrastructure debt fund
· Section 194LBA(2) / (3) – Distributed income referred to in section 115UA
· Section 194LC – Interest payable by a specified company or a business trust
· Section 194LD – Interest payable to FII or QFI
· Section 196A – Income in respect of units of non-residents
· Section 196B – Income from units
· Section 196C – Income from foreign currency bonds or shares of Indian company
· Section 196D – Income of Foreign Institutional Investors from securities
· Section 195 – Other sums
2.1 All the sections, except section 195 as cited above, are applicable for specific nature of income/transactions. Whereas section 195, is a generic section applicable for deduction of TDS on any “other sums” paid/payable to a non-resident. As this section is very generic, the ramification of this section is very vast as any payments made to non-residents which are out of the ambit of other provisions will invariably be covered by the provisions of section 195 for withholding taxes. Hence, it becomes very important to know intricacies of this section comprehensively.
Object and Overview of Section 195
3.0 As Section 195 being a generic section, covers a very vast area of withholding tax to non-residents, it is important for one to know the objective of this section. CBDT Circular No. 152 dt. 27.11.1974, in para 3 therein has laid down objective, to state that
“to ensure that the tax due from non-resident persons is secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment. Failure to deduct tax at source from payment to a non-resident may result in loss of revenue as the non-resident may sometimes have no assets in India from which tax could be collected at a later stage. Tax should, therefore, be deducted in all cases where it is required to be deducted under section 195 before the payment is made to the non-resident…”
3.1 It is very much clear from the above that, the government wants to collect tax upfront from any payments made to non-resident as there would be no difficulty later for collection of taxes due.This view also finds support in the decision of apex court in the case of Vodafone International Holdings B.V. cited in 341 ITR 1. In para 89 of the said decision Hon’ble Apex Court has opined that “The object of Section 195 is to ensure that tax due from non-resident persons is secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment.”
3.2 Hence, the broad objective can be summarized asthat to collect the due taxes at the earliest point, so as to facilitate ease of recovery of taxes due on income chargeable to tax in the hands of a non-resident.
4.0 From this background, it is very relevant for one to understand the provisions of section 195. Section 195 has 7 sub-section which has distinct operations of its own, but at the same time, they are inter-connected with each other.
Ø Section 195(1) – lays down the scope and conditions for deduction of tax at source
Ø Section 195(2) – provides for application by the ‘payer’ for determination of ‘sum chargeable to tax’ as required under sub-section 1 above.
Ø Section 195(3) – provides for application by the ‘payer’ for NIL deduction of TDS
Ø Section 195(4) – provides for validity of certificate issued under sub-section 3 above
Ø Section 195(5) – Empowers CBDT to make rules as required for sub-section 3 above
Ø Section 195(6) – Obligation on payer to furnish information about payment to non-resident
Ø Section 195(7) – Empowers CBDT to specify class of person who are required mandatorily to apply to AO for determination of ‘sum chargeable to tax’ as required under sub-section 1 above.
4.1 Herein, it can be observed that the provisions of sub-section 1 of section 195 has provisions relating to scope and conditions, which would determine to deduct tax at source u/s 195 and hence, it is important for one to give weightage for the relevant sub-section and understand each and every limb therein.
Interpretation of sub-sections under Section 195
5.0 At the outset let us read through the provisions of sub-section 1 to section 195.
“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.
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.” |
5.1 From the above reading, it can be seen that, there are various wordings/limbs in this sub-section and in order to understand the provisions therein, it is important to understand and interpret each and every limb under this sub-section. Accordingly, in the below para’s each and every words which has significance/requirement of interpretation are bifurcated and analysed individually.
5.1.1 “Any Person” – Person is defined in Section 2(31) and every such person will be covered by the provisions of this section irrespective of the fact that,
- whether or not such person being a deductor is liable for audit during the preceding previous year under any provisions of The Income Tax Act,
- whether or not such person being a deductor is a resident or non-resident under the provisions of The Income Tax Act. [Explanation 2 to section 195(1)]
- whether or not such person being a non-resident deductor has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India. [Explanation 2 to section 195(1)]
5.1.2 “responsible for paying” – it means that there is an obligation for making payment. If there is no obligation for payment, then even when all the other criteria are met, there would be no deduction of TDS u/s 195.
