- Who is NRI
- What is taxable for NRI in the absence of DTAA
- What is DTAA and benefits available under the same.
In the Finance Act, 2013, India has amended Section 90(4) by
omitting the requirement that a tax residency certificate must contain certain
information in order to be valid for purposes of claiming the benefits of a tax
treaty. Instead, new Form 10F may be submitted by a nonresident to an Indian
payor when claiming Treaty benefits.
In the Finance Act,
2012, Section 90(4) made the submission of a valid tax residency certificate
(TRC) issued by the government of the party claiming tax treaty benefits a
requirement. Pursuant to that section of the Act, Rule 21AB listed seven items
that must be found on a TRC for it to be valid in India -- name, status,
nationality or country of incorporation/registration, taxpayer identification
number, residential status for purposes of tax, period for which the
certificate is applicable, and the address of the applicant.
U.S. Form 6166, Certification of U.S. Tax Residency, does
not contain all of the required information on its face. Therefore, many U.S.
law firm service providers seeking to claim the benefits of the U.S. - India
Income Tax Treaty, i.e., zero withholding on the payments of their fees where
there is no permanent establishment (PE) in India, were encountering issues
with their clients in India. The Indian clients were withholding taxes for fear
that the local tax authorities would reject Form 6166 as an invalid TRC. A
number of groups approached the relevant U.S. governmental authorities to make
this withholding problem known and to seek some clarification that Form 6166 is
a valid TRC for purposes of claiming Treaty benefits in India.
Since the Finance Act, 2013 has now amended Section 90(4)
and invalidated the requirement that a TRC must contain the seven items of
information listed above, effective 1 April 2013 clients needs to provide the
following forms/information to a payor in India in order to claim Treaty
benefits and zero withholding under domestic India tax law where the firm does
not have a PE in India:
(1) a self-certified Form 10F
(2) a Permanent
Account Number (PAN) for India,
(3) U.S. Form 6166 for the relevant tax year, and
(4) a signed letter on firm letterhead stating that the firm
does not have a permanent establishment in India under the relevant Treaty
article.
Salary received by a non resident in India, for services rendered outside India, not taxable in India,if tax treaty conditions met.
ITO vs. Arjun Bhowmik (ITA No 3484/Del/2012)
Background Recently, the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) in a case of Arjun Bhowmik (the taxpayer) held that salary received in India by the taxpayer, a tax resident of Philippines, for rendering services in Philippines, is exempt from Indian income-tax under the India-Philippines tax treaty (tax treaty)
Facts of the case
The taxpayer, an employee of M/s KJS India Pvt Ltd (KJS India) was seconded to Kraft Foods, Philippines on a long-term international assignment. During the tax year 2007-08, the taxpayer was rendering services in Philippines. Also, he was a tax resident of Philippines and had paid taxes in Philippines in respect of the salary he received in India.
The taxpayer was present in India for only 17 days during the tax year 2007-08. He filed his Indian tax return as a ‘non-resident’for India tax purposes, claiming an exemption in respect of the salary received by him in India for services rendered in Philippines and accordingly claiming a refund of India income-taxes in his return.
The Assessing Officer (AO) rejected the exemption claimed by the taxpayer on the grounds that the salary received by the taxpayer in India was taxable in India even if he qualified as a ‘non-resident’ 3 . On appeal, however, the Commissioner of Income-tax (Appeals) [CIT(A)], permitted the exemption claimed by the taxpayer.
Issue before the Tribunal Whether the taxpayer was eligible to claim an exemption under the tax treatyin respect of the salary received in India?
Tax department’s contentions
The salaryreceived or due to be received in India by a non-resident taxpayer, notwithstanding the source, would be taxable in India. In this case, the salary accrued in India was also received and paid in India. The exemption had erroneously been allowed by the CIT(A) without ascertaining as to whether tax was paid by the taxpayer in Philippines on the salary accrued and received in India.
Taxpayer’s contentions
Under Article 16(1) of the tax treaty,the salary derived by a tax resident of Philippines from exercising employment in Philippinesshall be taxable only in Philippines.In the taxpayer’s case,the taxpayer was present in India for only 17 days during the tax year 2007-08and had not rendered any services in India.
The taxpayer had actually paid taxes in Philippines on the salary received in India and had filed Philippines income-tax returns as well.
Tribunal’s ruling The Tribunal upheld the decision of the CIT(A) that the salary received by the taxpayer,through KJS India,for the employment exercised in Philippines, was not taxable in India, by virtue of Article 16(1) of the tax treaty.
Salary received by a non resident in India, for services rendered outside India, not taxable in India,if tax treaty conditions met.
ITO vs. Arjun Bhowmik (ITA No 3484/Del/2012)
Background Recently, the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) in a case of Arjun Bhowmik (the taxpayer) held that salary received in India by the taxpayer, a tax resident of Philippines, for rendering services in Philippines, is exempt from Indian income-tax under the India-Philippines tax treaty (tax treaty)
Facts of the case
The taxpayer, an employee of M/s KJS India Pvt Ltd (KJS India) was seconded to Kraft Foods, Philippines on a long-term international assignment. During the tax year 2007-08, the taxpayer was rendering services in Philippines. Also, he was a tax resident of Philippines and had paid taxes in Philippines in respect of the salary he received in India.
The taxpayer was present in India for only 17 days during the tax year 2007-08. He filed his Indian tax return as a ‘non-resident’for India tax purposes, claiming an exemption in respect of the salary received by him in India for services rendered in Philippines and accordingly claiming a refund of India income-taxes in his return.
The Assessing Officer (AO) rejected the exemption claimed by the taxpayer on the grounds that the salary received by the taxpayer in India was taxable in India even if he qualified as a ‘non-resident’ 3 . On appeal, however, the Commissioner of Income-tax (Appeals) [CIT(A)], permitted the exemption claimed by the taxpayer.
Issue before the Tribunal Whether the taxpayer was eligible to claim an exemption under the tax treatyin respect of the salary received in India?
Tax department’s contentions
The salaryreceived or due to be received in India by a non-resident taxpayer, notwithstanding the source, would be taxable in India. In this case, the salary accrued in India was also received and paid in India. The exemption had erroneously been allowed by the CIT(A) without ascertaining as to whether tax was paid by the taxpayer in Philippines on the salary accrued and received in India.
Taxpayer’s contentions
Under Article 16(1) of the tax treaty,the salary derived by a tax resident of Philippines from exercising employment in Philippinesshall be taxable only in Philippines.In the taxpayer’s case,the taxpayer was present in India for only 17 days during the tax year 2007-08and had not rendered any services in India.
The taxpayer had actually paid taxes in Philippines on the salary received in India and had filed Philippines income-tax returns as well.
Tribunal’s ruling The Tribunal upheld the decision of the CIT(A) that the salary received by the taxpayer,through KJS India,for the employment exercised in Philippines, was not taxable in India, by virtue of Article 16(1) of the tax treaty.
Salary credit to non-resident external rupee account not taxable
Indian employees working overseas often face litigation over taxation of their overseas salary income, if such salary is received in India. This is because a non-resident can be subjected to tax in India on that portion of the income which is received in India.
