foreign remittances u/s 195 of income tax act
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Foreign Remittances u/s 195 of Income tax Act. CA. PANKAJ SHAH |F.C.A.|C.S.|LLB( Hons .)|B.B.A.|. FEMA - Foreign Remittance. Current Account remittances like Trading remittances, Rent, Dividend, Interest, etc are freely remittable unless prohibited - PowerPoint PPT PresentationTRANSCRIPT
CA. PANKAJ SHAH|F.C.A.|C.S.|LLB(Hons.)|B.B.A.|
Foreign Remittances u/s 195 of Income tax Act
May 10, 2014
FEMA - Foreign Remittance Current Account remittances like Trading
remittances, Rent, Dividend, Interest, etc are freely remittable unless prohibited
Capital Account transactions like Investment in Shares, Property, Sale proceeds of Assets are generally restricted unless specifically allowed
NRI/PIO are allowed to remit upto USD One Million p.a. out of funds in NRO Account
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Remittance Procedure as per RBI
RBI has in A.P. (DIR Series) Circular No. 56, dated November 26, 2002 has instructed the Authorised Dealers (Banks) to make Remittance abroad after obtaining following:
Declaration from the Remitter in Form A2 (FEMA) specifiying nature and purpose of remittance
Income tax Clearance
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Income tax Clearance Under Income tax following facilities
are available for Income tax Clearance
Sec. 195(2) - Application by payer to A.O. for lower deduction
Sec. 195(3 & 4) - Application by payee to A.O. for lower deduction of Tax
Sec. 195(5) - Powers to CBDT to make Rules (Rule 37BB)Eg. Travel for Pilgrimage, Student Education, Equity Investment
Section 195(6) – C.A. Certificate in Form 15CB
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Tax Determination
Under Income tax if Remittance amount is
Taxable in hands of NR – Clearance after tax is paid Taxable If income is Received in India Taxable if income is accrued in India
Not taxable – Clearance on determination that no tax payable
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Section 195 (1)
“Any Person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest 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 further that no such deduction shall be made in respect of any dividends referred to in section 115-O”
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Objective of S. 195
Circular No. 152 dt. 27-11-74
Tax is collected at the earliest point of time
No difficulty in collection of tax at the time of assessment
To avoid loss of revenue as the non resident may not have assets in India for subsequent recovery
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Scope of S. 195 Person responsible to deduct tax - Person as defined in section 2(31) - Includes non-residents and foreign companies
• Satellite Television Asia Region Ltd (99 ITD 92)(Mum)• Vodafone B.V. (SC)• E-trade Mauritius Ltd (Mum HC)
On Payments made to non residents- Includes all non residents having presence in India or not- It does not include RNOR
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Scope of S. 195 What are the payments covered?
- Any sum chargeable under the Act- Except Salary and dividends referred to in section 115-O
When to deduct tax?- At the time of payment or credit whichever is earlier
What rate to apply?- Lower of the two rates:
• Relevant rates in force; or• Rates under the Tax Treaty – sec 2(37A)(iii) – Circular No. 728 dt. 30-
10-1995
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Section 4 and 195
Section 4(2) – “chargeable”
Section 195 not a charging but a machinery provision to give effect to Section 4(2). Eli Lily’s case (312 ITR 225)(SC)
Withholding tax is an offshoot of chargeability - not independent of it.
Whether payer is under obligation to withhold tax , even if the receipt is not taxable in the hands of the payee?
G. E. India Technologies v. CIT (327 ITR 456)(SC) Cooper Engineering v CIT (68 ITR 457) (Bom) Transmission Corporation’s case (239 ITR 587) (SC). Vijay Ship Breaking Corporation v. CIT (314 ITR 309) Maharashtra State Electricity Board v. DCIT (90 ITD 793)
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Section 5 and Section 9
Section 5(2)(b) defines ‘Total Income’ of ‘non-resident’ to include income which ‘accrues’ or ‘arises’ or is ‘deemed to accrue or arise’ in India.
Section 9 explains the meaning of the words “deemed to accrue or arise in India’ used in section 5(2)(b)
Right to tax – some reasonable nexus with India Residence; or Source
[Wadia v. CIT (17 ITR 63)(PC)]
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Impact of DTAA
Section 90(2) provides that where a DTAA exists beneficial of
Income tax Act or DTAA
shall apply
However for availing benefit of DTAA it is compulsary to obtain TRC of the Payee Non Resident
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Accrue or Arise – Business Income
Sale of Goods or Service in India.
Through a Fixed place of Business / PE in India
Profits attributable to Indian operations taxable in India
Eg. HSBC Bank (Branch of HSBC Bank Singapore)
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Accrue or Arise – Capital Gains
Subject Property located in India
Transferred and Gains accrue to NR
Taxable in India as Income generates in India
However, Treaty with Tax Havens like Mauritius, Singapore provide that gains are taxable in Country of Residence. Azadi Bachao Andolan versus Union of India (SC)
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Deemed to accrue or arise in India – meaning
Section Sources Of Income
Description
9(1)(i) Business Income
Income from a business connection in India or through or from any property or capital asset or source of income or transfer of capital asset situated in India.
