Applicability of Section 195 read with Section 197 regarding Tax Deducted at Source
The provisions of section 195 of the Act would require tax deduction on payments made to non residents (including PIOs) which are chargeable to tax in India. The purchaser on purchase of a property from a non resident is expected to deduct tax on income by way of capital gains at 20 per cent. In this discussion wherever the discussion pertains to NRI it also applies to PIOs.
However as per Board Circular No.728 dated 30.10.95 and Circular No.734 dated 24.01.96 the person responsible for deduction of tax can take into consideration the effect of the deductions that are available under the Act Moreover the Supreme Court in the case of Transmission Corporation of AP Ltd. vs. CIT (1999) 239 – ITR – 587 has clearly laid down that where the person responsible for deduction is fairly certain then he can make his own determination. Moreover the argument of the assessee in the case before the Supreme Court was that section 195 contemplates tax deduction only for payments fully having character of income. The provision for determination of tax is a safeguard and this safeguard by way of workings can be furnished by a Chartered Accountant of the non-resident. As per provisions of Section 195(2) if still there is any doubt, with regard to appropriate proportion of such sum so chargeable to tax in the mind of the person making the payment of such sum to a non resident then such person may make an application to the Assessing Officer to determine by general or special order to determine the appropriate proportion with regard to tax deducted at source. The application can also be made under section 195(3) read with section 197 to the assessing officer by the recipient (payee) requesting the officer to issue necessary directions in this regard.
One more thing which has to be ensured now is permanent account number (PAN) for NRIs as in the absence of a PAN, the NRI would be subject to tax deduction at 20% and in the absence of PAN no certificate can be obtained either by the payer under section 195(2) or the payee under section 195(3) of the Act. This is the impact of section 206AA introduced with effect from 01-04-2010
There are at least 3 decisions wherein it has been held that any payment made by assessee in respect of purchase of land to a resident in India, who was holding power of attorney for five non-resident co-owners cannot be considered as payment to non residents attracting the provisions of section 195 of the Income-tax Act.
These 3 decisions are-
- Rakesh Chauhan vs. Director of Income-tax (International Taxation) (2010)-33-DTR (Chd.) (Trib) 469
- Rakesh Chauhan vs Deputy Director of Income-tax (International Taxation)  128 TTJ 116 (CHD.)
- Tecumseh Products (I) Ltd. vs. Deputy Commissioner of Income-tax, Circle 6 (TDS), Hyderabad  13 sot 489 (hyd.)
The decisions (1) and (2) followed the decision in (3)
These decisions may be pressed into service when transactions are entered into on behalf of NRIs and payments are made to power of attorney holders who are Indian citizens.
The Chennai Special Bench of the ITAT in the case of ITO vs. Prasad Production Ltd. (2010)-3-taxmann.com 78(Chennai-ITAT) (S.B.) vide its detailed order dated 09-04-2010 in ITA No.663/Mds/2003 has held that if the payer has a bonafide belief that no part of the payment has income character, then section 195(1) will not apply because section 195 will apply only if the payment is chargeable to income-tax either wholly or partly. The Delhi High Court in the case of Van Oord ACZ India (P) Ltd. vs.CIT (2010)-3-taxmann.com 52(Delhi)(judgment dated 15-03-2010) has held that in case in the assessment proceedings relating to the non-resident recipient, if it is ultimately held that the sum received by the recipient was not chargeable to tax, the effect of that would be that there was no obligation on the assessee to deduct tax at source on the sum paid to the said non-resident and in that eventuality, the assessee will not be treated as assessee-in-default and would be absolved of any consequences for non deduction of tax at source.
This is what the Supreme Court in the case of GE INDIA TECHNOLOGY CENTRE (P) LTD. vs. COMMISSIONER OF INCOME TAX & ANR. (2010) 44 DTR (SC) 201 overruling the decision of the Karnataka High Court in the case of CIT vs. Samsung Electronic Company Ltd. 320-ITR-209(Kar) has observed –Head note-
TDS—Payment to non-resident—Obligation to deduct tax vis-à-vis taxability of remittance—Most important expression in s. 195(1) consists of the words “chargeable under the provisions of the Act”—Payer is bound to deduct tax at source only if the sum paid is assessable to tax in India—A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the IT Act—Sec. 195 also covers composite payments which have an element of income embedded or incorporated in them—Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct tax in respect of such composite payments—However, obligation to deduct tax is limited to the appropriate proportion of income which is chargeable under the Act—This obligation flows from the said words used in s. 195(1)—Sec. 195(2) pre-supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted but is not sure as to what should be the portion so taxable or the amount of tax to be deducted—In such a situation he is required to make an application to ITO(TDS) for determining the amount—It is only when these conditions are satisfied that the question of making an order under s. 195(2) arises – If the contention of the Department that the moment there is remittance the obligation to deduct tax arises is to be accepted, then the words “chargeable under the provisions of the Act” in s. 195(1) would stand obliterated - If the contention of the Department is accepted then the Department would be entitled to appropriate the moneys deposited by the payer even if it is not chargeable to tax because there is no provision in the Act whereby a payer can obtain refund—Sec. 237 r/w s. 199 implies that only the recipient of the sum can seek a refund – Thus, the interpretation of the Department leads to an absurd consequence—Entire basis of the Department’s contention is based on administrative convenience in support of its interpretation—There are adequate safeguards in the Act which would prevent revenue leakage.
