foreign remittance certification in form 15ca &...

CA. PANKAJ G. SHAH| B.B.A.| L.L.B.(Hons.)| C.S.| F.C.A.| D.I.S.A.(ICA)|

Foreign Remittance Certification in Form 15CA & 15CB

FEMA - Foreign Remittance Current Account remittances like Trading

remittances, Rent, Dividend, Interest, etc are freelyremittable unless prohibited

Capital Account transactions like Investment inShares, Property, Sale proceeds of Assets aregenerally restricted unless specifically allowed

NRI/PIO are allowed to remit upto USD One Millionp.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, datedNovember 26, 2002 has instructed the AuthorisedDealers (Banks) to make Remittance abroad afterobtaining following:

Declaration from the Remitter in Form specifying nature and purpose of remittance A1 – Imports A2 – Other than Imports

Income tax Clearance

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Income tax Clearance

Under Income tax following facilities areavailable 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

Sec. 195(6) – C.A. Certificate in Form 15CB

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Section 195 (1)“Any Person responsible for paying to a non-resident, not being acompany, or to a foreign company, any interest or any other sumchargeable under the provisions of this Act (not being incomechargeable under the head “Salaries”) shall, at the time of credit ofsuch income to the account of the payee or at the time of paymentthereof in cash or by the issue of a cheque or draft or by any othermode, whichever is earlier, deduct income tax thereon at the ratesin force…………….”

“Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O”

G.J. Shah & Company.

GE Technology 327 ITR 456(SC)

Payer not liable to deduct tax if amount not chargeable to tax

S.195(2) applies where payer is certain that tax is deductible on some part of remittance in composite payment

If payer is fairly certain, then he can make his own determination of TDS without AO by CA Certificate

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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

G.J. Shah & Company.

……any sum chargeable to tax Section 5(2)

Taxable in hands of NR – Clearance after tax ispaid Taxable If income is Received in India Taxable if income is accrued in India

Not taxable – Clearance on determination thatno tax payable

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To sum up

Reporting Mandatory in S.195(6)• Irrespective of taxability

Penalty u/s 271-I• Rs. 1 Lakh

Rule 37BB EXCEPTIONS

Online Form 15CA and 15CB

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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’ toinclude income which ‘accrues’ or ‘arises’ or is ‘deemed toaccrue or arise’ in India.

Section 9 explains the meaning of the words “deemed to accrueor arise in India’ used in section 5(2)(b)

Right to tax – some reasonable nexus with India Residence; or Source Interest, Royalty and FTS

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Impact of DTAA

Section 90(2) provides that where a DTAA existsbeneficial of Income tax Act or DTAA

shall apply

However for availing benefit of DTAA it is compulsary toobtain TRC of the Payee Non Resident

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Tax Residency Certificate / Form 10FTRC mandatory for claiming Treaty Benefits S.90(4)

Rule 21AB• Prescribed format – Difficult to obtain• Amended to have prescribed details in TRC

Form 10F• Self Declaration by NR• Information to be provided

• Status of taxpayer (Individual/Company/firm)• Nationality or Country • Taxpayers tax identification no.

• If no such no. then a unique number used to identified by Govt.• Period of residential status• Address

Form 10FA – TRC from Indian Government

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C. A. Certificate Reasoning for nil/lower deduction.

Determination of residence for deduction

PrecautionsRepresentation – No PECopies of Back-up papers.Certificate of Fiscal Residence must for Treaty Benefit

G.J. Shah & Company.