9(1)(ii) Salaries Salaries for services rendered in India.
9(1)(iii) Salaries Salaries by Govt. for services outside India.
9(1)(iv) Dividend Dividend paid by an Indian Company outside India. (now Exempt)
9(1)(v) Interest Interest by Govt. or by a resident (unless for a business or source outside India)
9(1)(vi) Royalty ‘Royalty’ by Govt. or a resident (unless for a business or a source outside India).
9(1)(vii) FTS ‘Fees for Technical Services (FTS)’ by Govt. or a resident (unless for a business or a source outside India).G.J. Shah & Company.15
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BUSINESS CONNECTION Taxability of a Business Income of Non-Resident Sec. 9(1)(i)
Taxability if “Business Connection“ exists or if asset or source in India. (Vodafone)
R.D. Agarwal (56 ITR 20(SC)); Cir. 23 of 1969 & Cir. 786)
Taxable only to the extent “reasonably attributable” to operations in India.
Morgan Stanley-292 ITR 416 (SC);
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Import Payments
Remittance for Import Purchases to overseas supplier
Proceeds are Business Income of the Supplier NR
If the Supplier does not have a Permanent Establishment in India then No tax
However 15CB required for remittance of Import ProceedsA.P. (DIR SERIES) (2007-08) CIRCULAR NO. 3, DATED 19-7-2007
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Overseas Commission to NR Agent
NR Agent provides services to locate buyers for Export
The same is business income of NR
In absence of PE/ Business connection in India – Not taxable
DCIT v Eon Technology ( P) Ltd ( 2011) 46 SOT 323, Dy. CIT v Devi’ s Laboratories Ltd ( 2011) [140 TTJ 746]
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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)
Reimbursement of Expenses:
TAXABILITY OF REIMBURSEMENT OF EXPENSES
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Explanation to S.9(1)(v), (vi) &(vii)Interest, Royalty, FTS
Taxable whether or not, —(i) the non-resident has a residence or place
of business or business connection in India; or
(ii) the non-resident has rendered services in India.”
Nullified Jindal Thermal Power Company Ltd. vs. DCIT (TDS) (182
Taxmann 252) Bombay High Court in Clifford Chance vs. DCIT (176
Taxmann 458)G.J. Shah & Company.
Case Studies
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Interest Loan taken from a Foreign Bank abroad for
Indian Project Overseas Project
Interest is being paid to Lender Bank abroad
Taxable or Not?
Interest paid to Bank resident in Mauritius ?
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Royalty Payment for “right to use” an Asset
Whether or not used in India or located in India
Imported Software?
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Fees for Technical Services Includes payment in consideration for the services of
managerial, technical or consultancy nature
Whether or not PE or received in India DTAA – “make available”
USA, Netherlands, U.K. Rate of Tax – 25%
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Fees for Technical Services Fees for Due Diligence carried out in South Africa?
Fees to Foreign Recruitment Agency in Resident of South Africa Ressident of USA
Fees for Repair of Imported Machinery to USA Co.
Fees for technical service paid to UAE Company which does not have clause of ‘FTS’?
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Golden Rules (as per ACT)
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Income Received in India – Taxable Income Accrued in India - Taxable
Nature of Remittance TAXABILITY
BUSINESS INCOME PE MUST
INTEREST PE IRRELEVENT
ROYALTY PE IRRELEVENT
FEES FOR TECHNICAL SERVICES
PE IRRELEVENT
CAPITAL GAINS ASSET OR BUSINESS IN INDIA
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C. A. Certificate Reasoning for nil/lower deduction.
Determination of residence for deduction
Precautions Representation – No PE Copies of Back-up papers. Certificate of Fiscal Residence must for Treaty Benefit
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“Rates in Force” & S. 206AA
Section 2(37A)
Effect of DTAA
CBDT Circular No. 728 dated 30.10.95
Whether surcharge leviable if DTAA rates adopted.
Effect of 206AA
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Consequences of non-deduction
Deductor deemed “assessee in default” – S. 201(1)
Interest @ 15% p.a. Section 201(1A).
Penalty u/s. 221
Penalty u/s. 271C.
Prosecution u/s. 276B.
Section 40(a)(i)
Section 163
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**Certificate No.2
Date: April 18, 2014 Signature:____________________
Form 15CA
Part A: To be filled up if
the remittance is chargeable to tax and
does not exceed fifty thousand rupees and
the aggregate of such remittances made during the financial year does
not exceed two lakh fifty thousand rupees
Part B: To be filled up if
the remittance is chargeable to tax and
exceeds fifty thousand rupees and
The aggregate of such remittances made during the financial year
exceeds two lakh fifty thousand rupees
THANK YOUPankaj G. Shah|F.C.A.|C.S.|LLB(Hons.)|BBA|
G.J. Shah & CompanyChartered Accountants
Mob-969 189 [email protected]