Taxation Times

September 2023

UJA | Taxation Times September 2023
1Introduction
2Article : Section 194a TDS on Interest to NBFCS – Compliance and Challenges
3Case Laws 
4Circulars and Notifications: September 2023
5Tax Compliance October 2023
6Tax News from around the World
Picture of by Neha Raheja
by Neha Raheja

Partner, Direct Tax

In this edition of Taxation Times, we will go through the provisions and procedural aspect of Section 194A ‘TDS on Interest Paid to NBFCs’.

In this month’s Taxation Times, we cover:

  1. An article encompassing the provisions related to TDS on Interest Paid to NBFCs.
  2. Case Laws from various courts & jurisdictions;
  3. Tax Compliance Calendar – October 2023;
  4. Circulars & Notifications – September 2023;
  5. Tax News from around the world.

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

Section 194A TDS on Interest to NBFCS: Compliance and Challenges

Background and Legislative Intent

Non-Banking Financial Companies (NBFCs) play a crucial role in providing financial support to businesses. 
However, what many payers may not realize is that there are Tax Deducted at Source (TDS) obligations associated with interest payments made to NBFCs. This article explores Section 194A of the Income Tax Act, shedding light on the TDS requirements and the challenges businesses face in complying with them.

Summary and Procedural Aspects

A. Provisions of Section 194-IA

Section 194A of the Income Tax Act mandates that the payer must deduct a 10% tax on interest payments made to residents who are not classified as Banks, Insurance companies, or other specified exceptions. Interestingly, NBFCs do not fall into the exception category, which means that businesses are obligated to deduct a 10% tax on interest payments to NBFCs. 

B. Consequences of Non-Compliance

Failing to deduct the required tax can lead to significant consequences. In such cases, the interest amount can face a 30% disallowance in the hands of the payer. This, in turn, could result in up to 30% tax on the disallowed amount, translating into a 9% tax cost for businesses. Furthermore, non-compliance may trigger penalties and prosecution by the tax department.

C. Challenges in TDS Compliance

Complying with TDS on interest payments to NBFCs is not without its challenges. One significant hurdle is the practical difficulty in deducting tax during the payment of Equated Monthly Installments (EMIs) to NBFCs. Payment portals may not accept payments less than the full EMI amount, making it impossible for businesses to deduct tax on the interest component of EMIs. 

D. Probable Solution
  • Identify Interest Component:
    The payer needs to examine the loan repayment schedule provided by NBFCs to identify the interest component within each EMI.
  • Calculate and Pay TDS:
    Once the interest component is identified, the payer can calculate TDS at the rate of 10% on this amount. They must then pay the TDS out of their own pocket.
  • Report TDS:
    The payer should report the TDS paid in their E-TDS returns.
  • Generate TDS Certificates
    After processing the TDS Returns, the payer can generate TDS certificates (in Form 16A).
  • Apply for Refund:
    To recover the TDS paid out of pocket, businesses can submit a refund request letter to the NBFC.
    Until NBFCs are brought on par with banks for TDS purposes by the government, businesses will continue to face these challenges.
Conclusion

TDS compliance on interest payments to NBFCs is a complex issue that businesses must navigate. The legal requirement to deduct 10% tax on such payments can have financial implications and may lead to penalties if not adhered to. While practical challenges exist, businesses can follow the outlined process to ensure compliance and seek refunds for TDS paid out of pocket. Staying informed and proactive in addressing TDS obligations is essential for businesses to avoid financial penalties and maintain good standing with tax authorities. 

Case Laws

Telefonica UK Ltd. V/s Deputy Commissioner of Income Tax [2023] 154 taxmann.com 475 (Mumbai - Trib.)
Reference: Section 9 of the Income-Tax Act, 1961, read with article 13, of the Double Taxation Avoidance Agreement between India and UK

Facts:
The assessee, i.e., Telefonica UK Ltd is a company incorporated under the laws of United Kingdom of Great Britain and Northern Ireland (UK) and is a tax resident of UK. The Assessee is a non-resident telecommunication service provider, primarily engaged in the business of providing mobile and broadband services along with various other ancillary services such as text, media messaging, games, music, video and data connections in the United Kingdom.

