We have credited royalty and management fees to our Swedish and Swiss group companies in our books but remitted nothing. Do we have to deduct tax now, or only when we pay?
Yes, now. The Authority ruled that section 195(1) is triggered when the amounts are credited to the non-resident's account in the payer's books, not only when they are remitted. The subsection operates at the time of credit of the income to the account of the payee or at the time of payment, whichever is earlier, and whether the money has actually gone out is irrelevant to the duty. It also held that the royalties and management service fees were taxable in India under the Act, article 12 of the Swedish and Swiss agreements permitting India to tax them according to its own laws, and that requiring deduction on credit does not defeat or render the agreement otiose.
Pronounced by the Authority for Advance Rulings (Syed Shah Mohammed Quadri, J. (Chairman), K. D. Singh and K. D. Gupta, Members) on 2004-04-22, reported as [2004] 267 ITR 727 (AAR). It bears on section 195, section 9(1)(vi), section DTAA art 12 of the Income Tax Act 1961, in TDS Defaults matters.
The standard answer to the argument that the treaty speaks of amounts paid, so nothing is due until remittance. The Authority separated two things a reader often runs together: the treaty's allocation of the right to tax, which uses the language of payment, and the domestic machinery for collecting the tax, which section 195(1) fixes at credit or payment, whichever is earlier. A group company that provides for a royalty in February and remits it eighteen months later has already crossed the trigger. The point bites hardest where the provision is made near a year end or into a suspense account, since the Explanation to section 195(1) treats a credit to any account, by whatever name called, as a credit to the payee's account.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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The applicant, Flakt (India) Limited of Chennai, was a resident company. It had obligations to two group companies. Under intellectual property licence and trade mark licence agreements it owed royalties to Flakt Woods AB of Sweden; under a management services arrangement it owed fees to Flakt Woods AG of Switzerland. Between February and December 2002 it credited the amounts due to those companies in its books, but made no actual payment to either until after 31 March 2003. It deducted no tax under section 195(1), taking the view that nothing had been paid and so nothing had to be deducted. It filed two applications, one in respect of each non-resident, asking whether the royalties and the management service fees were taxable in India only on a cash or receipt basis under article 12 of the relevant agreement, and whether tax had to be deducted under section 195(1) only at the time of actual remittance rather than upon the entry in its books.
The Authority answered both applications the same way. On the first question it held that the royalties and the management service fees were taxable in India under the Income-tax Act, which brings such income to charge on a receipt basis among others, and that article 12 does not cut that down: paragraph 2 in terms permits the State in which the income arises to tax it according to the laws of that State. On the second it held that tax had to be deducted under section 195(1) at the time of the credit to the payee's account and not only on actual remittance. The subsection operates at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, so whether the amount has in fact been paid or merely credited to the payee's account is irrelevant to the duty to deduct. The use of the word 'payment' in the treaty article does not make payment a precondition of the obligation, and compliance with section 195(1) cannot be said to defeat or render the agreement otiose.
The applicant's argument had two limbs and the Authority took them in turn. The first was that the treaty taxes royalties that are paid, so that until remittance nothing is taxable at all. The Authority answered that article 12 is a rule of allocation, not of computation or collection: paragraph 2 allows the State in which the royalties arise to tax them according to its own laws, and Indian law taxes such income when it accrues or is received according to the method applicable, without waiting for an outward remittance. The second limb was that section 195(1) could not be worked before payment. Here the Authority read the words. The subsection fixes the duty at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier. The disjunction and the words 'whichever is earlier' put credit and payment on the same footing, and a payer who has credited the income has done the earlier of the two things. The Authority declined to read the treaty's language of payment back into the collection machinery, and rejected the suggestion that this rendered the agreement otiose, since taxability according to Indian law is exactly what the article permits. The Supreme Court decisions the applicant cited went to other questions and did not touch the timing of section 195(1).
Section 195(1) comes into play at the stage where a payer either credits income to the payee's account or makes payment thereof.
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Handle my notice → Ask a CA on WhatsAppYes, now. The Authority ruled that section 195(1) is triggered when the amounts are credited to the non-resident's account in the payer's books, not only when they are remitted. The subsection operates at the time of credit of the income to the account of the payee or at the time of payment, whichever is earlier, and whether the money has actually gone out is irrelevant to the duty. It also held that the royalties and management service fees were taxable in India under the Act, article 12 of the Swedish and Swiss agreements permitting India to tax them according to its own laws, and that requiring deduction on credit does not defeat or render the agreement otiose. This was decided by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman), K. D. Singh and K. D. Gupta, Members) and bears on section 195, section 9(1)(vi), section DTAA art 12 of the Income Tax Act 1961. It is reported as [2004] 267 ITR 727 (AAR). The standard answer to the argument that the treaty speaks of amounts paid, so nothing is due until remittance. The Authority separated two things a reader often runs together: the treaty's allocation of the right to tax, which uses the language of payment, and the domestic machinery for collecting the tax, which section 195(1) fixes at credit or payment, whichever is earlier. A group company that provides for a royalty in February and remits it eighteen months later has already crossed the trigger. The point bites hardest where the provision is made near a year end or into a suspense account, since the Explanation to section 195(1) treats a credit to any account, by whatever name called, as a credit to the payee's account. If it applies to you, the first step is this: Deduct when you make the book entry, not when you remit; the trigger is credit or payment, whichever is earlier.
