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Sec 195 of the Income tax

lalitha (audit executive) (62 Points)

18 November 2009

Dear Friends,

Pl clarify the following queries:

1. Is SC and EC should not be deducted in view of the DTT restricting tax to be withheld to 15% / 10% and incluidng SC and EC in the defn of tax for this purpose.

2. If not, why not? Are there any arguments that the surcharges and Education are not subject to the DTT., despite apparantly being included in the definition of Indian tax for the purposes of the DTT?

3. If the surcharges and EC have been deducted incorrectly what is the mechanism for reclaiming these amounts back from the Indian tax authorities?

Kindly clarify on these issues at the earliest.

Regards,

Lalitha

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12 Replies

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 18 November 2009

Dear Lalitha,

Gud question,

Section 195 requires TDS is to be deducted at Rate in force.

Section 2 of Income Tax Act 1961 provides for ;

(37A) “rate or rates in force” or “rates in force”, in relation to an assessment year or financial year, means—

i) ………………..

ii) ………………..

iii) for the purposes of deduction of tax under section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be.

Now Rate in force for TDS shall be rates priscribed under finance Act of DTAA which ever is beneficial to assesee [Section 90(2)].

Provisions for charging of surcharge and additional surcharge (Cess) are governed by section 2(11), 2(12) and First Schedule of relevant Finance Act and hence, the rates as per Finance Act shall include surcharge and additional surcharge.

Also as interpretation of provisions of DTAA is to be made in libreal manner and so in general practice none of the professional advice to charge surcharge or additional surcharge on DTAA rates.

Do let me know if u want further clarificaitons.

Regards

Juzer

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lalitha (audit executive) (62 Points)
Replied 18 November 2009

Dear Mr.Juzer,

Thanks for your reply. It is not clear from your advice whether SC and EC has to be deducted alongwith the tax rates of 10% or 15% as the case may be in respect of payments to Non residents.

Regards,

Lalitha

Sunil (Trader) (2611 Points)
Replied 18 November 2009

Surcharge is not applicable for Individuals payees now. You still have to apply 10% surcharge for firms and for foreign companies 40% tax + 2.5% surcharge.

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 18 November 2009

Lalitha,

I assume this is clear to you. "TDS shall be at the rate in force i.e. lower of rates of finance act and rates of DTAA"

Now what is rate as per Finance Act?

Ans.

Rate provided in The First Schedule of Finance Act. Furhter provisions for charging of surcharge and additional surcharge (Cess) are governed by section 2(11), 2(12) and First Schedule of relevant Finance Act and hence, the rates as per Finance Act shall be said to have inclusive of surcharge and additional surcharge (cess).

What is rate as per DTAA.

Ans.

It is the rate mentioned under DTAA i.e. 10%/12.5% etc.

In DTAA it is nowhere provided that Surcharge or additional surcharge are to be charged on the rate provided in relevant article.

In view of above you may understand that the rate as per DTAA shall not attract Surcharge or additional surcharge.

I hope nw things might look little clear to you.

Thanks and Regards

Juzer

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 18 November 2009

Originally posted by :Sunil
"	Surcharge is not applicable for Individuals payees now. You still have to apply 10% surcharge for firms and for foreign companies 40% tax + 2.5% surcharge.	"

Plz rectify your statement.

Suggested statement

For TDS, Surcharge is only applicable for payment/credit to assesses being company other than domestic company @ of 2.5% only if its amount paid or likly to be paid is more than Rs. 1 crore.

Regards

Juzer

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Sunil (Trader) (2611 Points)
Replied 18 November 2009

Thanks Juzer. The surcharge is removed for firms and seems to be applicable only for the domestic companies and other than domestic companies having over 1 crore income. So for sending remittance to foreign company the TDS would be maximum 41% (including the surcharge).

Now consider these scenarious specifically for payment to a Non Resident from Germany.

The GmbH suffixed after name indicates private limited company and has to be treated as a company.

The AG suffixed indicates joint stock company and has to be treated as a company.

KG suffixed after the name is similar to our LLP with a difference that 1 partner has unlimited liabilities and others have limited liabilities (eg. working partners or really small share of partnership). Do we treat these as company or firm (non company) for determination of rate?

