Mar 7, 2010
The Indian income-tax law requires any person who makes remittance to a non-resident to withhold appropriate tax which corresponds to the income-tax liability of the non-resident. Essentially, there are three modes available to the remitter to determine the Withholding Tax (WHT) liability. The remitter could approach the Authority for Advance Rulings (‘AAR’) for a ruling, or the Indian Revenue for a WHT order. Alternatively, the remitter can determine its WHT liability suo-moto supported by a CharteredAccountant’s (CA) Certificate without approaching the AAR or the Revenue. While a suo-moto determination of WHT liability by the remitter appears to be preferred amongst the corporate sector given its time and cost effectiveness, it has its own share of risks given that the Revenue is empowered to challenge a suo-moto determination by the remitter where it believes that WHT has not been determined appropriately by the remitter At the time of remittance, the remitter is required to furnish an undertaking [addressed to the Assessing Officer (‘AO’)] whereby the remitter undertakes to pay any WHT or interest in the eventuality of a default and also agrees to be subject to the penalty provisions. The undertaking by the remitter is to be accompanied by a CAcertificate in the specified format. Hitherto, the undertaking and CA’s certificate were required to be physically submitted by the remitter to the Reserve Bank of India / authorised dealers who, in turn, were required to forward a copy to the AO concerned. Given the substantial increase in foreign remittances, it was difficult to manually handle and track certificates; in order to monitor and track remittances in a timely manner, the Revenue has, with effect from 1 July 2009, prescribed for electronic filing of the undertaking in the specified format (Form 15CA).
Challenge by the Revenue
Generally speaking, the Revenue may seek details of foreign remittances made during a particular period of time. Further, the Revenue may also seek reasons for non-deduction of tax on foreign remittances. This could be done by issuing notice under section 201 of the Income-tax Act, 1961 (‘ITA’). The Revenue may primarily examine remittances where the remitter has suo-moto determined that the remittance ought not to be subject to WHT. However, the Revenue may also scrutinise instances where it believes that WHT has been deducted at a lower rate:
If any default is noticed by the Revenue in compliance with the WHT obligations and such findings are upheld by judiciary, it could expose the remitter to onerous consequences such as recovery of WHT ( Taxes can be recovered only once, either from the non-resident payee or from the remitter. Hence, if appropriate tax has already been paid by the payee then such tax cannot be recovered from the remitter.) along with interest, initiation of penalty proceedings for default on WHT, and furthermore, disallowance of expenditure while determining the taxable income of the remitter resulting in tax / interest outgo and initiation of penalty proceedings for concealment of income. In light of these risks, if a notice is received under section 201 of the ITA, it is advisable that the response to theRevenue , whether through oral or written representations is based on strong facts as well as legal aspects, and adequate attention is paid to finer details.
Frequently asked questions
1. If the notice u/s 201 does not require the remitter to appear in person before the Revenue and only asks for certain details to be furnished. Is it necessary for the remitter to appear in person before the Revenue? What safeguards should be taken in the written submissions?
Answer:- If a personal appearance is not required in the notice issued by the Revenue, it is not necessary for the remitter to appear in person before the Revenue. It is essential that a stamped acknowledgement be sought from the AO’s staff at the time of filing written submissions. However, as a measure of good practice, once the written submissions are filed and acknowledgment is obtained, the remitter may meet the AO and inform him that it has adequately complied with the notice and will be happy to discuss its submissions with the AO at a convenient time. The written submissions filed with the AO could end by requesting the AO to grant a personal opportunity of hearing in case the AO wants to pass an unfavorable order.
2. Which types of transactions could be investigated by the Revenue?
A. The Revenue may primarily investigate transactions wherever WHT provisions have not been applied. Generally, given past precedents, the Revenue may challenge non-applicability of WHT on testing fees, software payments, bandwidth charges, EPC contracts, reimbursement of expenses, technical service fees, consultancy fees, management charges etc
3. If the notice u/s 201 seeks information in respect of all foreign remittances, are factual details required to be provided by the remitter even for import of goods or machinery where it is generally accepted that such imports are not taxable in India?
