Taxability of Royalty paid to non resident on receipt basis

FACTS:

A LLC (USA) no PE in India enters into an agreement with B LTD (India) the effect of which, royalty income will be generated in the hands of A INC in consideration of services provided to B LTD.

A INC follows cash basis whereas B Ltd follows accrual basis of accounting. During FY 2014-15 A raised invoices for USD 10 million out of which USD 7.86 million were paid by B Ltd during the same FY however as per mercantile system of accounting and out of abundant caution TDS is deducted by B Ltd on entire USD 10 million.

QUERY:

1.      The fact that since A LLC follows cash basis of accounting can it offer for taxation in India only USD 7.86 million ?

 

2.      How much of tax credit can be claimed?

OPINION

Issue 1

As per Sec 90(2) “Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assesse”.

The beneficial provisions are not only to be understood from the point view of lesser rate of tax but also to determine the taxability of income as well.

In INDIA-USA DTAA, Article 12 deals with taxability of royalty & fees for technical services

1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed :

(a)    in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] :

(i)    during the first five taxable years for which this Convention has effect,

(a)    15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ; and 

(b)    20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and

 

(ii)    during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and

(b)    in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services.

3. The term "royalties" as used in this Article means :

(a)    payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and

(b)    payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8.

In Article 12(1) phrase used was “paid to a resident of other contracting state” further definition of royalties also means “payment of any kind received”. Since the phrases used in the DTAA is ‘paid’ or ‘received’, therefore one can say that as per INDIA-USA DTAA royalty income is taxable on receipt basis and hence non-resident recipient with no PE in India can offer royalty for taxation in INDIA on receipt basis.

 

Issue 2

As per rule 37BA of Income tax rules, “Credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable”. Hence TDS credit corresponding to the income offer for taxation can be claimed, however balance tds credit can be carried forward to future years.

 

 

  

Disclaimer: The view expressed above is those of the contributors and posted here for knowledge sharing purpose without any commercial aspect. Professional opinion must be sought before entering into any similar transactions. The contributor shall not be held liable for loss of any kind arising from the exercise of information contained in it.

DIFFERENT TYPES OF WRITS & THEIR USE IN APPELATE

As a citizen of India each person has certain rights and obligations towards the nation which forms the fundamental limb towards democracy in India. Our constitution has given us various rights and obligations as a citizen of India. The Fundamental Rights to the citizen of India can be enforced through High Courts or Supreme Court of India according to the provisions of Article 32 of the Constitution. Article 226 of the Constitution provides that “ Notwithstanding anything in Article 32 , every High Court shall have power, throughout the territories in relation to which it exercises jurisdiction, to issue to any person or authority , including in appropriate cases, any government , within those territories , directors, orders or writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari, or any of them, for the enforcement of any rights conferred by Fundamental Right and for any other purpose.”

Different types of Writs and their use is discussed as below:

HABEAS CORPUS: This word Habeas Corpus means “to have a body”, it is a remedy for those people, who have been confined in prison or custody without legal justification. Through this writ the court orders the concerned authority to produce before it the person and facts of his detention. The court let the person free after considering facts before it produced by the detaining authority.

The principal of Equitable Justice is that no person can be deprived from his personal liberty and independence except for violation of any law enforced and in accordance with due course of law as prescribed. It means that the authority cannot snatch the liberty or right to live in peace of a person or deprive a person from liberty unless he/she has done something against the law of land. The detention of the person will be done according to rules prescribed in this regard by the government.

A person detained or any person or his relative may approach to the High Court for a writ of Habeas Corpus.

 

MANDAMUS: It means a “Command” is issued to direct any person, corporation, inferior court or government authority requiring him to do a particular thing therein specified, which pertains to their office and related to their public duty. This writ can be issued for any public authority.

It is important that the applicant must have legal right that the duty to be performed in his favour by the authority against whom writ is issued. If any public authority has any grievance against performance of duty in favour of applicant, then this writ will not be issued.

