Analysis of Form 15CA & 15CB requirement for payments made for import of goods
Back ground of the issue
Provisions of Sec. 195(6) of the income tax act got amended by the Finance Act 2015 and it comes into force with effect from 1-6-2015. As per the amended provision, the person responsible for paying any sum, whether chargeable to tax or not, to a non-resident shall be required to furnish the information of the prescribed sum in such form and manner as may be prescribed. When the original provision was inserted, it mandated the certification and reporting only when the person, who was required to deduct tax from the payment made to a non-resident, not being a company, or to a foreign company.
Thus the amendment took place from 1-6-2015 has triggered a question whether the payments made to the import of goods would also fall under the ambit of reporting under Sec.195(6) read with rule 37BB. It is understood that now many banks have been insisting for the certification and declaration reporting transactions in Form 15CA and Form 15CB.
At this point it is worthwhile to go through the memorandum explaining the provisions of the Finance Bill, 2015. It states that the mechanism of obtaining of information in respect of remittances fulfils twin objectives of ensuring deduction of tax at the appropriate rate from taxable remittances as well as identifying the remittances on which the tax was deductible but was not deducted at source. It is seen however in practice that the remitter does not provide the above information in respect of non-taxable remittances. Therefore, it is felt that obtaining of information only in respect of remittances which the remitter declared as taxable defeats one of the main principles of obtaining information in respect of foreign remittances i.e. to identify the taxable remittances on which tax was deductible but was not deducted. Thus, the above amendment is made in Section 195(6).
Further, there was no provision for levying of penalty for non-submission/inaccurate submission of the prescribed information in respect of remittance to the non-resident. For ensuring submission of accurate information in respect of remittance to a non-resident, a penal provision is incorporated in Section 271-I by the Finance Act, 2015 whereby a penalty of INR 1,00,000 would be levied for non-furnishing of information or furnishing of incorrect information under Section 195(6).
To overcome the principle of natural justice the exception seems to be provided for those cases where it is proved that there was reasonable cause for non-furnishing or incorrect furnishing of such information. It is not clear whether penalty is for each instance of non-compliance or for a particular TAN / assessee for the whole financial year.
Impact of amended provisions to import payments to non-residents
In 2013 CBDT had notified certain 39 items of payments for which Form 15CA and 15CB was not required though Notification No. 58/2013 however, it was then reduced to 28 items by a later Notification No. 67/2013 which had omitted 11 items of payments from the specified list. It includes (i) Advance payment against imports and (ii) Payment towards imports-settlement of invoice. It is pertinent to note that at that point of time Form 15CA and 15CB are required to be submitted only for those payments which are chargeable to tax in India and therefore the removal of these two items were not a matter of debate as it exists today due to the amended provisions of Sec. 195(6).
Plain reading Section 195 of the Act with Rule 37BB, would certainly give an impression that when the remittance to non-resident is not chargeable to tax, then above provision does not get triggered. However, to conclusively determine whether the income of a non-resident is chargeable to tax or not one has to analyse the provisions of Sec.5(2) and Sec. 9(1) of the Act.
Taxability of payment to non-resident for imports
The income in the case of imports would be in the nature of business income and therefore sub-clause (i) to 9(1) would only be relevant and as per which “all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset of source of income in India or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India”.
As per Explanation 1(a) to Section 9(1)(i), in the case of a business of which all the operations are not carried out in India, the income of the business is deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India.
“Business Connection” as per Explanation 2 to Section 9(1)(i) “Business connection would include any business activity carried out through a person who, acting on behalf of the non-resident,—
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident”
Hence, to tax the business income of a non-resident in India, the transaction should be carried out by such non-resident in India directly by himself or indirectly through any business connection in India failing which such business income would not be liable to tax India. Even when it becomes taxable in India, as per Explanation 1 to Section 9(1)(i) of the Act, only such part of the income which is attributable to the operations carried out by such non-resident in India could be taxed in India.