A. While one may have to see the actual text of the notice u/s 201 to be able to answer this question, but, generally speaking, if a notice specifically requires a remitter to furnish details of “all foreignremittances” the remitter may be required to provide details even for import of goods or machinery. However, in cases where it is practically difficult to collate details of import of goods or machinery within the time frame provided by theRevenue , the remitter (by appropriately mentioning this in its written submissions) can mention that in view of voluminous data, information of import of goods or machinery have not been furnished.
4. Are legal reasons required to be provided by the remitter for not withholding tax?
A. Yes, if the notice requires the remitter to submit reasons for not withholding tax.
5. Are reasons required to be provided for applying a particular rate of WHT (other than ‘Nil’ WHT)?
If the notice only requires the remitter to submit reasons for not withholding tax, then the remitter need not provide reasons for applying a particular rate of WHT.
6. If the Revenue asks for “copy of agreement with the foreign party, is the remitter required to submit documents such as “expression of interest” or “memorandum of understanding” or “bid document” which usually precede an agreement?
Answer: The remitter is required to submit the agreement along with all its exhibits. Further, if an agreement has been subsequently modified in certain respects, then the modifications ought to be also provided to theRevenue . If not specifically asked for, it is not necessary to submit documents such as “expression of interest” or “memorandum of understanding” or “bid document” which usually precede an agreement, unless the remitter wants to rely on these documents in support of its proposition that the transaction is not subject to WHT.
7. If the Revenue asks for copy of invoices raised by the foreign party, is it necessary to submit exhibits that are attached to the copy of invoices?
Answer: The remitter is required to submit the invoice along with all exhibits that are referred to in the invoice. In case of transactions where it is practically difficult to collate voluminous (but identically worded) invoices within the time frame provided by theRevenue, the remitter may submit sample copies of the invoices to the Revenue and simultaneously enquire with the Revenue on whether it wants copies of all the invoices or will it be satisfied with the sample copies. In case debit notes are raised for reimbursement of expenses and such debit notes are accompanied by proof of such expenses, then such proof should also be submitted to theRevenue.
8. If, in the notice under section 201, the Revenue has asked for factual details such as agreement and invoice, is the remitter required to provide any other factual details such as correspondence between the parties, details of visit of foreign personnel to India etc?
A. Unless specifically asked for by the Revenue, it is not necessary to submit factual details other than the agreement or invoice. However, in a situation where a remitter seeks to rely on additional factual details in support of its position, it may be advisable to submit such details to the Revenue at an appropriate stage. While preparing for proceedings u/s 201, it is important to appropriately consider Rule 46A of Income-tax Rules, 1962 which deals with circumstances in which additional evidence can be produced before the Commissioner (Appeals).
9. If a CA certificate has been obtained by the remitter for ‘Nil’ WHT and no application has been filed by the payee/remitter with the Revenue for a WHT order, would the CA certificate, by itself, be good enough for reasoning non-applicability of WHT?
A. Generally speaking, a CA’s certificate for ‘Nil’ WHT, by itself, may not be good enough for reasoning non-applicability of WHT in proceedings u/s 201 if it does not provide detailed reasoning, backed by facts or law, for not applying WHT provisions.
10. Recently, the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. & Ors [2009] 185 TAXMAN 0313 (KAR) case has held that that any payments in the nature of income per se to non resident taxpayers would require withholding of tax. However, for no withholding of tax or withholding at lower rate, a taxpayer will have to obtain a prior approval of Assessing Officer (AO). In other words, the Karnataka High Court has held that a remitter cannot suo-moto determine that payments to non-residents are not liable to WHT and has to necessarily approach the AO. The High Court has followed its decision in a later case of CIT v. Synopsys India (P) Ltd (ITA No 1271/2006) (KAR). Now, in situations where remittances have not been subject to WHT based on a suo-moto determination by the remitter, is the remitter required to submit reasons to the Revenue on non-applicability of Samsung’s case?