Specified Exemptions Travel for Pilgrimage, medical

treatment, education, business

Indian Investment abroad

Equity shares

Debt securities

Branches / WOS

Subsidiaries/Associates

Real estate

Advance against imports

Payment towards imports

Non resident towards family

maintenance

Personal gifts and donations

Payment or refund of taxes

Rebate reduction in invoice

value of exports

Payment in International

bidding

Documentation

Agreement, Invoice describing Nature of Payment

No PE Declaration by NR

Tax Residency Certificate + 10F if necessary

Opinion / Advice on taxability and TDS applicability

Exchange Rate Letter

CA Certificate in Form 15CB

Jurisdiction

Principal CCIT (Intl.tax), New Delhi

CCIT (Intl.tax)(West Zone), Mumbai

Director (I & TP), Ahmedabad

Additional/ Jt. Director (I & TP), Ahmedabad

Assistant/Dy. Director (I & TP), Ahmedabad

Income tax Officer (International tax & TP), Bhopal

DTAA Rate + Surcharge + Cess ?

Absolute Rates as per DTAA

Surcharge and Edu.Cess not to be included• DIC Asia Pacific Pte. (52 SOT 447)(Kol)• Sunil Motiani (59 SOT 37) (Mum)

Grossing up of Tax (S.195A)

Where the tax chargeable on any income

Is to be borne by the person by whom the income is payable,

then, for the purposes of deduction of tax

such income shall be increased to such amount as would, after TDS thereon at the rates in force

be equal to the net amount payable under such agreement or arrangement.

• Amount payable 100 and TDS 10% - Gross amt 111.11 (100*100/90)

Gross Receipts or Income

CBDT vide Instruction No 2/2014 instructed that in cases where the assessee does not withhold taxes under section 195 of the Act, the AO is required to determine the income component involved in the sum on which the withholding tax liability is to be computed and the payer would be considered as being in default for non-withholding of taxes only in relation to such income component.

Determination of income chargeable to tax

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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

Liability to deduct tax for Sale of property arises when Sale deed clearly showed that seller is NR.

• Mrs. Meena S. Patil v ACIT 30 ITR 317 (Bang Tri)

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 –meaningSection Sources Of

IncomeDescription

9(1)(i) Business Income

Income from a business connection in India or through or fromany property or capital asset or source of income or transferof 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. (nowExempt)

9(1)(v) Interest Interest by Govt. or by a resident (unless for a business or sourceoutside India)

9(1)(vi) Royalty ‘Royalty’ by Govt. or a resident (unless for a business or a sourceoutside India).

9(1)(vii) FTS ‘Fees for Technical Services (FTS)’ by Govt. or a resident(unless for a business or a source outside India).

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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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Business Income

Is TDS required to be deducted on Import Payments?

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

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Safeguards – Import Payments

Avoid E-mail correspondance with Indian Agents

Indian agent should not be Dependent agent• Mainly and wholly

Indian agent should not• Secure orders• Conclude contracts• Negotiate rates

Tax Rate 40% on income

Income considered at 10% of Import value

Liasion Office

LO

Marketing Activities

No

No PE

Yes

PE

Overseas Commission to NR Agent

Toshoku Limited (1980) (125 ITR 525) (SC)

No PE/ Business connection in India – Not taxable • Farida Leather Company [2016] 287 CTR 565 (Madras)• CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155 (Mad)• CIT v. EON Technology (P.) Ltd. [2011] 203 Taxman

266(Del)• AMD Metplast (P.) Ltd. v. Dy. CIT [2012] 341 ITR

563(Del)G.J. Shah & Company.37

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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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InterestRoyalty

Fees for technical Services

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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)

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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

Process – transmission by satellite, cable, optic fibre, etc. 194J Electricity, Telephone

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Fees for Technical Services

Includes payment in consideration for the services of• managerial, • technical or • consultancy nature

Excludes where used for earning from source outside India

any construction, assembly, mining or like project

Whether or not PE or received in India

Rate of Tax – 10%

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Fee for Technical Services and DTAAD

TAA

Managerial, technical or consultancy Various

Technical and Consultancy

Canada, Finland, UK, US, Australia,

Singapore

No FTS clause (refer royalty clause)

Australia, Bangladesh, UAE, Indonesia, Mauritius, etc.

Make availableUS, UK, Canada,

Australia, Singapore, Finland

MFN Netherland, France, Sweden, etc.

