BY SUSHIL LAKHANI

WIRC OF ICAI
1
THE lNSTlTUTE OF
CHARTERED ACCOUNTANTS OF lNDlA
18/07/2009 2
WlRC OF lCAl
3
OVERVlEW OF SECTlON l95
WlRC OF lCAl
18/07/2009 4

How this Section is different

from other TDS provisions ?
By SUSHIL LAKHANI
WlRC OF lCAl

Snapshot of the Section

Sec. 195(1) - Scope & conditions for applicability

Sec. 195(2) - Application by payer to A.O. for lower

deduction of tax

Sec. 195(3 & 4) - Application by payee to A.O. for lower

deduction of Tax

Sec. 195(5) - Powers to CBDT to make Rules

18/07/2009 5 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 6
Section l95(l) : Scope & Conditions
Wide Scope of the section
Conditions for application of Section l95
a)"any person" - lncludes a person having no taxable
income
b) "a non-resident" - lncludes NRls
- does not include R but NOR
c) "sum chargeable to tax (other than Salaries)"


BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 7 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 8 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 9 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 10 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 11 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 12
Section 195(2) : Appication !" #a"e$ to AO fo$ o%e$
&e&'ction of ta(:

Difference between Section l95(2) & Section l97

Form for this application ?

Appeal against order u/s. l95(2)

(Section 248)

within 30 days of payment of tax.

Only if the payer bears the tax liability & not of receiver
bears the tax

Refund to deductor of tax deducted ? (Circular 790)

Revision possible u/s 263 against order u/s. l95(2)

(BCCl Vs. DlT (96 lTD 263)
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 13
Section l95(3) : Application by payee for lower deduction of tax ?
Rule 29B(2) conditions

"Certificate" by AO.\

Consequences of non / short deduction of TDS

Disallowance u/s. 40(a)(i) or Section 58(l)(a)(ii)

Can deprecation be disallowed, if, TDS on capital expenditure not
deducted? (3 SOT 798 (2005))

lf the lndian Co. has not deducted the Tax at source u/s l95,Can the
dept proceed to recover the tax from both?. i.e. lndian Party and
Foreign party. (Explanation to Sec. l9l r.w. Section 205)
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 14

lnterest u/s. 20l(lA)

Cannot be levied if recipient has paid full tax (296 lTR 226
(SC))

Penalties - (Section 221) Section 2*1C)(Refer

Hindustan Coca Cola (293 lTR 226 (SC))

Prosecution - (Section 2*+ ,)

BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 l5 ,- S.S/I0 0A1/A2I
WlRC OF lCAl
SCOPE OF lNCOME OF A
NON-RESlDENT
18/07/2009 16
l. Business Profits Taxable if Business Connection in lndia or
property or asset or source in lndia or trf.
of a capital asset situated in lndia.
2. Salaries Taxable if services are rendered in lndia
[Section 9(l)(ii)] (Refer Eli Lilly (SC))
3. Dividends Taxable if paid by an lndian Company
[Section 9(l)(iv)]- (At present exempt)
4. Capital Gains on Shares /
Property
Taxable if situs of Shares / Property in
lndia
5. Rental from Properties Taxable if situs of Property in lndia
6. lnterest/Royalty/FTS Taxable if sourced from lndia
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 17
WlRC OF lCAl
BY SUSHIL LAKHANI
31/05/2008 18 18 BY SUSHIL LAKHANI
w.e.f.l
st
July, 2009 :

CA Certificate to be obtained in Form

No. l5CB

Form l5CA to be furnished

electronically by the assessee
WlRC OF lCAl
18/07/2009 19

Clause A "name & address of beneficiary"

"Beneficiary" meaning of "Beneficial

Owner" or "Recipient"?

Clause B(l3) determination of a PE and

profits of PE:

Whether CA duty bound to ascertain the

existence of PE?

Determination of attributable to PE ?
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 20
CERTlFlCATE BY A CA FOR REMlTTANCE
Some lssues:

Consequence of difference of opinion between a CA and AO

Consequence of change in the view due to an amendment or a

judicial decision or circular subsequent to issue of certificate.

Determination of any "special relation" between payer and payee.

Tax residency certificate if not available?

Tax residency certificatenot sufficient -- dual residency?

Validity period of tax residency certificate / undertaking /

declaration from the payee for a year or for single payment?
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 21
Some lssues (Cont.):

Whether CA certificate is an alternative to

Order u/s l95(2)?