The Income Tax Appellate Tribunal (ITAT) which adjudicates tax matters, in a recent decision, has held that merely because the salary was credited by the Singapore-based employer company to the employee's NRE bank account in Mumbai, it will not trigger a tax incidence in India. The ITAT sought to distinguish between 'income' received in India and an 'amount' received in India.
The ITAT relied on earlier judicial pronouncements and held that salary income is a compensation for services rendered by an employee. Thus, salary income in the hands of the non-resident employee cannot be taxed in India, if the services are rendered outside India. The place of receipt of the appointment letter is immaterial.
However, the income tax authorities pointed out that the money was received in India, as the salary cheques were credited by Executive Ship Management Pte — the Singapore employer — to the NRE ( non-resident external rupee) account maintained by the employee Arvind Singh Chauhan with HSBC Bank in Mumbai. Thus, it should be taxable in India in his hands.
Under tax laws, the tax incidence is based on the concept of residence, which in turn depends on the number of days stayed in India. A tax resident of India is subject to tax on his global income. However, a non-resident is subject to tax in India only under two situations, one of them being that income received in India is taxable in India. In this case, the employee who was working on a ship plying on international routes was a non-resident as he had spent less than 182 days in India during the relevant financial years relating to the matter being heard by the ITAT.
The ITAT rejected the contention of the tax department that the salary amount credited to the bank account in India should be subject to tax. It observed that the employee had a lawful right to receive the salary amount at the place of employment (which is the location of the foreign employer outside India). The ITAT held: "The connotation of an income having been received and an amount having being received are qualitatively different. The salary 'amount' is received in India in this case but the salary 'income' is received outside India".
Gautam Nayak, partner, CNK & Associates, said, "The ITAT in this order has highlighted a new aspect relating to income received in India. It has drawn a distinction by holding that salary income was not received in India as the employee had the lawful right to receive salary outside India. The salary amount was at the employee's disposal outside India and he merely exercised his right to transfer it to India."
India, with 1.42 crore migrants, is among the leading exporters of manpower, according to latest UN statistics. A large chunk of them constitute blue-collar workers. The practice of a salary credit either in full or in part to a bank account in India is more common in case of highly skilled workers.
"Employee agreements should be properly structured. If these agreements bring out the point that the salary for services rendered overseas is being credited to a bank account in India, at the employee's request for the sake of convenience, this ITAT decision could help mitigate litigation" explains Nayak.
Indian employees working overseas often face litigation over taxation of their overseas salary income, if such salary is received in India. This is because a non-resident can be subjected to tax in India on that portion of the income which is received in India.
The Income Tax Appellate Tribunal (ITAT) which adjudicates tax matters, in a recent decision, has held that merely because the salary was credited by the Singapore-based employer company to the employee's NRE bank account in Mumbai, it will not trigger a tax incidence in India. The ITAT sought to distinguish between 'income' received in India and an 'amount' received in India.
The ITAT relied on earlier judicial pronouncements and held that salary income is a compensation for services rendered by an employee. Thus, salary income in the hands of the non-resident employee cannot be taxed in India, if the services are rendered outside India. The place of receipt of the appointment letter is immaterial.
However, the income tax authorities pointed out that the money was received in India, as the salary cheques were credited by Executive Ship Management Pte — the Singapore employer — to the NRE ( non-resident external rupee) account maintained by the employee Arvind Singh Chauhan with HSBC Bank in Mumbai. Thus, it should be taxable in India in his hands.
Under tax laws, the tax incidence is based on the concept of residence, which in turn depends on the number of days stayed in India. A tax resident of India is subject to tax on his global income. However, a non-resident is subject to tax in India only under two situations, one of them being that income received in India is taxable in India. In this case, the employee who was working on a ship plying on international routes was a non-resident as he had spent less than 182 days in India during the relevant financial years relating to the matter being heard by the ITAT.
The ITAT rejected the contention of the tax department that the salary amount credited to the bank account in India should be subject to tax. It observed that the employee had a lawful right to receive the salary amount at the place of employment (which is the location of the foreign employer outside India). The ITAT held: "The connotation of an income having been received and an amount having being received are qualitatively different. The salary 'amount' is received in India in this case but the salary 'income' is received outside India".
Gautam Nayak, partner, CNK & Associates, said, "The ITAT in this order has highlighted a new aspect relating to income received in India. It has drawn a distinction by holding that salary income was not received in India as the employee had the lawful right to receive salary outside India. The salary amount was at the employee's disposal outside India and he merely exercised his right to transfer it to India."
India, with 1.42 crore migrants, is among the leading exporters of manpower, according to latest UN statistics. A large chunk of them constitute blue-collar workers. The practice of a salary credit either in full or in part to a bank account in India is more common in case of highly skilled workers.
"Employee agreements should be properly structured. If these agreements bring out the point that the salary for services rendered overseas is being credited to a bank account in India, at the employee's request for the sake of convenience, this ITAT decision could help mitigate litigation" explains Nayak.
Economictimes.com
DTAA
The “Double Tax Avoidance Agreement (DTAA)” or “Tax Treaty” is essentially bilateral agreements entered into between two countries, in our case, between India and another foreign state. The basic objective is to avoid taxation of income in both the countries (i.e. Double taxation of same income). Currently India has comprehensive DTAA or Tax Treaty with 84 other countries.
The advantage of DTAA are as under,
- Lower
Withholding Taxes (Tax Deduction at Source)
- Complete
Exemption of Income from Taxes
- Underlying
Tax Credits
- Tax
Sparing Credits
The Provisions of DTAA override the general provisions of
taxing statue of a particular country. It is now well settled that in India the
provisions of the DTAA override the provisions of the domestic statute.
Moreover, with the insertion of Sec.90 (2) in the Indian Income Tax Act, it is
clear that assessee has an option of choosing to be governed either by the
provisions of particular DTAA or the provisions of the Income Tax Act,
whichever are more beneficial.
Let’s take an example to understand how DTAA
works; An NRI residing in ABC
country is maintaining NRO Account with a bank in
India. The interest earned on balances in this account is considered as the NRIs income originating in
India. If India has DTAA with country ABC, this income will be taxed at the rate prescribed in the agreement.
Else, it will be taxed at 30.90 % (the existing withholding tax).
The Non Resident can certainly take the benefit
of the provisions of DTAA entered into between India and the country, in which
he resides, more particularly in respect of Interest Income from NRO account,
Government securities, Loans, Fixed Deposits with Companies and dividends etc.
MLI(BEPS)
vs DTAA
The MLI is an outcome of the G20-OECD
project to tackle Base Erosion and Profit Shifting (the BEPS Project), i.e. tax
planning strategies that exploit gaps and mismatches in tax rules to
artificially shift profits to low or no-tax locations where there is little or
no economic activity, resulting in little or no overall corporate tax being
paid.
The MLI will modify India’s DTAAs to curb
revenue loss through treaty abuse and base erosion and profit shifting
strategies by ensuring that profits are taxed where substantive economic
activities generating the profits are carried out. The MLI will be applied
alongside existing DTAAs, modifying their application in order to implement the
BEPS measures.
