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Pune West Study Circle

Changing Landscape of WHT on foreignremittances

19 March 2017

Pune

Presented by:CA Manoj Rathi & CA Mitesh Thakkar

Contents

Brief Overview of WHT on NR provisions

DTAA – Overview and Application

Section 195A & Section 206AA

Lower WHT – options and procedural aspects

Alternative avenues for refund of WHT

Consequence of Default

The road ahead – Impact of domestic and internationaldevelopments

Case Studies

Objectives of WHT Provisions

Regular inflow ofrevenue forGovernment

Checking oftax evasion

Collection oftaxes at

earliest pointof time

Section 195 – Overview applicability

Section Provisions195(1) Scope and conditions for applicability

195(2) Application by the ‘Payer’ for determining sum chargeable

195(3) Application by the ‘Payee’ for lower or Nil withholding

195(4) Validity of certificate issued by the AO u/s 195(3)

195(5) CBDT empowered to make Rules in respect of sec 195(3)

195(6) Furnishing of information relating to payment in prescribed formsand manner.

195(7)* CBDT empowered to specify class of persons or cases (whererecipient is NR) who will be mandated to furnish application to AOfor determination of withholding rate

* Introduced by Finance Act, 2012, no notification issued till date

* Not being interest referred to in S. 194LB or S. 194LC or S. 194LD (discussed is subsequent slides)

► Explanation was inserted by Finance Act 2012 with retrospective effect from

1 April 1962

► Section 195 applies to all payers , whether residents or non residents

► Irrespective of non resident payer having taxable presence in India

Section 195(1) – Scope and applicability

*Any personresponsiblefor paying

Non-resident(not being acompany)

ORforeigncompany,

Interest* or anyother sum (otherthan Salaries)

ANDChargeableunder provisionsof IT Act

Deduct TDS atrate in force,at the time ofpayment orcredit,whichever isearlier

Meaning of ‘Any sum chargeable under theprovisions of the Act’…► Unlike other provisions in Chapter XVII (TDS provisions), Section 195 uses a

special phrase “any sum chargeable under the provisions of this Act”

► Sum chargeable under the Act means:

► Amount paid which wholly bears the character of income and

► Which is not exempt from tax in the hands of NR

► In case of Composite Contract - What will be sum chargeable under the Act?

Supreme Court Rulings –1. Transmission Corporation of AP Ltd. (1999)2. GE India Technology Centre (P) Ltd (2010) - Net amount if payer fairly

certain of income portion (Transmission Corp ruling explained)

Obligation of TDS: limited to proportion of income chargeable to tax ?

…Meaning of ‘Any sum chargeable under theprovisions of the Act’

Instruction No. 2 of 2014 issued by CBDT, clarifying that tax to bewithheld only on portion representing sum chargeable to tax and noton the whole sum being remitted, casting an obligation on taxauthorities to compute the sum chargeable to tax for the purposes of taxwithholding, even when no application is made to determine such sum

Circular No. 3 of 2015 issued to clarify that disallowance of “other sumchargeable”, under S. 40(a)(i) is interlinked with the sum chargeableto tax in section 195 of the Act. Thus, where the taxpayer or therecipient has made an application to the tax authority under the Act todetermine “other sum chargeable”, then such sum shall form the basisfor disallowance

However, CBDT has noticed that tax authorities are still adopting acontradictory position. Direction to tax authorities vide Instruction (F.No. 500/39/2015) dated 26 October 2016 to consider Circular 3 of2015 while filing further appeal or in their litigation before ITAT/ Courts.

The Instruction is a reiteration of the CBDT’s earlier benevolent Circular– especiallywhose cases are pending in litigation.

Determination of ‘Any sums chargeable totax’

Nature of Income Act Treaty/DTAA

Business/Profession Section 9(1)(i): Concept ofBusiness Connection

Article 5;7; 14: Concept ofPE or Fixed Base

Salary Income Section 9(1)(ii) Article 15

Dividend Income Section 9(1)(iv) and section115A

Article 10

Interest Income Section 9(1)(v) and section115A

Article 11

Royalties Section 9(1)(vi) and section115A

Article 12

FTS Section 9(1)(vii) and section115A

Article 12

Capital Gains Section 9(1)(i) and section 45 Article 13

Provision of Act or DTAA, whichever is beneficial shall apply subject to furnishingof prescribed documents like TRC, declaration in Form 10F, etc.

Time of Deduction & Payment Covered

► Tax shall be withheld at the time of credit or payment whichever is earlier

► Payment of Royalty under DTAA - tax deductible on payment?► Affirmed by - National Organic (96 TTJ 765) (Mum) (ITAT)► Contrary View - Flakt (India) Ltd (267 ITR 727) (AAR)

► Tax to be withheld even when no remittance on adjustment of dues► Raymond Ltd. – (86 ITD 791) (Mum) (ITAT)

► Tax withholding on ‘payments in kind’?► Yes [Kanchanganga Sea Foods Ltd. (325 ITR 0540 )(SC)]

► Tax withholding on provisions made pending RBI► Adverse view in case of United Breweries Ltd – (211 ITR 256) (Kar) (HC)► Favorable view for dividend in case of Pfizer Corporation – (259 ITR 391)

(Mum) (HC)

Meaning of ‘Rates in force’…

► Rates specified in this behalf in the Finance Act of therelevant year (refer Part II of the First Schedule to theFinance Act); or

► Rates specified in a DTAA entered with respective country,whichever is more beneficial

► In the period that the Finance Bill is pending approval, ratein force for the preceding year or rate proposed for thecurrent year, whichever is more favourable will beapplicable (Section 294)

‘Rates inforce’ [Sec.2(37A)(iii)]

► Rates prescribed by DTAA inclusive of surcharge andeducation cess {CIT vs. Arthusa Offshore Co. [2008] 169Taxman 484 (Uttarakhand HC), Sunil V Motiani vs. ITO (59SOT 37) (ITAT Mum)}

► Generally ‘tax’ is defined in tax treaties to mean income-tax including surcharge thereon

Applicabilityof surchargeand cess toDTAA taxrates ?