This writ will enforce the inferior court or public authority to do its/ his duty in favour of applicant. Article 360 of the Constitution of India prohibits any writ of mandamus against President of India and Governors’ of the States. This cannot be issued against any private body, unless state is in collusion with the private body.

The court before issuing this type of writ, consider all types of remedies.

 

PROHIBITIONS: – Supreme Court or any High Court in India can issue orders for prohibiting any court inferior to it preventing latter from exercising any jurisdiction, which is not in their power. It forces a court or tribunal to act within their jurisdiction, when they cross limits provided to them by statue.

This writ is available only against judicial or quasi judicial authorities and not available against public servant who is not vested with juridical powers.

The Supreme Court may issue this writ only in case of Fundamental Rights being affected by reason of the jurisdictional defect in the proceedings.

This remedy is available during the pendency of proceedings and before the order is made.

CERTIORARI:- It is available to any person whenever anybody of persons having legal authority to determine questions affecting the rights of subjects and having the duty to act judicially, acts in excess of its legal authority.

This writ remove the proceedings from such body to the High Court so that the decision shall be quashed, which has gone beyond power of deciding authority.

 

QUO WARRANTO: – It can be issued by the court on application or prayer to inquire the legality of appointment of a person in the office of a public and of a substantive nature. Through this writ court order to check the procedures or legality of appointment of that person and if found to be illegal, he will be removed from the public office.

This writ is available to the public to ensure that no unauthorized person will be appointed in a public office.

When a person challenges the validity of appointment to a public office, it is maintainable whether or not any fundamental or other legal right of such person has been infringed. This writ is intended to safeguard against the usurpation of public offices.

DEDUCTION U/S 32AC

Section 32AC is introduced vide Finance Act, 2013 as an investment linked incentive for attracting new investment and to quicken the implementation of projects by providing an incentive for acquisition and installation of new high value Plant or Machinery to manufacturing companies.

For AY 2014-15 & AY 2015-16 [Sec 32AC (1)]

A deduction of 15% of the actual cost of Plant & machinery acquired and installed by a manufacturing company between April 1, 2013 and March 31, 2015. A company is eligible for claiming the deduction u/s 32AC subject to following conditions:

1.  The company should be engaged in the business of manufacturing of an article or thing.
2. The actual cost of new Plant or Machinery should exceed INR 100 crore (aggregate) and such Plant or Machinery should be acquired and installed (both) during the period 1 April 2013 to 31 March 2015.
3. The deduction shall be available in the financial year in which the aggregate cost exceeds INR 100 crore.
4. The Plant or Machinery should not include office equipments, computers and computer software, Plant or Machinery installed in office premises or any residential accommodation, vehicles, ship or aircraft or any second hand Plant and Machinery.
5. Such Plant or Machinery cannot be sold or otherwise transferred within a period of 5 years from the date of its installation, otherwise the deduction allowed would be taxable as business income in the year of transfer. However, transfer can be made under amalgamation or demerger but the restriction of 5 years would apply to the amalgamated or demerged company.

For AY 2015-16 & AY 2017-18 [Sec 32AC (1A)]

Further, in order to simplify the existing provisions of section 32AC of the Act and also to make medium-size investments in plant and machinery eligible for deduction, a new sub section (1A) has been introduced vide Finance Act, 2014 which provide that a deduction u/s. 32AC (1A) shall be allowed if a company, on or after 1st April, 2014, invests more than Rs. 25 crore in plant and machinery in the previous year subject to following conditions:

1. The company should be engaged in the business of manufacturing of an article or thing.
2.  Deduction shall be 15% of actual cost of new plant or machinery.
3. Acquisition & installation both should be done in the same previous year.
4. The Plant or Machinery should not include office equipment’s, computers and computer software, Plant or Machinery installed in office premises or any residential accommodation, vehicles, ship or aircraft or any second hand Plant and Machinery.
5. No deduction shall be allowed under section 32AC(1A) for AY 2015-16 where an assessee is eligible to claim deduction under sub section (1) i.e. where aggregate value of new plant & machinery acquired and installed during the period 01-04-13 to 31-03-15 exceed Rs. 100 crore. Such Plant or Machinery cannot be sold or otherwise transferred within a period of 5 years from the date of its installation, otherwise the deduction allowed would be taxable as business income in the year of transfer. However, transfer can be made under amalgamation or demerger but the restriction of 5 years would apply to the amalgamated or demerged company.