Article
6 of MLI provides for modification of the Covered Tax Agreement to include the
following preamble text:
“Intending
to eliminate double taxation with respect to the taxes covered by this
agreement without creating opportunities for non-taxation or reduced taxation
through tax evasion or avoidance (including through treaty-shopping
arrangements aimed at obtaining reliefs provided in this agreement for the
indirect benefit of residents of third jurisdictions),”
In
order to achieve this, clause (b) of sub-section (1) of section 90 of the Act
which provides for providing relief in respect of avoidance of double taxation
of income under the laws of both country or territory (India and the other
foreign country of territory) is required to contain the text provided for in
MLI as mentioned above. In case of section 90A of the Act also, similar
amendment would be required to be carried out.( clause (b) of sub-section (1)
of section 90A of the Act)
These
amendments will take effect from 1st April, 2021 and will, accordingly, apply
in relation to the assessment year 2021-22 and subsequent assessment years.
Indian PAN mandatory for Non Residents (if receiving payments from Residents in India) Sec 206AA
*Relaxation u/s 206AA to Non-residents from 20% TDS:
*Relaxation u/s 206AA to Non-residents from 20% TDS:
CBDT has issued notification no. 53/2016 dated 24 June 2016 giving relaxation to Non-residents from furnishing PAN no. in India. TDS at higher rate of 20% will not be deducted if following conditions are satisfied by non-resident:-
Provisions of Sec 206AA shall not apply in respect of payments in the nature of
- Interest,
- Royalty,
- Fees for technical services and
- Payments on transfer of any capital asset,
- Interest,
- Royalty,
- Fees for technical services and
- Payments on transfer of any capital asset,
if the non-resident furnishes the following details/ documents
(i) name, e-mail id, contact number;
(ii) address in the country of which the non-resident is a resident;
(iii) Tax Residency Certificate (TRC) from the Government of that country if the law of that country provides for issuance of such certificate;
(iv) Tax Identification Number (TIN) or any other Unique Identification Number of the non-resident of his residence country.
All the above information needs to be furnished in TDS returns as well.
For example:- ABC Pvt Ltd is making payment of Interest to X Inc, a US Company who do not have who do have PAN in India. Higher rate of 20% u/s 206AA will not be applicable if US Company provides Name, E-mail, Contact no, Address of USA, TRC, TIN or SSN of USA.
Original Provision before the 2016 amendment
Foreign parties who are receiving payments from India are required to obtain a permanent account number (PAN Number) from the Income Tax Authorities of India.
According to section 206AA which was inserted by the Finance (No.2) Act, 2009, it has been clearly stated that all foreign parties whether an individual companies or partnerships or any kind of entity who receive payment from the Indian companies after the period of 1st April 2010 is expected to give their PAN to the Indian party which is remitting that payment.
Application for allotment of PAN is form 49AA for Non Residents. A check list for obtaining PAN of foreign parties is given below for your reference in addition to checklist provided at the end of the form
1. Notarized and Consularised copy of Certificate of incorporation - COI (specifying the name, address and date of incorporation). Notarization and Consularised shall be done by Indian Embassy in respective countries.
2. In case COI doesn't specify the address of the company, please provide any other certificate (duly Notarized and Consularised by Indian Embassy in that respective country) obtained from competent authority in respective country, specifying the address and date of incorporation.
3. A printout of application is required to be signed by the Authorized Signatory of the company. In this regard, please note that:
Signatures should be made in BLACK ink and within the designated box given in the 'Page 2' sheet. Signatures should not overlap or cross the designated boxes
Please also affix company stamp at the places of signatures.
No photograph needs to be attached in case of companies.
Local address should not be provided since that shall create a PE issue. Providing details of RA (Representative Assessee) is not mandatory in the PAN application for such applicants. Hence, this column may be left blank.
If communication Address is outside India (a). The fee for processing PAN application is 962.00[ (Application fee 85.00 + Dispatch Charges 771.00) + 12.36% service tax]. (b). Payment can be made only by way of Demand Draft payable at Mumbai. Demand draft and cheque should be drawn in favour of 'NSDL - PAN'.
Non Resident Indian as per FEMA :-
An Indian Citizen who stays abroad for (a) employment/ carrying on business or (b) vacation outside India or (c) stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad is a non-resident. Persons posted in U.N. organizations and officials deputed abroad by Central/ State Government and Public Sector Undertakings on temporary assignments are also treated as non-resident.
Non-resident foreign citizens of Indian Origin are treated on par with non-resident Indian citizens.
Who is a person of Indian Origin? :-
- For the purpose of availing of the facilities of opening and maintenance of bank accounts and investments in shares/ securities in India:
A foreign citizen ( other than a citizen of Pakistan or Bangladesh ) is deemed to be of Indian Origin, if,
- he, at any time, held an Indian passport,
- (ii) he or either of his parents or any of his grand parents was a citizen of India bu virtue of the Constitution of India or Citizenship Act, 1956( 57 of 1955)
A spouse( not being a citizen of Pakistan or Bangladesh ) of an Indian citizen /Indian origin is also treated as a person of Indian origin provided the Bank accounts are opened or investments in shares/securities in India are made by such persons jointly with their NRI spouses.
B. For Investment in immovable properties:
A foreign citizen ( other than a citizen of Pakistan, Bangladesh, Afghanistan, Bhutan, Sri lanka or Nepal ), is deemed to be of Indian origin if,
(i) he held an Indian passport at any time, OR
(ii) he or his father or paternal grand-father was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 ( 57 of 1955).
(ii) he or his father or paternal grand-father was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 ( 57 of 1955).
Non Resident Indian as per Income Tax Act :
The laws does not define who is non resident. Rather it define who is resident and who are not ordinarily resident. Therefore, if a person does not fall in the category of resident or not ordinarily resident, he / she will be non-resident.
Residential status of an individual or HUF or a company is of great importance in Indian Income Tax Act as the liability to pay tax in India does not depend on the nationality or domicile of the Tax payer but on his residential status. Residential Status is determined on the basis of physical presence i.e. the number of days of stay in India in any year. There are three types of status based on the stay in India:-
(1) Resident:
- An individual is resident if any of the following conditions are satisfied:
(i) he stayed in India for 182 days or more during the previous year, or
(ii) he stayed in India for 365 days or more during the four preceding years and stays in India for atleast 60 days 9 182 days in case of an Indian citizen or a person of Indian Origin coming on a visit to India or 182 days in case of an Indian citizen going abroad for an employment ) during the previous year.
Stay in India for the above criteria may be continuous or intermittent.
- Hindu Undivided Family (HUF) or firm or other Association of persons is resident of India except in cases where the control and management of its affairs is wholly situated outside India in the previous year
(c) A company is resident in India if-
- it is an Indian company, or
- 9ii) during the previous year, the control and management is situated wholly in India.
- A person resident in India, in a previous year in respect of any source of income shall be deemed to be resident in India in respect of his other sources of income.
(2) Non-Resident
A person is non-resident if he is not resident in India.