"Non resident" status of the receiver at what

point of time to be considered?

at the time of signing of agreement or

the prior financial year or

making of remittance

ln absence of address in the agreement is the

payer obliged to determine the status of
purchaser for purchase of capital gains?
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 22

RBl Circular No. AP (DlR) Series

Circular No. 03 dated l9
th
July,
2007

However, withdrawn through

RBls letter
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 23 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 24

Business (Connection) Receipts of a non-resident:

Taxability under the Act, U/s 9(l)(i)

Taxability if "business connection" exists or if asset or source in

lndia.(Vodafone (Bom)(HC) & E-Trade Mauritius (Bom) (HC))

Specific exclusions Explanation l(b); l(c) & l(d) of Section

9(l)(i)
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 25
BUSlNESS lNCOME (of NR) (Cont.)
Section 9(l)(i) - (Cont...)
Specific inclusions Explanation 2 to Section 9(l)(i)
Treaty concept of dependent agent introduced in Act
Agent need not be in lndia but must Act in lndia.
"Business Connection" lnterpretation of:
ClT Vs. R.D. Aggarwal & Co. (56 lTR 20)
Circular 23 of l969 & Circular 786 (Commission on exports - l25 lTR 525;
267 lTR 725) (Controversial view (278 lTR 97), (27l lTR l93)(AAR))
F$o3 othe$ 4'&icia $'in5s
existence of some organisation in lndia (223 lTR 4l6; l08 lTR
874; 274 lTR 50l(AAR))
Agency in lndia (239 lTR 879; 36 lTR 4l8; l20 lTR 887; 268 lTR l56 (AAR);
etc)
(Note: Explanation 2 now introduced to Section 9(l)(i))
(refer Speciality Magazine (274 lTR 3l0 (AAR))
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 26
BUSlNESS lNCOME (of NR) (Cont.)
"Business Connection" lnterpretation of
From other judicial rulings (Cont.)

Close relationship in lndia - (ll9 lTR 986)

Asiasats case (85 lTD 478)

Gutal Trading Est. in re (278 lTR 643)(AAR) (LO not "BC")

Taxation of BPO units (Circular 5 of 2004)

Difference between Business Connection & Permanent

Establishment ?
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 27
BUSlNESS lNCOME (of NR) (Cont.)
SC o!se$6ation $e5a$&in5 inco3e a$isin5 f$o3 !'siness
connection 7 (288 I9R 4:8 (SC))

Although section 9 of the Act raises a legal fiction, it must

be construed having regard to the object it seeks to
achieve (Maruti Udyog Vs. Ramlal (2 SCC 638 followed)

There is a distinction between existence of a business

connection and income accruing or arising from such
business connection
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 28
BUSlNESS lNCOME (of NR) (Cont.)
SC observation regarding income arising from business connection
(288 lTR 408 (SC))(contd.)

Mere existence of a business connection may not result in

income accruing or arising in lndia;

Existence of a Permanent Establishment does not necessarily

mean existence of business connection

Where severable parts of a composite contract are performed in

different jurisdictions, the principle of apportionment should be
applied to determine profits taxable in each Jurisdiction.
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 29
BUSlNESS lNCOME (of NR)(contd.)
Sit's of the so'$ce of inco3e (SC o!se$6ations (288 I9R 4:8)
The source of income need not be the place where income
accrues or arises (ClT Vs. Ahmedbhai Umerbhai (l8 lTR 472
(SC)) & ClT Vs. Kirk (l900) AC 588 (HL), Anglo-French Textile
Co. Ltd. Vs. ClT (25 lTR 27 (SC)), Carborandum Co. Vs. ClT (l08
lTR 335 (SC), lTO Vs. Sriram Bearings Ltd. (224 lTR 724 (SC)).
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 30
BUSlNESS lNCOME (of NR) (Cont.)

Turnkey Contracts:

SC Observation in 288 lTR 408;

"The mere fact that contract is a turnkey contract would

not itself mean that for the purpose of taxability the entire
contract must be considered to be an integrated one;"

"The very fact that supply and service segments were

specified separately indicates that the liability of the
assessee would also be different;"
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 31
BUSlNESS lNCOME (of NR) (Cont.)
TURNKEY CONTRACTS (Cont.)
SC Observation in 288 lTR 408;(Cont..)
"The payment for offshore supply and services was clearly
demarcated cannot be held to be a complete contract that has to
read as a whole. (288 lTR 408)"
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 32
BUSlNESS lNCOME (of NR) (Cont.)
Off;sho$e S'pp": (288 I9R 4:8)

lf title to goods passed outside lndia & payment outside lndia not taxable.

Signing in lndia not relevant.