They also have a system where a Pvt. Ltd. Company is the partner with unlimited liability in an LLP. They have to disclose this fact in their name. Therefore it is XYZ GmbH & KG where the unlimited partner in LLP is company and individuals have share in the LLP with limited liability. For purpose of our TDS under section 195, how should we treat such an entity when we pay them. Firm or Company?

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 18 November 2009

Dear Sunil Sir,

I am preparing thorough reply for your query.

Plz excuse me for some time.

Regards

Juzer

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 23 November 2009

Dear Sunil Sir,

Part III of THE FIRST SCHEDULE of Finance No. 2 Act 2009;

2. In the case of a company—

(b) where the company is not a domestic company—

Surcharge on income-tax

The amount of income-tax deducted in accordance with the provisions of item 2(b) for companies other than domestic companies of this Part, shall be increased by a surcharge, for purposes of the Union, in the case of every company other than a domestic company, calculated at the rate of two and one-half per cent of such income-tax where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees.

Interpretation;

Surcharge shall be only applicable on TDS of companies other than domestic companies.

Section 2

(17) “company” means—

(i) any Indian company, or

(ii) any body corporate incorporated by or under the laws of a country outside India, or

(iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or

(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company :

Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ;

Interpretation;

Company means any Indian Company or any Body corporate incorporated by or under the laws of a country outside India.

Section 2

(26) “Indian company” means a company formed and registered under the Companies Act, 1956 (1 of 1956), and includes—

(i) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir and the Union territories specified in sub-clause (iii) of this clause) ;

(ia) a corporation established by or under a Central, State or Provincial Act ;

(ib) any institution, association or body which is declared by the Board to be a company under clause (17) ;

(ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State ;

(iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union territory :

Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India ;

Section 2(7) of Companies Act 1956 defines term Body corporate

(7) "body corporate" or "corporation" includes a company incorporated outside India but [does not include-

(a) a corporation sole;

(b). a co-operative society registered under any law relating to co-operative societies; and

(c) any other body corporate (not being a company as defined in this Act) which the Central Government may, by notification in the Official Gazette, specify in this behalf;]

For further information about body corporate refer https://en.wikipedia.org/wiki/Body_corporate

For information about incorporation refer https://en.wikipedia.org/wiki/Incorporation_(business)

Interpretation;

Body corporate shall include those entities which incorporated as per their domestic Incorporation law and have characteristic of legal person.

(22A) “domestic company” means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income ;

Interpretation;

Domestic company includes Indian company and any other company which has made prescribed arrangements (Rule 27) for declaration/distribution of Dividends in India on Income earned from India. Also the company which is not domestic company is Foreign Company (Section 23A).

Conclusion;

Person responsible of deduction of TDS u/s. 195 shall deduct tax at source at the rate in force and such rate shall be increased by surcharges @ 2.5% in case of every person being foreign company or body corporate incorporated outside and has not made prescribed arrangement for distribution/declarion of dividend in India from income earned in India and income/payment/credit of such person is more than Rs. 1 crore.

Thanks and Regards

Juzer

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Sunil (Trader) (2611 Points)
Replied 23 November 2009

Thanks Juzer. This means that a single owner LLC in USA that is like a proprietorship concern as IRS classifies it as an entity disregarded as being separate from the individual would also be a foreign company. In USA they have single owner LLCs that is more like a registered proprietorship but disregarded as a legal person in USA.

As it stands, other than professionals in partenership that are normally clear in the DTAAs under Independent Personal Sevices, all sorts of registered entities incorporated abroad should be treated as companies when we apply TDS.

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 23 November 2009

Dear Sunil Sir,

For sake of reservation/conservative approach, you may charge surcharge on them.

Also note that defination of Body corporate as per Co Act 1956 exlude Sole corporation.

Law is not clear, Decision is urs.

Regards

Juzer

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Sunil (Trader) (2611 Points)
Replied 23 November 2009

It is only these suffixes at the end of the name that make it hard to decide what it is. Now when we deal with a person we do not know whether to apply rate of 30% or 40%. However, the safest is to ask the person to submit copy of an english version of their incorporation documents notarised or attested by Indian Consulate so we can determine the tax status for India.