(3) Resident but not ordinarily resident
An individual or an HUF is treated to be not ordinarily resident in India in any previous year if he or the manager of HUF-
- has not been resident in India in 9 out of 10 previous years preceding the previous year; or
- has not during the seven previous years preceding that year, been in India for a period of or periods amounting in all to 730 days or more.
- Thus according to condition in clause (a) a newcomer to India would remain not ordinarily resident in India for the first 9 years of his stay in India. Similarly, in case where a person who is resident in India goes abroad and ceases to be resident in India for at least 2 years, he would upon his return, be treated as, not ordinarily resident for the next 9 years.
How the residential status of a person is determined :-
In case of Indian citizen who leaves Indian during previous year for the purpose of employment :-
Such a person is resident in India if he satisfies the following conditions:
- He stays in India for at least 182 days during the previous year.
- He is resident in India for at least 9 out of 10 years preceding the previous year.
- He is resident in India for at least 730 days during 7 years preceding the previous year.
- If such a person satisfies condition (a) but does not satisfy either of the conditions at (b) or (c) above, such a person would be resident but not ordinarily resident.
Such person would be non-resident if he does not satisfy condition (a) stated above.
In case of Indian citizen or a person of Indian origin living abroad comes to India for a visit during the previous year
The residential status of such a person is to be determined after looking into the following
- He stays in India for at least 182 days during the pervious year and,
- He is resident in India for at least 9 years out of 10 years preceding the previous year.
- He is resident in India for at least 730 days during seven years preceding the previous year.
The person would be resident in India if he satisfies all the conditions (a) to (c) above.
The person would be resident but not ordinarily resident if he satisfies the condition at (a) but does not satisfy any or either of the conditions at (b) and (c) above.The person would be non-resident if he does not satisfy the condition at a) above.
Thus condition (a) is of fundamental importance and must be satisfied to be resident in India. Conditions ( b) and (c) only help to qualify that resident status.
In case of any other individual
For individuals other than those included in category ( I ) or (ii), we have to look into the following four conditions to determine the residential status:
- He stays in India for at least 182 days during the previous year.
- He stays in India for at least 60 days during the previous year and for at least 365 days during 4 year preceding the previous year.
- He is resident in India at least in 9 out of 10 years preceding the previous year.
- He is resident in India for at least 730 days during 7 years preceding the previous year.
A person would be resident in India if he satisfies any of the conditions at (a) or (b) and both the conditions at (c) and (d) i.e. he either satisfies conditions (a) , (c) and (d) or (b), (c) and (d).
A person would be resident but not ordinarily resident if he satisfies either of the conditions at (a) or (b) and does not satisfy both or either of the conditions at (c) and (d). In other words, if a person satisfies condition (a) or (b) only but does not satisfy either (c) or (d) or both, he would be treated as resident but not ordinarily resident in India.
If a person satisfies neither of the conditions (a) or (b) , he is non-resident.
Tax implications for Non Resident Indians (NRIs) returning to India
Residential Status amendment- number of days stay in India
– The exception provided in Explanation 1(b) to section 6(1), for Indian citizens and persons of India origin visiting India in that year has been decreased to 120 days, only in cases where the total income of such visiting individuals during the financial year from sources, other than foreign sources, exceeds INR 15 lakhs.
– The term ‘income from foreign sources’ has been defined to mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
Residential Status – Provision of ‘Deemed Resident’ applicable if total income exceeds INR 15 lakhs
– The amendment to clause (1A), introduced by the Finance Bill, 2020 targeted individuals who do not spend considerable amount of time in any country so as to be treated as tax residents of such foreign countries.
– This created a lot of misapprehension in the non-resident Indian (NRI) community, especially for Indians who are bonafide employed in other countries or carry on business there, etc.; and who are not subject to tax in those countries as per the domestic tax law of those countries, will be taxed in India on the income that they have earned outside India.
– Hence, to avoid such misapprehension, the CBDT issued a Press Release dated 2 February 2020, clarifying that in case of an Indian citizen who becomes deemed resident of India, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession.
– The scope of clause (1A) has been now limited through the Finance Act, 2020, and shall only be applicable to such Indian citizens who meet the threshold*. Accordingly, all Indian citizens who fail to meet the threshold, but are not subject to tax in any other jurisdiction, will not be considered as Indian tax resident
(*Threshold: an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year)
Deemed resident to be treated as ‘Not Ordinarily Resident’
– The proposed relaxation to the Resident but Not Ordinarily Resident (RNOR’) under the Finance Bill have been removed through the Finance Act, 2020, that is:
The Finance Bill proposed to streamline the test for RNORs by providing that an individual or an HUF shall qualify as an RNOR, if such individual or manager of the HUF has been a non-resident in India for seven out of the ten previous years preceding that year
– The Finance Act, 2020, now adds two categories to the test for RNOR in section 6(6).
– The below persons shall also be treated as RNOR:
· Indian citizens/ persons of Indian origin who meet the threshold and have been in India for a period of more than 120 days but less than 182 days i.e. those Indian citizens / persons of Indian origin who fulfil the conditions mentioned above in Explanation 1(b) to section 6(1) and
· Indian citizens who fulfil the conditions mentioned above in Explanation (1A) to section 6(1).
– The above amendments mean that even where an Indian citizen qualifies as a tax resident under section 6(1) of the Act but owing to the amendment as mentioned above to Explanation 1(b) and Explanation (1A) to section 6(1), he will still not be taxed on a worldwide basis (unless as per section 5 of the Act, such foreign income is derived from a business controlled in or a profession set up in India), even if he does exceed the threshold.
-The day count and total income criteria has to be examined every financial year
– The same shall be applicable from AY 2021-22
May 27, 2011, Anand Dhelia, senior tax professional with Ernst & Young, for Economictimes
I received a call from my friend and he mentioned that he is planning to return to India to explore new avenues here. Basically, he wanted to know, what implication his Non Resident Indian (NRI) status would have on his tax liability in India. I explained him the following points after he promised me to get some chocolates from US!
Under Indian tax provisions, NRI is an individual who is an Indian citizen or person of Indian Origin who is not a resident in India.
The residential status in India is determined based on the physical presence of an Individual in India during the tax year, which is from April 1 to March 31. An Individual is considered as a Non-Resident for a particular tax year, if he is physically present in India for less than 60 days in that tax year.
However, when a citizen of India or a person of Indian origin who is outside India visits India in any year, he would be regarded as Non-Resident if his total stay is less than 182 days in the relevant tax year. Person of Indian origin means an Individual who is born in undivided India. Even if either of parents/grandparents of an Individual were born in undivided India, he would be regarded as person of Indian origin.
A Resident Individual can qualify as Not Ordinarily Resident (NOR) for a particular year based on his stay details in the past years (i.e, he should be a non-resident in India in nine out of the ten years preceding the previous years or should have stayed for less than 730 days in seven years preceding the previous years).
Taxability in India is dependent on whether an individual qualifies as a Resident, NOR or Non-Resident.
A Resident is taxable on his global income, while a NOR or Non-Resident is taxable on the income earned or received in India. In the present case, Vasanth is employed with a company in US. He resigns from his present employment and takes up a new employment in India.
