With holding tax of non residents under section 195 Importance of Section 195

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Importance of Section 195

  • To cut or Not to cut that is the question?

  • Withholding tax or TDS(Tedious) would be the best name to describe this Section of the Income Tax Act,1961.

  • Regards importance:

  • Gateway to International Taxation for Domestic Persons

  • More and More Payments to non residents.

  • Increased revenue’s attention like form 15CA and 15CB

  • Professional Diligence for CA’s

Unique Features of section 195 as compared to other TDS provisions

  • Unlike personal payments exempted in section 194C (ie If he is liable to get audited U/S 44AB) etc; no exclusion for the same in section 195 (all payments covered excluding salaries provided) eg. payment to foreign architect for residential house construction.

  • Unlike threshold criteria specified in section 194C etc, no basic limit in section 195 even Rs.1 payment is covered

  • Unlike other provisions in Chapter XVII (TDS provisions), section 195 uses a special phrase “chargeable to tax under the Act”

  • All payers covered irrespective of legal character HUF; Individual etc

  • Multi-dimensional as involves understanding of DTAA/Treaty

Objective behind section 195

  • Non resident connection with India for the transactions

  • Potential Difficulty in Recovery having little/no assets in India

  • To Avoid Hassles of recovery from Non resident

Overview of section 195

  • Section 195(1)

  • Jurisdictional Operation

  • Territorial Operation

  • Section 195(2)

  • Certificate by Revenue for LOWER withholding

  • Application from Payer No Format

  • Section 195(3)

    • Certificate by Revenue for NIL Withholding

    • Application by Payer – Rule 29B Form 15C and Form 15D

    • Section 195(4)

    • Validity of certificate by revenue

    • Section 195(5)

    • Power of CBDT to issue notification

    • Section 195(6) Finance Act 2008

    • Rule 37BB & Form 15CA and Form 15CB

    • Scope of provision vis a vis Main Provision 195(1)

Section 195(1) : Key Phrases

    • Any person responsible for paying to a; (payer)

    • A Non resident, not being company, or to a foreign company ; (payee)

    • Any Interest or other sum chargeable under the provisions of the Act;

    • Shall at the time of credit or payment whichever is earlier;

  • In the case of Gov., Public sector bank and PFI at the time of payment; shall deduct the tax at rates in force.

Payer Covered

  • Payment by branch to HO/another branch abroad whether payment by a “person” to a “payee” u/s 195? –

  • Payment by Agent to Principal Abroad for Indian Collections

  • If Vendor of Property is a non resident –purchaser has to apply Section 195.

  • Payment by Bank in India acting as agent for purchase/sale of securities on behalf of foreign resident

  • Whether Non Resident Payer Covered: Eg. Purchase of Indian co. shares by A from B both are non residents : contract and payment outside India?; Payment outside India by Branch of Indian Co In Singapore to foreign people for Singapore branch business purposes (daily house keeping) etc?

Chargeable to tax under Act

How to approach taxability of non resident payee while proceeding u/s 195 of the Act:

 Step 1: Make the classification of transaction (eg whether covered u/s 9(1)(v),(vi),(vii) or u/s 9(1)(i) resp. dealing with interest, royalty or Fees for technical services and Business transaction in general etc.

Step 2: Check the taxability under Income Tax Act

Step 3: If Above is in affirmative, Check as per treaty entitlement and DTAA (if any), taxability under DTAA

Sec. 9- a brief

Section 9 defines Income deemed to accrue or arise in India. Following payments are covered:

  1. all income through or from any business connection in India/ any property in India/ any asset or source of income in India/ capital asset situated in India.

  2. income under the head “Salaries”, if it is earned in India.