Performing of certain activities in lndia (loading, unloading, inland transportation) not

relevant.
#a"3ents to Fo$ei5n A5ents
Operation outside lndia ( CBDT Circulars 23 & 786)
Not taxable in lndia (l25 lTR525),(267 lTR725)
Contrary view taken by AAR in case of Wallace Pharma (278
lTR 97) & Rajiv Malhotra 284 lTR 564 (AAR)
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 33
BUSlNESS lNCOME (of NR) (Cont.)
Payment for supply and installation etc of equipment (CBDT circular 23)
(243 lTR 459), (259 lTR 248) (229 lTR 735) (AP)
Consideration for design & drawings
Outright purchase of design and drawing is not royalty
(l90 lTR 626), (243 lTR 459),(94 lTD 2ll)(kol)
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 34
lssues arising u/s. l95 in respect of certain specific
payments.
Royalties & FTS:
Sec. 9(l)(vi) & Section 9(l)(vii):
Payment in nature of Royalty & FTS:

These sub-sections override Sec. 9(l)(i) (l67 lTR 884)

Difference between "Royalty" & "FTS"

"Royalty" - Act Vs. Treaty

"FTS" - Act Vs. Treaty

"Make available" definition of FTS

TDS where FTS Article is missing in Treaty

BY SUSHIL LAKHANI
WlRC OF lCAl
Ro"aties An& F9S
Sec. 9(1)(6i) & Section 9(1)(6ii):
Place of Accrual
Accrue where service are utilized (SRK(230 lTR 206(AAR))
Accrue where the payer is situated(238 lTR 296)
Accrue where right to receive income arose (Rajiv Malhotra 284 lTR 564(AAR))
18/07/2009 35 BY SUSHIL LAKHANI
WlRC OF lCAl
Royalty / FTS income is taxable in India if service is used / utilised in India
Place of rendering service not relevant
18/07/2009 36 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 37 BY SUSHIL LAKHANI
WlRC OF lCAl
Is the $atio of the &ecision of the SC sti 6ai& in the i5ht of a!o6e e(panation<
18/07/2009 38 BY SUSHIL LAKHANI
WlRC OF lCAl
Ro"aties An& F9S (cont&=)
Place of Accrual (contd.)
SC in 288 I9R 4:8

For being covered U/s. 9(l)(vii) two conditions to be fulfilled:

Services should be rendered in lndia; and

Services should be utilized in lndia.

Section 9(1)(vii) must be read with Section 5 which takes within its purview the
territorial nexus
Sufficient nexus between the rendering of services and territorial limits of
lndia necessary to make the income from offshore services taxable
Even after insertion of (vi) & (vii) in Section 9, the provisions of 9(l)(i)
continue to govern such cases
To be covered in Sec. 9(l)(vii) the services should have a "live link" with
lndia.

Ratio of lHHl Ltd. (SC)may not apply to Composite contracts.(Refer

Ansaldo Energia SPA Vs. lTAT ,(2008), ll5 TTJ (Chennai), 942)
(Caution:- atio o! "## (SC) ma$ not appl$ to composite contracts (e!er
%nsaldo &ner'ia S(% (Chennai)
18/07/2009 39 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 40 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 41 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 42 BY SUSHIL LAKHANI
WlRC OF lCAl
Ro"aties An& F9S (cont&=)
Consideration for designs & drawings

outright purchase not royalty (l90 lTR 626) (Pfizers Case (27l lTR l0l(AAR))
contrary (94 lTD 2ll)

when it forms part of composite contract for supply of machines (243 lTR 459; 259
lTR 248; 255 lTR 354) (contrary 27l lTR l93(AAR) & 279 lTR l65 (AAR))

Services provided in course of business not FTS (237 lTR l42) (contrary 27l
lTR l93(AAR) & 279 lTR l65 (AAR))

Payment for initial know-how rendered from abroad (l48 lTR 774; l45
lTR 84; l43 lTR 720; l64 lTR 4l9 & 224 lTR 724 (SC))

"information" meaning

HEG (263 lTR 230)

Dun and Bradstreet Espana (272 lTR 99(AAR))

Wipro Ltd. (94 lTD 9 (Bangalore)) & STPl (3 SOT 529 (Bang))
18/07/2009 43 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 44 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 45
Ro"aties An& F9S (cont&=)

Software / E-Commerce Payments

License to use Software or for electronic downloading of computer programs
/ digital content may give rise to use of "cop$ri'ht" as per Copyright Act.
"s it) thus) covered in *ro$alt$+
The Test (OECD / lRS View) : ,hat is the consideration !or +

i! !or ri'hts to use cop$ri'ht then ro$alt$-

i! use o! cop$ri'ht onl$ incidental) then business pro!its-

i! !or a cop$ri'hted article then business pro!its-

BY SUSHIL LAKHANI
WlRC OF lCAl
Ro"aties An& F9S (cont&=)
The Test (OECD / lRS View) : ,hat is the consideration
!or + (Cont)

i! !or ri'hts in the cop$ri'ht i.e. !or trans!er o! ownership

then /usiness "ncome or Capital 0ains.