- Interpretation of these wordings becomes especially important, when it comes to certain specific type of transactions. Ex:- a Gift as described in provisions of section 2(24)(xviia) is given by a resident to another non-resident outside India will be covered by section 9(1)(xviii) and will be deemed to accrue or arise in India. Hence, this income will be chargeable to tax in India. But this payment being in the nature of gift, there is no obligation on the part of payer to make payment. A payment which is in the nature of gift is voluntarily made and there is no obligation on the part of payer to make such gift mandatorily. Hence, as there is no responsibility for making payment of this sum, the same will not attract TDS obligations under the provisions section 195 of The Income Tax Act.
- The above position finds support in the decision of Hon’ble Andhra Pradesh High Court in the case of Addl. CIT v/s K Ramabrahmam & Sons (P.) Ltd cited in 115 ITR 369 (1978) wherein it is categorically stated that
“As already stated, there is no obligation on the part of the payer, and no right to receive the same by the recipient. Payments do not arise out of any contract or obligation between the assessee and the recipients. There is no obligation either by virtue of a contract or in law to make these payments. They are made voluntarily by the assessee towards entertainment of the crew. We, therefore, hold that s. 195(1) is not attracted in the present case.”
5.1.3 At this juncture, it is also relevant to note that “person responsible for paying” has been defined under the provisions of section 204, which casts responsibility on the following person, under the following circumstances
- In case of Salary ‘the employer’ and if the company is employer, then ‘the company and principal officer thereof,’
- In case of interest on securities, ‘the local authority, corporation or company, including the principal officer thereof,’
- In case of sum payable to non-resident representing consideration for the transfer of any long term foreign exchange capital asset, ‘the authorised person’
- In case of furnishing information under section 195(6), ‘the payer’ himself or if the payer is a company, then ‘the company itself including principal officer thereof,’
- In case of credit or payment of any other sums under section 195(1), ‘the payer’ himself or if the payer is a company, then ‘the company itself including principal officer thereof,’
- In case of credit or payment of any other sums under section 195(1), made by or on behalf of Central Govt. or State Govt., ‘the drawing and disbursing officer or any other person, by whatever name called,’
- in the case of a person not resident in India, the ‘person himself’ or ‘any person authorised agent’ including an agent u/s 163.
It can be seen from the gist of section 204 as cited above, that the act has specifically casted responsibility on specific persons under specific circumstances for the purpose of chapter XVII. Hence, while interpreting the provisions of section 195, it is also relevant for one to understand the meaning of provisions of this section and act accordingly.
5.1.4 “to a non-resident, not being a company,”
- it means a non-resident person, other than a company will be covered by the provisions of section 195 as a payee.
- Herein, it is important to refer to section 2(30) which defines non-resident negatively, to be a person who is not a “resident”. Hence, any person who does not qualify to be a “Resident” by virtue of the provisions of clause 1, 1A, 2 and 4 of section 6 under The Income Tax Act, will be a “non-resident” for the purpose of section 195.
- At this juncture, one might have a query that in which year one should determine the residential status as non-resident. Say for example, a person who has been resident all these years, is planning to go outside India in June. A transaction has taken place in April/May preceding to the month of June and can the payer decide for this purpose in April/May, that a person is non-resident for the relevant previous year and liable for TDS u/s 195? Or if we take a reverse situation, a non-resident liable to TDS u/s 195 is coming back to India in June and in the relevant year he will be resident and not liable to TDS u/s 195. For a transaction entered in April/May, can a payer not deduct TDS u/s 195 in anticipation of change in his residential status for the year? This is a practical difficulty for which there is no specific answer as such as on date. However, in the context of determining who is a non-resident to be eligible for filing an application before the AAR, the residential status for the preceding year was accepted [Advance Ruling P. No. 20 of 1995 [1999] 237 ITR 382 (AAR)].
5.1.5 “or to a foreign company,”
- Apart from a non-resident, a foreign company irrespective of their residential status will also be covered by the provisions of section 195 as a payee.