Further, Section 90(2) of the Income Tax Act provides has an option to a non-resident to opt for the provisions of the Act or Double Tax Avoidance Agreement (DTAA), whichever is more beneficial to him. In most of the DTAAs that India entered into, the business income would be liable to tax in India only if such non-resident has any permanent establishment in India to which the transaction can be attributed. However, Sec.90(4) mandates for tax residency certificate from the respective country to claim DTAA benefit and Sec.90(5) read with Rule 21AB(1) to (12A) requires Form 10F to be given by the non-resident to avail the DTAA benefits.
Judicial precedents on taxability of payments to non-resident for import of goods
i. Vodafone International Holdings B.V. v. UOI (2012) 204 Taxman 408 (SC)
ii. GE Technology Cen (P) Ltd v. CIT (2010) 193 Taxman 234 (SC)
Thus, one can conclude that the import of goods is not liable to tax in India if
1. The contract between the parties are on principal-to-principal basis and at arm’s length basis,
2. Contracts to sell are made by the non-resident outside India,
3. Delivery of the goods are taken outside India on FOB basis, and
4. The non-resident exporter of goods does not have any business connection or permanent establishment in India.
Thus, one cannot simply conclude that all imports are, as a matter of rule, exempt from tax and there could be imports, which do not comply with the conditions mentioned above and therefore result in some income being chargeable to tax in India. Therefore in order to conveniently conclude , it would be advisable to adhere with the conditions specified above while entering into contracts of sale/ import transactions and to obtain the following documents from the foreign exporter/vendor:
1. Tax Residency Certificate,
2. Form 10F signed by the vendor
3. A declaration from vendor stating he does not have a business connection or PE in India.
4. The contract of sale is entered on principal to principal at arm’s length with the non-resident signing the same outside India.
Whether payments to non-resident for imports requires 15CA and 15CB
Amending Sec.195(6) by removing the reference to the person referred to in Section 195(1) and replacing it with whether or not the sum being remitted was chargeable to tax, one could conclude that the prescribed information under Section 195(6) will have to be furnished in case of all remittances including that of the import payments.
However, it may be noted that Rule 37BB is not in line with the amended provision of Section 195(6). As per the present Rule 37BB, Form 15CB would be required only if the remittance is chargeable to tax. Therefore, one can even take a view that CBDT had not prescribed any thing for reporting in case payments to non-resident that is not liable to tax in India. However, it would be dependent upon the authorised dealers. If the banker insist for Form15CB in all cases as per the amended Section 195(6), the payer has no choice but to obtain the same for all the remittances.
It is also understood that, in the conference organised by Chamber of Tax Consultants and IFA Delhi Chapter on 4 March 2015, the CBDT officials clarified that the reporting required under Section 195(6) is not required in all cases. Jt. Secretary, Pragya Saxena further clarified that only that ‘information’ which may be ‘prescribed’, would have to be furnished. One needs to wait and watch for more clarification and notification in this regard.
Possibility to levy Penalty for non filing of Form 15CA & Form 15CB
If one takes a view that if the remittance is not chargeable to tax, Form 15CB may not be required, he might wonder whether he would be subjected to penalty u/s 271-I. The stringent penalty provision, would also play as an incumbent on the payer to file Form 15CA and 15CB in all cases irrespective of the fact that the remittance to the non-resident is taxable or not unless CBDT clarifies otherwise.
One can note that even in case if tax authorities take penal action against the payer, it can be defended by quoting the conflict between Rule 37BB and Section 195(6). Though the department can argue that when there is a conflict between the act and the rule the rule prevails the argument from the payer is that the rules itself is awaited in the case of reporting the payments which are not chargeable to tax. Further, the decisions of SC in the case of Vodafone International Holdings B.V. v. Union of India (2012) 204 Taxman 408 (SC) and GE Technology Cen (P) Ltd v. CIT (2010) 193 Taxman 234 (SC) etc. can be relied upon to defend the levy of penalty. Time and again courts have held that, ‘when there are two possible interpretations of the Act, the one which is favourable to the assessee has to be preferred’. The above ratio has been applied by the Honbl’e Supreme Court in the cases of CIT V. Podar Cement (P.) Ltd. 226 ITR 625 and CIT V. Vegetable Products Ltd. 88 ITR 192 . Therefore one can get the immunity from penalty proceedings.
Tags :Income Tax