Interview Questions on TDS profile

General questions asked in interview for TDS profile in an organisation

Dear Friends,

Recently i have been given opportunity to conduct technical session during interviews of candidates for TDS related profile in my department (Direct taxation), i therefore prepared a list of Q&A series and would like to share with you as below:

Ques:  What are the different types of forms of filing TDS return?

Ans:    24Q-Salary, 27EQ-TCS, 27Q-Non resident, 26Q- Other than salary, non resident & TCS.

Ques:  Exposure about online corrections, what are the different types of corrections can be done online? How online correction of TDS return is done?

Ans:    Different types of corrections which can be done online: Pan correction, Challan correction, Addition of challan to Statement. Correction can be done online by submitting a combination of details of Original TDS return & latest revised return (details like return acknowledgement number, challan number, 3 deductee details) with use of Digital signature of Authorised signatory.

Ques:   TDS software using in current company for filing TDS return?

Ans:   Candidate who had experience on software currently using by companies are given a preference. Candidates should go through a quick tutorials of best used TDS softwares like Webtel, Genius, Computech, Taxmann etch available on internet .

Technical questions

Ques:   How to identify actual/genuine TDS defaults appearing in TRACES website?

Ans:    Justification report (JR) & Console file is downloaded from TRACES. JR states the reason of TDS demand & console file is generally the TDS data what we have filed in our TDS return. By applying checks on both two files integrity of demand can be identified.

Ques:  Exposure on non-resident payment?

Ans:   Generally Panel is not looking for exhaustive knowledge of Non resident TDS however Candidate must have basic knowledge like tds rate in case of non-resident is tax as per income tax or as per DTAA whichever beneficial however benefit under DTAA to deductee only when following documents were received from deductee:

Tax residency certificate (TRC)

            Pan card copy

            Certificate of establishment

Ques:   Employee TDS

Ans:    Quarterly TDS return is filed mentioning salary paid & TDS deducted however in quarterly statement of Q4 additional details of salary of employee for the whole year is also required to file to generate Form 16. Candidate should have knowledge on basic Income tax provision of employee TDS like exemption calculation for HRA (least of Actual HRA received, Rent paid-10% of salary or 50% (metro cities) or 40%(non metro cities) of salary), Gratuity (least of Actual gratuity received, 15 days average salary for each completed year or Rs 10 lakhs)

Ques:   Current organization workflows of TDS calculation & TDS return?

Ans:    Candidates should prepare the current workflow for preparation of data in their current organisation for payment of TDS & TDS return filing in a narrative form & practice it to make it understand clearly to panel members without missing any important activity.

Hope questions shared above will help you in interview. Please share your experience.

Best of Luck

SYNOPSIS OF DIRECT TAXES PROPOSALS FOR INDIVIDUALS

v No change in the basic exemption limit and the tax rates.

v  Additional surcharge @ 2% being levied on income exceeding Rs. 1 crore (currently if an individual having income above Rs 1 crore, surcharge would be leviable @ 10% of Income tax). This surcharge would be levied in place of Wealth-tax which is proposed to be abolished.

v     No change in Exempt-Exempt-Exempt (EEE) tax benefit proposed for assessee having a girl child and investing under the Sukanya Samriddhi Account Scheme. The investments made in the Scheme will be eligible for deduction under section 80C of the Act, the interest accruing on deposits in such account will be exempt from income tax and the withdrawal from the said scheme in accordance with the rules of the said scheme will be exempt from tax.

