non resident taxation in india

8/8/2019 Non Resident Taxation in India

1/22

NON-RESIDENT TAXATION IN INDIA.

A PROJECT UNDER

LAW OF TAXATION-I

Name. ANOOP KUMAR

Roll. No. 11

8th Semester, 4th Year, B.A. LL.B. (Hon.).

1


2/22

Acknowledgement.

I am highly obliged to our respected teachers Sir U.P. Singh Ms. Pratibha , without

whose support this project could not have seen the light.

Secondly I would also like to mention the name of our Library Staff members who

had provided me with the enough material on my project topic, because of which I was able

to prepare this project on time.

Thirdly I am highly obliged to my parents whose blessings always turned out to be a

solution of every problem in my project.

I am also thankful to my dear friends who provided me their help and support at every

stage.

Last but not the least I would like to thank the Almighty God, without whose blessingsmy project would have never been complete.

ANOOP KUMAR

2


3/22

INDEX

INTRODUCTION.

DEFINITION OF NON RESIDENT

SECTION 9 OF THE INCOME TAX ACT 1961

BUSINESS CONNECTION

TAX DEDUCTION AT SOURCE

TAX EXEMPTION FOR THE NON RESIDENT INDIANS

SPECIAL RATE OF TAXATION FOR NON RESIDENTS

3


4/22

INCOME ENJOYING CONCESSIONAL RATE OF TAXATION

DOUBLE TAXATION RELIEF

AUTHORITY FOR ADVANCE RULING

CONCLUSION

4


5/22

INTRODUCTION.

The overall package of liberalization process, which began in the early part of 1990s, consisted of

attraction of foreign investment. Many Indians have settled abroad and have been doing extremely

well in their respective fields. Attracting investments into India from these Indians settled abroad was

one of the primary objectives of the Government policy of liberalization. In this endeavour, extending

income tax benefits was one of them. In retrospect, these tax benefits have been instrumental in

attracting more investment from the Non-Resident Indians (NRI).

The Indian Income-tax Act provides for levy of income-tax on the income of foreign companies

and non-residents, but only to the extent of their income sourced from India. Under section 5 of the

Act, a foreign company or any other non-resident person is liable to tax on income which is received or

is deemed to be received in India by or on behalf of such person, or income which accrues or arises or

is deemed to accrue or arise to it in India. Section 9 thereafter specifies certain types of income that are

deemed to accrue or arise in India in certain circumstances. These two sections embody the source rule

of income taxation in the domestic law. No income of a non-resident can be taxed in India unless it

falls within the four corners of section 5 read with section 9 of the Income-tax Act.Broadly speaking,

business income of a foreign company or other non-resident person is chargeable to tax to the extent it

accrues or arises through a business connection in India or from any asset or source of income locatedin India, and to the extent such income is attributable to the operations carried out in India. Income in

5


6/22


7/22

An individual shall be deemed to be a resident, if during the previous year he/she is physically present in

India

(i) for 182 days or more; or

(ii) for 60 days or more and has been in India for 365 days or more in the immediately preceding four

previous years.

However, if an individual who is a citizen of India, leaves the country in any financial year as a member ofthe crew of an Indian ship or for the purposes of employment outside India or who being outside India,

comes on a visit to India during any financial year, then the conditions of 60 days, specified in (ii) above,

shall be read as 182 days.

To Be A Non-Resident:

If an individual is not tested resident during any previous year, then he or she is deemed to be a non-

resident.

To Be An Ordinarily or Not Ordinarily Resident:

Once an individual fulfill the condition of being resident, then he/she has to test for ordinarily or not

ordinarily resident. He / She is said to be Not Ordinarily Resident, if in any previous year, he/she is:

(i) not a resident in India in nine out of the ten previous year preceding the previous year during which

such individual is tested resident; or

(ii) has not been in India for 730 days or more during the seven preceding previous year;

Hindu Undivided Family (HUF)

A HUF is a resident in India during a previous year, when the control and management of its affairs are

situated within India (section 6(2)). Consequently, when the management control of the affairs of a HUF is

situated outside India, then such HUF is deemed as non-resident.

Having tested positive for resident, the HUF is termed as `not ordinarily resident if during any previous

year, the manager of such HUF is:

i) not a resident in India in nine out of the ten previous year preceding the previous year during

which such individual is tested resident; or

ii) has not been in India for 730 days or more during the seven preceding previous year;

But it is submitted that the provision regarding non ordinary resident should be deleted from income tax act

as such a provision acts against the gain of residence based taxation, which provides for taxation of a

resident of a country in respect of income from any source wherever situated. India follows the concept of

residence based taxation. India also is a signatory to more than 65 DTAAs (Double Taxation Avoidance

Agreements). A person availing of the status of not ordinarily resident in India is not taxed on his overseas

income but only on the income earned in India. The overseas income particularly the passive income is

taxed at more beneficial rates in the source countries as provided for in the DTAAs. A resident in Indiaescapes taxation on his passive income in India because of the NOR provision and is required to pay tax

only at very concessional rates in the other jurisdiction because of DTAA provisions. Such a resident is not

paying tax at full rate in either country. There is no rationale for continuing with the status of not ordinarily

resident for the reason that it militates against the concept of taxation on global basis in the case of a

resident. By doing away with the status of NOR an individual would be taxable in India on global basis if he

becomes a resident and the Tax Department would thereafter have to give credit for the taxes payable in the

foreign country in respect of the same income. The individual would therefore not be taxed twice on the

same income and the Government would get its share of revenue1.