A. If the Revenue seeks submissions in respect of Samsung’s decision, the remitter will have to represent appropriately. The decision of Karnataka High Court is primarily binding only on the taxpayers in Karnataka and not on taxpayers in other states such as Maharashtra. There are various judicial precedents, including that of the Supreme Court, AAR and Income Tax Appellate Tribunal (‘the Tribunal), as well as Central Board of Direct Taxes (‘CBDT’) circulars which can be relied upon by the remitter (in Maharashtra) in support of the proposition that it can suo-moto determine that WHT provisions are not applicable without having to necessarily make an applicable to the Revenue. With due respect, the High Court appears to have misinterpreted an earlier decision of the Supreme Court in Transmission Corporation of A.P. Limited v. CIT [1999] 239 ITR 587 (SC) . The Supreme Court, while hearing a special leave petition filed against the judgment of the Karnataka High Court, has directed “stay of recovery till further orders”. The final hearing before the Supreme Court has been scheduled on 18 August 2010.
However, if the Revenue has not asked the remitter to specifically file submissions on applicability of Samsung’s decision, the remitter may choose to simply mention in its written submissions that as per the rights available to it under various judicial decisions & CBDT circulars, it has opted not to approach the Revenue u/s 195(2) and has suo-moto determined that no WHT liability exists in accordance with the law.
11. Recently, the Mumbai Tribunal in the case of ACIT v. Anchor Health and Beautycare Private Limited (ITA. No. 7164/2008) (Mum) has followed Samsung’s decision discussed in question (12) above. Will the remitter be bound by this Tribunal decision and hence, in a situation where WHT was determined suo-moto by the remitter, WHT should have been deducted? Are there arguments to deny applicability of Anchor’s decision?
Answer: Normally, decisions of the Mumbai Tribunal are binding on taxpayers and tax administrators within its jurisdiction. However, in this specific situation, the Mumbai Tribunal in Anchor’s case would not serve as a good precedent given that the Tribunal has ignored the binding decision of its Special Bench in case of Mahindra & Mahindra Ltd v. DCIT [2009] 30 SOT 374 (Mum) (SB) and instead chose to follow Samsung’s decision which serves as a binding precedent only in Karnataka and not in other states. Taxpayers and tax administrators in Mumbai are bound by Mahindra & Mahindra’s decision which upheld the rights of a remitter to suo-moto determine that WHT provisions do not apply if the non-resident payee is not chargeable to tax in India. In any case, the following facts are noteworthy as regards Anchor’s decision: (i) It was rendered by a Single Member bench (ii) The decision was an ex-parte order (iii) The Tribunal gave its ruling in absence of any contrary decision before it (iv) The decision was in the context of section 40(a)(i) and not in the context of section 201.
12. Is the remitter required to provide a Tax residency certificate (‘TRC’) of the recipient, or alternatively, demonstrate eligibility of treaty benefits in submissions to the Revenue?
Answer: If the notice u/s 201 does not specifically require the remitter to provide a TRC of the recipient, or alternatively, demonstrate availability of treaty benefits to the non-resident payee, then such details may not be filed with the Revenue. However, even if these details are not required by the Revenue in the initial notice u/s 201, the Revenue can subsequently ask for these details at least in respect of those remittances where tax has not been deducted. Hence, in order to be well prepared for any subsequent enquiries, the remitter can ask the non-resident payee to provide a TRC or sufficient details to demonstrate availability of treaty benefits. In any case, irrespective of any enquiry from the Revenue, it may be advisable to gather these details over a period of time as a part of robust housekeeping and tax risk management.
13. Remittances like royalties, interest and technical service fees attract lower WHT under certain double tax avoidance agreements (‘tax treaty’) if the recipient is also the beneficial owner. Is the remitter required to provide proof of beneficial ownership to the Revenue?
A. See answer to question (12) above.
14. In case of remittance on account of turnkey contracts which, interalia, involve offshore services, can it be argued on the basis of Supreme Court’s decision on Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 158 Taxman 259 (SC) (IHI) case, that WHT ought not to be applied on the offshore services under the tax treaty?