v   In view of continuous rise in the cost of medical expenditure, section 80D is proposed to be amended to raise the limit of deduction from 15,000 to Rs. 25,000. Further, the limit of deduction for senior citizens is also proposed to be increased from Rs. 20,000 to Rs. 30,000.

v    As a welfare measure towards very senior citizens, a deduction under section 80D is proposed for any payment made on account of medical expenditure in respect of a very senior citizen, subject to a limit Rs. 30,000.

v     The limit for deduction under section 80DDB is proposed to be increased to Rs. 80,000 in respect of amount paid for medical treatment of very senior citizen. Section 80DD and section 80U is proposed to be amended to increase the limit from 50,000 to Rs. 75,000 and from Rs. 1 lakh to Rs. 1.25 lakh, as the case may be.

v     In order to promote social security, deduction section 80CCC(1) which provides for deduction of amount paid or deposited to effect or keep in force a contract for any annuity plan of LIC or any other insurer for receiving pension from a fund set up under a pension scheme is proposed to be amended to raise the limit of deduction from 1 lakh to Rs. 1.5 lakh, within the overall limit provided in section 80CCE.

v    Section 80G is proposed to be amended to provide for 100% deduction in respect of donations made to the National Fund for Control of Drug Abuse.

v    With a view to encourage and enhance people’s participation in the national effort to improve sanitation facilities and rejuvenation of river Ganga, section 80G is proposed to be amended so as to provide 100% deduction for donations made by any donor to the Swachh Bharat Kosh and to Clean Ganga Fund.

SYNOPSIS OF DIRECT TAXES PROPOSALS FOR CORPORATES

v    Corporate tax rates proposed to be reduced from 30% to 25% over the next four years, starting from next financial year. (i.e. F.Y. 2015-16)

v       Change in the rate of surcharge.

	If net income does not exceeds Rs 1 crore	If net income exceeds Rs 1 crore but less than Rs.10 crore	If net Income exceeds 10 crore
Domestic company	Nil	7%	12%
Foreign company	Nil	2%	5%

v      MAT rate is to continue @ 18.5%

v      The education cess to continue at 3 percent.

v      It is proposed to amend section 92BA by increasing the limit of specified domestic transactions entered into by the assessee from 5 Crores to 20 Crores rupees.

v      Incentive for setting up of Manufaturing units in the State of Andhra Pradesh and the State of Telangana: A new section 32AD is proposed to be inserted to provide for an additional investment allowance of an amount equal to 15% of the cost of new asset acquired and installed by an assessee, if—

(i) he sets up an undertaking or enterprise for manufacture or production of any article or thing on or after 1st April, 2015 in any notified backward areas in the State of Andhra Pradesh and the State of Telangana; and

(ii) the new assets are acquired and installed for the purposes of the said undertaking or enterprise during the period beginning from the 1st April, 2015 to 31st March, 2020.

This deduction shall be available over and above the existing deduction available under section 32AC of the Act.

Further, in order to incentivise acquisition and installation of plant and machinery for setting up of manufacturing units in the notified backward area in the State of Andhra Pradesh or the State of Telangana, it is proposed to allow higher additional depreciation at the rate of 35% (instead of 20%) in respect of the actual cost of new machinery or plant (other than a ship and aircraft) acquired and installed by a manufacturing undertaking or enterprise which is set up in the notified backward area of the State of Andhra Pradesh or the State of Telangana on or after the 1st day of April, 2015.

To remove the discrimination in the matter of allowing additional depreciation under section 32(1)(iia) on plant or machinery used for less than 180 days and used for 180 days or more, it is proposed to provide that the balance 50% of the additional depreciation on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately succeeding previous year.

v     There is no express provision under the Income-tax Act, with regard to value to be considered as cost of acquisition of a capital asset in the hands of resulting company on transfer of capital assets acquired on demerger. Accordingly, section 49 is proposed to be amended to provide that the cost of acquisition of an asset acquired by resulting company shall be the cost for which the demerged company acquired the capital asset as increased by the cost of improvement incurred by the demerged company.

v    TDS: It is proposed to amend the provisions of section 195 of the Act to provide that the person responsible for paying any sum, whether chargeable to tax or not, to a non-resident individual or foreign company, shall be required to furnish the information of the prescribed sum in such form and manner as may be prescribed.