SECTION 9 OF THE INCOME TAX ACT 1961.

1Report of working group on non-resident taxation 2003 p/17

7


8/22

Broadly speaking, business income of a foreign company or other non-resident person is chargeable to

tax to the extent it accrues or arises through a business connection in India or from any asset or source

of income located in India, and to the extent such income is attributable to the operations carried out in

India. Certain income is deemed to accrue or arise in India under s. 9 2, even though it may actually

accrue or arise outside India. Income Tax Act, 1961, s. 9 applies to all assesses irrespective of their

residential status and place of business. Thus, only Indian income is liable to income tax in India in thecase of a non-resident person. This means that a non-resident person is not liable to pay any income tax

in India on his foreign income. Though an income may not actually accrue or arise in India, yet it may

be deemed to accrue or arise in India.

Thus, under s. 9, the following are the important types of income which are deemed to accrue or

arise in India:

(1) Income through any business connection in India, or through or from any property in India, or

through or from any asset or source of income in India or through the transfer of a capital asset situated

in India;

(2) Salary income for service rendered in India; and

(3) Salary for the rest period or leave period which is preceded and succeeded by services rendered in

India and forms part of the service contract of employment from the assessment year 2000.

Also the following incomes that are payable outside India are deemed to arise in India:

(1) Dividend paid by an Indian company outside India;

(2) Interest payable on money borrowed and brought into India; and

(3) Royalty and technical service fees payable in respect of any right/technical services used for

business/profession in India.

However, royalty and fees for technical services is exempt, where such royalty/fees earned is in respect

of computer software supplied by a non-resident manufacturer along with the computer or computer

based equipment under an approved scheme.

BUSINESS CONNECTION.

2Income deemed to accrue or arise in India - (1) The following incomes shall be deemed to accrue or arise in

India: (i) All income accruing or arising, whether directly or indirectly, through or from any business connection

in India, or through or from any property in India, or through or from any asset or source of income in India, or

through the transfer of a capital asset situate in India;

explanation : for the purposes of this clause: (a) In the case of a business of which all the operations are not

carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only

such part of the income as is reasonably attributable to the operations carried out in India; (b) In the case of a

non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are

confined to the purchase of goods in India for the purpose of export; (c) In the case of a non-resident, being a

person engaged in the business of running a news agency or of publishing newspapers, magazines or journals,no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the

collection of news and views in India for transmission out of India.

8


9/22

The concept of business connection is an important concept for determining tax liability of the non

residents. Several interpretations have been made in various cases by the courts to determine the

meaning of it. A business connection involves a relation between a business carried on by a non-

resident, which yields profits or gains and some activity in India that contributes to the earning of these

profits or gains. A business connection may arise between a non-resident and a resident if both of them

carry on business and if the non-resident earns income through such a connection3. A businessconnection involves a relation between business carried on by non-resident that yields profits or gains

and some activity in India, which contributes to the earning of these profits or gains. A business

connection may arise between a non-resident and a resident carry on business and if the non-resident

earns income through such connections4. It basically predicates an element of continuity between the

business of the non-resident and the activity in India: a stray or isolated transaction is not normally

regarded as business connection

Business connection as defined in the Income Tax Act, 1961, s. 9(1) and also in Circular no.23 5

It includes a profession connection. It includes a person acting on behalf of a nonresident and who

performs any one or more of the following:

(1) Activity 1: he exercises in India an authority to conclude contracts on behalf of non-resident (it

does not cover the activity of only the purchase of goods or merchandise for a non-resident);

(2) Activity 2: he has no such authority but habitually maintains in India a stock of goods or

merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

(3) Activity 3: he habitually secures orders in India (mainly or wholly) for the non-resident or for non-

residents under the same management

Provided that such business connection shall not include any business activity carried out through

broker, general commission agent or any other agent having no independent status, if such broker,

general commission agent or any other agent having an independent status is acting in the ordinary

course of his business:

Provided further that where such broker, general commission agent or any other agent works mainly or

wholly on behalf of a non-resident ( hereinafter in this proviso referred to as the principal non-

residents which are controlled by the principle non-resident or have a controlling interest in the

principle non-resident or are subject to the same common control as the principal non-resident, he shall

not be deemed to be a broker, general commission agent or an agent of an independent status.

Where such a business is carried on in India through a person referred to in Activity one, two or three

(mentioned above) only so much of income is attributable to the operations carried out in India will be

deemed to accrue or arise in India.

But it is submitted that second proviso of section 9(1) need some improvement.

