In our company, we have been making payments to a foreign company in Uk(monthly) after deducting TDS u/s 195. Now, suddenly the foreign company has given declaration that "We don't have permanent establishment" in india. But I know that the said foreign company is having sales office in NewDelhi.
In this regard, can you please clarify me whether we continue deducting tax u/s195 or stop deducting tax u/s195 by considering their declaration mentioning "we don't have permanent establishment India".
PE plays an important role even in case of Technical Services also. Sec. 44AD provides for taxation of 40% on NET basis in case of PE of Foreign Company is being paid FTS from India.
06 November 2012
Thanks Sir. So, the PE declaration submitted by the foreign company is void as per these conditions.
And with regard to IT PAN, I have 2 queries.
First one is, can we deduct TDS and give credit it to PAN account of their Indian entity.
Second one is, let us say the UK company not provided PAN details. And in that case, shall we get shelter u/s 90(2) for taking benefit lowest tax for foreign companies comparing with 20% u/s 206(AA), 10% u/s 115A(BB) and 15% as per DTAA.
Or the section 206(AA) supercedes 90(A)??
Once again, thank you very much for your valuable time spent for me.
07 November 2012
No, the NO PE declaration is perfectly valid if the Foreign Company feels so and the same has not overruled by the Indian Income Tax Authorities.
I suggest that you keep the same on record and ask the Foreign Company to put a line in NO PE Certificate"That in case the NO PE declaration is not accepted or is otherwise held not valid by Indian Income Tax Authorities we shall be responsible for the tax consequences of the same" .
Although I doubt that Foreign Company shall put these lines.
If you are still confused then you can contact me for the PERFORMA for NO PE Certificate.
If the paym,ent is being made to foreign Company then obtain the PAN of Foreign entity and deduct TDS @ 10.51% or otherwise deduct TDS @ 20%.
07 November 2012
Thanks Sir and sorry for misunderstanding.
Now I understood and let me summarise it as below:
As mentioned by you, it is true that the foreign company may refuse to make a note in the "NO PE certificate" for taking responsibility for tax consequences in future. Hence, we can't ask it.
2. We are left with 2 options. Such as, accept the "NO PE certificate" and do not deduct TDS. Other option is to deduct TDS u/s 195 or 206AA as applicable by not accepting "NO PE certificate".
07 November 2012
No , on the contrary do ask for inclusion of clause, mentioned by me.
You are again confusing the NO PE Certificate as a License for not deducting TDS.
I suggest that you carry on with deducting TDS and keep the NO PE Declaration as a proof of correct deduction of TDS @10.51% or 20% as the case may be instead of 40% (applicable in case the foreign company had a PE in India)
07 November 2012
Yes sir, I am highly confused now:
Because, the foreign company approached us not to deduct tax by submitting "NO PE" declaration and the below case law reference.
"On appeal, the Tribunal held that the compensation in the hands of the UK company has the character of business profit as it arises out of a trading contract and is covered by Article 7 of the DTAA between India and UK. Hence the compensation is not liable to tax in India in the hands of the UK company in absence of a permanent establishment (PE) of the UK company in India. Consequently there was no obligation on the assessee to deduct tax under section 195 of the ITA and no disallowance under section 40(a)(i) of the ITA could be made. The Tribunal further held that though the damages included an element of interest, the same was not assessable because in a decree or arbitration award, the nature of the compensation would not partake its original character and assumes the character of a judgment debt. In substance, interest partake the character of the compensation and hence could not be considered as “interest”. Goldcrest Exports v. ITO [ITA No. 442/Mum/2009]"
So, I checked the definition for Permanent establishment and found that the "NO PE" declaration is not valid since the foreign company has its sales office in New Delhi.
08 November 2012
I wish to close this query thread with the below remarks based on the discussions and the clarifications given by Mr.Anuj and our auditor Mr.Dasaraty.
First, we must understand that the status of "PE (Permanent establishment)" or "no PE" of a foreign company is not the deciding factor for the tax applicability in India for payment made towards royalty and technical services.
However, it is the deciding factor whether TDS u/s 195(Rate as per 115A) or Income tax u/s 44DA is applicable.
1. In case the foreign company has "no PE" in India (Fees for Technical services)
In this case, the TDS shall have to be deducted as per the Section 195(Rate as per 115A) which clearly says that....
[Explanation2 ----For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section(1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has__
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India]
So, for foreign companies having "NO PE" in India, the TDS rate shall be at the rate of 10.51% u/s195(as per the rate specified in u/s 115A) if PAN available otherwise 20% u/s 206(AA) for PAN not available.
2. In case the foreign company has "PE" in India (Fees for Technical services)
In this case, the Income tax shall have to be computed under the head "Profits and gains of business or profession" in accordance with the provisions of this Act as per section 44DA(1) which clearly says that....
(1) The income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after the 31st day of March, 2003, where such non-resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession, as the case may be, shall be computed under the head "Profits and gains of business or profession" in accordance with the provisions of this Act :
So, for foreign companies having "PE" in India, the Tax rate shall be at the rate of 40% on net income earned.
HOWEVER, THE "PE" & "NO PE" STATUS OF A FOREIGN COMPANY PLAYS IMPORTANT ROLE IN COMPUTING TAX UNDER BUSINESS PROFITS.
Once again thanks to the experts Mr.Anuj and Mr.Dasaraty for their guidance with patience.
CAclubindia