Concessional withholding rate on interestpaid to NR (Section 194LC & 194LD)

Sec Borrower /Issuer

Eligibleinvestor

Eligibleborrowings/debt

instruments

Sunset date postFinance Bill 2017

194LD Government FIIs/QFIs Government securities Interest payablebetween 1 June 2013

to 1 July 2020*Indian

companiesFIIs/QFIs Rupee denominated

(INR) bonds194LC Indian

companiesNon-

residentsForeign currency

borrowings under loanagreements

Borrowings between1 July 2012 to 1 July

2020*Foreign currency longterm bonds includinginfrastructure bonds

Borrowings between1 Oct 2014 to 1 July

2020*

194LB Infrastructuredebt fund setup as a NBFC

Non-residents

Infrastructure debt fund No sunset date

* Proposed by Finance Bill, 2017

Double Taxationavoidance agreement(‘DTAA’) – Overviewand application

Exchange of information to combat tax avoidance/ tax evasion

Promotion of cross border trade

Elimination of double taxation

Clarification of fiscal situation of tax payer

Sharing of tax revenues between contractingcountries

Key objectives of DTAA

However, obtaining TRC remains critical in order to availbeneficial provisions of the DTAA for any taxpayer

► Furnishing of Tax Residency Certificate (‘TRC’) with prescribed particularsmade mandatory by Finance Act (‘FA’), 2012► 8 particulars prescribed by CBDT vide notification dated 17 September 2012

► Mandatory requirement for inclusion of prescribed particulars in TRC doneaway with vide FA 2013. Taxpayer mandated to provide ‘such otherdocuments and information as may be prescribed’ (Notification 57/2013issued for the same – discussed in subsequent slide)

Application of DTAAFurnishing TRC – a mandatory requirement

► Notification 57/2013 dated 1 August 2013 issued by CDBT, which mandatessubmission of following information in Form 10F:

► Declaration not required if TRC contains above particulars

Application of DTAAFurnishing TRC - a mandatory requirement

Sr No Particulars

1 Status of taxpayer (i.e. individual, company, etc)

2 Nationality/ country/ specified territory of incorporation or registration of thetaxpayer

3 Taxpayer’s tax identification number in the country/ specified territory ofresidence. In case such identification number does not exist, a uniqueidentification number issued by the Government of the country/ specifiedterritory of which the taxpayer claims to be a resident;

4 Period for which the residential status, as proposed to be mentioned in thecertificate, is applicable; and

5 Address of the taxpayer in the country/ specified territory outside India,during the period for which the certificate, as mentioned in (4) above, isapplicable.

Technical guidanceon provisions

► TechnicalExplanation toDTAA by treatypartners (eg USAto India-US DTAA) ;

► Jurisprudence/Case Laws(including foreigncourts);

► OECDCommentary andUN MCCommentary; etc

Case specificpoints► LOB Clause;► MFN Clause;► Protocols and

Memorandum ofUnderstanding

Basic aspects tobe considered► Entry into force &

termination ofDTAA;

► Availability of PAN(unless covered bynew Rule 37BC);

► TRC;► Declaration for no

PE;► Beneficial owner

& payment basis(for few incomes)

Important checks before applying DTAAProvisions

WHT obligation in NR to NR paymentsMost impacted transactions► Transfer of Capital Asset in India directly or indirectly

► Landmark Ruling in case of Vodafone International Holdings BV§ Indirect transfer of capital asset not taxable in India;§ ‘Look at’ & not ‘ Look through’ provision to be applied for transfer of shares§ Section 195 not applicable for payments by NR to NR

► Retrospective amendments by Finance Act 2012 to overrule the above ruling► Ruling of Andhra Pradesh HC in case of Sanofi§ Held amendments do not override and cannot be read into DTAA provisions

► Salary to Expatriates► CBDT Circular No. 685 dated 20th June 1994§ Payments to employees for services rendered in India are taxable in India and

WHT under section 192 applies► WHT applicable on salary paid in home country if services rendered in India

• Ruling of SC in Eli Lilly and Co. India (P) Ltd. (312 ITR 225)

Explanation 2 to section 195(1) inserted vide FA 2012 clarifies applicability of WHTobligation on NR to NR payments whether or not NR payer has place of business

in India or not – Amendment retrospective in nature?

WHT obligation in NR to R payments: Can Indian taxlaws extend to extra territorial jurisdiction?► Services rendered by a Resident to a

NR having no business presence inIndia

► Considering the nature, such serviceswould fall within the coverage ofsection 194C or 194J or 194H

► Section 194C, 194J, 194H worded asfollows:“Any person responsible for paying anysum to any resident……”

►Issue for consideration:► Would the NR be required to

withhold taxes under respectivesection and undertake necessarycompliances for the same?