Many of the tax treaties which India has entered into e.g. with USA, Canada, Netherlands etc, provide

that when the activities of an agent (as defined under the tax treaty) are devoted wholly or almost

3

Commissioner of Income Tax vs. Ashok Jain, (2002) 121 Taxman 328 (Delhi).4Commissioner of Income Tax vs. R.D. Aggarwal and Company, 1964 INDLAW SC 254, (1965) 56 ITR 20 (SC).

5Circular no. 23 dated 23 July 1969 ( Income Tax Act, 1961, s. 9 referred).

9


10/22

wholly on behalf of an enterprise and the transactions between the agent and the enterprise are not

made under arms length conditions6, he shall not be considered an agent of independent status. As a

corollary, even in cases where the activities of an agent are carried out wholly or almost wholly on

behalf of an enterprise, he shall not be considered to be a dependent agent if the transaction between

the agent and the enterprise are carried out at arms length. Similar provisions which exclude an agent

from being a dependent agent if the transactions are carried out at arms length should be inserted insection 9(1) of the IT Act7.

As per the second proviso to section 9(1) of the IT Act, an agent shall not be considered to be an

independent agent if the agent works mainly or wholly on behalf of the non-resident. The words

mainly or wholly in the proviso should be replaced by wholly or almost wholly8.

Also according to the Circular No. 23 9, some illustrative instances of a nonresident having business

connection in India are given below:

(1) Maintaining a branch office in India for the purchase or sale of goods or transacting other business;

(2) Appointing an agent in India for the systematic and regular purchase of raw materials or other

commodities, or for sale of the nonresidents goods, or for other business purposes;

(3) Erecting a factory in India where the raw produce purchased locally is worked into a form suitable

for export abroad;

(4) Forming a local subsidiary company to sell the products of the nonresident parent company; or

(5) Having financial association between a resident and a non-resident company. Although the term

business connection is not defined in the enactment, the courts have given various judicialpronouncements which have been categorically classified below:

There must be element of continuity as well as real and intimate connection

The expression business connection undoubtedly means something more than business. A business

connection involves a relation between a business carried on by a non-resident which yields profits or

gains and some activity in the taxable territories which contributes directly or indirectly to the earning

of those profits or gains. It predicates an element of continuity between the business of the nonresidentand the activity in the taxable territories. The expression business connection postulates a real and

intimate relation between trading activity carried on outside the taxable territories and trading activity

6The arm's length principle (ALP) is the condition or the fact that the parties to a transaction are independent and

on an equal footing. Such a transaction is known as an "arm's-length transaction". It is used specifically in contract

law to arrange an equitable agreement that will stand up to legal scrutiny, even though the parties may have shared

interests (e.g., employer-employee) or are too closely related to be seen as completely independent (e.g., the parties

have familial ties).

7

Pre-Budget Memorandum 2009-2010 for direct taxes p/278ibid

9Circular no. 23 dated 23 July 1969 ( Income Tax Act, 1961, s. 9 referred).

10


11/22

within the territories, the relation between the two contributing to the earning of income by the non-

resident in his trading activity.

In the case ofCommissioner of Income Tax vs. R.D. Aggarwal and Company10, the contracts

for the sale of goods took place outside the taxable territories, price was received by the non-residents

outside the taxable territories, and delivery was also given outside the taxable territories. Therefore inthe view of the court, where such a relation with respect to expression business connection must be

real and intimate through or from which income must accrue or arise whether directly or indirectly to

the non-resident, in this case, it was absent. The Supreme Court in the same case further observed that

a business connection...involves a relation between a business carried on by a non-resident which

yields profits or gains and some activity in the taxable territories which contributes directly or

indirectly to the earning of those profits or gains. Business connection may take several forms: it may

include carrying on a part of the main business or activity incidental to the main business of the

nonresident through an agent, or it may merely be a relation between the business of the non-resident

and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In

each case the question whether there is a business connection from or through which income, profits or

gains arise or accrue to a non resident must be determined upon the facts and circumstances of thecase.

The expression business is defined in the Income Tax Act, 1961, as any trade, commerce,

manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the

enactment contains no definition of the expression business connection and its precise connotation is

vague and indefinite.

In Commissioner of Income Tax vs. Fried Krupp Industries11 it was held that an isolated

transaction between a non-resident and a resident in India without any course of dealings such as might

fairly be described, as business connection does not attract the provision. There is no question ofcontinuing business relating when a person purchases machinery or other goods abroad or uses them in

India and earns profit.

But where there is connection and continuity in business relationship between the person in

India who helps to make the profits and the person outside India who receives and realizes the profit,

such relationship constitute a business connection12. In each of such case whether there is a business

connection from or through which income arises or accrues must be determined upon the facts or

circumstances of that case13.

Business includes profession, vocation and callings.

The expression business does not necessarily mean trade or manufacture only. It is being used

as including within its scope profession, vocations and calling from a fairly long-time.

In the context in which the expression business connection is used in s. 9(1), there is no

warrant for giving a restricted meaning to it excluding professional connection, from its scope. The

definition of the expression business given in the Income Tax Act, 1961 is an inclusive one. The

101964 INDLAW SC 254, [1965] 56 ITR 20 (SC).

11(1981) 123 ITR 27 (Mad).