A. One can rely on the Supreme Court’s decision provided the facts and the tax treaty are identical to the Indo-Japan tax treaty in the context in which IHI’s decision was pronounced. Post IHI, there has been pronouncements by the High Court, AAR and Tribunal where IHI has either been followed or distinguished. It is important that these decisions be evaluated while finalising written submissions to the Revenue or higher authorities.
15. The Supreme Court in IHI had held that for technical service fees earned by a non-resident to be chargeable to tax in India under section 9(1)(vii) of the ITA, it is necessary that the services are not only utilised within India but also rendered in India. Can this decision be relied upon in support of no WHT on remittance of technical services / royalties?
A. Post IHI’s decision, there was an attempt of the legislature, as argued by the Revenue, to neutralise IHI by amending sections 9(1)(vi) and 9(1)(vii) of the ITA. However, subsequent to the said amendment, here have been conflicting pronouncements by the judiciary as regards the manner of interpretation of IHI decision and whether stands neutralised by the amendment in sections 9(1)(vi) and 9(1)(vii). Accordingly, it is important that IHI decision be evaluated in light of these decisions.
16. In respect of consultancy fees or technical service fees, are there arguments which the remitter could explore to contend that such remittances are not liable to WHT?
Answer. Depending upon the facts, the remitter could develop an argument, inter alia, on the following:
* Section 9(1)(vii) provides an exclusion from the definition of “fees for technical services (‘FTS’)”. Per this exclusion, considerations for construction, assembly, mining or like project undertaken by the recipient are not “FTS”. There are judicial precedents where this concession has been interpreted widely to include services linked to these specified activities and which can support the proposition that remittances ought not to be subject to WHT.
* Depending upon the tax treaty under consideration, it has to be evaluated whether the article for “Independent Personal Services” (‘IPS’) can override the Article for “FTS” and consequently, could an argument be developed that such IPS are not taxable in India in the absence of a fixed base in India.
* By placing reliance on the “make available” clause9 exists in some of the tax treaties where it is provided that the technical or consultancy services will be considered as Fees for included services (FIS) only if they are made available to the person acquiring such services.
17. In case the remittance is on account of reimbursement of expenses and WHT has not been deducted, how should one represent to the Revenue?
Answer . Apart from the judicial precedents which support the proposition that there is no “income” element in the expenses which are reimbursed to the remitter, the remitter may rely on documentation to demonstrate that expenses were originally the obligation of the remitter and were incurred by the non-resident on behalf of the remitter. To illustrate, the following documentation could be examined:
* Relevant correspondence with the non-resident payee (eg, emails)
* Proof of such out of pocket expenses such as air tickets, hotel bills etc
* Accounting treatment in books of the remitter and non-resident
* Transfer Pricing Study (in case of associated party transactions) and past Transfer Pricing orders passed by the Revenue.
18. Circular 23 dated 23 July 1969 read with Circular 786 dated 7 February 2000 provided that export commission shall not attract WHT. The said circulars have been withdrawn vide Circular 7 dated 22 October 2009. Will the withdrawal apply prospectively (that is, wef 22 October 2009) or even retrospectively? In other words, can Circular 23 and 786 be relied upon for not withholding tax on export commission payments upto the date of their withdrawal (22 October 2009)?
A. The Mumbai Tribunal in a recent decision in DDIT v. Siemens Aktiengesellshaft [ITA No 6133 / Mumbai / 2002] has held that the withdrawal of circular 23 is not retrospective. Hence, Circular 23 and 786 be relied upon for not withholding tax on export commission payments upto the date of their withdrawal (22 October 2009). In any case, there are judicial precedents which have, independent of the circular, held that export commission is not liable to WHT.
19. Capital gains earned by Mauritian residents (eg, on sale of shares or on buyback of shares) are not taxable in India based on Supreme Court’s decision in Union of India v. Azadi Bacho Andolan and Another [2003] 263 ITR 706 (SC) case. However, of late, there have been instances where the Revenue has challenged non-taxability of capital gains earned by Mauritian residents (eg, E-Trade) on the ground of lack of substance in Mauritius. Is Azadi Bachao Andolan still a good law for reasoning that no WHT ought to be applied on capital gains earned by Mauritian residents?