Since, Vodafone Idea Limited (hereinafter referred to as “VIL), a licensed telecommunication service provider in India, did not have a license and the infrastructure to provide telecommunication services in UK, it entered into an agreement with the Assessee to provide the roaming services to its customers travelling to UK whereby customers of VIL travelling to UK are able to make and receive calls while they are in UK, i.e., in the territory of the Assessee. In lieu of the services provided to VIL’s customers, VIL is under an obligation to pay roaming charges to the Assessee. Thus, in essence, roaming charges is the income of the Assessee for providing telecom services VIL’s customers while they are roaming outside India.

During the previous year relevant to A.Y 2014-15, the Assessee received Rs. 7,45,72,448 for providing roaming services and discount settlement in connection therewith from VIL. The aforesaid amount received by the Assessee was not offered to tax by the Assessee, since the roaming services were rendered outside India i.e., in UK therefore, according to the Assessee, the income did not accrue or arise in India. And further, according to the Assessee, the income received by the Assessee was not chargeable to tax as Royalty or Fees for Technical Services (“FTS”) under the provisions of the Act and under the provisions of India-UK Double Taxation Avoidance Agreement (“DTAA”). Accordingly, the Assessee did not file a return of income for A.Y 2014-15 as there was no income chargeable to tax in India.

During the assessment proceedings the assessing officer treated the amount received from VIL as royalty under Income Tax Act, 1961 as well as under India-UK DTAA.
The assesee filed its objections before The DRP against the draft assessment order but The DRP directed the assessing officer to pass the final assessment order treating the amount received as FTS. Against the final assessment order the assesee filed an appeal before the tribunal. 

Held:
Assessee-company, a UK based company, telecommunication service provider was primarily engaged in business of providing mobile and broadband services in United Kingdom – Vodafone (VIL) a licensed telecommunication service provider in India entered into an agreement with assessee to provide roaming services to its customers travelling to UK – In lieu of services provided to VIL’s customers, VIL was under an obligation to pay roaming charges to assessee – Assessee did not file return on ground that roaming services were rendered outside India i.e., in UK therefore, income did not accrue or arise in India – Assessing Officer held that roaming charges received by assessee were in nature of royalty on ground that involves the NTO(Non-resident Telecom Operator assessee) sharing information with RTO/VIL (Resident Telecom Operator) concerning working of, or use of process employed in telecom network of NTO to allow transit of telecom traffic generated by RTO/VIL – He, thus, held that amount received by assessee 

was covered within scope of “process” and taxable as royalty under Act as well as India-UK DTAA – Whether process employed for rendering roaming services was not at all exclusively held by assessee or VIL and it was a standard process employed by all telecom operators around world including VIL in India – Held, yes – Whether since VIL could not provide services to its customers who travelled to UK as it did not have any facility or infrastructure in UK and arrangement with assessee was made only to provide services to its customers whenever they travelled to UK, roaming charges would not fall within scope and meaning of royalty under section 9(1)(vi).
In Favour of: The Assessee

Security Printing and Mining Corporation of India Ltd. V/s Principal Commissioner of Income Tax [2023] 154 taxmann.com 554 (Delhi)
Reference: Section 14A of the Income-tax Act, 1961, read with section rule 8D, of Income tax Act, 1962

Facts
Assessee, a public sector undertaking engaged in the business of designing and printing of bank notes, minting of coins, medallion seals and tokens etc, filed its return of income for the relevant assessment year.

The case of the assessee selected for scrutiny and the Ld. Assessing Officer passed an order under section 143(3) of the Income Tax Act, 1961 by making additions to the income of the assessee under section 14A of the Income Tax Act, 1961.

Against the assessment order the assessee filed an appeal before Ld. Commissioner of Income Tax (Appeals) but the Ld. CIT(A) passed an order and upheld the additions made by the Ld. AO.
Against the order passed by the CIT(A) the assessee filed an appeal before Hon. ITAT and Hon. ITAT deleted the additions and passed an order in favour of the assessee.

Aggrieved by the order of the Hon. ITAT the Income Tax Department filed a petition before the Hon. High Court.