Make Available

DTAA – “make available”

Rendering of services by US Co such that Indian Co can use inventions, ideas and improvements obtained from US Co

•Providing technical designs to enable Indian Co to perform mining job by themselves

•Providing technical services and start-up services to enable promoters to set up power plant and run it on a going forward basis

•Sending technicians to show personnel in Indian Co to undertake certain tasks

Most Favoured Nation

MFN terms granted to other countries extended to existing DTAA• Lower tax rate, • Narrowing scope of income liable to tax

Binds country (‘A’) to offer to the other country (‘B’) the same benefits which A may offer to a third country

Under protocol / exchange of notes, MFN DTAA

• Netherlands, Belgium, France, Sweden, Norway, Switzerland, • Spain, Kazakhstan, Philippines and Hungary

FTS not defined in DTAA

No FTS definition in DTAA

Business income or Other income• No PE – Not taxable

Jurisprudence• Tekniskil (Seniderian) Berhard (222 ITR 551) (AAR)• GUJ Jaeger GMBH (37 ITD 64) (Mumbai ITAT),• Christiani & Nielsen Copenhagen (39 ITD 355) (Mum)• Golf in Dubai, LLC, vs. DIT [2008] (306 ITR 374) (AAR).• Bangkok Glass Industry 34 Taxmann.com 77 (Mad)

Golden Rules (as per ACT)

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Income Received in India – Taxable Income Accrued in India - Taxable

Nature of Remittance TAXABILITYBUSINESS INCOME PE MUSTINTEREST PE IRRELEVENTROYALTY PE IRRELEVENTFEES FOR TECHNICAL SERVICES

PE IRRELEVENT

CAPITAL GAINS ASSET OR BUSINESS IN INDIA

Case Studies

FTS Case Study

A Ltd. makes payment of technical services to B Ltd. France.

Tax rates are as follows:

• France 20%• US 10%• Germany 10%

What is rate of TDS?

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Case StudiesFees for Due Diligence CA Firm in South Africa for

• DD of Indian company• DD of South African Co.

Fee to Foreign Recruitment Agency ABC, South Africa for finding employee in Canada?

Employee interview fees paid to Head Hunters, USA?

Fees to CA in UAE for Auditing Accounts of Branch?

Business support services given to Assessee by US Co.?

G.J. Shah & Company.

Other Remittances

Fees for Repair of Imported Machinery to Singapore Co.

It is the Web-server and not the Website which constitutes a “Permanent Establishment” – examined only on the basis of website simplicitor and no other additional basis.

• Right Florists (P.) Ltd. (32 taxmann.com 99)

User Fees paid by Indian users of website cannot be characterised as “Fees For Technical Services”

• eBay International AG (140 ITD 20)

Whether payments for keyword advertising are for “use of equipment”—Held No

• Pinstorm (2012) and Yahoo India (2011)

Referral fee paid to NR is not taxable in India.

• Cushman and Wakefield Pte Ltd. 305 ITR 208 (AAR)

Discounting charges from LC

Particulars AmountInvoice Amount Export 100LC Charges -2Net Payment Received 98

Accounting Issues

Withholding tax issues• Diversion by Overriding title• No payment by Assessee

Sponsorship Sponsorship to popular sports events is sales

promotion expenditure. It cannot be treated as royalty. Hence, no TDS. DIT v Sahara India Financial Corporation Ltd 321 ITR 459

(Del)

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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.

G.J. Shah & Company.

Rates in Force

Nature Foreign Co. (Sur 2/5%)

Non Corp. (Sur 15%)

Business Income/Other Income

41.20 %42.024 43.26 %

30.9 %35.535 %

Royalty/FTS 10.3 %10.506 %10.815 %

10.3 %10.845%

Effect of Section 206AA

Taxable

No Yes PAN/FTR

Yes No

Treaty and TRC

Yes -DTAA

No –20%

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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

G.J. Shah & Company.

THANK YOUPankaj G. ShahG.J. Shah & CompanyChartered Accountants

Mob-969 189 3040pankajgshah@gmail.com