PROVISIONS OF TDS UNDER SECTION 195 – AN UPDATE – PART III

In Part I of the Article we dealt with overview of the
statutory provisions relating to TDS u/s. 195 and other related sections,
various aspects and issues relating to section 195(1), section 94A and section
195A.

In Part II of the Article, we dealt with provisions section
195(2), 195 (3), 195(4), section 197, refund u/s. 195, consequences of non-deduction
or short deduction, section 195A, section 206AA and Rule 37BC.

In this part of the Article we are dealing with various other
aspects and applicable relevant sections and issues.

1.     Furnishing of
Information relating to payments to non-residents

1.1    Section 195(6)

Section 195(6) substituted by the
Finance Act, 2015 wef 1-6-2015 reads as follows:

“(6)
The person responsible for paying to a non-resident, not being a company, or to
a foreign company, any sum, whether or not chargeable under the
provisions of this Act, shall furnish the information relating to payment of
such sum, in such form and manner, as may be prescribed.”

In respect of section 195(6) it is
important to keep in mind that the substituted s/s. mandates furnishing
information for all payments to (a) a non-resident, not being a company, or (b)
to a foreign company, irrespective of chargeability of such sum under the
provisions of the Act.

Section
271-I inserted w.e.f 1-6-2015 provides that if a person, who is required to
furnish information u/s. 195(6), fails to furnish such information, or
furnishes inaccurate information, the AO may direct that such person
shall pay, by way of penalty, a sum of Rs. 1 lakh.

It is to be noted that though
section 195(6) was substituted w.e.f 1-6-2015, there was no simultaneous
amendment in rules. Rule 37BB was substituted by Notification No 93/2015 dated
16^th December 2015 effective from 1.4.2016.

1.2    Rule 37BB –
Furnishing of information for payment to a non-resident, not being a company, or
to a foreign company

a)  It is worth noting that while section
195(6) provides that information is to be submitted in respect of any sum,
whether or not chargeable under the provisions of Act, Rule 37BB(1)
provides that the person responsible for paying to a non-resident, not being a
company, or to a foreign company, any sum chargeable under the
provisions of the Act, shall furnish the prescribed information. Thus, on a
plain reading it is apparent that the Rule 37BB restricts the scope of
submission of the information as compared with the provisions of section
195(6).

b) Thus,
a question arises as to whether the rules can restrict the scope of the
section. Based on the various judicial precedents it is well settled that the
rules cannot restrict the scope of what is provided in the section.
Accordingly, the information should be furnished for all payments, irrespective
of chargeability under the provisions of Act except in cases given in Rule
37BB(3).

c) Rule
37BB in substance provides for submission of prescribed information in Form
15CA as follows:

i. If payments are chargeable to tax and not exceeding Rs. 5,00,000
in a financial year, information in Part A of Form 15CA.

ii. Payments chargeable to tax other than above:

Part B of Form 15CA
after obtaining 197 certificate from AO or Order u/s. 195(2) or 195(3) from AO

or Part C of Form 15CA
after obtaining Certificate in Form 15CB from an accountant.

iii.   Payments not chargeable to tax, information in Part D of Form
15CA.

d) Further,
Rule 37BB(3) provides that no information is required to be furnished for
any sum which is not chargeable under the provisions of the Act, if,-

(i) the
remittance is made by an individual and it does not require prior approval
of Reserve Bank of India as per the provisions of section 5 of the Foreign
Exchange Management Act, 1999 read with Schedule III to the Foreign Exchange
(Current Account Transaction) Rules, 2000; or

(ii) the
remittance is of the nature specified in the specified list of 33 nature of
payments given in the rule.

e) Form
15CA to be furnished electronically by the assessee on e-filing portal, to be
signed by person competent to sign tax return.

Furnishing of information for
payment to non-resident is summarised as follows:

2. Certificate by a CA for remittance

The CA Certificate has to be
obtained in Form 15CB and has to be furnished electronically by the CA as
against earlier practice of issuing physically and signing of the 15CB with
digital signature of the CA is mandatory.