Held :

Expenditure incurred in relation to income not includible in total income – Assessment year 2014-15 – Assessee filed its return of income – Assessing Officer observed that assessee had invested substantial money in mutual funds, dividend whereon income was exempt from tax; and that assessee also held shares of a joint venture company, which shares being assets, could yield exempt income – Thus, he made disallowance of expenditure under section 14A by invoking rule 8D – It was noted that admittedly, before recording aforesaid disbelief, Assessing Officer did not examine even a shred of accounts of assessee – Without looking into accounts of assessee, Assessing Officer held that assessee had infused funds by way of equity in joint venture company and also held that it was not believable that no expenditure had been incurred in relation to assets, income where from did not form part of total income – Completely ignoring version of assessee that being a cash rich company, it did not have to deploy any person by way of any special effort which could be treated as expenditure to earn exempted income, Assessing Officer recorded a conclusion that assessee had infused significant funds by way of equity in joint venture company – No cogent reasons, much less supported by data extracted from accounts of assessee were advanced by Assessing Officer to explain why case set up by assessee was not believable – Even quantification of disallowance was carried out under rule 8D(iii) without scrutinizing accounts of assessee and by jumping over mandate to first proceed under section 14A – Whether, on facts, impugned disallowance of expenditure under section 14A made by Assessing Officer was unjustified.

In Favour of: The Assessee

Circulars and Notifications September 2023

Notifications

CBDT amends Rule 11UA incorporating new valuation methods; includes norms for valuing “CC preference shares”

Section 43d Of The Income-Tax Act, 1961 – Computation Of Business Income -Special Provision In Case Of Income Of Public Financial Institutions, Public Companies, Etc. – Notified Non-Banking Financial Companies
CBDT notifies amendments under section 47(viiab) of the Income Tax Act, 1961

Circulars

CBDT extends timeline for filing of Form 10B/10BB and ITR-7 for AY 2023-2024

Press Release:

Gross Direct Tax collections for Financial Year 2023-24 (as on 16.09.2023) register a growth of 18.29%
CBDT resolves more than 46,000 public grievances and 7,000 grievance appeals between December, 2022 till July, 2023 under Special Campaign 2.0 for Swachhata and disposal of pending matters

6.84 crore ITRs verified out of 6.98 crore ITRs filed for AY 2023-24 with over 88% of verified ITRs processed as on 5th Sept. 2023

Tax Compliance: October 2023

07 October 2023

  • Due date for deposit of tax deducted/collected for the month of September, 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.

15 October 2023

  • Due date for furnishing of Form 24G by an office of the Government where TDS/TCS for the month of September, 2023 has been paid without the production of a challan.

  • Due date for issue of TDS Certificate for tax deducted under section 194-IB/194-A/194M/194S in the month of August, 2023.

  • Quarterly statement of TCS deposited for the quarter ending September 30, 2023.

  • Upload declarations received from recipients in Form No. 15G/15H during the quarter ending September, 2023.

  • Quarterly TCS and TDS certificate in respect of tax collected by any person for the quarter ending June 30, 2023.

30 October 2023

  • Due date for furnishing of challan-cum-statement in respect of tax deducted under section 194-IA/194-IB/194M/194S in the month of September, 2023.

  • Quarterly TCS certificate (in respect of tax collected by any person) for the quarter ending September 30, 2023.

31 October 2023

  • Intimation by a designated constituent entity, resident in India, of an international group in Form no. 3CEAB for the accounting year 2022-23.

Quarterly statement of TDS deposited for the quarter ending September, 2023 

Audit report under section 44AB for the assessment year 2023-24 in the case of an assessee who is also required to submit a report pertaining to international or specified domestic transactions under section 92E

Report to be furnished in Form 3CEB in respect of international transaction and specified domestic transaction.

Furnishing of Audit report in Form no. 10B/10BB by a fund or trust or institution or any university or other educational institution or any hospital or other medical institution.
Note: the due date for furnishing the Audit report in Form no. 10B/10BB has been extended from September 30, 2023 to October 31, 2023 vide Circular no. 16/2023, dated 18-09-2023

Tax News from Around the World

Tax slump in outperforming Brazilian economy scrambles reform plans

Brazil to end import tax exemption for electric vehicles, says official

Argentina’s lower house passes bill to reduce taxes on wealthy

German tax revenues up 8.6% in August

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