OutsideIndia

India

Non residentservice recipient

Residentserviceprovider

Considerationpaid

Servicesrendered

► Under the Act, necessary for NR to have presence in India so as to berequired to undertake procedural compliances

► Charging provisions may extend territorial applicability of the Act if the incomesought to be taxed has some territorial nexus with India

► On the other hand, courts have traditionally taken a view that burden ofcompliance with procedural sections may be cast only if the NR has someform of presence in India (by way of PE, agent, etc).

► However, in case of GVK Industries and others, Hon’ble Supreme Court hasheld that provisions of Indian Income-tax law can be extended to extra-territorial aspects as long as the connection to India is real and not illusory orfanciful

► Where NR payer has business presence in India, it would need to undertakecompliances.

WHT obligation in NR to R payments: Can Indian taxlaws extend to extra territorial jurisdiction?

In case of NR payer not having any business presence in India, nexus ofunderlying transaction with India may need a closer review on case to case basis

Presentation title

Section 195A andsection 206AA

Grossing-up of taxes under section 195A

► In cases where tax payable on payment to a non-resident is to beborne by the payer:

► Such tax borne by the payer also forms part of non-resident’s income;

► Accordingly, payment to non-resident required to be grossed up to anamount which would, after withholding appropriate taxes, be equal tothe net amount payable to non-resident.

Particulars Amount (in INR)Amount payable to non-resident (net of tax) 100

Tax rate applicable 20%

Gross-up income: 100 * 100 .(100-20) 125

Tax payable (INR 125 * 20%) 25

Net amount paid to non-resident (INR 125 – INR 25) 100

Overview of section 206AA

Section 206AA prior to Finance Act 2016► S.206AA (1). If the deductee does not furnish it PAN to the deductor, TDS

should be deducted at higher of following:-► At the rate mentioned in the relevant provisions of the ITL or

► at the rate in force or

► at the rate of twenty per cent., whichever is higher

Exemption from application of above provisions - S.206AA(7)(amended vide FA 2016)► The provisions of this section shall not apply to NR in respect of:

► Interest on long term bonds as referred to in section 194LC.

► Any other payment subject to such conditions as may be prescribed*

► Applicability of the amendment – Prospective or Retrospective?► Memorandum to Finance Bill specifies applicability from 1 June 2016.

* Rule 37BC prescribed vide Notification No. 53 dated 24 June 2016 – refer next slide

Exemption from requirement of furnishingPAN to certain classesNotification no. 53 of 2016► Exemption applicable to interest, royalty, fees for technical services and

payment for transfer of any capital asset

► Following details to be furnished to deductor by deductee:

► Name, e-mail id, contact number;

► Address in country of the deductee is a resident;

► A certificate of his being resident in any country or specified territoryoutside India;

► Tax Identification Number of the deductee in the country/ specifiedterritory of his residence

► Deductor has to furnish all the above stated details of the deductee in thequarterly TDS return in Form 27Q

Interplay of section 206AA & section 195A

► In a situation where 20% rate under section 206AA isapplicable, will 20% tax rate be further required to befurther grossed up under section 195A of the Act ?

Ø Section 195A requires grossing up of ‘rate in force’ as provided inFinance Act

Ø Higher rate of 20% under section 206AA is arrived at after comparisonwith rate in force & rate in IT Act

Ø Accordingly, 20% rate will not be required to be further grossed up-Bosch ruling of Bangalore ITAT

Ø TDS will be capped to 20% as long as the grossed up rate in force &rate in IT Act is less than 20%

Does Section 206AA override tax treaty for ratespurposes in view of the non-obstante clause ?

Ruling confirming section S.206AA does not override the beneficial provisionsof DTAA:► Serum Institute of India Ltd. [(2015) 170 TTJ 0119 Pune ITAT];

► M/s Pricol Ltd. [ITA No. 880 & 1141/Mds./2014] Chennai ITAT;

► M/s Rathi Super Steel Limited (ITA No. 2490/Del/2015) Delhi ITAT;

► Uniphos Envirotronic Private Limited (ITA No.1974/Ahd/2015) Ahmedabad ITAT;

► Infosys BPO Ltd [(2015) 154 ITD 0816] ,

► Wipro Ltd. (2016 47 ITR 0404) (Bang ITAT)]

Special Bench was constituted in Hyderabad in the case of M/s NagarjunaFertilizers and Chemicals Limited in view of the divergent views taken in theabove rulings and Bosch ruling [(2012) 155 TTJ 354]

Ruling of the Special Bench pronouncedrecently► Provisions of treaty will prevail and override even the charging

provisions of the Domestic Law in case of conflict► Accordingly, DTAAs by virtue of s.90(2) to the extent more beneficial to

the assessee override the domestic law including the machineryprovisions like s.206AA of the Act.