12Anglo French Textiles Company Limited vs. Commissioner of Income Tax, 1952 INDLAW

SC 28, (1953) 23 ITR 101 (SC).13Blue Star Engineering Company Private Limited. vs. Commissioner of Income Tax, 1968

INDLAW MUM 90, (1969) 73 ITR 283 (Bom).

11


12/22

expression business connection, however, is not defined in the enactment. It is no doubt true that

there is specific reference to business in s. 9(1) and there is no reference to profession.

In Commissioner of Income Tax vs. Currimbhoy Ebrahim and Sons Limited14, Sir George

Rankin, speaking for the Judicial Committee of the Privy Council, while construing the expression

business connection mentioned in the Income Tax Act, 1922, observed:

the phrase 'business connection' is different from, though doubtless not unrelated to, the word business ofwhich there is a definition in the Act.

The expression business does not necessarily mean trade or manufacture only. It is being used as including

within its scope professions, vocations and callings from a fairly long time. The Shorter Oxford English

Dictionary defines business as stated occupation, profession or trade and a man of business is defined

as meaning an attorney also. In view of the above dictionary meaning of the word business, it may not be

said that the definition of business given in the Partnership Act, 1890, s. 45 was an extended definition

intended for the purpose of that enactment only. Partnership Act, 1890, s. 45 states that:

........the expression 'business' includes every trade, occupation, or profession.

Indian Partnership Act, 1932, s. 2(b) also defines business thus:

Business includes every trade, occupation and profession.

The observation of Rowlett J. in Christopher Barker and Sons vs. IRC15, all professions are businesses, but

all businesses are not professions............. also supports the view that professions are generally regarded as

businesses. The same learned judge inIRC vs. Marine Steam Turbine Company Limited16held:

The word business, however, is also used in another and a very different sense, as meaning an active

occupation or profession continuously carried on and it is in this sense that the word is used in the

enactment with which we are here concerned.

The word business is one of wide import and it means an activity carried on continuously and

systematically by a person by the application of his labor or skill with a view to earning an income. The

courts are of the view that in the context in which the expression business connection is used in s. 9(1),

there is no warrant for giving a restricted meaning to it excluding professional connections from its scope.

In the case ofBarendra Prasad Ray vs. Income Tax Office17

r, the contention of the appellants was that aprofessional connection may not amount to a business connection attracting s. 9(1). The court held that the

word business is one of wide import and it means an activity carried on continuously and systematically by

a person by the application of his labour or skill with a view to earning an income. The judges were of the

view that in the context in which the expression business connection is used in s. 9(1), there is no warrant

for giving a restricted meaning to it excluding professional connections from its scope.

Mere purchase abroad and use in India is not continuing business

141935 INDLAW PC 4, (1935) 3 ITR 395.

15(1919) 2 KB 222 (KB).

16(1920) 1 KB 193 (KB)

171981 INDLAW SC 309, (1981) 129 ITR 295 (SC).

12


13/22

The term business connection postulates a continuity of business relationship between the foreigner and

the Indian. There is no question of continuing business relation when a person purchase the machinery or

other goods abroad and uses them in India and earns profit as it was held inCommissioner of Income Tax

vs. Fried KruppIndustries18. In this case the court looked into the question whether principal to principaltransaction amounts to any business connection.

The court observed that where a person purchased goods from a foreigner without anything more, and the

purchased goods are utilised in commercial operations in India by the Indian, then the Indian merchant or

company is earning his own or its own income. The foreigner in such a case has nothing to do with the

Indian-assessees transaction in India, as by selling his machinery abroad, he had no further interest in the

business in India. The term business connection postulates a continuity of business relationship between

the foreigner and the Indian. The court held that there is no question of continuing business relation when a

person purchases machinery or other goods abroad and uses them in India and earns profit and the part of

the foreigner has been played wholly abroad, so that there is no connection as such with any business in

India. The Supreme Court referred and approved the decision of the Bombay High Court in Commissioner

of Income Tax vs. Tata Chemicals Limited19, wherein it had been held that in order to rope in the income of

a non-resident, under the deeming provision, it must be shown by the department that some of the operationswere carried out in India in respect of which the income was sought, to be assessed. Therefore the court

declared that in respect of principal to principal transaction there is no question of any business connection.

Capital gains derived outside India is excluded

Where the words business connection in India were wide enough to cover all transactions including

transactions in capital assets, there was no reason for Parliament to specifically include income

(1) through or from any property in India;

(2) through or from any asset or source of income from India; and

(3) through or from sale of a capital asset situate in India. From the very fact that the transfer of a capitalasset situate in India has been brought within the purview of s. 9 the intention of Parliament was not to bring

within its purview any income derived out of sale or purchase of a capital asset effected outside India as it

was held in the case ofCommissioner of Income Tax vs. Quantas Airways Limited20.

If no operations are carried in India, deeming concept may not apply

In Commissioner of Income Tax vs. Toshoku Limited21the court observed that if no operations of business

are carried out in the taxable territories, it follows that the income accruing or arising abroad through or

from any business connection in India may not be deemed to accrue or arise in India.

