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Senior Advisor - Direct & International Tax
The Finance Bill 2023 was presented on 1 February 2023 by the Hon’ble Finance Minister, Nirmala Sitharaman. Recently, the Finance Minister announced certain amendments to the originally proposed Finance Bill and the amended Bill was then passed by Parliament. In a surprise move, the Government amended the Section 115A of the Income Tax Act, 1961 in which it doubled the tax rate for royalty and fees for technical services earned by non-resident from 10% to 20% with effect from April 01, 2023.
In the first edition of Taxation Times for FY 2023-2024, we will understand the amendment made to Section 115A and its impact on non-resident tax payers.
In this month’s Taxation Times, we cover:
We hope that you find this month’s edition of the Taxation Times useful. In case you have any feedback or need us to include any information to make this issue more informative, please feel free to write to us at info@uja.in
Happy Reading!
Best Regards,
UJA Tax Team
As per the provisions of the Income Tax Act 1961 (‘ITA’), the income of a non–resident is taxable in India only to the extent such income
Payments made to a non–resident in the form of fees for technical services/royalties are subject to tax in India & hence taxes were withheld at the time of making such payment section The rates of deduction of taxes have been specified in section 115A of the ITA.
The Finance Bill 2023 was announced by Hon’ble Finance Minister Nirmala Sitharaman in February 2023. However, subsequently, certain amendments were made to the original Bill which was also passed by the Parliament.
The Finance Bill 2023 made an amendment to section 115A of the ITA. The tax rate on royalties and fees for technical services (FTS) has been increased from 10% to 20%. This amendment is effective 1st April 2023. Thus, any payment made to a non–resident in the nature of royalties/ fees for technical services shall be subject to withholding tax at 20% (as increased by cess & surcharge).
Section 115A had exempted taxpayers from filing their tax returns in India provided that:
Thus, non–resident taxpayers were exempted from filing their tax returns if the conditions of section 115A were satisfied. This also meant that they need not obtain a Permanent Account Number (‘PAN’).
Section 90(2) of the ITA provided that taxpayers have the option to pay taxes as per the Double Taxation Avoidance Agreements (‘DTAA’) or the ITA whichever was more beneficial to them.
However, with the revised section 115A amending the tax rate to 20% on FTS & royalty, the tax rates as per the DTAAs would be more beneficial to taxpayersection When a non–resident taxpayer opts to deduct taxes as per the DTAA certain additional documents would be required to be furnished which are as follows:
The Central Board of Direct Taxes (‘CBDT’) had notified that non–resident taxpayers were required to electronically file Form 10F. However, considering that non–residents do not have a PAN in India, the CBDT, this requirement has been extended till 30th September 2023. However, considering that taxpayers would opt for lower tax rates as per the DTAA, they would have to mandatorily obtain the PAN in order to submit form 10F electronically.
Further, taxpayers opting for the beneficial tax rates as per the DTAA would also be required to file their tax returns in India.
Apart from increasing the tax burden, the amendment to section 115A would also increase the compliance burden on non–resident taxpayers which would include
Another impact could also be on resident tax deductors wherein the royalty & FTS payments are being grossed up.
Facts: The assessee is engaged in the business of software development. The assessee deducted tax at source (TDS) in respect of salaries, contract payments etc. during the year under consideration. The assessee remitted some of the TDS amount with a delay ranged from 05 days to 10 months. A survey was conducted by the Revenue at assessee’s premises and it was noted that TDS was not deposited within the prescribed dates under Income Tax Rules (IT Rules).
The Additional Commissioner of Income Tax issued a show cause notice proposing to levy penalty under section 271C of the amount equal to TDS and thereby passed an order levying the penalty.
The assessee company filed an appeal before Hon. High Court which dismissed the appeal filed by the assessee.
The same issue was faced by the assessee in the subsequent assessment years.
Therefore, the assessee filed an appeal against the judgement of Hon. High Court and filed civil suits against the revenue.
Held: The words used in Section 271C(1)(a) are very clear and the relevant words used are “fails to deduct.” It does not speak about belated remittance of the TDS. As per settled position of law, the penal provisions are required to be construed strictly and literally. As per the cardinal principle of interpretation of statute and more particularly, the penal provisions are required to be read as they are. Nothing is to be added or nothing is to be taken out of the penal provision.
Therefore, on plain reading of Section 271C of the Act, 1961, there shall not be penalty leviable on belated remittance of the TDS after the same is deducted by the assessee. Section 271C of the Income Tax Act is quite categoric. Its scope and extent of application is discernible from the provision itself, in unambiguous terms.