If Vasanth qualifies as Non-Resident or Not-Ordinarily Resident in India in the relevant tax year, then he need not offer his US employment Income to tax in India. If he qualifies as Resident in India, his global income would be taxable in India and he has to offer his US employment income also to tax in India, subject to the relief available under the double taxation avoidance agreement.
There are some special provisions under Indian tax laws wherein NRIs can opt for special tax rates (instead of progressive slab rates applicable in India) for specific investment incomes or capital gains from foreign exchange assets (eg: Shares in Indian company purchased in convertible foreign exchange). Further, the interest earned by NRI on his NRE, FCNR or RFC account is tax free subject to certain conditions.
It should be noted that the NRI benefits are available to a person till the time he qualifies to be a Non-Resident in India. A person may lose his NRI status in the same year when he returns to India or within two to three years from the date of arrival to India depending on the number of days of stay in India as explained above.
Separately, under wealth tax law, wealth tax is payable at the rate of 1% for the net wealth in excess of Rs 30 lakhs. However, assets located outside India owned by NRI shall not come under wealth tax bracket. Further, a NRI returning to India for good can claim wealth tax exemption for the assets brought by him to India or assets acquired by such money up to seven years commencing from the year in which such person returned to India subject to fulfillment of other conditions.
It is also important to keep in mind the upcoming Direct Tax Code (DTC). There is a proposal under DTC to remove concept of 'NOR' (though similar exemptions have been given separately to residents who meet the conditions prescribed for qualifying as NOR under existing provisions).
Further, an Indian Citizen or Person of Indian origin who is outside India visits India in any year, would be regarded as Resident, even if he stays in India for less than 182 days, but 60 days or more in the relevant tax year and 365 days or more in preceding four tax years, (the extended stay benefit of 181 days shall be removed under DTC).
Under DTC, a person may qualify as Resident on account of removal of NOR concept (whereas he would have become NOR under existing provisions), which would bring assets situated outside India under the ambit of wealth tax. DTC also proposes to levy wealth tax on net wealth in excess of Rs 1 crore as compared to 30 lakhs of existing provisions.
When Vasanth thanked me for briefing him on the above, I could make out that he was quite happy to understand the specific tax provisions governing NRI's which he could have otherwise overlooked.
(Views expressed are personal.)
Fees for technical services rendered outside india but utilised in India - it is deemed to accrue or arise in India - TDS needs to be made
1. Country of Residence:
Country where the person is tax resident under the relevant tax laws of any country is called the country of residence. Tax laws of all countries are different. At times, a taxpayer may be a resident of two countries. In such situations, he has to apply the tiebreaker test to become tax resident of only one country for the purposes of the double tax avoidance agreement (meaning of DTAA is explained in point no.11 & tie breaker tests can be seen in Article 4 Resident
of any DTAA ).
2. Country of Source:
Country where the person earns income or where the income accrues or arises is the country of source. In International Taxation parlance, it is the country where that person has done the value addition. Where the value addition is done is a big controversy in itself!
3. Country of Payment:
Country from which the person makes the payment is called the country of payment. Country of Source may not be the same as country of payment. Also, country of market / consumption may or may not be the same as country of payment.
4. Country of Market / Consumption:
Country where the actual consumption takes place is called the country of market consumption. Here also, country of source & country of payment may not be same as country of market / consumption.
5. Tax Base:
There has to be a tax base for Government of different countries to charge tax. There can only 2 bases for levy of income-tax:
1. Residence.
2. Income.
For the levy of income-tax, Indian Government can tax the global income of Indian tax residents or the Indian accrued income of tax non-residents of India. Governments cannot tax foreign sourced income of non-residents. Prima facie they have no right to levy income-tax on foreign sourced income of non-residents. There has to be a nexus between the country & its residents or the country & income sourced in that country. Unless & until, there is a nexus between any one of the two, Governments do not have a base/ jurisdiction for taxation.
6. Permanent Establishment (PE):
Sec. 92 F provides an inclusive definition of Permanent Establishment. The section says, "It includes fixed place of business through which the business of the enterprise is wholly or partly carried out." Article 5 of OECD & UN model conventions also provide for an inclusive definition of the term permanent establishment i.e. "it includes a place of management, a branch, an
office, a factory, a workshop and ….."
Attribution of profits to PE:
This is a major controversy in International Taxation i.e. How to attribute the profits to a permanent establishment? The international consensus has been that the profits should be attributed to a PE on the basis of the "separate enterprise" concept, and the application of the arm's length principle. This is currently encapsulated in Article 7(1) and (2) of the OECD Model Tax Convention as follows:
"(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.
(2) Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment."
This means that PE should be hypothesized as separate unit. Accordingly, functions, risks, assets, capital employed, etc. should also be attributed to the Permanent Establishment for attributing profits to PE. Governments cannot tax the business income of a non-resident in absence of a Permanent Establishment.
7. Business Connection:
Sec. 9 (i) explains business connection. It says it includes "any business activity carried out through a person who, acting on behalf of the non-resident-
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise or the non-resident ; or
(b) 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
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident :
Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an 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 (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal nonresident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.
Explanation 3— Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India. " For better understanding of business connection & permanent establishment, kindly refer:
1. CIT v. R. D. Aggarwal & Co., 56 ITR 20 (1965) SC
2. Circular No. 1 of 2004 dated January 2, 2004.
3. Circular No. 23 of 1969 dated 23rd July, 1969.
4. Circular No. 5 of 2004 dated 28th September, 2004.
8. Associated Enterprises:
Sec. 92A subsection (1) provides for the meaning of Associates Enterprises. Sub-section (2) lists out the possible situations in which two enterprises will become associated enterprises. Article 9 of OECD & UN model conventions also provide for the meaning & situations in which two entities will become associated enterprises. Identification of associated enterprises is very important for applicability of transfer pricing provisions.
9. Arm's Length Price - Transfer Pricing Methods:
Sec. 92 (1) says "any income arising from an international transaction (sec. 92B) i.e. a transaction between two or more associated enterprises, either or both of whom are nonresidents shall be computed having regard to the arm's length price." Sec. 92 C (1) read with rule 10 B provides for the methods to be used for computation of arm's length price. The Board has prescribed following 5 methods for calculation of arm's length price:
(a) comparable uncontrolled method,
(b) resale price method,
(c) cost plus method,
(d) profit split method,
(e) Transactional net margin method.
Transfer pricing refers to the price at which an associated enterprise of one country enters into a financial transaction with other associated enterprise of different country. The arm's length price is determined with the use of comparables. One has to calculate the arm's length price with regard to several factors like capital employed, risk undertaken, assets used by the associated enterprise, functions undertaken, etc. Practically, it is very difficult to calculate the arm's length price. One has to use the most appropriate method out of the CBDT prescribed methods.
