| Now, you can escape withholding tax : IF THE NON-RESIDENT IS NOT TAXABLE IN INDIA, THE REMITTER NEED NOT HOLD BACK TAX
OVER THE LAST FEW MONTHS, INDIA INC has been concerned with the onerous compliance requirement of obtaining a tax withholding order for almost all payments to overseas vendors. There could, however, be relief for India Inc from the requirement to obtain a tax withholding order, especially in cases where non-resident recipient is not taxable in India. The latter position is in light of a recent Delhi High Court decision in the case of Van Oord Acz India (P) Ltd.
Relaxation from the rigours of Samsung ruling?: The Karnataka High Court in the case of Samsung Electronics & Others mandated that every remitter should withhold taxes at the rates prescribed by the Act or obtain a certificate for lower tax withholding from the tax officer.
Failure to do so would have attracted serious consequences such as the remitter entity being considered assessee-in- default, denied deduction for the expenses incurred, etc.
In the case of Van Oord Acz India (P) Ltd, the Delhi High Court had the opportunity to examine the withholding obligation in the case of an Indian entity remitting monies to its overseas parent towards reimbursement of mobilisation and demobilisation costs. In a landmark ruling, the Delhi High Court held that the obligation to deduct tax at source arises only if the non-resident is chargeable to tax in India.
The rationale adopted by the Delhi High Court was based on two facts: that the subject reimbursements did not constitute income and that the assessment of the foreign recipient has been completed without further tax liability.
Analysis of the tax withholding decisions and the way forward: The Karnataka High Court ruling in the case of Samsung Electronics Co Ltd & Others was based on the decision of Supreme Court in the case of Transmission Corporation. It did not distinguish between the remittances that may be taxable and not taxable.
This decision created issues for Indian remitters who were paying sums that were not taxable under the Act. However, the Delhi court's decision in the Van Oord case, under a different fact pattern, gives certainty to the remitters that where the non-resident is not taxable, there is no need to withhold taxes.
For example, applying the Samsung ruling, a person purchasing shares of an Indian company from a non-resident (say, a Mauritius entity) would be required to withhold taxes or approach the tax officer for a Nil withholding order, even if the transferor has not made a profit on the sale of shares or the transaction is not taxable in India (based on the beneficial provisions of India-Mauritius double taxation avoidance agreement).
In this context, it is important to note the ruling given by the Authority for Advance Ruling (AAR) in the case of E Trade Mauritius Ltd, which held that the Mauritian company holding valid tax residency certificate is eligible to claim benefits of India-Mauritius tax treaty and the capital gains are not liable to tax in India. Linking the Delhi High Court decision with that of the AAR, the issue that now would be relevant for investors would be whether to deduct tax while remitting funds to the seller of the shares where the gain on sale may not be taxable based on the tax position adopted by the seller.
If the income is not taxable based on the tax position adopted by the seller due to reasons like benefit of a tax treaty, foreign exchange fluctuation leading to no tax in the hands of the seller etc would the buyer of the shares be at default if he did not withhold tax at source.
Falling back on the Delhi High Court decision, one would believe that the buyer of the shares should not be in contravention of the withholding provisions. However, there is an important observation by the Delhi High Court that if the tax authorities assess the foreign company to tax in respect of its transactions, the remitter may be treated as a defaulter for not withholding taxes.
Hence, if the buyer — under the tax position adopted by the seller — does not withhold tax as long as the seller's tax position is upheld, there should not be any default on part of the buyer. However, if the seller's tax position does not survive before the tax authorities and the seller is made liable to tax, the buyer may be treated as defaulter in not withholding the tax, and interest and penalty may visit the buyer of the shares.
Conclusion: The judiciary is making an effort to streamline legal and tax positions by pronouncing rulings on critical tax issues. However, businesses would still need to be cautious before taking a call based on these rulings with regard to the fact pattern at hand and the tax-risk appetite of the parties involved.
(Source: The Economic Times, March 30th 2010)
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