IFC stands for internal financial control, a new scenario in Indian financial reporting system which has evolved from Companies Act 2013. With massive increase in the size of the companies having gigantic transactions size, verification of each and every transaction has become impossible. Audit sampling has and always had an inherent risk of non finding of error or fraud. Therefore, establishing trust on Internal Controls implemented by the Companies has become the ultimate recourse to Auditors to take hold on the Entity’s financial environment and thus on reporting of the same. Internal Financial Controls does not only give comfort to Auditors but to other stake holders like Independent Directors, Shareholders, Banks and Government Bodies. Indian Authority has introduce reporting requirement on Internal Financial Controls making Statutory Auditors responsible to comment on implementation and operating efficiency of IFC through Companies Act 2013. The similar concept was introduced by USA in 2002 through SOX i.e. Sarbanes – Oxley Act.
The understanding on withholding tax under section 195 of the Income Tax Act, 1961 (“Act”) has become essential for all the professionals and CFOs as there has been a astounding proliferation in cross border transactions. Almost all organization having any type of cross boarder transactions are required to comply with section 195 of the Act. Since the Income Tax Department do not have adequate control over non residents, the department want to ensure the deduction of tax on the income element of any amount paid to non-resident so that department do not have to chaise the non-resident for recovery of taxes. As compare to other provision of TDS, section 195 has wider scope as all payers are covered and there is also no threshold exemption available in the section. Therefore, any person making any payment must ensure the compliance stated in the said section and related rules.
The Foreign Contribution (Regulation) Act, 2010 also known as FCRA, 2010 was enacted after it received presidential assent on 26th September 2010. It has replaced its predecessor i.e. the Foreign Contribution (Regulation) Act, 1976.
The FCRA was enacted to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilisation of foreign contribution for any activities detrimental to the national interest and for matters connected therewith or incidental thereto. (Source: Wikipedia)
Whether payment made to non-resident (if non-resident does not have any PE or Business Connection in India) for advertisement through online banners and other keyword-based searches on multiple websites outside India would be subject to Withholding of Tax?
To find out the answer one must analyzed the situation in accordance with the provisions under section 4 (charge of Income Tax) read with section 5(2) (Scope of Total Income) of the Income Tax Act, 1961 (hereinafter referred as “Act”), which provides for the taxability of income accruing or arising in India to a non-resident payee.
Section 5(2) of the Act provides for the taxability of income pertaining to the non-resident assessee. It specified that:
Force of Attraction Rule (hereinafter called as ‘Rule’) in any DTAA is something which is dreadful for non-residents tax assessees as it allows for the taxation of income outside the Contracting State. The ‘force of attraction’ rule supports the philosophy that when an enterprise sets-up a permanent establishment (‘PE’) in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can tax all profits that the enterprise derives from that country – whether through the Permanent Establishment (PE) or not. This rule can cause taxability on all profits derived from another country in that another country due to mere existence of PE in that another country.
The Rule can be categorized in following three categories based in extent of coverage of profits subject to chargeability in another country: