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Payment to Non-Resident U/s 195

Lets Simplify TDS on Payment made to Non-resident u/s 195 

Important Section to be read are Section 5,6,9, 90,91,92,115,172, 195 and 206AA 
 

Steps to determine rate of withholding tax on payments made to non-resident: 
 

1. Read Section 195(1) 

2. Then Section 5 read with Section 9 to test whether income falls within scope of Total Income 

3. If you are not sure of Residential Status of receiver then also read Section 6 

4. Section 90(2) which says rate as per DTAA or Act whichever is beneficial for the Assessee. 

5. Section 90(4) which says no benefit of DTAA can be claimed unless Tax Residency Certificate (TRC) is obtained. 

6. Section 115A(b) which gives special tax rate of 25% for Royalty & Fees for Technical Services. 

7. Section 206AA – Requirement to Furnish PAN else withholding tax at higher rate of 20% or more. 

8. Read Specific article of DTAA entered with that respective country. 

Text of Section 195(1) 
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : 

Important Points of Section 195(1): 
1. Deductor    :   Any person 
2. Deductee   :   Non Resident Assessee (Excl. Domestic Company) 
Please note : 
Company incorporate outside India can be “Domestic Company” if the Company has made prescribed arrangement for the declaration and payment of dividend in India, from Income which is liable to tax in India.
3. Income must be chargeable to tax i.e. it must fall within scope of total income defined under Section 5 read with Section 9. 

Section 90 talks about Double Taxation Relief : 
Section 90(2) says Provision of the Act OR Double Taxation Avioidance Aggrement (DTAA) whichever is beneficial to the assessee. 
One of the condition for claiming Double Taxation relief is obtaining of Tax Residency Certificate (TRC) which is mentioned in Section 90(4) & also in 90A(4) 

Text of Section 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 assessee. 

Text of Section 90(4) 
An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. 

 

Section 206AA talks about requirement to furnish Permanent Account Number (PAN) 

Text of Section 206AA 
206AA(1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:— 
(i)  at the rate specified in the relevant provision of this Act; or 
(ii)  at the rate or rates in force; or 
(iii) at the rate of twenty per cent. 

About Tax Residency Certificate (TRC): 
In very simple words, Tax Residency  Certificate (TRC) is a certificate which are issued to Tax resident of a foreign country mentioning that the Income of the Assessee is liable to Tax in that foreign country. 

Obtaining TRC is a must for claiming tax benefit provided under respective Double Taxation Avoidance Agreement (DTAA) entered between India and that foreign country. 

Format of Tax Residency Certificate is specified in Form 10F 

Important Note : 
If the remittance made is not Taxable u/s 195 then the importance of TRC & PAN doesn’t comes into picture. 
TRC is required for claiming benefit provided in DTAA entered between respective countries. 
PAN is required to escape from applicability of Section 206AA (i.e. applicable TDS rate  OR  20% whichever is higher) 

Example: 
Royalty / Fees for Technical Services is taxable @ 25% w.e.f. 01.04.13 under Income Tax Act whereas rate provided in DTAA entered between respective countries is say 15% 

Case 1 : Both PAN & TRC is available      
TDS rate will be 15% (no cess as DTAA rate applies) 
Benefit of DTAA is available(because of TRC) & also Section 206AA is escaped(because of PAN) 

Case 2 : PAN is available but no TRC       
TDS rate will be 25.75% (25% plus 3% cess as Act rate applies) 
Benefit of DTAA is not available(because of no TRC) & also Section 206AA is escaped(because of PAN) 

Case 3 : PAN not available but TRC available      
TDS rate will be 20.60% (20% plus 3% cess as Act rate applies) 
Benefit of DTAA is available (because of TRC) but Section 206AA is attracted (because of non furnishing of PAN) 
Therefore 15% or 20% whichever is higher 

Note : 
In the above example since Royalty was taxable under Income Tax Act. Importance of TRC & PAN comes into picture. 

Please Note :  

In the above article, we have tried to explain the importance of TRC and PAN in determining withholding tax rate for payments made to non-resident in simple words. This article is written to provide readers with the basic knowledge on the concept. You are requested to read the relevant sections & consult professional before taking view based on the above article. Hope you enjoyed the article.


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