► Absence of specific overriding effect to s.206AA over DTAA, the► Section 90 (2A) gives GAAR specific overriding effect over DTAA

provisions

► Accordingly, restrictive meaning to the given to non-obstante clause ofsection 206AA

► Section 206AA inapplicable in cases of NR not required to obtainPAN in view of s.139A(8) r.w.r 114C:

► In Bosch ruling it appears that various relevant aspects discussedabove were not argued before the tribunal

Presentation title

Lower tax withholding(‘WHT’) – options andprocedural aspects

Payer of the sumApplicable to

Payer considers that the whole of sum payable toNR would not be income chargeable in the case ofthe recipient

Stage ofapplication

Payer may make an application to the AssessingOfficer (‘AO’) to determine, by general or specialorder, the appropriate proportion of such sum sochargeable

Procedureinvolved

Tax shall be withheld only on that proportion of thesum which is so chargeable

Post order of AO

Section 195(2) – Application by the ‘payer’for determining sum chargeable

► Is it obligatory to approach the AO for non-withholding oftaxes?► Where a person responsible for deduction is fairly certain, then he can make his

own determination as to whether the tax is deductible at source and, if so, whatshould be the amount thereof- GE India Technology Centre (P) Ltd. vs CIT (327ITR 456) (SC)

► Appeal against order u/s 195(2)?► In case tax borne by the payer – Taxpayer may, after payment of the taxes, file an

appeal before CIT Appeals (Section 248)► Revision of order u/s 263/ 264?

► Yes - Board of Control for Cricket in India (278 ITR 83) (Mum ITAT)

► Whether any time limit for passing order u/s 195(2)?► No time limit - Blackwood Hodge (India) Pvt. Ltd. 81 ITR 807 (Cal)}; {Central

Associated Pigment Ltd. 80 ITR 631 (Cal)

► Whether the order passed u/s 195(2) is conclusive?► Order u/s 195(2) not conclusive. Department may take a contrary view CIT vs.

Elbee Services Pvt. Ltd. 247 ITR 109 (Bom)

Section 195(2) – Application by the ‘payer’for determining sum chargeable – Key issues

► Whether an application can be made u/s 195(2) for Nilwithholding order?► No – Czechoslovak Ocean (81 ITR 162) (Cal HC); Graphite Vicarb India Ltd. (18

ITD 58) (Kolkata ITAT); BIOCON Biopharmaceuticals Private Ltd. v. ITO [2013] TS-347-ITAT-2013-Bang

► Yes - Mangalore Refinery and Petrochemicals Ltd (113 ITD 85) (Mum ITAT)

► Whether deductor may have exposure u/s 163 of the Act?► S. 195(2) order is tentative in nature and the proceedings initiated in terms of S.

163 read with section 161 and section 162 as representative assessee of theprincipal recipient may still be sustained.

► The liability u/s 163 read with section 162 is likely to be co-terminus with that of theliability of the principal and is therefore final in nature.

Section 195(2) – Application by the ‘payer’for determining sum chargeable – Key issues

Practically, section 195(2) orders have been issued for both nil as well aslower withholding tax rate purposes

Payee of the sumApplicable to

Payee can make an application in prescribed form (Form 15C or15D) to the AO for nil WHT certificate (application may be made atany time) with respect to a identified form of payment

Form ofapplication

► Taxpayer has been regularly assessed to tax and has filed allreturns of income due as on the date of filing of application;

► Not in default in respect of any tax interest, penalty, fine, or anyother sum;

► Not subjected to penalty u/s 271(1)(iii) of the Act;► Carrying on business in India continuously for at least five years

and the value of the fixed assets in India exceeds Rs 50 lakhs

Conditions to besatisfied (Rule29B)

Every person responsible for payment of the identified sum shallmake payment without WHT as long as the certificate is in force

Post order/certificate of AO

Section 195(3) - Application by the ‘payee’ fornil WHT Certificate

Section 195(4) – Validity of certificate issuedby AO under section 195(3) and other issues► A certificate granted u/s 195(3) shall remain in force:

► for the FY mentioned therein, or► until cancelled by the AO before expiry of FY

► Filing of subsequent application?► After the expiry of the period of validity of the earlier certificate, or within

three months before the expiry thereof

► CBDT empowered to notify rules in connection with Section 195(3) -circumstances for making an application, condition for grant ofcertificate and any other related matters [Section 195(5)]

► Order passed under Section 195(3) challengeable before higherauthorities?► Revision application before the CIT u/s 264► Writ petition before the jurisdictional High Court

Section 197 – Application for lower or nilcertificate by payee

Payee of the sumApplication bywhom

If payee considers that tax withholding can be at‘nil’ or ‘lower rate’

Stage ofapplication

Application can be made to the AO in Form 13 todetermine the tax rate. Application to be madebefore the payment/ credit, whichever is earlier

Procedureinvolved

Tax shall be withheld only at the rate provided inthe certificate issued by the AO

Post order of AO

Section 197 – Application for lower or nilcertificate by payee – Key issues► AO shall issue a ‘Lower’ or ‘NIL’ withholding certificate upon satisfaction of

the fact that existing and estimated tax liability of a person justifies thededuction of tax at Nil or Lower Rate

► In determining the existing and estimated liability, the A.O shall consider thetax payable on the estimated income of the current year , tax payable in thelast 3 years, existing liability, advance tax payments of current year, WHT &TCS in the current year

► The certificate shall be valid for such period as mentioned in it, unlesscancelled by the AO

► Can the order under section 197 be challenged before higher authorities?► Revision application before the CIT u/s 264► Writ petition before the jurisdictional High Court

Comparative analysis of 195(2), 195(3) and197

Particulars 195(2) 195(3) 197(1)Applicant Payer Payee

(who satisfiesconditions specified

in Rule 29B)

Payee

Purpose To determine theportion of income

liable for taxwithholding

To receive aspecified payment

without deduction oftax at source

To obtain nil/ lowertax withholding rate

for all receipts

Applicability Applicable tospecified payments

Applicable tospecified receipts

Applicable to allreceipts

Whether appealableunder Section 248?