A. Azadi Bachao Andolan’s decision is still a good law for reasoning that no WHT ought to be applied on capital gains earned by Mauritian residents provided they have obtained a TRC from the Mauritian authorities. Recently, the Delhi Tribunal in the case of Saraswati Holding Corporation12 has applied Supreme Court’s decision inspite of objections by the Revenue. In so far as an update on E-Trade is concerned, an application has been filed before the AAR and the ruling is awaited.
20. How can legal submissions to support the remitter’s position be made exhaustive either for the purpose of proceedings u/s 201 or appellate proceedings?
Answer: There are more than 800 Indian judicial rulings and Indian revenue circulars on taxation of non-residents which ought to be appropriately considered in light of the given facts. Additionally, information from the following sources could be useful:
* Model Commentaries issued by United Nations, Organisation for Economic Cooperation & Development (‘OECD’) and United States Treasury;
* Protocol to Indian tax treaties;
* Technical Explanation issued by USA in relation to India-USA tax treaty;
* Technical Explanation issued by Australia in relation to India-Australia tax treaty;
* Commentaries by Indian and international experts;
* Revenue rulings and judicial precedents internationally; and
* India’s position on OECD Commentary.
21. If there are decisions that favour the Revenue, is it necessary for the remitter to demonstrate, at an appropriate stage, during proceedings u/s 201 or appellate proceedings that the said decisions are on a different set of facts, or that there exist decisions which favour the remitter?
A. Yes
22 . Is the Revenue bound by the decision of the Mumbai Tribunal or Bombay High Court, which favors the remitter, although there may exist conflicting decisions of other benches of Tribunal or High Courts in other states?
A. Yes
23. Subsequent to the receipt of a notice u/s 201, can the remitter apply for an advance ruling in respect of foreign remittances which are the subject matter of the notice?
A. The AAR has the right to reject an application where the question raised in the application is already pending before the Revenue. Accordingly, if possible, it may be advisable if the non-resident payee, instead of the remitter, applies before the AAR provided the question before the
AAR is not pending in the non-resident’s case before any income-tax or appellate authority.
24. Can a writ petition be filed by the remitter before the High Court challenging a notice u/s 201?
A. Generally speaking, mere issuance of a notice u/s 201 may not entitle a remitter to file a writ petition before the High Court challenging the said notice as there are alternate remedies available.
25. Upon receipt of the notice u/s 201, can the non-resident payee invoke the option for “Mutual Agreement Procedure” (‘MAP’) in tax treatys? What relief may be available to the remitter in such a situation?
A. Generally speaking, depending upon the tax treaty, a non-resident payee can invoke MAP before competent authority of its country of residence, if it could be demonstrated that the actions of the Indian Revenue will result in taxation not in accordance with the tax treaty. However, there is no provision in the ITA for the AO to keep the proceedings under section 201 in abeyance pending resolution of MAP.
26. Post receipt of notice under section 201, if the remitter, on a detailed analysis of facts and law, feels that it has a weak case for not applying WHT provisions or, just wants to buy peace of mind and avoid litigation with the Revenue, can it pro-actively offer to pay WHT along with interest in return for non-levy of penalty?
A. There is no provision in the ITA for this purpose. One has to engage into discussions with the Revenue to evaluate whether the Revenue will accept for such a resolution. If this proposition is acceptable to the Revenue, then it needs to be appropriately documented in the correspondence with the Revenue.
27. In case the Revenue passes an unfavorable order u/s 201, what remedies are available to the remitter?
Answer. The following alternate remedies are available to the remitter against an order u/s 201:
* Filing a rectification application u/s 154 if there has been a mistake apparent from record (applicable in very few circumstances)
* Filing an appeal before the Commissioner (Appeals) or
* Filing a revision application u/s 264 with the Director of Income-tax (International Tax)
In certain exceptional situations, depending upon the facts, a writ petition may be preferred before the High Court. However, it is not permissible to approach the Dispute Resolution Panel against an order u/s 201.
28. In case an unfavorable order is passed by the Revenue u/s 201, is it necessary to pay the entire demand before approaching higher authorities?