The application (undertaking) for issuing of a certificate by the Income-tax Officer (Foreign Section) for NIL/less deduction can be made under section 195(2)[ refer circular no.10/2002 dated 09-10-2002 issued by CBDT] by the person responsible for making the payment along with the certificate of a Chartered Accountant specifying that the payment of sum does not attract tax or attracts tax at a lower rate based on the workings of the Chartered Accountant. In case of a bonafide belief by the payer that no part of the payment bears income character, it is not mandatory for him to undergo the procedure of section 195(2) before making any payment to a non-resident.
The application for NIL/less deduction can also be made by the payee (the recipient) to the Income-tax Officer (Foreign Section) in Form 13 with all necessary and relevant documents along with workings.
The Income-tax Officer (Foreign Section) on being satisfied with the correctness of the claim made by the applicant shall proceed to issue a certificate under section 195(3) of the Income-tax Act specifying the rate at which tax has to be withheld by the payer and remit it to the Income-tax department on behalf of the payee.
The purchaser being a businessman, sometimes may not like to take any risk as payment (to be) made for purchase of the property would partake the character of an expenditure on the debit side of his financial accounts (Profit & Loss Account) and any violation of TDS provisions on his part (which includes payments made to NRIs without tax deduction) would result in disallowance of entire payment made to the purchaser (refer section 40(a) (i) (B) of the Income-tax Act) and in that case he may insist that the assessee(transferor) should apply to the Income-tax Officer (Foreign Section) and get a direction/certificate from him.
The ITAT (Chennai Special Bench) in the case of Income-tax Officer vs. Prasad Production Ltd.  003 ITR (Trib) 0058 summarized the various situations that can arise for the applicability of section 195 as under-
(a) In case of a bonafide belief by the payer that no part of the payment bears income character, it is not mandatory for him to undergo the procedure of section 195(2) before making any payment to a non-resident. However, if the Department is of the view that the payer ought to have deducted tax at source, it will have recourse under section 201 of the Act. Thus, here the interests of the Revenue is protected. In the proceedings under section 201, the Assessing Officer will determine the portion chargeable to tax according to the provisions of the Act and determine the tax payable by the payer. The Assessing Officer is bound to determine the income chargeable to tax in accordance with the provisions of the Act. In any case, the liability of the payer cannot exceed that of the payee and if the payer is dissatisfied with the order under section 201, he will have recourse to appeal against the said order. Thus, the interests of both the parties are protected.
(b) If the payer believes that whole of the payment is chargeable to tax and if he deducts and pays the tax, no problem arises.
(c) If the payer believes that only a part of the payment is chargeable to tax, he can apply under section 195(2) for deduction at appropriate rates and act accordingly. No interest is jeopardized.
(d) If the payer believes that a part of the payment is income chargeable to tax, and does not make an application under section 195(2), he will have to deduct tax from the entire payment. Thus, the interests of the Revenue stand protected.
(e) If the payer believes that the entire payment or a part of it is income chargeable to tax and fails to deduct tax at source, he will face all the consequences under the Act. The consequences can be the raising of demand under section 201, disallowance under section 40(a)(i), penalty, prosecution etc. The interests of the Revenue stand protected.
(f) If the payee wants to receive the payment without deduction of tax, he can apply for a certificate to that effect under section 195(3) and if he gets the certificate, no one is adversely affected.
(g) If the payee fails to get the certificate, he will have to receive payment net of tax. No interest is jeopardized.