Yes – where the taxis deposited by the

payer

No No

Whether revisableu/s 264?

Yes Yes Yes

Whether Writpossible?

Yes Yes Yes

Presentation title

Procedures to foreignremittances

Section 195(6) – CA Certificate for remittance

► Section provides person responsible for paying to the non-resident,any sum, whether or not chargeable to tax in India, should furnishthe information as prescribed by the CBDT

► Pursuant to above, the Rule 37BB prescribes the forms for furnishingof information for various categories of payments under the amendedprovisions – Refer Next slides for details

► The Rule was recently amended in June 2016;

► It provides for furnishing of these forms electronically using DSC;

► Signatory on behalf of payer can be any authorised person;

► Quarterly filings required by Authorised dealers bank alsoprovided for

► Failure to comply with reporting requirements may attract penalty upto ofINR 1 lakh

Manner and Forms of Reporting –Comparative analysis

Remittance to NR

TaxableNon-taxable

Payment lessthan 5 Lakhs

Payment exceeding5 Lakhs

No CAcertificaterequired

Reporting inForm 15CA –

Part A

Certificateunder S.197,

195(2) or195(3)

obtained

CA certificateobtained

Reporting inForm 15CA

– Part B

Reporting inForm 15CA –

Part C

Specifiedtransactions like

outboundinvestments,

importpayments,personal

expenses etc(Rule 37BB)

Transactionother than

thosecovered

under thespecified list

No reportingrequirements

Reporting inForm 15CA

– Part D

Alternate avenues forrecovery of excesstaxes withheld undersection 195 of the Act

Refund of Tax Withheld under section 195 of the ActCircumstances for availing refund► Payer is entitled to claim refund in prescribed cases (Circular No. 7/

2007 dated 23-10-2007 and Circular No. 7/2011, dated27 September, 2011):► Contract is cancelled and no remittance is made to the non-resident;► Remittance is made to the non-resident but the contract is cancelled and

remittance is received back;► Contract is cancelled after partial execution;► Retrospective amendment in law/ exemption by way of notification

making the sum remitted exempt from tax► Order u/s 154/ 248/ 264 reducing WHT liability of deductor► Tax deducted twice on the same income by mistake► Grossing up done when not required to do so;► WHT at higher rate as per domestic tax law when lower rate prescribed

under DTAA or vice versa

Refund of Tax Withheld under section 195Procedural compliances► Undertaking to be given by deductor

► No TDS certificate has been issued to the NR;► If TDS Certificate is issued –

§ It is obtained back by the applicant, or§ Applicant must indemnify the department from any possible loss

arising out of any delicacy of refund claim.► Refund should be granted only if the deductee has not filed return of income

and the time for filing of return of income has expired.► Prior Approval of CCIT or DGIT required;► Adjustment of refund against existing liability by AO possible after intimating

assessee;► Refund claim must be made within 2 years from the end of F.Y in which the

tax has been deducted► Amendment proposed in Finance Bill 2017 to grant interest on refund due to

deductor – pursuant to a CBDT Circular issued on the subject as well as inline with ruling of SC in the case of Tata Chemicals Limited (43 taxmann.com240)

When taxes deductible under section 195 of the Actare borne by the deductor and such person claimsthat no tax was required to be deducted. Payment oftax a mandatory requirement

Prescribed under section 249 of the Act read withrules 45 and 46 of the Income tax Rules, 1962.Appeal to be filed within 30 days of payment of taxes

• Appeal under section 248 is permitted if : taxesborne by the payer; taxes so deductible have beenpaid; no taxes liable to be deducted; and appealunder section 249 is preferred within prescribedtimelines.

• Hence, one may argue that order u/s 195(2) is nota prescribed mandate for filing the appeal.

Introduction

Form ofappeal andlimitation

Whetherorderunder195(2)mandatory?

Appeal to CIT(A) under section 248 of the ActPractical aspects

Consequences ofdefault in WHTprovisions

Consequences of non-compliance and beingtreated as Assessee in default

Section Implications

TDS - 201(1) Taxes would be recovered for the taxes short withheld

or short paid

Interest - 201(1A) • 1% p.m. or part of month for short deduction

• 1.5% p.m. or part of month for short payment

Disallowance u/s

40(a)(i)/(iii)

Expenditure disallowed in the tax computation

Disallowance u/s

58(1)(a)(ii)

Interest payable outside India, which is deductible

under the head IFOS.

Consequences of non-compliance and beingtreated as Assessee in default

Section Default Consequence

221 Default in making payment of tax

within prescribed time

Maximum penalty of 100% of the tax

arrears

271C Failure to deduct the whole or any

part of tax

Penalty equal to 100% of whole or

part of tax, as applicable

276B Failure to pay to the central

government, tax deducted under

the provisions of Chapter XVII-B or

the tax payable by him, as required

by (i) section 115-0(2); or (ii) second

proviso to section 194B

3 months to 7 years – Refer recent

decision in the case of Kitty Steels

Limited (Hyderabad Special Court)

No limit specified for a fine

The road ahead –Impact of domestic andinternationaldevelopments

India and BEPSWhat the future holds

Transfer pricingdocumentation and CbCR(Action point 13)

India has recently incorporatedCbCR provisions as a part ofdomestic laws

Aligning transfer pricingoutcomes with value creation(Action points 8 to 10)

India is keen to implement theOECD recommendations underaction points 8 to 10 by makingsuitable amendments to theIndian tax laws as soon as itwould be practically feasible

