Payment of guarantee fees to a foreign bank

This query is : Resolved

C.Muthukumar (Querist)
Follow

02 November 2009 A subsidiary company is liable to pay guarantee fees to the overseas bank for the guarantee given by the bank to the indian lenders bank,is it liable for tax deduction at source,if so under which section

CA SANJAY MUKHERJEE

CA SANJAY MUKHERJEE (Expert)
Follow

02 November 2009 Yes, Sec 195 (i)

Rate is 41.2 for payment less than 1 crore and
42.23 for more than 1 Crore

Cross check the rate if DTA is there for Country of the recipient.

taxindiaconnect

taxindiaconnect (Expert)
Follow

02 November 2009 Section 195 of the Act casts an obligation on a resident tax payer making payment to a non resident in respect of an income taxable in India to withhold tax at the rates applicable. The tax is not required to be deducted from the payments made outside India to a NR if the income of NR is not taxable in India. The income of the NR is taxable in India if it satisfies certain conditions.

As per section 5 the income of NR should have been either be received or deemed to be received in India or should be accrue or deemed to accrue in India for such income to be taxable in India.

The definition of Interest has been provided in section 2(28A) of the Income tax Act as following .

"interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;

According to this definition the interest includes any service fees or other charges in respect of the money borrowed or debt incurred. An upfront fee paid to a bank is nothing but service charges paid to bank as service fees or other charges in respect of moneys borrowed.

As per section 9 the income of a resident by way of Interest treated as deemed to accrue and arise in India, the income will be taxable in India. Hence TDS is applicable on such payments.

However As per section 90 of IT Act one can take the benefit of provision of Double taxation Avoidance Agreements ( DTAA) on the payment of Interest if the recipient of the income from interest is a resident of a country with whom India has a DTAA. Currently India has DTAAâ€™s with more then 75 Countries.

Upgrade to CAclubindia Pro. Subscribe Now!