As laid down under Section 195 of the Income-tax Act ("the Act") any payment made to a nonresident, tax will have to be deducted at the rates prescribed under the Act or rate in force. The deduction has to be made at the time of payment or credit which is earlier. The world is no longer a local village it has become global. With Globalization, Digitization becoming the buss word there lies no geographic boundaries for doing business. Considering the same India has entered into double taxation avoidance agreement ("DTAA") with many countries which enables nonresident to claim relief through Tax residency certificate. This section even describes that while making payment to non-resident tax has to be deducted at rates under the Act or DTAA whichever is beneficial. This section describes about non-resident other than Company as well as Foreign Company.
A thumb Rule is that any payment made to foreign company tax has to be deducted only at the rates as laid under 195 Section. For foreign Company (Having Permanent establishment("PE") in India) Place of effective management test needs to be performed for Company having turnover (based on Audited financials) exceeds Rs 50 crores. Whether resident or non resident tax withholding has to be done only under Section 195 of the Act.
The fundamental checklist for any payment made to non resident
- Does India have a DTAA with other country to deduct tax at the rates favorable to assessee.
- Identify the nature of payment whether Royalty or Fee for technical services or any other.
- Does nonresident have PE.
- Does non resident have Tax residency certificate
- Whether gross basis or net basis
- Whether Equalization levy as under Section 165 of Finance Act 2016 applies in combined manner along with regular TDS
- Whether Form 15CB need to be obtained from an Accountant
- Whether can treaty benefit be applied or possibility of applying Most Favored Nation Clause
- Whether to make use of case laws of relevance
As a thumb rule if TDS has been deducted at the rate in force then add education cess surcharge wherever applicable.
Non resident Sportsmen
Today the Indian Premier league has becoming popular which attract fans from all over the world to come and watch cricket matches in India. Moreover, several payments are made to nonresident cricket players (not citizen of India) as well as payment are made to non resident franchise. These payments get covered by Section 195 of the act.
But let us analyze two key rulings.
Pilcom vs CIT
Supreme court held that payment made to nonresident sports association tax has to be deducted under Section 194E of the Act. Pilcom made several payment to nonresident sport association during 1996 world cup it was held through the apex court that neither treaty benefit nor DTAA can be taken. In short tax has to be deducted at 20% (along with Surchage cess whereever applicable). No question of applying DTAA or treaty benefits.
Indcom vs CIT
In this case it was held by Calcutta High Court that non resident( match referee umpire) do not fall within the preview of sportsman and tax need not be deducted under 194E instead can be done under 195 of the Act. Here for match referee umpire treaty or DTAA benefit can be taken considering conservative view.
Keypoints
In case of nonresident sportsman (not citizen of India) no need to file return of Income if income consist of only the following
- Participation in sports game or other any games other than winning of lottery
- Advertisement
- Contribution of articles in sports journal
And Tax has been deducted at source based on 194E.
However, no deduction shall be allowed with respect to any expenditure or allowance while computing income.
Conclusion
It should be noted that days have gone where by non resident sportsman earn only the following above-mentioned income and had no obligation to file return of income. Now with IPL popularity nonresident sport players come to India and can participate in online gaming and lottery event which makes non resident sportsman to file return of Income. Here there is possibility of making changes in provision of the Act in coming years or a major case law or circular impacting the provision relating to it.
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