- At this juncture it is also important to note that, a corporate entity is not covered by the above words “non-resident” u/s 195, because of the fact that the legislature did not intended to cover domestic company but wanted to cover only “foreign company” irrespective of its residential status, under the provisions of section 195.
- “foreign company” is negatively defined u/s 2(23A) to mean a company which is not a domestic company.
- Hence, if a company is not a domestic company as defined u/s 2(22A), then it will be deemed to be a foreign company liable for withholding tax u/s 195 irrespective of its residential status in India.
5.1.6 “any interest (not being interest referred to in section 194LB or section 194LC or section 194LD)”
- Payment of any type of interest to a non-resident would be covered by the ambit of section 195.
- At this juncture it is relevant to understand the meaning of “interest” as defined under section 2(28A) under The Income Tax Act, “means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised”. If the amount paid is in the nature of interest as defined herein, it would be liable for deduction of Tax at Source u/s 195.
- It is also important to note that if the interest is covered by the liability for deduction of tax at source u/s 194LB, 194LC or 194LD, then as they being specific provisions will override general provision for the purpose of deduction of TDS and hence, will not be covered by the provisions of section 195. (para 2.0 supra)
- It is also relevant to note that, even if the interest is not paid, but is credited to “interest payable account” or “suspense account” or any other account by whatever name called, it would also be covered by the provisions of section 195 and liable to deduction of tax at source. [Explanation – 1]
5.1.7 “or any other sum chargeable under the provisions of this act”
- “Sum chargeable” means any sum which is chargeable under the provisions of The Income Tax Act. If the ‘entire sum’ is ‘not chargeable to tax’, then there will not be any obligation to deduct TDS u/s 195.
Ex:- Any gift to non-resident individual relative as defined in section 56(2)(vii), or say a non-resident earns any income which is exempt under any provisions of The Income Tax Act, will be out of the ambit of the provisions of withholding tax under section 195.
- Herein, chargeability should not only be seen from the point of view of provisions of section 4, but should also be kept in mind and seen whether the sum payable/paid will be subjected to tax in the hands of the recipient. If such sum even though it is chargeable to tax, but is exempted from tax under any specific provisions, the same also would not be liable for deduction of TDS u/s 195. Ex:- Interest on NRE deposits covered by section 10(4)(ii), will not be subjected to TDS u/s 195. Even though such interest is chargeable to tax u/s 4, 5 & 9 the same will be specifically exempt u/s 10(4)(ii).
- If sum chargeable to equalisation levy, then such sum will be exempt from income tax u/s 10(50), hence the same would not be liable to TDS u/s 195.
- In my view, this position would also hold good for a transaction, when a non-resident transfers funds from NRO account to his own NRE account. Meaning thereby, when funds are transferred from NRO to NRE, the same would not be chargeable to tax on such remittance, as the charge of tax would already have been there at the time of receipt of such sum to his NRO account either as per the provisions of section 4, 5 and 9. Hence, when such funds are remitted from his own NRO to his own NRE account, there would not be any chargeability under The Income Tax Act, 1961, hence there would not be requirement for deduction of TDS u/s 195.
- “Sum chargeable” would also mean that in the hands of recipient, such sum should be liable to tax in any assessment year. Unlike provisions of section 4(1) which requires the chargeability to tax qua assessment year; the provisions of section 195 being withholding tax provisions requires that such sum is chargeable to tax deduction u/s 195 in any assessment year irrespective of the assessment year in which such sum is liable to be assessed to tax under the provisions of The Income Tax Act. This interpretation would also get support, from the provisions of section 4(2) and section 190 of The Income Tax Act. It can also be seen from the provisions of section 199 read with rule 37BA that, a deductee can claim the TDS in the assessment year in which the corresponding income is chargeable/charged to tax. If such income is declared in any subsequent year, then such TDS can also be carried forward and claimed in such subsequent assessment year. Hence, it can be safely concluded that, if any sum is chargeable to tax in the hands of recipient, irrespective of the assessment year of chargeability in the hands of recipient, the payer will deduct tax in the assessment year in which such sum is credited or paid whichever is earlier.