Transactions must be systematic and well-defined

It is not every business activity of a manufacturer that comes within the expression operation to which theprovisions of Income Tax Act, 1922, s. 42(3) (corresponding to Income Tax Act, 1961, s. 9) are attracted. In

the case ofAnglo-French Textile Company Limited vs. Commissioner of Income Tax22 it was observed

that activities which are not well defined or are of a casual or isolated character would not ordinarily fall

within the ambit of this rule, in a case where all that may be known is that a few transactions of purchase of

raw materials have taken place in British India, it could not ordinarily be said that the isolated acts were in

their nature operations within the meaning of that expression.

181980 INDLAW MAD 128, (1981) 128 ITR 27 (Mad).

191973 INDLAW MUM 2938, (1974) 94 ITR 85

20

2002 INDLAW DEL 39, (2002) 256 ITR 84, 122 Taxman 935 (Delhi).211980 INDLAW SC 181, (1980) 125 ITR 525 (SC).

221952 INDLAW SC 28, (1953) 23 ITR 101 (SC).

13


14/22

Therefore these were the changes introduced by the judiciary in the definition of tern business connection.

Other then the abovementioned transactions, following transactions does not amount to business

connections:

(1) In respect of business operations carried out both in India and overseas, transactions relating to overseas

operations;

(2) Transactions relating only to purchase of goods in India for purpose of export by the non-resident;(3) transactions confined to the collection of news for transmission outside India in the business of news

agency or publishing newspapers, magazines or journals, carried on by non-resident, and

(4) operations confined to shooting of cinematography films by a nonresident foreign national.

TAX EXEMPTION FOR THE NON RESIDENT INDIANS

Section 10 grant some exemption to the non-residents while calculating their taxes which are as follows:

Section Particulars Remarks

10(4) Interest on Bonds or securities as notified by the

Government, premium on redemption and Interest incomeon NRE Account paid or credited

Exempt

10(4B) Interest income from notified government securities; i.e.,

NSC (VI/VII Issue) purchased in foreign exchange before

1-6-2002, by a NR who is an Indian citizen or a PIO

Exempt

10(15)(i) & (iid)Income by way of Interest, premium on

redemption or any other payment on NRNR

deposit and other securities, bonds, savings certificates,

notified u/s 10(15)(i)

Exempt (Interest on NRNR deposit is exempt ti

continues to be a non resident), however Prem

encashment is taxable in the year of encashmen

10(15)(iv)(fa) Interest on FCNR and RFC Deposits paid by a scheduled

bank to a NR or NOR, however Premature encashment istaxable in

Exempt

10(34) Income by way of dividend from domestic companiesExempt

10(35) Income received from Mutual fund specified u/s 10(23D)

Administrator of Unit Trust of India and from Unit Trust of

India

Exempt

10(36) Income from transfer of Long-term Capital asset Conditions

purchase and sale through a recognized

Exchange or issued through public issue by co

purchased on or after 1st March, 2003 abefore 1st March, 2004

forming part of BSE - 500 as on 1st Ma

2003,

held for a period of 12 months

is exempt. Further CBDT has issued a circular

clarifying the shares allotted under the divestm

process by the Government of India shall quali

this section and hence can be claimed exempt.

10(38) Income by way of Long-term Capital Gains On Sale of securities affected on a recognized s

14


15/22

exchange. after the applicability of the Securiti

Transaction Tax are exempt

Need of improvement:

Section 10(4)(ii) excludes, in the case of an individual, from computation of income, interest accruing in a

Non-Resident (External) Account. The exemption from tax is available only to non-resident Indians (NRIs).Under the existing tax regime, non-residents do not pay any tax in India on the interest on such deposits.

They may ordinarily be paying tax in the country where they are resident on such interest income. In this

manner tax in any case is being paid in the country of residence. It is submitted that with more than 65

DTAAs in place, there is no need for India to forgo any tax in respect of non-residents. In the current

scenario the benefit of exemption does not really flow to the taxpayer but to the other countrys treasury.

The interest accruing on such deposits should be taxed at source in India at the DTAA rate and credit for the

taxes paid can be claimed in the country of residence by the NRIs as provided in DTAAs. In this manner

double taxation in respect of the same income in the hands of the same individual would be avoided. There

is no need for filing of any return in India by the NRI. He would continue to file his return in the country of

residence along with his claim for credit of tax payable in India. The deposits in Non-Resident (External)

Accounts are substantial and without any loss to the NRIs, India would get its share of revenue. It is

therefore suggested that the provisions of section 10(4)(ii) be omitted. On the same anology section 10 (15)

(iv)(fa) and section 10 (15)(iv)(g) be deleted which relate to interest on foreign currency deposits by banks

and interest on foreign currency loan taken by housing companies respectively23.

