U/S 195 TDS - Foreign remittance tax to be deducted
yagnesh
Respected Members,
My querry is that, A firm from India is making payment
to foreign party in canada, as the participation fees in the Fashion
Show organised in Canada, Whether firm is liable to deduct Tax under
section 195 as Technical serivces or not. If tax has to be deducted
then at what rate and will include surcharge & Ecess also.
Reply awaited as early as possible.
Thanks & Regards,
yagnesh
Pravin Navandar
Regards,
Pravin R. Navandar
Chartered Accountants
Tel : 022 2511 0019 // 2516 16 06
Tel Fax 022 2511 22 21
Mob : 93222 74633
603 / 209 Anita Kutir, HIG Colony,
90 Feet Road, Ghatkopar East,
Mumbai 400 075.
shyam sharma
Hi Yagnesh,
As I understand, your query is that a firm in India is making payment of "participation fees" for a fashion show organised in Canada. The referred "foreign party" is a non-resident. In light of the remittance made to Canada, whether there is any withholding tax liability arising to the Indian firm on account of remittance made to Canada?
The tax position with respect to the issue under consideration can be analysed / discussed under Income Tax Act, 1961 ('the Act') as well as India-Canada Tax Treaty ('the Tax Treaty') as under:
Under the Act:
Under section 5(2) of the Act a non-resident is chargeable to tax in India on all income from whatever source derived which:
“(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.”
Section 195(1) of the Act provides that where a person is responsible for paying any sum to a non resident which is "chargeable" to tax in India, he is required to withhold tax at the time of such payment or credit of the income to the account of the payee, whichever is earlier.
The word “chargeable” as pointed out by Kanga and Palkhiwala at page 1391 in their Book “Law and Practice of Income-tax” (Eight Edition) as under:
“These words would not apply to payments which are in reality trading receipts in the hands of the recipient. One reason is that income-tax is chargeable on income and trading receipts are not income; a trader’s income from his trade can be determined after he has deducted his expenditure from his receipt and a trading receipt is only one element in the ascertainment of income.”
In view of the above provision, tax would be required to be deducted on any sum only which is “chargeable to tax” under the provisions of the Act. In the terms of the two sections 4 and 5, in order that an amount may be included in the total income of a person, it is necessary that it is received or accrued as ‘income’.
As we can observe from the above facts and provisions, that provisions of section 5 read with section 195(1) are not satisfied. Hence a position can be taken that no "income" is chargeable to tax in India and therefore there is no withholding tax liability for Indian firm.
Having said that, coming to the deeming fiction of section 9(1)(vii) of the Act with respect to Fees for Technical Services (FTS). Explanation 2 to section 9(1)(vii) defines FTS and is very widely worded definition. A look at the Explanation shows that it contains a definition of FTS and says that FTS means any consideration for the rendering of any managerial, technical or consultancy services including the provision of services of technical or other personnel, but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".
The content of the Explanation unmistakably is that the payment must be made as quid pro quo for such services rendered as have been enumerated therein. It postulates that the remitter of the amount has received the benefit of the "technical services" and that the technical services have been rendered by the recipient of the amount.
From facts of your case it can be observed that there is no service element of technical nature rendered by the Canadian firm just by charging "participation fees" in a fashion show organised by them in Canada. Further, you may also observe that none of the ingredients in the definition of FTS in the course of rendering services of the nature of "any managerial, technical or consultancy services" is satisfied, hence even in this light as well the deeming fiction of FTS is not attracted. In result, a position can be taken that no withholding tax liability is attracted even under section 9(1)(vii).
[For your academic interest, you may also refer the case law of Madras High court rendered in Skycell Communications 252 ITR 53 (Mad) on the meaning and scope of FTS.]
Under the Tax Treaty:
As such, the position under the Act is beneficial position hence the Tax Treaty may not be explored. However for all practical purposes following positions can be taken:
As regards FTS:
Article 12 of the Tax Treaty in relation to FTS contains the provision for “making available” technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein. Therefore a position may be taken that by paying “participation fees" in a fashion show organised in Canada, no technology had been made available by the Canadian resident to the Indian resident and hence there is no question of availing of FTS.
As regards Business Income:
Article 5 read with Article 7 of the Tax Treaty, in absence of Permanent Establishment (PE) no profit on account of "participation fees" is attributable to PE and hence no withholding tax is required to be made.
Limitation on the view:
By way of caution, you may also caveat the client that the Indian Revenue Authorities may take an adverse view. Depending on the view taken by Indian Revenue Authorities, tax may be required to be withheld @10.557% or 42.23% .
I believe that my understanding of your query is correct and it is answered.
Bye…
With warm regards,
Shyam Sharma.
From: yagnesh <yagn...@gmail.com>
To: Ghatkopar CPE Study Circle <gsc-...@googlegroups.com>
Sent: Friday, 11 September, 2009 2:37:11 PM
Subject: U/S 195 TDS - Foreign remittance tax to be deducted
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PARESH ZATAKIA
yagnesh
Thank you sir.