11. Categorisation of Income:
Since different incomes will have different ways of determining the location of source; different categories have been listed. For e.g.: royalty, interest, dividend, fees for technical services, rental income, etc. Under the DTA, it is necessary to determine the country of source of income. Since different incomes will have different ways of determining the country of source; different categories are useful to determine the source. The house property income is sourced in
the country where the property is situated. The dividend income is sourced where the company distributing the dividend is resident. Salary income is taxable where services are performed. Thus for determining the location or the country of source, the categorisation is useful. Under the domestic law, categorisation is useful for computation. Different categories of
income may have different computation provisions.
12. Authority for Advance Ruling:
Sec. 245 N defines an advance ruling. Authority for Advance Ruling is a quasi judicial authority that helps the non-resident to know his taxability in India relating to a financial transaction in advance. This helps in avoiding controversies & litigation at a later stage i.e. after the financial transaction is undertaken. In the past, AAR has given several rulings. Unfortunately, with due respect, these rulings have put precedents that differ from the Tribunal, High Court or the Supreme Court decisions.
13. Tax Heavens:
A tax heaven is a country which does not charge tax to its residents or charges lower rates of tax. These countries sign the DTAAs with other countries in such a way, that there may not be any tax payable by the assessee in any country. Therefore, a lot many number of companies structure their investments so that they are outside the purview of any tax jurisdiction. Countries like Isle of Man, Cayman Islands, Mauritius, Cyprus, Malta, Singapore, etc. are
examples such tax heavens.
14. Treaty Abuse or Treaty Shopping:
Treaty shopping is nothing but shopping of the DTAA. Companies may take the benefit of the most beneficial DTAA. Generally, a treaty shopping arises when a resident of a State other than Contracting States of a tax treaty attempts to capitalize on benefits of the treaty by setting up a company with no economic substance or conducting a bogus transaction. A good example of treaty shopping is that of Malaysia-Korea, India- Mauritius, etc. Treaty shopping can occur in the following two ways:
1) A taxpayer of a country that has no treaty with the a particular country say India seeks the coverage of a favorable treaty, or
2) A taxpayer of India treaty partner prefers the treaty of another country.
15. Round Tripping:
Round tripping is the act of moving your funds outside the country & then channelising them back in the country to change the actual character of funds. Funds earned through illegal sources, etc. may be sent abroad & reinvested in the same country as legal funds. Companies use round tripping for changing the character of domestic funds into foreign funds or illegal funds into legal funds.
16. Hybrid Entities:
Hybrid entities are the different forms of entities. Say, for example, India gives the status of the firm as a tax resident. It axes the firm on its income & the income of the firm is exempt in the hands of the partners. In some countries, taxation is transparent i.e. it may not tax the income of the firm in the hands of the firm but it may tax the partners individually on income earned through the firm. There are also several other entities like US LLP, UK LLP, Dutch CV, German KG * Co., trust, partnership, co-operative societies, venture capital funds & collective investment vehicles, etc.; taxation of which may be separate in separate countries. This may give rise to conflict in classification of cross border scenario. Hybrid entities may also give rise to complication in application of treaty provisions.
18. Underlying Tax Credit:
Credit is available in residence country for taxes paid by subsidiaries of companies in foreign countries. The above can be explained with the help of following example:
Say, for e.g.: Company A in India has a wholly owned subsidiary in a foreign country. During the year, foreign subsidiary earns a profit of $ 1,000. Assuming tax rate in foreign country is 35 %, foreign subsidiary is liable to pay $ 350 in foreign country itself & shall remit the balance $ 650 in India. Foreign subsidiary will also have to pay a dividend distribution tax on this, say 15 % i.e. $ 97.5 on $ 650.
In India, Co. A will be taxed on its overseas subsidiary's profit. Since corporate taxes in India is, say we assume 30 %, then this translates to a tax of $ 300. But since a tax greater than this has been paid in the foreign country, no taxes are paid in India. In effect, Co. A has paid a tax of 44.75 % ($ 350 + $ 97.50) & tax credits of $ 147.5 is lost. Pooling of foreign tax credits:
If however India would have permitted pooling of foreign tax credit, then even $ 147.5 would have been available as credit. Many international treaties signed provide for underlying & pooling tax credits.
19. Non-Discrimination Clause:
Article 24 of OECD & UN Model Convention provide for subjecting the residents of one country to taxation & requirement connected therewith in other country similar to that of the residents of that other country i.e. the taxation & connected requirements should not be more burdensome than subjected to residents of that other country.
20. Limitation of Benefits:
Many persons were using the provisions of treaties to their own benefits. Some persons have even misused the treaty provisions by forming conduit, shelf, offshore companies or SPVs i.e. Special Purpose Vehicles.
Limitations on benefits provisions generally prohibit third country residents from
misusing treaty benefits. For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the treaty country.
Article 23 of the UK - USA treaty provides for limitation of benefits clause.
Recently Indo- Singapore treaty was amended to insert the limited version of limitation of benefits clause. Indian tax authorities are also trying to re-negotiate tax treaties with UAE, Cyprus, Mauritius to insert this limitation of benefits clause.
21. Mutual Agreement Procedure (MAP):
Article 25 of the OECD & UN Model Convention state that where a person considers that the actions of his domestic country or the other country shall result in taxation not in accordance with the treaty provisions, irrespective of the remedies provided by the domestic law of those states, he can present his case to the competent authority in the country of his residence. The competent authority of residence country shall verify the arguments stated whether the arguments are justified & if the case of unable to arrive at a satisfactory solution as regards elimination of the double taxation or interpretation of tax treaty, competent authorities of both the countries shall resolve the difficulties by mutual agreement.
22 Advanced Pricing Arrangements (APA):
An APA is an arrangement between a taxpayer and the tax authority wherein the method of determining the transfer pricing for inter-company transactions are set out in advance. Such programmes are designed to resolve actual or potential transfer pricing disputes in a cooperative manner. The tax payer must submit a formal APA application, tax authorities shall review & evaluate the proposal & then negotiate and execute the APA. An APA:
provides your business with certainty on an appropriate transfer pricing methodology, enhancing the predictability of tax treatment of your international dealings, substantially reduces or eliminates the possibility of double taxation in the future, provides a possible solution to situations where there is no realistic alternative way of both avoiding double taxation and ensuring that all profits are correctly attributed and taxed, limits the prospect of a potentially costly and time-consuming examination of major transfer pricing issues that would arise in the event of a transfer pricing audit, and lessens the possibility of protracted and expensive litigation, places your business in a better position to predict costs and expenses, including tax liabilities, reduces the record keeping burden on your business as you know in advance what records you are required to keep to substantiate the agreed methodology, and reduces your business costs, as no fee is charged for the APA.
24. Force of Attraction rule:
Normally, business profits are taxed in the country of residence except when the entity functions or performs business in the other country with the help of a dependent agent or a permanent establishment. In such cases, income attributable to the permanent establishment is taxed in the country of source. The Contracting States will attribute to a permanent establishment the profits that it would have earned had it been an independent enterprise engaged in the same or similar activities under the same or similar circumstances. As the name suggests, the force of attraction approach focuses on the actual economic connection between a particular item of income and the permanent
establishment. Under the "force of attraction" approach, all domestic sourced income is attributed to the permanent establishment, irrespective of whether the relevant item of income is in fact economically connected with the activity of such a permanent establishment.