2. PROCEDURE FOR REMITTANCE /REPATRIATION OF FUNDS BY NRIs
CBDT ON REMITTANCE TO NON-RESIDENTS UNDER SECTION 195
CIRCULAR NO. 04/2009, DATED 29-6-2009
Section 195 of the Income-tax Act, 1961 mandates deduction of income tax from payments made or credit given to non-residents at the rates in force. The Reserve Bank of India has also mandated that except in the case of certain personal remittances which have been specifically exempted, no remittance shall be made to a non-resident unless a no objection certificate has been obtained from the Income Tax Department. This was modified to allow such remittances without insisting on a no objection certificate from the Income Tax Department, if the person making the remittance furnishes an undertaking (addressed to the Assessing Officer) accompanied by a certificate from an Accountant in a specified format. The certificate and undertaking are to be submitted (in duplicate) to the Reserve Bank of India / authorized dealers who in turn are required to forward a copy to the Assessing Officer concerned. 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 non-residents.
2. There has been a substantial increase in foreign remittances, making the manual handling and tracking of certificates difficult. To monitor and track transactions in a timely manner, section 195 was amended vide Finance Act, 2008 to allow CBDT to prescribe rules for electronic filing of the undertaking. The format of the undertaking (Form 15CA) which is to be filed electronically and the format of the certificate of the Accountant (Form 15CB) have been notified vide Rule 37BB of the Income-tax Rules, 1962.
3. The revised procedure for furnishing information regarding remittances being made to non-residents w.e.f. 1st July, 2009 is as follows:-
(i)The person making the payment (remitter) will obtain a certificate from an accountant (other than employee) in Form 15CB.
(ii)The remitter will then access the website to electronically upload the remittance details to the Department in Form 15CA (undertaking). The information to be furnished in Form 15CA is to be filled using the information contained in Form 15CB (certificate).
(iii)The remitter will then take a print out of this filled up Form 15CA (which will bear an acknowledgement number generated by the system) and sign it.Form 15CA (undertaking) can be signed by the person authorized to sign the return of income of the remitter or a person so authorized by him in writing.
(iv)The duly signed Form 15CA (undertaking) and Form 15CB (certificate), will be submitted in duplicate to the Reserve Bank ofIndia/ authorized dealer. The Reserve Bank ofIndia/ authorized dealer will in turn forward a copy the certificate and undertaking to the Assessing Officer concerned.
(v) A remitter who has obtained a certificate from the Assessing Officer regarding the rate at or amount on which the tax is to be deducted is not required to obtain a certificate from the Accountant in Form 15CB. However, he is required to furnish information in Form 15CA (undertaking) and submit it along with a copy of the certificate from the Assessing Officer as per the procedure mentioned from Sl.No.(i) to (iv) above.
(vi) A flow chart regarding filing of Form 15CA and Form 15CB is enclosed at Annexure -A.
4.The Directorate General of Income-tax (Systems) (www.incometaxindia.gov.in) shall specify the procedures, formats and standards for running of the scheme as well as instructions for filling up Forms 15CA and 15CB. These forms shall be available for upload and printout at www.tin-nsdl.com.
5. The Reserve Bank of India is being requested to circulate the revised procedure among all authorized dealers. (The flow is appended herewith.)
3.FINAL STAGE FOR TRANSFER OF FUNDS VIS-À-VIS BANKER’S RESPONSIBILITY
File the income-tax return after following the usual procedure. It is better to get the assessment completed by the jurisdictional income-tax officer, Foreign Section. Follow the procedure laid down in Circular no 4 dated 29-06-2009 Submit a letter signed by the assessee addressed to the bank which has to transfer the funds-the bank and branch where accounts are kept by the assessee with the following documents-
1. Form 15CA signed by the assessee.
2. Form 15CB in duplicate signed by the Chartered Accountant
3. Form A2 to be signed by the assessee-this form would be supplied by the bank.
4. Application for foreign exchange- this form would also be supplied by the bank
5, Copy of the purchase document and sale document in respect of the property the sale of which has resulted in capital gains. If the property had been inherited then copy of the WILL, legal heir certificate, death certificate on whose death the property has evolved on the asssessee,If there had been any Release in favour of assessee then copy of the Release Deed. In short to establish that the assessee had title over the property sold and the transmission of funds from such property is involved.
6 Copy of the income-tax acknowledgment with all supporting documents.
Kindly note that maximum that could be repatriated in a year is two million US dollars.
Flow of filing undertaking form u/s 195 of I T Act 1961
- Remitter obtains certificate of Accountant (Form 15CB).
- RBI/Authorized Dealer remits the Amount.
- Submit the Signed paper undertaking form to the RBI/Authorized Dealer along with certificate of an Accountant in Duplicate.
- Take Printout of the Undertaking form (15CA) and get it signed.
- Electronically upload the remittance details in Form 15CA.
- Take Printouts of filled undertaking form (15CA) with system generated acknowledgement number.
- Forward a copy of Undertaking (Form 15CA) & certificate of Accountant (Form 15CB) to Assessing Officer.