As mentioned above, there is no
requirement to furnish CA certificate in Form 15CB if (a) the payments are not
chargeable to tax and (b) the same are either included in the list of 33
payments specified in Rule 37BB(3) which does not require any information to be
furnished or (c) they are by individuals and are current account
transactions  mentioned in Schedule III
of the FEM Current Account Transaction Rules not requiring RBI approval (LRS
transactions).

However, in practice, it is observed
that in some ultra conservative and cautious payers insist upon a CA
certificate in Form 15CB in respect of all remittances.

Revised Remittance Procedures –
Flow Chart

3. Form 15CB –
Analysis re Documents that should be Reviewed and Maintained

Before issuing a Certificate in Form
15CB, it is strongly advisable that an accountant obtains and minutely reads
and analyses, inter alia, the following documents and information before
issuing a Certificate:

a. Agreement
between parties evidencing important terms of the Agreement, nature of payment,
consideration, withholding tax borne by whom, etc.;

b. Taxability
of the concerned remittance under the provisions of the Act as well as
applicable Double Taxation Avoidance Agreement [DTAA] particularly keeping in
mind the various issues relating to the taxability of the nature of payment in
India, controversies, latest judicial pronouncements, reconciliation of
conflicting judicial pronouncements in the context of the remittance, latest
thinking and developments in the area of international taxation etc.

In this connection, inter alia,
provisions of section 206AA, Rule 37BC, latest circulars / notifications, Most
Favoured Nation [MFN] clauses and various protocols of the DTAAs entered in to
by India should also be kept in mind.

It would be advisable to keep a
proper note in the file recording proper reasons for taxability /
non-taxability of the remittance as it is very difficult to recall at a later
date as to why a remittance was considered as taxable or non-taxable and
applicable rate of tax.

c. Obtain
Tax Residency Certificate [TRC] in order to claim Treaty benefits as required
by section 90(4);

d. Opinion
/ advice, if any, obtained from consultants while taking position on
withholding tax implications in respect of the given transaction;

e. Exchange
rate Certificate / letter from the bank in respect of SBI TT buying and selling
rate, as applicable;

f. Invoice(s),
Debit Notes, Credit Notes etc;

g. Ledger
account(s) of the Party and other relevant accounts;

h. Correspondence
on which reliance is placed including emails;

i. Declarations
regarding (a) No Permanent Establishment [PE] in India (including print out of
website details of payee, if relevant and required to ascertain PE in India
etc.); (b) Associated Enterprise relationship between the payer and payee
including under the DTAA; (c) beneficial owner of
royalty/FTS/interest/dividends; (d) Fulfilment of the conditions of Limitation
of Benefits [LoB] Clause, if present, in the DTAA.

j. In
cases of certificates for reimbursement of expenses to the non-residents,
obtaining supporting vouchers, invoices and other documents and information, is
a must.

k. It
is imperative that proper record/copies of the documents / information received
and reviewed should be kept so that the same would be very handy and helpful in
responding / substantiating to the letters / communications / notices / show
cause notices, which may be received from the revenue authorities at a later
date alleging non-deduction of tax or short deduction of tax.

4.     Issues relating to
the Certificate by a CA for Remittance

4.1    Whether CA
Certificate is an alternate to section 195(2)?

In the context of this important
issue, in the case of Mahindra & Mahindra Ltd vs. ADIT [2007] 106 ITD
521 (Mum ITAT), the ITAT held as follows:

•     CA Certificate is not in substitution
  of the scheme u/s. 195(2) but merely to supplement the same.

•     CA Certificate has no role to play for
  determination of TDS liability.

•     It is merely to support assessee’s
  contention while making remittance to a non-resident.

•     Payer at his own risk can approach a CA and
  make remittance to a non-resident on the basis of CA’s Certificate.