25. Controlled Foreign Corporations (CFC) rules:
Income from a foreign source is taxed usually after it is accrued or received as income in the country of residence of the taxpayer. The use of intermediary entities in a tax-free or low-tax jurisdiction enables a tax resident to defer (or avoid) the domestic tax on the income until it is repatriated to the residence state. This tax deferral could lead to an unjustifiable loss of domestic tax revenue. A CFC is a legal entity that exists in one jurisdiction but is owned or controlled primarily by taxpayers of a different jurisdiction. CFC laws can be introduced to stop tax evasion through the use of offshore companies in
low-tax or no-tax jurisdictions such as tax havens. It is rarely illegal to have a financial or controlling interest in a foreign legal entity; however, many governments require taxpayers to declare their interests and pay taxes on them, and CFC laws (combined with a no-tax jurisdiction or a double taxation agreement) sometimes mean that a company is only taxed in one jurisdiction. The CFC rules are designed to stop companies avoiding tax in residence country by diverting income to subsidiaries situated in low tax regimes.
Important sections in the Indian Income-tax Act:
Taxation of Foreign Income in India
Determination of Residential status:
Residential status of a person is a big factor for the determination of taxability of foreign income.Residential status can be determined by the number of days you are in India during previous year.
Resident:
An individual is resident in the previous year if he fulfills following conditions:
1. He has been in India for 182 days or more days during the previous year. OR
2. He has been in India for 60 days or more during the previous year and 365 days or more during the last 4 years preceding the previous year.
Exemption:
Only condition 1 will be applicable in following cases:
1. Person of Indian origion who resides outside India and come to India on a visit in previous year.
2. Indian citizen who go outside india during previous year for employment purpose or as a crew member.
3. When employee is transferred outside India. In all these cases, a person shall be considered resident if he has been in India for 182 days or more.
Non Resident:
If an individual does not fulfill above conditions, he is non resident for taxation purpose.
For resident, Indian and foreign income is taxable. That’s why you have to plan your visit to India or outside India accordingly. If you are included in above three category, stay in India for 181 days or less so that your foreign income will not become taxable.
Example:
Mr. Robot has in India for 51 days during the financial year 2013-14. He went to U.S. on May 21, 2013. He never went outside india before.
Residential status: Resident.
Though he has been in India for less than 60 days during previous year, he has been in India for more than 365 days during 4 last years (from 2009-10 to 2012-13) from previous year.
In above case, if Mr. Robot has visited India for first time and he has been in India for 51 days, his residential status will be Non resident.
Resident and ordinary resident: An individual is resident and ordinary resident if he fulfills above conditions and he also fulfills below mentioned conditions:
1. He has been resident in India for at least 1 year out of 10 preceding previous years and
2. He has been in India for 730 days or more during 7 preceding previous years.
Resident but not ordinary resident:
If an individual does not fulfill additional conditions mentioned above, he is resident but not ordinary resident.
Income treatment in various cases
Income
|
ordinary resident
|
Resident but not ordinary resident
|
Non resident
|
Accrued and received in India (indian Income)
|
Taxable
|
Taxable
|
Taxable
|
Accrued in India (indian income)
|
Taxable
|
Taxable
|
Taxable
|
Received in India (indian income)
|
Taxable
|
Taxable
|
Taxable
|
Income is neighter accrued nor received in India (foreign income)
|
Taxable
|
Taxable only if business is controlled wholly or partly in India or profession is set up in India
|
Non taxable
|
Now if your foreign income is taxable, you have to calculate tax on that income and pay to government.
If there is any DTAA exists between India and country you visited, you can get exemption as per DTAA agreement or pay tax as per agreement.
If there is no DTAA, you can still claim exemption u/s 91.
You can take benefit of section 91 if you are resident and you have paid tax in foreign for income received during previous year.
Steps for claiming section 91 benefit:
1. Calculate gross income including foreign income.
2. Reduce it with deduction under chapter VI-A.
3. Calculate income tax payable
4. Find average rate of income tax. Average rate=Total tax/total income
5. Calculate average foreign tax rate
6. Claim rebate from tax payable in India at the rate of step 4 or step 5 whichever is lower.
Example:
Pranay is resident individual.Pranay has earned Rs. 2000000 from outside India during financial year 2013-14. His Indian income is Rs. 300000. Pranay is 32 year old. There is not DTAA between India and foreign country. Pranay has paid 20% tax in foreign country. His investment in LIC is Rs. 100000.
Calculation of tax payable by Pranay in India.
Step
|
Particulars
|
Amount
|
Indian income
|
3,00,000
| |
Foreign income
|
20,00,000
| |
1
|
Gross total income
|
23,00,000
|
2
|
Deduction under chapter VI-A
|
1,00,000
|
Total income
|
22,00,000
| |
3
|
Tax payable as per indian law
|
5,04,700
|
4
|
Average rate of income
|
22.94%
|
5
|
foreign tax rate
|
20%
|
6
|
Rebate/s 91 u at 20%
|
4,00,000
|
Tax payable after rebate
|
1,04,700
|
Income deemed to Accrue or Arise in India
Fees for technical services rendered outside india but utilised in India - it is deemed to accrue or arise in India - TDS needs to be made
FEES FOR TECHNICAL SERVICES - SECTION 9(1)(vii)
Section 9(1)(vii) provides that fees for technical services is deemed to accrue or arise in India in case it is payable by
- the Government both Central or State
- resident person except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India
- a non resident where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purpose of making or earning any income from any source in India
Iit may be noted that the section provides for services utilised and not the place of rendering of services. Therefore, in both the clauses if the information is used or services are utilised in India will be chargeable to tax irrespective of the fact that information or services are rendered outside India or some preparatory work has been done outside India or patent etc. have been delivered outside India.
Double Tax Avoidance Agreement
Country where the person is tax resident under the relevant tax laws of any country is called the country of residence. Tax laws of all countries are different. At times, a taxpayer may be a resident of two countries. In such situations, he has to apply the tiebreaker test to become tax resident of only one country for the purposes of the double tax avoidance agreement (meaning of DTAA is explained in point no.11 & tie breaker tests can be seen in Article 4 Resident
of any DTAA ).
2. Country of Source:
Country where the person earns income or where the income accrues or arises is the country of source. In International Taxation parlance, it is the country where that person has done the value addition. Where the value addition is done is a big controversy in itself!
3. Country of Payment:
Country from which the person makes the payment is called the country of payment. Country of Source may not be the same as country of payment. Also, country of market / consumption may or may not be the same as country of payment.
4. Country of Market / Consumption:
Country where the actual consumption takes place is called the country of market consumption. Here also, country of source & country of payment may not be same as country of market / consumption.
5. Tax Base:
There has to be a tax base for Government of different countries to charge tax. There can only 2 bases for levy of income-tax:
1. Residence.
2. Income.
For the levy of income-tax, Indian Government can tax the global income of Indian tax residents or the Indian accrued income of tax non-residents of India. Governments cannot tax foreign sourced income of non-residents. Prima facie they have no right to levy income-tax on foreign sourced income of non-residents. There has to be a nexus between the country & its residents or the country & income sourced in that country. Unless & until, there is a nexus between any one of the two, Governments do not have a base/ jurisdiction for taxation.