A. No. The remitter is entitled to apply to the AO or higher authorities for keeping the demand in abeyance pending adjudication of the dispute before the higher authority. There are judicial precedents and circulars which have laid down principles for keeping the demand in abeyance, either in part or full.
29. Can the Revenue initiate penalty proceedings for non-deduction of WHT? What is the quantum of the penalty and the time limit for imposition of penalty?
A. In case of an adverse order u/s 201, the Revenue can initiate penalty proceedings u/s 271C for default in deduction of tax. The quantum of penalty is equal to the WHT in default. However, penalty is not leviable if there is a reasonable cause for not withholding tax. Section 275 of the ITA provides the period of limitation for the Revenue to pass penalty orders.
It is important to strategise representations, at the outset, during the proceedings u/s 201 in a manner which creates a strong defence during penal proceedings in case they are initiated.
30. If WHT defaults are noticed by the Revenue for remittances made recently, can the Revenue issue notice u/s 201 for past years?
A. The Revenue is empowered to issue a notice u/s 201 for past years provided it is not barred by limitation. The ITA does not expressly provide a time limit for passing an order u/s 201 in respect of non-resident payees unlike for resident payees. However, it is arguable that even in such a situation, the period of limitation as held in Mahindra & Mahindra’s case ought to apply; hence, any proceedings under section 201 for past years ought to be initiated and completed by the Revenue in accordance with the time limits provided in section 147 of the ITA for reassessment proceedings and if these time limits are exceeded, then the order under section 201 may be barred by limitation. However, this position may be contested by the Revenue since it may believe that remittances to non-residents ought not to subject to any limitation as to the period of scrutiny.
31. Can the Revenue treat the remitter as an “agent” of the non-resident and requisition filing of return of income? What can be the consequences?
A. As per section 163 of the ITA, an “agent”, in relation to a non-resident, includes any person in India from which the non-resident is in receipt of any income, whether directly or indirectly. The ITA further provides that no person is liable to be treated as the “agent” of a non-resident unless he has had an opportunity of being heard by the Revenue as to his liability to be treated as such. If the Revenue finds that the “agent” is to be taxed as a representative of the non-resident, it must ask the agent to file a return as such. The obligations and rights of an “agent” are discussed in sections 161 and 162 of the ITA. It is also to be noted that taxes can be recovered only once, either from the non-resident payee or from the agent. Hence, if appropriate tax has already been paid by the payee then such tax cannot be recovered from the agent.
Conclusion
As per news reports, the Revenue is giving special attention to WHT as it aims to turn in the highest ever WHT collection this financial year. During the last five years, the contribution from WHT (for resident as well as non-resident transactions) has gone up from 33 percent to 38.5 percent of the net direct tax collection with an average annual growth of 25 percent. The Government has expressed hope that the high growth rate in WHT collections would not only to be maintained but further accelerated. Given the increased focus of the Government on WHT, it is quite likely that if notices under section 201 of the Act are issued, “high pitched” orders could be passed by the Revenue creating a demand on the remitter. Hence, on receipt of a notice under section 201 of the Act, it is important to strategise representations before the Revenue in a manner which endeavors to either have the proceedings under section 201 of the Act dropped, or in case an adverse order is passed under section 201 of the Act, create a strong defence during subsequent proceedings.
Note:-
1. The Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd has held that in the case of a composite contract involving various operations within and outside India, amounts received by a non-resident company in respect of offshore supply of equipment and materials as well as in respect of offshore services are not liable to tax in India.
2. The Memorandum of Understanding (MOU) attached to the India-USA tax treaty provides the meaning of term ‘make available’ as follows:
* Technology will be considered as ‘made available’ only when the person acquiring the service is enabled to apply the technology.
* Provision of requiring technical input by the person providing the services does not per se means that technical knowledge, skills, etc. are made available.
* Use of a product which embodies technology shall not per se be considered to make the technology available.
The concept of ‘make available’ under the FTS clause is available under the Indian tax treaties with Australia, USA, UK, Canada, Cyprus, Netherlands, Singapore, etc.
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