4.2  Appeal to a
CIT(A) u/s. 248

In
the Mahindra & Mahindra’s case (supra), on the facts, it was held
that no appeal to a CIT(A) u/s. 248 is maintainable, against the CA
Certificate. In this case, in which the assessee filed an appeal directly
against the Chartered Accountant Certificate and had not taken the matter for
the consideration by the Assessing Officer (TDS) at all, the CIT(Appeals)
clearly erred in entertaining the appeal.

However, in this connection, in the
case of Kotak Mahindra Bank Ltd. vs ITO (IT) ITA No. 345/Mum/2008 ITAT
Mumbai vide its Order dated 30^th June 2010 (unreported)
where the assessee had deducted the TDS and paid and later on filed the appeal
before CIT(A) denying its liability to TDS, which was rejected by the CIT(A) on
the ground that no order u/s. 195 was passed by the AO, held that the assessee acted
u/s. 195(1) which does not contemplate any order being passed and therefore the
appeal to CIT(A) u/s. 248 was maintainable.

In the case of Jet Air (P.)
Ltd. vs. CIT (A) [2011] 12 taxmann.com 385 (Mumbai) the matter was
remanded back to CIT(A) as the question whether section 248, as amended with
effect from 1-6-2007, was applicable or not, had not been adjudicated by
Commissioner (Appeals) and facts had not been verified.

4.3 Penalty in case
of non-deduction and short deduction based on CA Certificate

In the case of CIT vs. Filtrex
Technologies (P.) Ltd. [2015] 59 taxmann.com 371 (Kar), the Karnataka
High Court held that in this case the Chartered Accountant has given a
certificate to the effect that the assessee is not required to deduct tax at
source while making the payment to Filtrex Holding Pte. Ltd., Singapore. Thus,
the assessee acted on the basis of the certificate issued by the expert and
hence the CIT (Appeals) and the ITAT have rightly concluded that this is not a
fit case to conclude that the assessee has deliberately concealed the income or
furnished inaccurate particulars of the income. The assessee has filed Form 3CD
along with the return of income in which the Chartered Accountant has not
reported any violation by the assessee under Chapter XVII B which would attract
disallowance u/s. 40(a)(ia) of the Act.

4.4   Non deduction
based on CA certificate – section 237B and section 276C

A question arises as to
non-deduction or short deduction based on a CA Certificate would constitute
reasonable cause u/s. 273B for non-levy of penalty u/s. 271C.

In
the case of ADIT vs. Leighton Welspun Contractors (P.) Ltd 65 taxmann.com
68 (Mum), the ITAT held as that “The decision with regard to the
obligation of the assessee for deduction of TDS on the aforesaid payments was
highly debatable, in the given facts of the case and legal scenario and the
view adopted by the assessee based upon the certificate of the CA, was one of
the possible views and can be said to be based upon bona fide belief of the
assessee. Therefore, under these circumstances, it can be held there was
reasonable cause as envisaged under section 273B for not deducting tax at
source by the assessee on the aforesaid payments, and therefore, the assessee
was not liable for levy of penalty under section 271C.”

Similarly, in the case of Aishwarya
Rai Bachchan vs. ADCIT 158 ITD 987 (Mum) the ITAT held as follows:

“On a perusal of the relevant
facts on record, it is observed, the payment of U.S. $ 77,500 was made to a
non–resident for development of website and other allied works. Therefore,
question is whether such payment attracts deduction of tax under section 195.
As is evident, assessee’s C.A., had issued a certificate opining that tax is
not required to be deducted at source on the remittances to Ms. Simone
Sheffield, as the payment is made to a non–resident having no P.E. in India
that too, for services rendered outside India. It is a well accepted fact
that every citizen of the country is neither fully aware of nor is expected to
know the technicalities of the Income Tax Act. Therefore, for discharging their
statutory duties and obligations, they take assistance and advise of
professionals who are well acquainted with the statutory provisions. In the
present case also, assessee has engaged a chartered accountant to guide her in
complying to statutory requirements. Therefore, when the C.A. issued a
certificate opining that there is no requirement for deduction of tax at
source, assessee under a bona fide belief that withholding of tax is not
required did not deduct tax at source on the remittances made. …