The applicant, Flakt (India) Limited of Chennai, was a resident company. It had obligations to two group companies. Under intellectual property licence and trade mark licence agreements it owed royalties to Flakt Woods AB of Sweden; under a management services arrangement it owed fees to Flakt Woods AG of Switzerland. Between February and December 2002 it credited the amounts due to those companies in its books, but made no actual payment to either until after 31 March 2003. It deducted no tax under section 195(1), taking the view that nothing had been paid and so nothing had to be deducted. It filed two applications, one in respect of each non-resident, asking whether the royalties and the management service fees were taxable in India only on a cash or receipt basis under article 12 of the relevant agreement, and whether tax had to be deducted under section 195(1) only at the time of actual remittance rather than upon the entry in its books. The matter was decided on 2004-04-22 by the Advance Ruling (Syed Shah Mohammed Quadri, J. (Chairman), K. D. Singh and K. D. Gupta, Members). On those facts the Advance Ruling held as follows. The Authority answered both applications the same way. On the first question it held that the royalties and the management service fees were taxable in India under the Income-tax Act, which brings such income to charge on a receipt basis among others, and that article 12 does not cut that down: paragraph 2 in terms permits the State in which the income arises to tax it according to the laws of that State. On the second it held that tax had to be deducted under section 195(1) at the time of the credit to the payee's account and not only on actual remittance. The subsection operates at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, so whether the amount has in fact been paid or merely credited to the payee's account is irrelevant to the duty to deduct. The use of the word 'payment' in the treaty article does not make payment a precondition of the obligation, and compliance with section 195(1) cannot be said to defeat or render the agreement otiose.
The applicant's argument had two limbs and the Authority took them in turn. The first was that the treaty taxes royalties that are paid, so that until remittance nothing is taxable at all. The Authority answered that article 12 is a rule of allocation, not of computation or collection: paragraph 2 allows the State in which the royalties arise to tax them according to its own laws, and Indian law taxes such income when it accrues or is received according to the method applicable, without waiting for an outward remittance. The second limb was that section 195(1) could not be worked before payment. Here the Authority read the words. The subsection fixes the duty at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier. The disjunction and the words 'whichever is earlier' put credit and payment on the same footing, and a payer who has credited the income has done the earlier of the two things. The Authority declined to read the treaty's language of payment back into the collection machinery, and rejected the suggestion that this rendered the agreement otiose, since taxability according to Indian law is exactly what the article permits. The Supreme Court decisions the applicant cited went to other questions and did not touch the timing of section 195(1). In the words reproduced by the source cited on this page: "Section 195(1) comes into play at the stage where a payer either credits income to the payee's account or makes payment thereof."
It was decided by the Advance Ruling on 2004-04-22 and is reported as [2004] 267 ITR 727 (AAR). Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 195, section 9(1)(vi), section DTAA art 12, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Authority answered both applications the same way. On the first question it held that the royalties and the management service fees were taxable in India under the Income-tax Act, which brings such income to charge on a receipt basis among others, and that article 12 does not cut that down: paragraph 2 in terms permits the State in which the income arises to tax it according to the laws of that State. On the second it held that tax had to be deducted under section 195(1) at the time of the credit to the payee's account and not only on actual remittance. The subsection operates at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, so whether the amount has in fact been paid or merely credited to the payee's account is irrelevant to the duty to deduct. The use of the word 'payment' in the treaty article does not make payment a precondition of the obligation, and compliance with section 195(1) cannot be said to defeat or render the agreement otiose. It arises in TDS Defaults matters, on section 195, section 9(1)(vi), section DTAA art 12 of the Income Tax Act 1961, and was decided by Syed Shah Mohammed Quadri, J. (Chairman), K. D. Singh and K. D. Gupta, Members. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not park the amount in a suspense or provision account to postpone the trigger - the Explanation to section 195(1) covers a credit to any account, by whatever name called. Do not argue from the word 'paid' in the treaty article: it allocates the taxing right, it does not fix the time of deduction. Where you have credited and not deducted, quantify the exposure to interest under section 201(1A) from the date of credit, not the date of remittance.
Still good law. Checked the current official text of section 195(1). The words fixing the duty at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, stand as the Authority read them, and the Explanation treating a credit to an interest payable account, a suspense account or any other account by whatever name called as a credit to the payee's account is still there. The Supreme Court in GE India Technology Cen. P. Ltd v. CIT, decided 9 September 2010, confined section 195 to sums chargeable under the Act, which does not disturb this ruling because the Authority first held the royalties and fees chargeable. I found no court decision dealing with this ruling, which under section 245S binds only Flakt (India) Ltd. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Indian Kanoon reproduction does not set out a separate operative paragraph for each of the two applications, so I have taken the outcome from the body of the reasoning. The input note described the ruling accurately. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Authority answered both applications the same way. On the first question it held that the royalties and the management service fees were taxable in India under the Income-tax Act, which brings such income to charge on a receipt basis among others, and that article 12 does not cut that down: paragraph 2 in terms permits the State in which the income arises to tax it according to the laws of that State. On the second it held that tax had to be deducted under section 195(1) at the time of the credit to the payee's account and not only on actual remittance. The subsection operates at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, so whether the amount has in fact been paid or merely credited to the payee's account is irrelevant to the duty to deduct. The use of the word 'payment' in the treaty article does not make payment a precondition of the obligation, and compliance with section 195(1) cannot be said to defeat or render the agreement otiose.
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