i! !or ri'hts in relation to cop$ri'ht 1 to use 2 make

copies !or operation onl$ within its business 1 then
business pro!its.

i! Capital 0ains a 3ixed (a$ment i.e. sale o! hardware

with embedded so!tware then break-up unless one part is
the dominant part 2 other parts are ancillar$.
18/07/2009 46 BY SUSHIL LAKHANI
WlRC OF lCAl
Ro"aties An& F9S (cont&=)
Soft%a$es:

Fa6o$a!e:

Samsung Electronics (94 lTD 9l (Bangalore)

Lucent Technologies (82 TTJ l63)

TCS (27l lTR 40l)

Nokia, Erricson and Motorola (95 lTD 269)

Sonata lnformation Technologies (l03 lTD 324 (Bang))

Motorola lnc (95 lTD 269 (Delhi-SB)

A5ainst:
Head Start (285 lTR 530 (AAR))

lMT Labs (287 lTR 450 (AAR))

18/07/2009 47 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 48 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 49
Ro"aties An& F9S (cont&=)
Sec. 9(l)(vi) & Section 9(l)(vii) (Cont.):

Payments for repairs

Sahara Airlines (79 TTJ 268)
Lufthansa Cargo (9l lTD l33 (Delhi))
Airport Authority of lndia (273 lTR 437)
Contrary view Mannesmann Demag (26 lTD l98)

Payments for testing charges

South West Mining Ltd (278 lTR 233)
Wallace pharmaceutical Pvt. Ltd (278 lTR 97)

Payments to Credit Rating Agency Taxable as royalty under the Treaty as

held in (>ssa$ Oi)(4 SO9 1+1 ? @'3)

Payment for services related to GDR lssue(80 TTJ l20)

Connectivity payment
-Standard facilities - (Wipro (80 TTJ l9l); Skycell (25l lTR 53))
-Satellites (Asiasat (85 lTD 478)(Del), & (Raj TV (Unreported)
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 50 BY SUSHIL LAKHANI
WlRC OF lCAl
Ro"aties An& F9S (cont&=)
Sec. 9(l)(vi) & Section 9(l)(vii) (Cont.):

Payments for Services to Airlines:

British Airways (73 TTJ 5l9)

Lufthansa German Airline (83 TTJ ll3)

Payments to agent of a shipping company:

Circular 723 dated l9/09/l995

18/07/2009 51 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 52 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 53 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 54 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 55 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 56 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 57 BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 58

Reimbursement of incidental expenses in addition to fees.

Reimbursement of allocated / shared costs.

Payment for services at cost or cost plus basis

Reimbursement of cost of third party.

Reimbursement of salaries & living allowance of

deputees.
BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 59

ClT Vs. TELCO (245 lTR 823 (Bombay))

ClT Vs. lndustrial Projects (202 lTR l0l4-Delhi)

Clifford Chance 82 lTD l06-Mumbai)

Mahindra & Mahindra Ltd. (l0 SOT 896 (Mum))

A5ainst:

Cochin Refineries (222 lTR 354 (Ker))

Hindalco (278 lTR l25 (AT))

ClT Vs. Dunlop (l42 lTR 493 (Cal))

Danfoss lnd. (268 lTR l (AAR))

BY SUSHIL LAKHANI
WlRC OF lCAl
18/07/2009 60
Reimbursement of allocated or shared cost
Danfoss lnd. (268 lTR l (AAR))
Reimbursement of services at cost or cost plus basis

Timkin (273 lTR 67 AAR)

Reimbursement of cost of third party:
Wallace Pharma (278 lTR 97 AAR)
Reimbursement salaries & living allowances to deputees:
Held salaries of technicians:

HCL lnfosystems (274 lTR 26l Delhi)

ClT Vs. BHEL (252 lTR 2l8 Delhi)

Held as FTS & salaries:
AT & S lndia (P) Ltd. (287 lTR 42l (AAR))
BY SUSHIL LAKHANI
WlRC OF lCAl
SUSHlL LAKHANl
Lakhani & Associates,
Chartered Accountants
4
th
Floor, Bharat House,
l04, Mumbai Samachar Marg,
Fort, Mumbai-400023
Tel: +9l-22-40693946
(M) : 982llll852
E-mail : s'shiAaBhanian&associates.co3