While imposing penalty, the
authority concerned is duty bound to examine assessee’s explanation to find out
whether there was reasonable cause for failure to deduct tax at source. As
is evident, the assessee being advised by a professional well acquainted with
provisions of the Act had not deducted tax at source. Therefore, no mala fide
intention can be imputed to the assessee for failure to deduct tax. More so,
when the issue whether tax was required to be deducted at source, on payments
to a non–resident for services rendered is a complex and debatable issue requiring
interpretation of statutory provisions vis-a-vis relevant DTAA between the
countries. Therefore, in our considered opinion, failure on the part of the
assessee to deduct tax at source was due to a reasonable cause. The
decisions relied upon by the learned Authorised Representative also support
this view. Accordingly, we delete the penalty imposed under section 271C.”

4.5  When should one
approach the AO for Certificate u/s.195(2) or (3) / 197

Many a time, when the facts of a
case where certificate is required in Form 15CB, are very complex and there is
divergence of judicial decisions, lack of clarity about the taxability /
non-taxability under the provisions of the Act as well as DTAAs and the stakes
are very high, it would be advisable for the assessees to approach the tax
office for a certificate for no deduction and or lower deduction u/s. 195(2) /
(3) or section 197. After obtaining the certificate from the AO, the
certificate of CA in Form 15CB should be obtained.

In view of severe consequences of
disallowance u/s. 40(a)(ia), levy of interest and penalties under various
provisions of the Act for the assessee and to avoid multiplicity of proceedings
under the Act, it is imperative that a very cautious and judicious approach is
taken while issuing certificate in Form 15CB.

4.6 Validity period
of TRC / undertaking / declaration from the payee – for a quarter, a year or
for each single payment?

A question often arises while
issuing certificate in Form 15CB, is about the validity period of each TRC.
Revenue officials of various countries have different formats for issue of
TRCs. Some of them state the Tax Residency position as on particular date and
some of them state the same for a particular period. Obtaining TRC in the
respective countries is also time consuming and costly affair.

In such circumstances, should a CA
insist upon a fresh TRC each time a certificate u/s. 15CB is to be issued where
the TRC is silent about the validity period of TRC. Alternatively, for what
period the TRC should be reasonably be considered to be valid.

Similarly, whether a new no PE
declaration / undertaking, LoB certificate, beneficial ownership declaration
etc. should be insisted upon at the time of each remittance or can the same be
considered valid for a certain reasonable period, is not clear. Should the
reasonable period be a month or a quarter or half year or year, is not clear.

There is need for clarity from the
CBDT in this regard.

4.7  Responsibility of
CA

a. Whether
a Certificate under 15CB be issued in absence of a valid TRC, particularly in
cases where TDS has been deducted under the provisions of the DTAA.

As per the provisions of section
90(4), TRC is a pre-requisite for obtaining benefit under any treaty. However,
attention is invited to the decision of the ITAT Ahmedabad in the case of Skaps
Industries India (P.) Ltd. vs. ITO [2018] 94 taxmann.com 448 (Ahmedabad –
Trib.), which has been dealt with in Part 2 of our article. 

b. Similarly,
whether it is necessary for a CA to insist upon the payment of TDS and verify
the TDS Challan before issuing the Form 15CB.

Form 15CB does not cast a duty on a
CA to verify or mention the details of TDS Challan. It only requires a CA to
mention the amount of TDS. However, out of abundant caution, it would be
advisable for the CA to obtain the receipted challan from the remitter.

4.8  Manner of
certification where issue debatable

Presently, there is not enough space
or provision in the 15CA / 15CB utility to elaborately explain the debateable
issues and the stand taken by the assessee / CA for TDS. Therefore, it would be
imperative for the assessee / CA to keep proper details / reasons for any stand
taken so that the same could be substantiated at a later date in case the
revenue authorities commence any proceedings for non/short deduction of TDS.