When the non-deduction of the whole or any part of the tax, as required by or under the various instances/provisions of Chapter XVIIB would invite penalty under Clause 271C (1)(a); only a limited text, involving sub-section (2) of Section 115O or covered by the second proviso to Section 194B [ and now the first proviso to sub-section (1) of section 194R and the proviso to sub-section (1) of section 194S with effect from 1-4-2023 and section 194BA wef 1-7-2023] alone would constitute an instance where penalty can be imposed in terms of Section 271C (1)(b) of the Act, namely, on non-payment.
In Favour of: The Assessee.
Facts: The assessee is a company engaged in the business of manufacturing, trading, marketing and distribution of dental products, cosmetics, toiletries, leather products. Considering the volume of international transactions involved the assessing officer referred the case to the Transfer Pricing Officer (TPO) and the Ld. TPO passed an order by making upward adjustment on 30th January.
Aggrieved by the order passed by the Ld. TPO the assessee raised an objection before the Hon. Dispute Resolution Panel (DRP) wherein certain adjustment was made on account of transfer pricing issues and the Ld. Assessing Officer (AO) passed final assessment order.
Aggrieved by the order passed by the Ld. AO the assessee filed an appeal before Hon. Income Tax Appellate Tribunal (ITAT).
Held: Where TPO had passed transfer pricing order, beyond time limit available under section 92CA (3A), assessee did not remain an eligible assessee in terms of provisions of section 144C (15) (b) and extended time limit in terms of provisions of section 153 (4) of 12 months would also not be available, thus, assessment order passed under section 143 (3) being barred by limitation was to be quashed and set aside.
In Favour of: The Assessee
Facts: The assessee, a wholly owned subsidiary of Japanese company, was engaged in business of marketing and supplying of factory equipment. The assessee had debited certain amount, being reimbursement of expenses to the parent company in Japan. On verifying the details, Ld. assessing officer found that one part of the payment made was classified as salary for providing services in India through certain employees of parent company. and certain amount was paid to four expatriate employees working in managerial position with assessee.
The Ld. Assessing officer contended that the above transaction is in the nature of Fees for Technical Services (FTS) and TDS is required to be deducted on the same and hance shall attract disallowance under section 40(a)(i) of the Income Tax Act, 1961.
Aggrieved by the assessment order the assessee filed an appeal before CIT(A), which in turn upheld the order of the Ld. Assessing Officer.
Aggrieved by the order passed by CIT(A) the assessee filed an appeal before the Hon. Tribunal.
Held: Assessing officer found that one part of said payment was classified as salary for providing services in India through certain employees of parent company for rendering managerial services. Assessing officer concluded that parent company had seconded its employees for rendering managerial services to assessee, and, therefore, fee paid to them was in nature of FTS, requiring withholding of tax under section 195. Since assessee had not deducted tax at source on such payment, Assessing Officer made disallowance under section 40(a)(i). Terms of assignment agreement between parent company and assessee made it clear that assigned employees, in respect of whom, disputed payments had been made by assessee were under complete control and supervision of assessee during tenure of assignment agreement and thus, there was employer-employee relationship between assessee and assigned employees.
Where some employees of parent company were assigned to assessee since assigned employees were under complete control and supervision of assessee during tenure of assignment agreement and reimbursement of expenses made by assessee to its parent company for salary paid to expatriate employees was in nature of salary cost and was subjected to TDS under section 192, such reimbursement could not be treated as FTS under section 9(1)(vii) and article 12 of India Japan DTAA.
In Favour of: The Assessee
Due date for deposit of Tax deducted/collected for the month of April, 2023. However, all sum deducted/collected by an office of the government shall be paid to the credit of the Central Government on the same day where tax is paid without production of an Income-tax Challan.
Due date for issue of TDS Certificate for tax deducted under section 194-IA/194-IB /194M in the month of March, 2023
Quarterly statement of TCS deposited for the quarter ending March 31, 2023.
Due date for furnishing of challan-cum statement in respect of tax deducted under section 194-IA/194-IB /194M in the month of April, 2023.
Issue of TCS certificates for the 4th Quarter of the Financial Year 2022-23.
Quarterly statement of TDS deposited for the quarter ending March 31, 2023.
Due date for furnishing of statement of financial transaction (in Form No. 61A) as required to be furnished under sub-section (1) of section 285BA of the Act respect for financial year 2022-23.
Due date for e-filing of annual statement of reportable accounts as required to be furnished under section 285BA(1)(k) (in Form No. 61B) for calendar year 2022 by reporting financial institutions.