Business Income of Non-resident (Section 44)

The following chart shows the taxable income of non-residents on their business income:

Section Particulars Remarks

44B Shipping companies profits

derived by non-residents

Profits and gains of non- resident from the business of

operation of ships are taxed at the rates of 7.5% of the

aggregate of the amount paid on account of carriage of

passengers, livestock mail or goods shipped at any port in

India and amount received or deemed to be received in

India on account of carriage of passengers, livestock mail or

goods shipped at any port outside India.

Note: Amount received on account of Demurrage

charges/Handling charges or any other amount of similarnature shall also be included for the purpose of calculating

business profits @ 7.5%

44BB Income from activities

connected with exploration of

mineral oils

In case of NR engaged in the business of providing services

and facilities in connection with or supplying, plant and

machinery on hire, used or to be used for and exploration of

mineral oils, the income is taxable @ 10% of amount paid

or payable to any person on behalf of, for the provision of

these services

23 Working Committee Report on non-resident taxation 2003 p/20

15


16/22

44BBA Operation of a Foreign Airlines Income from such business is charged at 5% of the amount

received from carriage of passenger, livestock, mail, or

goods from any place in India or deemed to be received by

or on behalf of the tax-payer on account of such services

from any place outside India.

44BBB Foreign Companies engaged inbusiness of civil construction

Income of a foreign company with respect to the businessof civil construction or the business of erection of plant and

machinery or testing or commissioning in respect of a

turnkey power project approved by the Central Government

in this behalf, shall be chargeable @ 10% of the amount

paid or payable in connection with such project.

44C Deduction of head office

expenditure in respect of Non-

resident

Allowance for expenditure of Head office shall be restricted

to least of the amount equal to 5% of adjusted total income

or so much of expenditure as is attributable to business or

profession in India

An assessee can claim profits lower than prescribed above, for which he would be required to maintain

books of account as required by section 44AA and the accounts shall have to be audited under section

44AB. The AO shall make an assessment u/s 143(3) and determine the tax payable or refundable as the case

may be.

Need of improvement in section 44C

In the case of foreign companies operating in India through branches, a proportion of the general

administrative expenses incurred by the foreign head office is claimed as a deduction in the computation of

taxable profits. A ceiling of 5% was introduced in the year 1976 for deductibility of such HO expenses,

under the premise that it was extremely difficult to scrutinize and verify such claims, particularly in theabsence of account books of the head office which are kept outside India.

It is to be recognized that the presence of non-resident companies and MNCs in India has increased

over the years. Section 44C was inserted in the statute in the year 1976 with a ceiling of 5% (of adjusted

total income) on the deductibility of head office expenditure. Over a period of 30 years the number of

branches / project offices of non-resident companies in India have also grown.

Over the last few years there has been considerable liberalization in terms of encouraging foreign

investment into India. The ceiling of 5% was introduced in the year 1976. The scenario has changed

considerably since then and it would not be appropriate to continue with such an arbitrary ceiling of 5% on

allowability of such expenses.

Generally the expenditure of MNCs on head office expenditure is far more than 5% of their net profit

(broadly akin to adjusted total income). So it is suggested that ceiling of 5% on the deductibility of HO

expenses should be increased to at least 10%.24

SPECIAL RATE OF TAXATION FOR NON RESIDENTS

Sections 115A to 115AD covers the tax rates for investment income/royalty income of different non-

resident entities

24Pre-Budget Memorandum 2009-2010 on direct taxes p/26

16


17/22

Particulars of Income Tax rates/TDS

115A(1)(a) 1. Income by way of Dividend (other than 115O),

2. Interest received from Government or any Indian

concern for money borrowed in foreign currency, and

3. Income on units of Mutual Fund specified u/s 10(23D)

or of UTI purchased in foreign exchange

20%

115AB Income from units purchased in foreign exchange by a

Overseas Financial Organsiations registered with SEBI by way

of:

1. Long-term Capital Gains arising on sale/repurchase of

units of Mutual Funds u/s 10(23D)/UTI

2. Income received from units

10%

115AC 1. Interest by way of notified bonds of Indian Companies

or bonds of public sector company, purchased in forex

10%

2. Dividend on Global Depository Receipts (GDR) 10%

3. Long-term Capital Gains on transfer of such bonds or

GDR

10%

115 AD Income of Foreign Institutional Investor (FII)

1. income (other than dividend u/s 115-O) 20%

2. Short-term Capital Gains 30%/15%*

3. Long-term Capital Gains 10%/NIL**115A(b) Income by way of Royalty or Fees for Technical Services

received by a non-resident (not being a company) or a foreign

company from Government or Indian Concern under

agreement entered after 31st May, 1976 and where it is entered

into with Indian Concern, it is approved by Government or it

relates to matter included in Industrial policy

for royalty/fees for Technical Services payment under

agreement entered on or before 31st May, 1997

30%

for royalty fees for Technical Services payment under

agreement entered on or after 31st May, 1997 but

before 1st June 2005

20%

for royalty fees for Technical Services payment under

agreement entered on after 1st June, 2005

10%

(*) Where securities transaction tax (STT) has been paid tax would be charged at 15%

(**) Where securities transaction tax (STT) has been paid the long-term capital gains would

be exempt

In case where the gross total income consists of only income referred above, no deduction shall be

allowed under chapter VIA or under sections 28 to 44C and 57 in computing the taxable income undersections 115 A, 115AB, 115AC, 115AD. Further, no return is required to be furnished u/s 139(1) where

17


18/22

the total income of the assessee includes only the specified income and the TDS under provision of

Chapter XVII B has been deducted there from.