- The word “sum” would also mean that, the entire gross sum will be liable to withholding tax u/s 195 and not the income portion embedded in such sum. It means that, rate of TDS should be applied on the gross amount of income and as a deductor, he does not have power or authority to determine the income embedded in such sum, and deduct tax thereon. This view would also get support from the following provisions
(i) It can be seen that apart from a couple of sections under chapter XVII which obligates deduction of TDS on various types of income paid to various persons, the TDS has to be deducted on the gross amount
(ii) It can also be seen that, the word used under this section is “sum chargeable” and not “income chargeable”
(iii) The provisions of section 195(2), 195(3), 197 provides that if required the payer or payee can approach the authorities and can apply for lower or nil deduction certificate and whereby, it is clear that the payer/dedcutor does not have authority to determine/calculate income portion embedded.
(iv) Various decisions of supreme court such as Transmission Corporation of AP Ltd. cited in 239 ITR 587 (1999), GE India Technology Cen. (P.) Ltd. cited in 327 ITR 456 (2010)
- If any ‘sum’ includes both i.e. ‘sum chargeable to tax’ as well as ‘sum not chargeable to tax and/or exempt from tax’ and such portion of sum which is not chargeable to tax or exempt from tax is determinable by identification (not calculation) then withholding tax obligation u/s 195 will only be on the ‘sum chargeable’ to tax. The portion of ‘sum not chargeable to tax’ can be transferred without requiring for deduction of TDS u/s 195. Ex1: An invoice is received wherein, a payment towards ‘Royalty’ & payment towards ‘Rent for property situated outside India’ is to be made. Let us assume that Royalty will be chargeable to tax in India and Rent is not chargeable to tax in India as the property is situated outside India. The ‘sum’ will include both ‘Royalty’ and ‘Rent’. The payment towards ‘Rent’ can be easily identifiable and hence there is no requirement for deduction of TDS u/s 195 on such portion of income. It would suffice if TDS is deducted on ‘Royalty’ alone at applicable rates. Ex2: On sale of property, there will be long term capital gain to the recipient. Herein, the payer cannot calculate the portion of capital gain out of the consideration and deduct TDS therefrom, because such calculation is out of the ambit of the payer due to provisions of section 195(2), 195(3) & 197 which cast this responsibility on the appropriate income tax authority. This view would also get support from Instruction No. 2/2014 dt 26-02-2014, Circular No 3/2015 dt. 12-02-2015 and various decisions of supreme court such as Transmission Corporation of AP Ltd. cited in 239 ITR 587 (1999), GE India Technology Cen. (P.) Ltd. cited in 327 ITR 456 (2010).
- To determine whether or not a sum is chargeable to tax, it is not only important to apply the specific provisions of The Income Tax Act, but it is also important for the deductor to look into the provisions of double taxation avoidance agreement between India and the other country in which such non-resident deductee is a resident. It is also relevant to note that the payee/dedcutee should comply with provisions of section 90(4) & 90(5) and obtain and submit Tax Residency Certificate (TRC) and duly filled Form 10F, in order to avail the benefit under the provisions of double taxation avoidance agreement.
- It can also be seen that there is no threshold limit for triggering TDS obligation u/s 195. Even when ₹ 1 is paid, the same will be considered as sum and liable for deduction of TDS u/s 195.
5.1.8 (not being income chargeable under the head "Salaries")
- As explained in para 2.0 supra, income chargeable to tax under the head “Salary” would be liable to deduction of tax at source under the provisions of section 192, even though such salary is paid to non-resident. Hence, the said nature of income is specifically excluded under the ambit of section 195.
- At this juncture, it is also relevant to note that, if any sum is liable for deduction of TDS under any other section other than section 195 as stated in para 2.0 supra, the same shall be liable to TDS under those specific section and there would be no liability u/s 195 for the sum. This interpretation is based on the principal of ‘specific provisions having overriding effect on general provisions’.
5.1.9 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,
- This portion of the provision refers and brings into context, when a withholding tax needs to be deducted. It says that either at the time of credit in the books or at the time of payment, whichever is earlier, TDS should be deducted. This clause or condition is generally applicable in almost all the provisions of TDS under chapter XVII of The Income Tax Act and there is no change in the same.