It is further proposed to insert a new provision in the Act to provide that in case of non-furnishing of information or furnishing of incorrect information under sub-section (6) of section 195(6) of the Act, a penalty of one lakh rupees shall be levied.

It is also proposed to amend the provisions of section 273B of the Act to provide that no penalty shall be imposable under this new provision if it is proved that there was reasonable cause for non – furnishing or incorrect furnishing of information under sub-section (6) of section 195 of the Act. These amendments will take effect from 1st June, 2015.

v    Definition of charitable purpose: The definition for charitable purpose provided under section 2(15) is proposed to be amended to include the activity of Yoga as a special category of activity to be considered as charitable purpose on the lines of education.

The definition is proposed to be further amended to provide that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless,-

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities, during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, for the previous year .

INTERNATIONAL TAXATION

v   It is proposed to reduce the rate of tax provided under section 115A on royalty and fees for technical service (FTS) payments made to non-residents from 25% to 10%.

v  Place of effective Managaement (POEM) is proposed to be introduced for determining the residential status of company which is in line with DTAA. It is proposed to amend the provisions of section 6 to provide that a person being a company shall be said to be resident in India in any previous year, if-

(i) it is an Indian company; or

(ii) Its place of effective management, at any time in that year, is in India. (Earlier the provision was – during that year, the control and management of its affairs is situated wholly in India).

Further, it is proposed to define the place of effective management to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.

v    Clarity relating to Indirect transfer provisions – Further clarification to Explanation 5 in section 9(1)(i): Currently The Explanation 5 in section 9(1)(i) clarified that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

The share or interest of a foreign company or entity shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of Indian assets,-

a) exceeds the amount of ten Crore rupees ; and

b) Represents at least fifty per cent. of the value of all the assets owned by the company or entity.

Value of an asset shall mean the fair market value of such asset without reduction of liabilities, if any, in respect of the asset.The specified date of valuation shall be the date on which the accounting period of the company or entity, as the case may be, ends preceding the date of transfer.

v     In the case of a non-resident, being a person engaged in the business of banking, the PE in India of such non-resident shall be obligated to deduct tax at source on any interest payable to either the head office or any other branch or PE, etc. of the non-resident outside India. Further, non-deduction would result in disallowance of interest claimed as expenditure by the PE and may also attract levy of interest and penalty in accordance with relevant provisions of the Act.

OTHER DIRECT TAX PROPOSAL IN BUDGET 2014-15

v     Measures to curb black money

In order to curb generation of black money by way of dealings in cash in immovable property transactions, section 269SS is proposed to be amended so as to provide that no person shall accept from any person, any loan or deposit or any sum of money, whether as advance or otherwise, in relation to transfer of an immovable property otherwise than by an account payee cheque or account payee bank draft or by electronic clearing system through a bank account, if the amount of such loan or deposit or such specified sum is twenty thousand rupees or more.

Similarly, section 269T also is proposed to be amended so as to provide that no person shall repay any loan or deposit made with it or any specified advance received by it in relation to transfer of an immovable property whether or not the transfer takes place, otherwise than by an account payee cheque or account payee bank draft or by electronic clearing system through a bank account, if the amount or aggregate amount of loans or deposits or specified advances is twenty thousand rupees or more.

v     The implementation of General Anti Avoidance Rule (GAAR) is proposed to be deferred by two years. Accordingly, it would be applicable for the financial year 2017-18 (A.Y. 2018-19) and subsequent years. Further, it is also proposed that the investments made upto 31.03.2017 shall not be subject to GAAR.