4.9 Section 271 J –
Penalty for furnishing incorrect information in reports or certificate – Rs.
10,000 for each report or certificate

Section 271-J provides that “Without
prejudice to the provisions of this Act, where the Assessing Officer or the
Commissioner (Appeals), in the course of any proceedings under this Act, finds
that an accountant or a merchant banker or a registered valuer has furnished
incorrect information in any report or certificate furnished under any
provision of this Act or the rules made thereunder, the Assessing Officer or
the Commissioner (Appeals) may direct that such accountant or merchant
banker or registered valuer, as the case may be, shall pay, by way of penalty, a
sum of ten thousand rupees for each such report or certificate.”

It is important to note that both
the AO as well as the CIT(A) has power to levy penalty u/s. 271 J.

5.  Section 195(7)

“(7) Notwithstanding anything
contained in sub-section (1) and sub-section (2), the Board may, by
notification in the Official Gazette, specify a class of persons or cases,
where the person responsible for paying to a non-resident, not being a company,
or to a foreign company, any sum, whether or not chargeable under the
provisions of this Act, shall make an application to the Assessing Officer
to determine, by general or special order, the appropriate proportion of
sum chargeable, and upon such determination, tax shall be deducted under
sub-section (1) on that proportion of the sum which is so chargeable.”

Section 195(7) contains enabling
powers where under the CBDT may specify class of persons or cases where person
responsible for making payment to NR/Foreign company of any sum chargeable to
tax shall make application to AO to determine appropriate portion of sum
chargeable to tax. Thus, in prescribed cases Compulsory Application to AO would
have to be made and the AO may determine by general or special order the TDS to
be deducted on appropriate portion of sum chargeable.

Presently, no
notification has been issued u/s. 195(7).

CA
Certification and Remittance – Process to be followed

6.  Certain Cross Border Payments – TDS Issues

A large number of issues arises in
the context of payment of Fees for Technical Services [FTS], Royalties and
reimbursement of expenses the non-residents. There has been huge amount of
litigation in these areas.

It is not possible to cover various
legal issues arising in respect of the taxability of these payments in this
article.

It is strongly advisable that both
the assessees and the CAs issuing the Certificate in 15CB are aware of the
issues / developments in all the areas, to avoid severe consequences of
non-deduction or short deduction of TDS.

It is therefore advisable for a
remitter to obtain such a certificate from a CA who is well versed with the
subject and in case of any doubts about the taxability of a particular
remittance, to seek appropriate professional guidance.

7.  Key Takeaways in a
nutshell

a. Payments
to non-residents should be thoroughly examined from a withholding tax
perspective – under the beneficial provisions of the Act or DTAA.

b. Payments
can be remitted under alternative mechanism (CA certificate route) if assessee
is fairly certain about TDS obligation.

c. In case of a doubt or a substantial amount, it
is advisable to obtain tax withholding order section 195(2) / 197.

d. Mitigate
against severe consequences of non-compliance with exacting requirements of
section 195.

e. Ignorance
of relevant sections, rules and judicial developments may lead to avoidable
huge cost and consequences of long drawn litigation.

f.  Alternative
remedy of application before AO is conservative, but time consuming.

g. Enhanced
onerous provisions for issue of CA certificate.

h. Cumbersome
compliance provisions for the non-resident taxpayers.

i. Very
important to stay updated or take help of competent professionals for a
comprehensive evaluation of taxability of a particular remittance.

j. One
should have patience and trust in Indian tax judiciary and proper, balance and
judicious interpretation would enable success in these matters.

In view of reputational risks and
other professional consequences, more so in recent times, it would be advisable
for a professional who is not well versed with the intricacies of the entire
gamut of international taxation, to refrain from issuing the remittance
certificate without appropriate professional guidance.

8.  Conclusion

In these three parts of the Article
relating to ‘Provisions of TDS under section 195 – An Update’ we have covered
the developments in regard. TDS u/s. 195 is a very complex and an evergreen
subject with a large number of controversies and issues. There is no substitute
for remaining updated on the subject on a day to day basis, for proper
compliance and avoiding harsh consequences of non-compliance.