- At this juncture, it is also relevant to note that the provisions of section 195 as well as any other provisions of TDS will not attract on any deemed income portion, for the reason that the said deemed income is neither credited nor paid to the payee. Ex:- A property is sold for a consideration less than stamp duty value. The Full value of consideration for the purpose of determination of capital gain is Stamp Duty Value and where as the consideration is less than that. In my considered opinion, the TDS needs to be deducted on the “consideration which is actually paid” and not on the stamp duty value which is a deemed consideration for the purpose of determination of capital gains. This view also finds support in the decision of Hyderabad Tribunal in the case of Bhagawandas Nagla ITA No. 143/Hyd/2017 (para 19).
- It is also to be noted that, the liability for deduction of TDS on Interest paid by Govt. or PSU banks covered by section10(23D) or PFI, will only arise, when such interest is actually paid by them. Hence, here too there would be no deduction of TDS u/s 195 at the time of credit of such interest in the books of accounts (1st proviso)
5.1.10 deduct income-tax thereon at the rates in force :
- Rate for deduction of tax under section 195 is not given in specific. It is stated that, withholding tax should be made at ‘rates in force’. ‘Rates in force’ has been defined u/s 2(37A) and clause (iii) which states that for the purpose of section 195, it will be rates as prescribed under Finance Act of relevant year (i.e. Part II of First Schedule to Finance Act) OR rates of income tax as specified in agreement as entered u/s 90/90A, as applicable.
- When a non-resident payee is applied with TDS rate as prescribed under Part II of First Schedule to relevant Finance Act, then to such rates, applicable surcharges and cess should be added. However, if the non-resident payee is applied with rates of income tax as prescribed in DTAA, then there would not be addition of any surcharge or cess, as the rate prescribed in DTAA is final and there cannot be increase on such rates.
5.1.11 After going through interpretation/understanding of each and every word which has been put forth in sub-section1 of section 195, it is very important for one to understand that, all the conditions as laid down in para 5.1.1 to 5.1.9 supra, has to be cumulatively satisfied in order make a withholding of tax at source u/s 195 as per the rate explained in para 5.1.10 supra. Even if any one condition is not satisfied, it will not be possible for making deduction of TDS.
5.1.12 Impact of Exchange Rate
- Rule 26 prescribes the rate of exchange for TDS on income payable in foreign currency.
- The Exchange rate to be adopted is the TT buying rate as on the date on which the tax is required to be deducted at source under section 195.
- If the payer pays higher payment, due to exchange rate fluctuation, such additional payment is not liable for TDS u/s 195 and consequently not to be disallowed u/s 40(a)(i), as decided by Karnataka High Court in the case of Mac Charles India Ltd cited in 195 Taxman 296 (2010).
5.1.13 Applicability of rate of TDS as per DTAA and Impact of non-availability of TRC
- As per the provisions of section 90(2), an eligible non-resident can take benefit of DTAA entered into between India and the country in which such non-resident is a Resident.
- As stated in para 5.1.10 supra, an eligible non-resident can apply the provisions of DTAA if the rate of income tax on certain type of income is lower than the rate of withholding tax as per section 195.
- However as per the provisions of section 90(4), such non-resident must submit TRC (which he should obtain from the competent authority of the country in which he is a tax resident), to the payer along with duly filled Form 10F as required under section 90(5). If the said requirements are not fulfilled, the non-residents will be denied availing the benefit of DTAA.
- Alternatively, if such TRC is not available (say due to impossibility of performance), then only as an alternate, the non-resident payee, if he is able to establish, based on the circumstantial evidences, under the facts and circumstances beyond doubt that he is a tax resident of such other country, then such evidence would be sufficient enough to avail the benefit of DTAA. This view has been emphasized by Ahmedabad Tribunal in the case of Skaps Industries India (P) Ltd. cited in 94 taxmann.com 448/171 ITD 723 (2018) and Hyderabad Tribunal in Sreenivasa Reddy Cheemalamarri (ITA No. 1463/hyd/2018) cited in 79 ITR(Trib.) 465 (2020).