Treaty Abuse(Action point 6)

India is considering theoption of implementing theLimitation of Benefits (LOB)rule along with the PrincipalPurpose Test (PPT) rule

Preventing the artificialavoidance of PE status(Action point 7)

India is likely to implementthe OECDrecommendations thatpropose to lower PEthresholds

India (being part of G20) has been an active participant right from the initial stages of the two-year longBEPS project of the OECD and G20 countries

At public forums, the Revenue officials have expressed their views on the possible approach forimplementing BEPS recommendations in India in near future, which includes:

Measures impacting digitaleconomy (Action point 1)India has recently introducedEqualization Levy to addresscertain digital economytransactions

Making Dispute ResolutionMechanism more effective(Action point 14)India is keen onimplementing the minimumstandards

Limiting InterestDeductions (Action point4)Interest limitation rulesadopted with modifications

► Objective: Rework existing tax rules todeal with digital economy.

► BEPS Report identified 3 options:► A new nexus based on significant

economic presence► A withholding tax on digital

transactions► Equalization levy

► Objective: Address thincapitalization issues. Group wideapproach and fixed ratio approachbeing evaluated

► Amendment proposed in FinanceBill 2017 to limit interest deductionpaid or payable to AE up to 30% ofEBITDA.

Action points 5 and 6 – Counter harmful practices and prevent treaty abuse

► Objective: avoiding double non-taxation created due to treaty shopping, hybridinstrument mismatch or domestic tax laws in investor countries

Action point 4 - Limit base erosion viainterest deductionsAction point 1- Digital economy

Impact ofBEPS in Indian

scenario

Recent changes influenced by internationaldevelopments - OECD BEPS action plans

Budget 2017 proposal – Cap on Interest deductionOverview from a withholding perspective

► Begins with a non-obstante clause; and will override any other provision ofthe Act that allows or regulates interest deduction under PGBP

► Crucial to note that interest expenditure considered as allowable deductionwould also be dependent upon taxes discharged on the same which havebeen considered allowable under section 40(a)(i) of the Act.

► Crucial to verify whether taxes have been appropriately withheld whilequantifying deduction under section 94B.

Particulars Year 1 Year 2

EBITDA for the year 100 100

30% EBITDA for the year 30 30

Total interest paid/ payable to AE for the year 40 20

Total interest paid to AE on which taxes have been withheld 25 15 + 20 = 35

Interest deduction allowable for the year 25 20 or 35 or 30?

Foreign Co

End user

Payment for asingle copy

Delivery of asingle copy of

shrink wrappedsoftware

Overseas

India

Delivery of software

Payment of software

Burning issues yet to attain finality

Payment for purchase of ‘shrink wrapped’software► Debate on characterizing transactions as

generating “royalty” or “business profits” withconsequential treatment► Income characterized as “royalty” would be

taxable in the hands of a NR regardless ofexistence of PE (though taxation mechanicsmay change due to existence of a PE);

► Income characterized as “sales income” or“business profits” not subject to tax in Indiain the absence of a PE of the NR in India.

► Definition of royalty retrospectively amendedvide FA 2012 to broadly cover computersoftware but the term is open to judicialinterpretation with respect to DTAA.

Matter pending before the Apexcourt since 2013 - likely to attain finality

in the near future

Payment of lease line charges► Divergent judicial view on characterization of lease line charges as royalty or FTS.► Definition of royalty widened with retrospective effect vide FA 2012 to include Satellite;

Cable, optic fiber and any other similar technology whether such process is secret or not

Burning issues yet to attain finality

Whether retrospective amendments can be read into definition under DTAA toinvoke taxability? – Various courts have held that a retrospective amendment

made unilaterally cannot override a bilateral agreement

Does dismissal of SLP imply that the matter has been put to rest?

Reimbursement of salary in secondment arrangements► MNCs are generally seen following practice of deputing/seconding its employees to Indian

group company on a frequent basis due to commercial/business requirements;► Seconded employees report to the management of I Co but payroll continues to be

maintained by the F Co for reasons like continuity of social security, etc. and salary cost isreimbursed on cost-to-cost/cost-plus basis to F Co

► Delhi HC approved the AAR ruling in respect of constitution of Service PE and additionallyheld that the payments fall within scope of ‘FTS/ FIS’ under respective treaties

► SLP filed by the taxpayer against the above ruling has been dismissed by the Apex Court.► The Hon’ble Apex court dismissed the SLP by taxpayer against Delhi HC order

Tax DiplomacyCompleted renegotiations of tax treaties► Last few months have been extremely action-packed from an international

tax perspective, as India successfully renegotiated and concluded severaltax treaties which denied it its share of taxes

► Cyprus, Mauritius and Singapore have all signed revised tax treaties whichnow give India the taxing rights to capital gains arising to investors fromthese countries along with some other amendments

► With these renegotiations, India is steadily moving towards the BEPSrecommendation of avoiding double non-taxation of income of taxpayerscreated due to treaty shopping, hybrid instrument mismatch or double non-taxation due to domestic tax laws in investor countries

► As a consequence, the CBDT issued Notification No. 114 of 2016 dated 14December 2016 in the Gazette of India rescinding Cyprus’ classification as a“Notified Jurisdictional Area” (‘NJA’) under section 94A of the Act - “except asrespects things done or omitted to be done before such rescission, witheffect from the date of publication of the notification in the Official Gazette”