  3. income under the head “Salaries” payable by the Government to a citizen of India for service outside India ;

  4. dividend paid by an Indian company outside India ;

  5. Interest

  6. Royalty

  7. Fees for technical services

Payments for which stand can be taken on chargeability point by payer itself, without approaching AO/TDS u/s 195(2):

  • Payments for capital account: loans; their repayment, gift remittance etc

  • Payment for revenue account: raw material import

  • Payment expressly exempt under the Act eg section 10

Act or DTAA/Treaty whichever is beneficial prevails

Nature of Income

Act (apart from section 5 where-ever applicable)



Section 9(1)(i): Concept of Business Connection

Article 5;7; Concept

of Permanent

Establishment(PE) or

Fixed Base

Salary Income

Section 9(1)(ii)

Article 15

Dividend Income

Section 9(1)(iv) and section 115A

Article 10

Interest Income

Section 9(1)(v) and section 115A

Article 11


Section 9(1)(vi) and section 115A

Article 12

Fees for technical services/FTS

Section 9(1)(vii) and section 115A

Article 12

Capital Gains

Section 9(1)(i) and section 45

Article 13

Payee Covered

    • Non resident. Except company (section 2 definitions)

    • Status at the time of payment or preceding year? (Sec.6)

    • Payment to agent of non resident

    • Whether covers resident but not ordinarily resident as payee u/s 195? Seems No

    • Branch/PE of Non resident Assessee CBDT Circular No 20/3-1-1961 – (foreign bank branch – practical way out – branches obtain 195(3) certificates)

    • When payee is a non resident as per DTAA and not as per section 6? Only IT Act applies, no FEMA or DTAA

Payment covered

    • Where No credit nor payment: CJ International Hotels Ltd v ITO (79 ITD 506) (Delhi)-No tax liability

    • Payment in Kind: SC ruling in Kachanganga Sea Foods Ltd IN 7/7/2010 Approving APHC order 265 ITR 644 –Taxable

    • Payment subject to Approval : Adverse views in Kar HC in United Breweries Ltd 211 ITR 256 (fav. views in BHC in Motor Industries Company Vs.Asst.comm 249 ITR 141)

    • Remuneration to Non resident Partners (in case partners are carrying activities outside India for firm’s business – could be argued that same is not chargeable to tax in India…)

    • Award amount under court rule: Held not applies

    • Void Agreements Payment – Delhi ITAT in Ericsson – no TDS applies

Section 195(2): Application by Payer to revenue: No Format

    • If the gross income is not chargeable to tax and so the payer has to make an application to the AO.

    • Based on principle of proportionality for charging tax

    • Applies when payer has doubt for chargeability vis a vis

    • Payee : Computation in doubt( Eg. Capital Gain)

    • Is not applicable to every foreign remittance as revenue seeks to keep track of foreign payments through this and for admin convenience – Not tenable

Sec. 195(3)/(4)

  • Recipient of interest or other sum (other than salary) may make an application in the prescribed form to the AO and obtain a certificate authorizing the person responsible for making such payment to pay without deducting tax thereon.

  • Note: application to be made in form 15C by banking Co. and 15D by others recipients (carrying on business/ profession in India through branch for any sum not being int./div. [Rule 29B]

  • certificate issued u/s 195(3) to be valid until cancelled by AO.

Section 195(6) : Rule 37BB

Section 195(6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.

Rule 37BB. (1) The information under sub-section (6) of section 195 shall be furnished by the person responsible for making the payment to a non-resident, not being a company, or to a foreign company, after obtaining a certificate from an accountant as defined in the Explanation to section 288 of the Income-tax Act, 1961

Objective of section 195(6)

“..The purpose of the undertaking and the certificate is to collect taxes at the stage when the remittance is made as it may not be possible to recover the tax at a later stage from the non-residents. There has been substantial increase in foreign remittances, making the manual handling and tracking of certificates difficult. To monitor and track transactions in a timely manner, it is proposed to introduce e-filing of the information in the certificate and undertaking. The amendment therefore, proposes to provide that the person responsible for deduction of income tax shall furnish the information relating to payment of any sum to the non-resident or to a foreign company in a form and manner to be prescribed by the Board…..”