- The applicability of Rate of TDS can be better understood by way of a chart as shown below
5.1.14 Impact of non-availability of PAN
- Section 206AA provides that the payee should provide PAN to the payer, failing which the tax should be deducted at higher of
(i) Rate specified in the relevant provision of this Act
(ii) Rates in force
(iii) Rate of 20%
- Section 206AA is a non-obstante provision and will apply when a deductor is liable to deduct Tax u/s 195 on a payment made to a non-resident. This view gets support in Para 5.1.14 of Circular No. 5/2010 dt. 03-06-2010.
- However, there is an exception to the same. In a case where the deductor is liable to deduct Tax u/s 195 by applying the beneficial rate as per DTAA, then as DTAA provisions being a bilateral negotiated agreement between two countries, will have an overriding effect on the provisions of section 206AA, and thereby the non-resident payee need not have and submit PAN to the payer/deductor. This view finds support in the following decision
(a) Delhi High Court in the case of Danisco India (P.) Ltd. (W.P.) cited in 90 Taxmann.com 295/253 Taxman 500 (2018)
(b) Bangalore Tribunal in the case of Infosys BPO Ltd. cited in 60 taxmann.com 465 (2015)
(c) Pune Tribunal in the case of Serum Institute of India Ltd cited in 56 taxmann.com 1 (2015)
- Further, it is also relevant to note that, the rigours of provisions of section 206AA has been diluted for certain specific cases. As per sub-section 7 therein, read with Rule 37BC (1) & (2), the provisions of section 206AA will not apply in respect of payments in the nature of interest, royalty, fees for technical services, dividend and payments on transfer of capital asset made to a non-resident or foreign company if the following information, documents are made available.
(a) Name, e-mail ID and contact number
(b) Address in the country outside India of which the deductee is a resident
(c) TRC from the competent authority of the country outside India in which deductee is resident
(d) TIN in the country outside India in which deductee is resident
- It is also relevant to note that as per Rule 37BC(3), the provisions of section 206AA will not apply in a case, where the non-resident or foreign company is not required to obtain PAN as per the provisions of section 139A read with rule 114AAB.
- The interplay between provisions of section 206AA and section 195 can be better understood by way of a chart as shown below
5.1.15 Impact of Section 206AB w.e.f. 01.07.2021:
- Provisions section 206AB states that, if a payee on whom Tax has to be deducted u/c XVII, has not filed return of income within the due date as prescribed under u/s 139(1) during preceding two previous years, and and they have aggregate of TDS & TCS exceeding ₹ 50,000 in each of these two years, then the payer should deduct TDS at higher of
(a) Twice the rate specified in the relevant provisions of the Act
(b) Twice the rate or rates in force
(c) 5%
- If such payee does not provide PAN as required u/s 206AA, then higher of the rate u/s 206AB(1) as explained above or rate u/s 206AA.
- It is also to be noted that a non-resident payee who does not have a fixed place of business in India, will not be covered by the provisions of section 206AB.
- Considering the above provisions of section 206AB, we can conclude as follows:
(a) Provisions of section 195 will not have an impact due to 206AB, if the payee
· Being a non-resident, does not have PE in India through a fixed place of business
· Being a non-resident or a foreign company, who is eligible to claim beneficial provisions of lower rate of income tax for TDS as per DTAA (as explained in para 5.1.12, as provisions of DTAA overrides provisions of income tax act)
(b) Provisions of section 195 will have an impact due to 206AB, if the payee
· Being a non-resident, has a PE in India through a fixed place of business
· Being a foreign company, irrespective of the fact that they have a PE in India or not
- It is also to be noted that, for application of section 206AB, it is not only important that the above mentioned criteria as per section 195 is satisfied, but the twin conditions as laid down in 206AB also needs to be satisfied (non-filing of ROI and aggregate TDS of ₹ 50,000).
5.1.16 Miscellaneous Information: It is also relevant to note that the payee cannot apply under Form 15G/15H for non-deduction of TDS u/s 195.