Note: Short-term Capital Gains taxed @15% u/s 111A as well as Long-term Capital Gains shall

not be eligible for deduction

Need to Improve Section 115A:

Currently, Section 115A provides that Royalties/FTS received by non-residents are taxed at a

concessional rate of 10% only if the agreement under which these Royalties/FTS are received is

approved by the Central Government or relates to a matter that is covered under the Industrial Policy.

After the enactment of the Foreign Exchange Management Act, 1999 the Government has

liberalized the exchange control regulations and currently every payment to a non-resident on current

account is allowed unless specifically made subject to approval either by the Central Government or by

the Reserve Bank of India. The Reserve Bank of India has also in certain cases, granted automatic

approval for payments up to a certain monetary limit. Since the approval of Central Government is not

mandatory it would be in order to remove the condition with respect to Industrial Policy from Section115A. Further, the provisions of Section 115A should be made subject to the relevant FEMA provisions

with respect to payment of Royalties / FTS to non-residents25.

INCOME ENJOYING CONCESSIONAL RATE OF TAXATION

Chapter XII-A provides for concessional rate of taxation in respect of income of non-residents earned

from foreign exchange asset. Foreign exchange asset has been defined to mean any specified asset

acquired or purchased or subscribed to in convertible foreign exchange (section 115C (b)). A specified

asset has been defined under sub-clause (f) of section 115C to mean:

Shares in an Indian company; Debentures issued by an Indian company (not being a private company); Deposits with an Indian company (not being a private company); Security of the Central Government; or Such other notified assets.

These provisions apply to all NRI who has been defined to mean an individual, being a citizen of India

or a person of Indian origin who is not a resident.

All income arising (other than dividend referred in section 115-O) out of foreign exchange asset would

be subjected to concessional rate of tax at 20 percent on all income except in the case of long term

capital gains which shall be taxed at 10 percent.

Section 115F provides for certain relief in respect of long term capital gain arising out of the transfer of

foreign exchange asset. Exemption is provided to an NRI who has within a period of six months of the

date of transfer has invested the net consideration in any specified asset or in any savings certificate

referred to in section 10(4B). If the investment is less than the net consideration, then proportionate

exemption shall be given. However, the new asset shall not be transferred for a minimum period of three

years to obtain the complete benefit.

25ibid

18


19/22

No deduction under Chapter VI-A or the benefit of indexation provided under second proviso to section

48 is permissible in respect of investment income coming under this chapter.

Even after his return to India, NRI can choose to have the concessional rate applicable to the investment

income until the realization of the foreign exchange asset into money of such assets (section 115H).

NRI has the option of choosing the provisions of the Chapter being not made applicable for anyassessment year provided he gives a declaration to the effect and by furnishing a return of income for

that assessment year u/s 139.

If an NRI has only investment income under Chapter XII-A and proper tax has been deducted at source

under Chapter XVII-B, he need not file a return of income as provided u/s 139(1).

Special provision for calculation of capital gains of shares & debentures

Proviso 1 to Section 48 explains the method of calculation of capital gains on transfer ofshares/debentures of Indian company (private or public). The same shall be computed by conversion of

sales consideration and transfer expenses into the same foreign currency which was utilized for purchase

of such shares/debentures. The capital gains so arrived is reconverted into Indian rupees as per the rates

specified below:

Particulars Exchange rate to be applied

Sales consideration Average exchange rate on date of transfer

Cost of acquisition Average exchange rate on date of purchase

Expenditure on sale Average exchange rate on date of transfer

Capital Gains Buying rate on date of transfer

The exchange rates to be considered above shall be the telegraphic transfer buying/selling rates as

adopted by State Bank of India for purchasing or selling such currency.

Since the non-residents can avail of the benefit of exchange rate fluctuation, no indexation benefit is

available in this case.

DOUBLE TAXATION RELIEF

Section 90 of the Act provides for the Central Government to enter into an agreement with Government

of any other country to give relief for income suffering tax in both the countries. It is common in cases

of NRI, where the same income is taxed both in India and in their respective resident country. If any

income is taxed in two countries, then section 90 provides for the applicability of the provisions of the

Act to the extent they are beneficial to the assessee. Thus, if the provisions of the DTA are beneficial in

respect of taxability of such income, the provisions of the Act cease to apply. The DTA may provide,

depending on the type of income, the country where the income would be taxed, the rate at which it is

taxed, the type of relief given when the NRI pays taxes in both the countries. etc.,. However, the

applicability of the provisions of DTA is only to the extent of the relief in taxation, while all the other

19


20/22

procedural aspects like, payment of advance tax, filing of income tax return, assessment procedures,

etc., would be in accordance with the provisions of the Act26.