Details of transaction Renegotiated DTAAsCyprus Mauritius Singapore

Source based taxation of capital gains fromalienation of shares of an India company

a a a

Grandfathering of shares acquired till March 2017 a a a

Lower rate of taxation for transitory period (up toApril 2019 – 50% of domestic tax rate)

Full rate a a

Presence of Limitation of Benefit clause r a a

Service and supervisory PE (subject to relevantthreshold)

a a a

Interest tax rate 10% 7.5% 10/15%

FTS/ Royalty tax rate 10% 15% 10%

MFN clause benefit r r r

Tax DiplomacyCompleted renegotiations of tax treaties

Important to consider revised treaty rates while withholding tax on paymentsmade to respective countries

GAAR impact:Illustrative

consequences

Treat as ifImpermissibleAvoidance Agreementnot entered into

Reallocate income/expense/ relief

Disregard/ combine /re-characterize anysteps or parts

Treat place ofresidence, situs ofasset/ transactions atdifferent place

Disregard / treat anyparties as sameperson / deem anyconnected personsas one

Disregard/ lookthrough any corporatestructures

Treatequity asdebt orvice versa

Treat revenueitems as capitalor vice versa

Threshold ofINR 3 crores(USD 4,50,000)of tax benefit

Applicable in India wef 1 April 2017 (Grandfathering for prior investments)

Re-characterizeexpenditure,deduction, reliefor rebate

Whether payer could be adversely impacted if the tax authorities conclude thattransaction of the payee was without substance?

General Anti Avoidance RulesWading into uncertain waters

Tax administration – Recent initiatives

Focus is shifting to expand the tax base and to target black money:

► Data analytics being used for detecting high value transactions

► Demonetization cases being monitored and notices being issued

► Search and survey actions being conducted at various locations

► Unprecedented focus on ensuring tax compliances including tax withholdingcompliances

Implementation of National Judicial Reference System (NJRS) - to streamlinelitigation management

► Electronic database for all appeals and judgments in Direct Tax acting as aknowledge repository

► Targeted to increase efficiency in tax litigation process and is targeted to enableefficient litigation management, comprehensive referencing, timely actions

Due to low tax recovery, stern recovery measures likely to be adopted byauthorities

Presentation title

Case Studies

Case Study1: Centralized telecommunicationfacility

Case Study1: Centralized telecommunicationfacility

Reimbursementof cost of runningthe centralizedfacility under acost sharingagreement

Access tocentralizedtelecommunicationfacility

Overseas

Access to telecom facility

Reimbursement of cost

Danish Co

Indian Agents

India

Facts:► Taxpayer, (foreign Co.) engaged in

shipping, related business

► Appoints agents in various countries

including India for booking cargo etc.

► Sets up in-house centralized telecom

facility enabling agents to access info.

like tracking cargo, transport schedule

customer info., documentation etc.

► Expenditure for running system is

shared by all agents on pro-rata basis

under a cost sharing agreement.

Issue under Consideration:► Whether the payment received by the

tax payer (foreign co.) from the Indian

Agents for the use of centralized

telecommunication facility can be

classified as fees for technical services

(‘FTS’) under the provisions of the Act

read with relevant DTAA?

► If yes, will the same be liable to tax in

India if the said payment represents the

actual cost incurred to run the facility and

does not involve any profit element?

Case Study1: Reimbursement of Centralizedtelecommunication facility cost

Case Studies

Reimbursementof cost of runningthe centralizedfacility under acost sharingagreement

Access tocentralizedtelecommunicationfacility

Overseas

Access to telecom facility

Reimbursement of cost

Danish Co

Indian Agents

India

Classification as FTS:Ø Words “technical services” should be read in narrower sense as it appears

between “managerial and consultancy services” and thus would involve‘human efforts’.

► Mere use of a ‘facility’ does not tantamount to technical services.► Technical services denotes services that caters to the special needs of the

person using it.► Relying on its earlies decisions in the case of Kotak Securities Limited, (2016)

383 ITR 1 (SC) and Bharti Cellular Ltd. (2011) 330 ITR 239], the Apex courtheld

Taxability of payment with no income element:► Once the character of the payment is found to be in the nature of

reimbursement of the expenses (with no profit element embedded in it), itcannot be regarded as income chargeable to tax.

Case Study1: Reimbursement of Centralizedtelecommunication facility cost

Case Studies

• Ruling in case of A.P Moller Maersk A S (TS-70-SC-2017)• Taxability as Royalty – Point open for litigation

Related Controversy: Reimbursement of softwarelicense cost to Overseas related party

Issues under Consideration:► Can remittance made by India AEs

to F Co be considered as mere

reimbursement on license fees

actual cost to cost basis, and not

liable to TDS ?

► Who is the ‘beneficial owner’ the

licences fees paid by AE 2 & AE 3 ?

► Whether the amount remitted can be

taxed as ‘royalty’ ?

► Reporting in the Form 15CA & Form

15CB and application of Rule 37BA

Third party vendor

Foreign Company

AE 1

AE 2 AE 3

Overseas

India

Recharge by F Co to all AEs’ of licensefees on cost to cost basis based onlicense used.