5.2 Provisions of sub-section 2 of Section 195, provides that the payer can apply to the assessing officer to determine in such manner the appropriate proportion of such sum so chargeable to tax as required for the purpose of deduction of tax u/s 195(1). The payer is required to make submission electronically in Form 15E. The assessing officer after examination of record and being satisfied that the entire sum is not chargeable to tax, may issue a certificate determining the appropriate portion of such sum chargeable under the provisions of this Act for the purpose of section 195(1). It has to be noted that, the sub-section provides for determining the ‘sum chargeable’ to tax and not lower deduction rate or nil deduction rate. However, from the application Form 15E, it can be noted that the information sought is mainly in respect of the tax liability and the rate of tax at which TDS is required to be deducted and practically also the assessing officers provide lower deduction certificate after determination of quantum of tax liability.
5.3 Provisions of sub-section 3 of Section 195 read with Rule 29B, provides that the payee being
(a) a banking company or insurer, being a foreign company, and which carries on operations in India through a branch, any income by way of interest, not being interest on securities (other than interest payable on securities referred to in proviso to section 193), or any other sum, not being dividends,
(b) in the case of any other person who carries on a business or profession in India through a branch, any sum, not being interest or dividends,
in so far as such interest or other sum is receivable by such branch on its own account and not on behalf of its head office or any branch situated outside India, or any other person, can apply in Form 15C or 15D as the case may be for NIL deduction of Tax u/s 195(1) to the assessing officer. If the assessing officer is satisfied that, all the conditions as required are fulfilled and if the issuance of such NIL deduction certificate will not be prejudicial to the interest of the revenue, may issue a certificate for NIL deduction of Tax u/s 195(3).
5.4 Provisions of sub-section 4 of Section 195, provides that the certificate as issued under 195(3) above, shall remain in force till the expiry of the period mentioned in such certificate or till the date of cancellation by the assessing officer whichever is earlier.
5.5 Provisions of sub-section 5 of Section 195, has empowered the CBDT to make necessary notifications from time to time specifying the cases and circumstances under which an application under sub-section 3 may be made and conditions under which certificates may be granted.
5.6 Provisions of sub-section 6 of Section 195, requires that a ‘person responsible for paying’ as per sub-section 1, to furnish such information to the appropriate authority in electronic mode in the prescribed form. This information should be furnished by the payer, irrespective of the fact whether or not such sums are chargeable to tax in the hands of non-resident payee. At this juncture, it is important for the payee to understand the provisions as laid down in Rule 37BB and submit the required forms 15CA and/or 15CB or 15CC as the case may be, electronically. It is also relevant to note that, even though section 195(6) mandates for submission of applicable forms irrespective of chargeability of the sums, the sub-rule 3 of 37BB provides certain exemptions from submission of Form 15CA under specific facts and circumstances.
5.7 Provisions of sub-section 7 of Section 195, has empowered the CBDT to notify specific class of person or cases, wherein the payer has to apply to the assessing officer compulsorily to determine the appropriate portion of sum chargeable and after such determination, TDS has to be deducted u/s 195(1) on such sum. It is also to be noted that, such notification can be made irrespective of the fact that whether or not such sum is chargeable to tax. Further, it is also relevant to note that this sub-section is a non-obstante as far as application of provisions of sub-section 1 & 2 of section 195, meaning thereby, even if the sum is not chargeable to tax and even if it is optional for the payer to apply under sub-section 2, this sub-section will make it mandatory to apply for determination of appropriate sum chargeable.
Conclusion
6.0 Section 195 has been in the Act from its inception in 1961 and had 2 sub-sections and a proviso. From then till date, the section has gone through several modifications and insertion of new sub-sections, explanations, addition of new rules and suitable forms from time to time, to suit the requirement of the ever evolving business scenarios. The usage of words in the sub-section have gone through various types of interpretations and new domains have been developed by both the tax payers and exchequer. However, the objective of enacting this section has remained unchanged. Hence, as a tax payer/deductor one has to comply with the provision keeping in mind that the main objective is to collect the taxes at the earliest point from the non-resident. However, it is also to be kept in mind that, whenever it is absolutely crystal clear that there is no requirement for deduction/no requirement for higher deduction etc., then no deduction has to be done or deduction has to be done at appropriate rates, because if wrongful practices are carried out, it will have greater impact on India’s overall business transactions with foreign entities.
Compiled by CA Sriram V Rao, FCA, DIIT, DISA
Partner at M/s Nitin J Shetty & Co., Mangaluru.