Section 91 of the Act provides for relief to be given in respect of doubly taxed income where there

exists no DTA between India and the other country. However, this section is applicable only to

residents and not non-residents.

India has signed tax treaties with various countries, most of which are based on the Organisation ofEconomic Cooperation and Development (OECD) Model. These treaties provide a favourable method

of computing taxable business profits.

India has tax treaties with over 40 countries including USA, UK, Japan, Germany and France, with

whom it has significant economic relationships. This results in a relatively lower tax cost for foreign

companies doing business in India.

.

TAX DEDUCTION AT SOURCE

Sections 192 and onwards coming within Chapter XVII-B, deals with tax deductibility at sources out ofpayments made to resident and non-resident. It is an accepted position that the provisions dealing with

tax deduction at source are payments specific. In respect of NRIs the applicable provisions of TDS are

given in section 192 to 196C of the Act.

It is generally believed that payments to non-residents are governed by the provisions of section 195.

This may not be true. The opening wordings of section 195 make it clear that the provisions contained

therein shall not apply to interest on securities and income chargeable under the head salaries.

However, a perusal of the relevant provisions indicates that section 194B, 194EE, 194G and section

194-I applies to both resident and non-residents. Accepting the principle of the TDS provisions being

payment specific, this interpretation should be correct.

Section 195 is a residual section, as far as payments to non-residents are concerned. Payments toresidents are restricted to specified ones like interest, contract payments, professional/technical fees,

commission, etc.,. However in the case of non-residents all payments which are ultimately taxed under

the Act in the hands of the non-resident get attracted for deduction of tax at source u/s 195. Payments

which are, in the hands of non-residents, in the nature of revenue receipt resulting in business or other

taxable income, capital receipt resulting in taxable capital gains, etc., are attracted by section 195. The

payment to non-residents could be in any currency, not necessarily in foreign currency. Even payments

to agents in India on behalf of the non-resident would get attracted by section 195.

The meaning of the wording any other sum used in the section was of considerable debate. The

Supreme Court in the case ofTransmission Corporation of AP Ltd.27, has laid to rest the controversy.

The Supreme Court has said, that, irrespective of the income or loss component, any other sumchargeable under the provisions of this Act would mean that any payment made to non-resident which

is chargeable under the Act. The Court further stated that by subjecting the gross payment to TDS there

is no extra burden on the non-resident in view of the provisions of section 195(2), 195(3) and 197,

wherein an application for the determination of income or loss component is maintainable by the non-

resident or the principal28.

AUTHORITY FOR ADVANCE RULING

26

Azwani Naresh Important Concept of International Taxation and Principle of Tax Treaty Interpretation27239 ITR 587

28www.sduca.com

20


21/22

To give a certainty as regards the tax liability in respect of their transactions entered into or proposed to

be entered into, non residents have been provided with advance rulings. Any non- resident can approach

the Authority for Advance Ruling (AAR) to get a ruling as to the taxability or the extent of taxability or

otherwise, of the transaction even before the transaction is entered into. The provisions of Chapter

XIX-B, relating to advance ruling is effective from 01.06.1993.

AAR is constituted of a retired judge of Supreme Court as its Chairman, a person of high ranking each

from Indian Revenue Service and Indian Legal Service as its members.

A non-resident or a resident with a non resident, entering into any transaction can approach the

Authority. The Authority could be approached even in respect of an issue relating to computation of

income pending before any income tax authority or appellate tribunal (section 245(a)). The ruling of

the Authority is binding on:

the applicant seeking the advance ruling;

the transaction before the Authority;

the commissioner of income tax and authorities subordinate to him, having jurisdictionover the applicant and the transaction.

Approaching the Authority, in all transactions involving non-residents, is not compulsory or mandatory.

Though the ruling of the Authority is binding only on the applicant and the transaction, generally, they

have an indicative or persuasive value for interpreting the provisions of the Act.

Effective 01.06.2000, the opportunity to approach AAR has been extended to residents entering into

transaction with non residents and to Public Sector Companies.29

CONCLUSION

In conclusion we can say that several provisions have been enacted by the government to attract

the investment of non-residents of India but with the passing of time the law relating to them in the

Income Tax Act 1961 has become outdated and now it requires several changes which are as

follows:

Status of non ordinary residents should be abolished.

A chapter no interpretation of DTTAs should be added in the Income Tax Act. It should

provide for interpretation of various terms used in the DTTAs.

Withdrawal of certain exemption given in section10 of the Income Tax Act.

Concept of business connection in section 9 Income Tax Act should be strengthened.

29www.cbec.gov.in

21


22/22

The Government should state its position with regard to both the aspects of existence of

permanent establishment and characterization of payment and deliveries in electronic commerce

environment.

BIBLIOGRAPHY

BOOKS

1. Dr. V.K. Singhania and Dr. Monica Singhania, Taxmann Students Guide to IncomeTax, 42nd ed., 2010-11

2. Nabhis Income Tax Guidelines and mini ready reckoner along with Wealth Tax,

2009, Nabhi Publication

22

non resident taxation in india

Documents