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TDS certificates for non-residents

Updated on: Nov 15, 2017

BL07_SNIPPETS | Photo Credit: K_Murali Kumar

Section 199 of the Income-Tax Act, 1961, provides that credit for taxes deducted at source is to be granted to the person from whose income the deduction was made on production of certificate issued under Section 203 of the Act. Section 203 requires that every person deducting tax at source shall furnish to the payee a certificate in the prescribed form.

The Central Board of Direct Taxes issued Circular No.3/2011 on May 13 according to which the deductors/payers are required to issue TDS certificate in Form 16A to the deductees/payees which is generated through the Tax Information Network (TIN) Central System. TIN System generates TDS certificates only in case of deductees/payees having a permanent account number (PAN).

Hence, the question that arises is that what happens to deductees/payees not having PAN, especially, non-resident deductees/payees. How will they claim credit for taxes withheld?

The only option available would be for the deductors/payers to issue manual TDS certificates in Form 16A evidencing the taxes deducted at source. With this, non-PAN deductees/payees should be able to claim credit for taxes withheld in India. Not granting tax credit (as the certificate is not generated through the TIN System) would be against the principles of natural justice.

Amendments in Point of Taxation Rules

Before April 1, the provision relating to change in the rate of service tax contained in the Point of Taxation Rules was inapplicable to the continuous supply of services, that is, services provided continuously or on a recurring basis for a period exceeding three months. This position has been amended vide Budget 2012 by treating continuous supply of services at par with non-continuous supply of services. It essentially means that continuous supply of services would now be affected in case of any change in the rate of service tax when either the invoice or the receipt of the consideration occurs after the said change. This has created a doubt in relation to invoices raised before April 1 pending realisation. While there are some who take the view that the portion of service provided after the rate change would attract enhanced service tax, others believe that as the point of taxation has occurred prior to the amended rate, the new rate should not apply. A clarification is awaited from the Central Board of Excise and Customs.

Slump sale not reconstruction: Court

In a recent ruling, the Bombay High Court has ruled that slump sale (transfer of whole or part of business concern as a going concern, for a lumpsum consideration without values being assigned to the individual assets and liabilities) of a business or undertaking, resulting in change in ownership, does not amount to reconstruction of business and the benefit of deduction under Section 10A cannot be denied.

The Court, relying on the principles laid down in earlier High Court and Supreme Court rulings, has drawn a distinction between sale and reconstruction of business. The Court held that when substantially the same business is carried on by the same persons, it would result in reconstruction of business if the business is carried out in an altered form. Sale of business as a going concern, resulting in a change in ownership, would not amount to reconstruction.

The principles laid down in this decision would be relevant to entities availing tax holiday under other Sections like 10AA, 80IA, 80IB, 80IC, etc, where similar conditions have been prescribed.

No tax on software sale by non-residents

The Mumbai Income-Tax Appellate Tribunal recently held that consideration received by a non-resident assessee from the sale of shrink-wrapped software to customers in India was not in the nature of royalty but was business income. In the absence of the non-resident having a permanent establishment in India, such income was not taxable.

The Tribunal held that where two views are available, one favourable (from the Delhi High Court) and one against (from the Karnataka High Court), the benefit of the favourable decision should be applied to the case of the non-resident assessee under the non-discrimination clause of India's tax treaties.

Applying the view taken above, the Tribunal in a recent ruling pronounced on April 30 held that even consideration for software purchased from Indian residents is not royalty and would consequently not attract tax-withholding obligations. Though the first mentioned case was rendered in the context of a tax treaty, the ratio was found to be equally applicable to the definition of royalty under Indian domestic law.

Published on May 06, 2012
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