Form No 15CA and Form 15CB

- Documentation by CA while issuing Form 15CB

    • Agreement and Invoices; Tax Residency Certificate

    • Declaration/Certificate from payee

    • for – no PE, tax residency, beneficial owner, treaty entitlement, etc and Indemnification from payee

    • Payment details

    • Correspondences

    • Technical Advice – prove bonafides

    • Proof of services being rendered in case of Group Company transactions

    • E-mails etc regarding pricing in case of Group Company transactions

    • Obtain TRC (Tax Residency Certificate) of Payee so as to examine treaty provisions (else obtain self declaration form (SDF) sufficiently detailed from payee as to tax residency of a country)- at appropriate places mention certificate based on declaration of payee eg declaration of payee on PE presence /income connection with PE may be required..

    • Example of Certification language by CA:

    • Since subject services being advertisement charges are classifiable as business profits under India- USA DTAA, in absence of payee’s PE under Article 5 of said DTAA, the subject remittance to payee is not taxable as business profits in India and hence it is concluded that no tax is deductible on the same”

    • Since subject export commission payable to non resident payee is classifiable as business profits under India USA DTAA, in absence of payee’s PE under article 5 of said DTAA, the subject remittance to payee is not taxable as business profits in India and hence it is concluded that no tax is deductible on the same”

Critical Points in Form 15CB

  • Beneficiary of Payment; Documents Examined

  • Legal Status of Payee

  • Capital Gains and Verification of PE

  • Form No 15CB whether applies to all payments? Rule versus Act 195(1) versus 195(6 No appeal against CA Certificate

  • No appeal against CA Certificate

Steps in brief


1. Obtains 15CB from the Chartered Accountant

2. Access www.tin-nsdl.com

3. Electronically uploads the remittance details in Form 15CA

4. Takes printout of filled undertaking form (15CA) with system generated acknowledgement number.

5.Print out of the undertaking form (15CA) is signed.

6. Submits the signed paper undertaking form to the RBI/Authorized dealer along with certificate of an Accountant in duplicate.

7. RBI/Authorized dealer remits the Amount

Refund of TDS…………? Some cases

Below mentioned cases are referred in it for consideration of refund in case of N.R.

  • Contract is cancelled and no remittance to N.R.

  • Remittance made to N.R. ,but the contract is cancelled and the remitted amount has been returned.

  • Contract cancelled after partial execution and no remittance to N.R. for non executed part.

  • Contract cancelled after partial execution and remittance related to non executed part is made to N.R. , either the remitted amount has been returned or not, but the tax was deducted and deposited.

  • Exemption of the remittance either by amendment in law or by notification.

  • Order is passed under section 154 or 248 or 264 reducing the tax liability or deductor under section 195.

  • Deduction of tax twice by mistake.

  • Payment of tax on account of grossing up, which was not required under the provisions.

  • Tax deducted at higher rate, however lower rate is prescribed in the relevant DTAA


  • Deemed to be assessee in default

- Receiver’s tax becomes payer’s tax [201(1) & 220]

  • Not to get deduction of underlying sum paid to non resident [40 a ]

  • Pay interest @ 1% pm [201(1A)]

  • Liable to penalty

    • up to 100 % of TDS amount [221]

    • up to 100 % of TDS amount [271 C]

    • of Rs. 100 per day for default in issuing TDS

Certificate / filing quarterly returns [272A(2)]

  • Imprisonment (3 months to 7 years) and fine [276B]


  • Taxability of LTCG from unlisted securities in the hands of non-resident and foreign company at 10% without indexation.

  • W.e.f the assessment year 2013-14. After the amendment LTCG will be taxable at the rate of 10% if the following conditions are satisfied:

  • (a)  Taxpayer is a non-resident (not being a company) or a foreign company;

  • (b)  LTCG arises on transfer of unlisted securities (i.e. unlisted shares, unlisted debentures, etc.)

  • (c)  LTCG is calculated without giving effect to the first proviso to S.  48 (under this proviso capital gain is calculated in foreign currency if few conditions are satisfied)

  • (d)  Capital gain is calculated without applying indexation provisions.


CA.P.Satheesan FCA



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