Withholding tax u/s 195
This query is : Resolved
10 July 2012
If commission on imports is paid by an Indian Company to a non resident broker who is not having PE in India, is it required to withhold tax before making brokerage payment?
12 July 2012
Yes, evenif the non-resident broker has no PE in India, it is required to deduct withhold tax at the rate as per the finance act of the relevant PY or at the rate as per the ADT agreement, whichever is lower.
In this respect, please refer to newly inserted Explanation 2 by Finance Act 2012 w.r.e.f. 1-4-1962 to section 195(1) which reads as follows:-
"195. (1).......
Explanation 2.—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.
........ "
In this respect, please refer to newly inserted Explanation 2 by Finance Act 2012 w.r.e.f. 1-4-1962 to section 195(1) which reads as follows:-
"195. (1).......
Explanation 2.—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.
........ "
12 July 2012
Thanks Mr. Patra for your expert guidance. One thing more on which I seek your guidance is that if the Non Resident Broker is of UAE and since India is having DTAA with UAE and as per Article 7 of the treaty :
ARTICLE 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
In the light of mentioned Article 7, please guide whether Article 7 of this DTAA supersede Sec 195(1) or not and in such case what would be the situation?
ARTICLE 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
In the light of mentioned Article 7, please guide whether Article 7 of this DTAA supersede Sec 195(1) or not and in such case what would be the situation?
13 July 2012
The case is payment of commission to a resident of UAE. India has ADT with UAE.
Please refer to sub-section (2) of section 90 of the Income Tax Act, which reads as follows:-
"(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."
Section 90(2) provides for overriding effect of provision of DTAA over Income Tax Act.
Refer to Article 22 of the DTAA with UAE which reads as follows:-
"ARTICLE 22 - Other income - 1. Subject to the provisions of paragraph (2), items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement, shall be taxable only in that Contracting State.
2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of Article 6, if the recipient of such income, being a resident of a Contacting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply."
Hence, in your case no withholding tax to be deducted.
Please refer to sub-section (2) of section 90 of the Income Tax Act, which reads as follows:-
"(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."
Section 90(2) provides for overriding effect of provision of DTAA over Income Tax Act.
Refer to Article 22 of the DTAA with UAE which reads as follows:-
"ARTICLE 22 - Other income - 1. Subject to the provisions of paragraph (2), items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement, shall be taxable only in that Contracting State.
2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of Article 6, if the recipient of such income, being a resident of a Contacting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply."
Hence, in your case no withholding tax to be deducted.
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