10 October 2011
Wished to understand the views on the applicability of TDS on payments by Indian Company to rep office or branch office abroad. The payments are in the nature of reimbursement of routine expenses incurred by branch/rep office abroad including legal fees/professional fees in certain cases. The query is more focussed on TDS applicability on legal fees reinbursed to branch/rep office which has already incurred the expense abroad and is providing statement of expense to HO (Indian Co)? Due to broad nature of Section 195 and ofcourse the deeming provision under Section 9 for such payments (FTS), it may be advisable for Indian co to insist on routing such expenses from India directly thoruhg instruction to branch so that payment may be released after understanding TDS applicability depending upon the facts of each case. This would result in better control over such transactions so that disallowances under Section 40 are not attracted on suhc payments. In respect of other payments since they involve only reimb of expenses and there is no profit element, there is no question of TDS. There are various caselaws available in this regard. This is only my view..request your view based on similar experience if any.
12 October 2011
I completely agree with your view as Indian Company's. Branch or rep office is nothing but extension of Indian company and is Indian resident as per Income Tax Act .
The expenses incurred by the Branch/rep Office are ultimately to be merged in Indian Books of Account and hence the ITO can rightly disallow them under Section 40.
19 April 2013
In case branch is located in say UK and making payment, he needs to comply with local law as well and he would also be expected to do deduction as per Indian law as well?
This situation would call for double deduction and practically difficult to implement as well.
Further in case indian branch in making payment to indian residnet, then also two withholding tax deduction would be called for which is not warranted.
There seems to be no clear cut provision in law to avoid however practically this is not implementable.
Normally income paid for services rendered and utilised outside India is not taxable in India.That principal shall also be applicable in case of UK branch.
Also to avoid questions on deduction of TDS for payments being made to Indian Residents, the best course of action shall be to ask the Indian Head Office to pay to the Indian Resident. That way the question of deduction of TDS under UK tax laws shall not arise.
Services which falls within FTS are taxable in India whether services are rendered in India or not. Finance Act 2010 has added this explanation under sec.9(2).
I appreciate the way out, but this is not the solution. As per principles, when PE is subject to withholding tax as per domestic law - the resultant profit only should be taxable in India and other compliance need not be enforced hence TDS should also not be questioned as per Indian law when payment is done by foreign branch.
Can anybody give me relevant case law on the same to have judiciary view on the same.
02 May 2013
You are right this can come as rescue. However it is pertinent to note that this is just applicable in case of Royalty and FTS payment to resident by Branch, however other payment to resident wont be covered e.g.194C, 194H, 194I etc.
While in case of payment to non-resident as most of the payment would be excluded as other payment (Other than FTS, Royalty, Interest) are liable to tax if PE exist in India and such payment is attributable to such PE.
So practically all payments made from branch are not liable to taxe provided they are pertaining to its own business outside India.
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