Softwarelicencespurchased forall groupcompanies

Considerationfor services

Case Study 2 – Application of MFN clause

► I Co is engaged in the business of providing IT services

► I Co entered into a service agreement with F Co, aresident of France, for various management services(general management, corporate communications,internal audit, finance related services, etc

► Services were provided offshore through electronicmedia & no personnel visited India for provision ofthe same

► Protocol to India -France DTAA contains MFN clausefor allowing benefit of restricted scope of sourcetaxation or lower rate of tax present in anysubsequent DTAA entered by India with an OECDmember

► Subsequently, a Notification was issued by GOI givingeffect to the MFN clause, which provided for a lowerrate of tax, but made no reference to restrictive scope

F Co(France)

I Co(India)

Paym

entf

orpr

ovid

ing

man

agem

ents

ervi

ces

France

India

Facts

► On application of MFN clause, can the narrower scope of definitionof FTS, as available in India-UK DTAA (‘make available’ clause), beapplied?

► Further, can it be argued that I Co is not required to withhold taxesas services provided by F Co to I Co do not make availabletechnical knowledge, skill etc, and thus are not taxable in India?

India – FranceDTAA

Protocol Notification India-UK DTAA

Broad definition ofFTS

Make available clause inFTS definition

Did not include makeavailable clause

Issues for consideration

AAR ruling:

► Protocol (though integral part of DTAA) cannot be treated at par with DTAA provisions

► Notification issued pursuant to protocol giving effect to MFN clause provides only for

reduced rate of tax & does not include anything about “make available” clause

► Restrictions in MFN clause of India - France DTAA is in relation to rates of taxes and

“make available clause” cannot be read into protocol

► Amount held to be taxable in India at 10% rate as per Article 12 of India-France DTAA

HC ruling:► The language of the MFN clause cannot be interpreted in a restrictive manner

► MFN Clause is self-operational. The France protocol is an integral part of the DTAA

► Definition of FTS under India – UK DTAA clearly excludes “managerial services” Hence,there is no requirement to examine fulfillment of “make available” condition

► Accordingly, no withholding implications would be applicable u/s of the Act

Decision in case of Steria (India) Ltd

From the courtroom

Case Study 3 – Interplay of PE and FTSclause in DTAA for WHT purposes

Article 5 of India-US DTAA (for illustrationpurpose only)ARTICLE 5 – PERMANENT ESTABLISHMENT

1...

2. The term "permanent establishment" includes especially:

(a)….. (j)

(k) a building site or construction, installation or assembly project or supervisory activitiesin connection therewith, where such site, project or activities (together with other suchsites, projects or activities, if any) continue for a period of more than 120 days in anytwelve-month period ;

(l) the furnishing of services, other than included services as defined in Article 12(Royalties and Fees for Included Services), within a Contracting State by an enterprisethrough employees or other personnel…..

3..

4..

5..

6..

Article 12 of India-US DTAA (for illustrationpurpose only)ARTICLE 12: ROYALTIES AND FEES FOR INCLUDED SERVICES

1...

2..

3..

4..

5..

6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of theroyalties or fees for included services, being a resident of a Contracting State, carries onbusiness in the other Contracting State, in which the royalties or fees for includedservices arise, through a permanent establishment situated therein, or performs in thatother State independent personal services from a fixed base situated therein, and theroyalties or fees for included services are attributable to such permanent establishment orfixed base. In such case the provisions of Article 7 (Business Profits) or Article 15(Independent Personal Services), as the case may be shall apply.

7..

► Mumbai ITAT concluded on existence of a Service PE, without examiningwhether services fall within the scope of FIS under Article 12 and held thatwhere PE is constituted, FTS/ FIS clause is not required to be analysed,basis Article 12(6) of India–USA DTAA► Delhi HC ruling in case of Centrica India (supra) distinguished on the basis that

provision of Article 12(6) was not brought to the notice of Delhi HC

► FTS/ FIS clause need not be examined in order to determineexistence of a Service PE: Mum ITAT (Morgan Stanley decision)

► If the taxpayer fails to satisfy the PE test, then even FTS clause notrequired to be analysed: Jabalpur ITAT (Birla Corporation decision)

► Jabalpur ITAT observed that if installation PE clause (being more specific) isanalyzed & held that PE is not formed, then taxability under FTS / FIS is notrequired to be analyzed at all

► Similar view had been upheld in the past in the case of Aditya Birla NuvoLtd (11 ITR 812) (Mum ITAT)

From the courtroom: Divergent views

► Delhi HC observed that FTS clause should be examined even if PE istriggered :► Payments made by I Co to F Co would be taxable as business profit

as Service PE was triggered► Additionally, as services were ‘made available’ to I Co by F Co, the

same would also be covered under FTS clause► SLP dismissed by the Hon’ble Apex court

FTS clause should be analysed even if the taxpayer has a PE in India:Delhi HC (Centrica)

From the courtroom: Divergent views

Moot question:Whether the above debate can be said to be merely academic

considering the definition of “rates in force” u/s 2(37A)?

Questions?

Time of Deduction & Payment Covered

Relevant extract of royalty article in India - USA treaty:

► Royalties and fees for included services arising in a Contracting State andpaid to a resident of the other Contracting State may be taxed in thatother State.

► However, such royalties and fees for included services may also be taxedin the Contracting State in which they arise and according to the laws ofthat State; ….

Relevant extract royalty article in India – Sweden treaty:

► Royalties and fees for technical services arising in a Contracting Stateand paid to a resident of the other Contracting State may be taxed in thatother State.

► Notwithstanding the provisions of paragraph (1), such royalties and feesfor technical services may also be taxed in the Contracting State inwhich they arise, and according to the laws of that State, …

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