6. Permanent Establishment (PE):
Sec. 92 F provides an inclusive definition of Permanent Establishment. The section says, "It includes fixed place of business through which the business of the enterprise is wholly or partly carried out." Article 5 of OECD & UN model conventions also provide for an inclusive definition of the term permanent establishment i.e. "it includes a place of management, a branch, an
office, a factory, a workshop and ….."
Attribution of profits to PE:
This is a major controversy in International Taxation i.e. How to attribute the profits to a permanent establishment? The international consensus has been that the profits should be attributed to a PE on the basis of the "separate enterprise" concept, and the application of the arm's length principle. This is currently encapsulated in Article 7(1) and (2) of the OECD Model Tax Convention as follows:
"(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.
(2) Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment."
This means that PE should be hypothesized as separate unit. Accordingly, functions, risks, assets, capital employed, etc. should also be attributed to the Permanent Establishment for attributing profits to PE. Governments cannot tax the business income of a non-resident in absence of a Permanent Establishment.
7. Business Connection:
Sec. 9 (i) explains business connection. It says it includes "any business activity carried out through a person who, acting on behalf of the non-resident-
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise or the non-resident ; or
(b) 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
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident :
Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an 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 (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal nonresident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.
Explanation 3— Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India. " For better understanding of business connection & permanent establishment, kindly refer:
1. CIT v. R. D. Aggarwal & Co., 56 ITR 20 (1965) SC
2. Circular No. 1 of 2004 dated January 2, 2004.
3. Circular No. 23 of 1969 dated 23rd July, 1969.
4. Circular No. 5 of 2004 dated 28th September, 2004.
8. Associated Enterprises:
Sec. 92A subsection (1) provides for the meaning of Associates Enterprises. Sub-section (2) lists out the possible situations in which two enterprises will become associated enterprises. Article 9 of OECD & UN model conventions also provide for the meaning & situations in which two entities will become associated enterprises. Identification of associated enterprises is very important for applicability of transfer pricing provisions.
9. Arm's Length Price - Transfer Pricing Methods:
Sec. 92 (1) says "any income arising from an international transaction (sec. 92B) i.e. a transaction between two or more associated enterprises, either or both of whom are nonresidents shall be computed having regard to the arm's length price." Sec. 92 C (1) read with rule 10 B provides for the methods to be used for computation of arm's length price. The Board has prescribed following 5 methods for calculation of arm's length price:
(a) comparable uncontrolled method,
(b) resale price method,
(c) cost plus method,
(d) profit split method,
(e) Transactional net margin method.
Transfer pricing refers to the price at which an associated enterprise of one country enters into a financial transaction with other associated enterprise of different country. The arm's length price is determined with the use of comparables. One has to calculate the arm's length price with regard to several factors like capital employed, risk undertaken, assets used by the associated enterprise, functions undertaken, etc. Practically, it is very difficult to calculate the arm's length price. One has to use the most appropriate method out of the CBDT prescribed methods.
10. Double Tax Avoidance Agreements (DTAA):
Sec. 90 (1) gives power to the Government to enter into an agreement with the
Government of any country outside India for granting relief in respect of double taxation, promotion of mutual economic relations, trade & investment, for the avoidance of double taxation, for exchange of information & for recovery of taxes.
Sec. 90 (2) states that provisions of Indian Income-tax or DTAA whichever is more beneficial to the assessee will apply i.e. in DTAA can even override the provisions of Indian Income Tax Act. Tax treaties are signed for sharing of tax between the country of residence & country of source. Mr. Ankur Nishar, in his article on International Taxation in the May, 2007 newsletter has very rightly explained the concept of double taxation & DTAAs. So, I would not elaborate on this aspect.
Sec. 90 (1) gives power to the Government to enter into an agreement with the
Government of any country outside India for granting relief in respect of double taxation, promotion of mutual economic relations, trade & investment, for the avoidance of double taxation, for exchange of information & for recovery of taxes.
Sec. 90 (2) states that provisions of Indian Income-tax or DTAA whichever is more beneficial to the assessee will apply i.e. in DTAA can even override the provisions of Indian Income Tax Act. Tax treaties are signed for sharing of tax between the country of residence & country of source. Mr. Ankur Nishar, in his article on International Taxation in the May, 2007 newsletter has very rightly explained the concept of double taxation & DTAAs. So, I would not elaborate on this aspect.
11. Categorisation of Income:
Since different incomes will have different ways of determining the location of source; different categories have been listed. For e.g.: royalty, interest, dividend, fees for technical services, rental income, etc. Under the DTA, it is necessary to determine the country of source of income. Since different incomes will have different ways of determining the country of source; different categories are useful to determine the source. The house property income is sourced in
the country where the property is situated. The dividend income is sourced where the company distributing the dividend is resident. Salary income is taxable where services are performed. Thus for determining the location or the country of source, the categorisation is useful. Under the domestic law, categorisation is useful for computation. Different categories of
income may have different computation provisions.
12. Authority for Advance Ruling:
Sec. 245 N defines an advance ruling. Authority for Advance Ruling is a quasi judicial authority that helps the non-resident to know his taxability in India relating to a financial transaction in advance. This helps in avoiding controversies & litigation at a later stage i.e. after the financial transaction is undertaken. In the past, AAR has given several rulings. Unfortunately, with due respect, these rulings have put precedents that differ from the Tribunal, High Court or the Supreme Court decisions.
13. Tax Heavens:
A tax heaven is a country which does not charge tax to its residents or charges lower rates of tax. These countries sign the DTAAs with other countries in such a way, that there may not be any tax payable by the assessee in any country. Therefore, a lot many number of companies structure their investments so that they are outside the purview of any tax jurisdiction. Countries like Isle of Man, Cayman Islands, Mauritius, Cyprus, Malta, Singapore, etc. are
examples such tax heavens.
14. Treaty Abuse or Treaty Shopping:
Treaty shopping is nothing but shopping of the DTAA. Companies may take the benefit of the most beneficial DTAA. Generally, a treaty shopping arises when a resident of a State other than Contracting States of a tax treaty attempts to capitalize on benefits of the treaty by setting up a company with no economic substance or conducting a bogus transaction. A good example of treaty shopping is that of Malaysia-Korea, India- Mauritius, etc. Treaty shopping can occur in the following two ways:
1) A taxpayer of a country that has no treaty with the a particular country say India seeks the coverage of a favorable treaty, or
2) A taxpayer of India treaty partner prefers the treaty of another country.
15. Round Tripping:
Round tripping is the act of moving your funds outside the country & then channelising them back in the country to change the actual character of funds. Funds earned through illegal sources, etc. may be sent abroad & reinvested in the same country as legal funds. Companies use round tripping for changing the character of domestic funds into foreign funds or illegal funds into legal funds.
16. Hybrid Entities:
Hybrid entities are the different forms of entities. Say, for example, India gives the status of the firm as a tax resident. It axes the firm on its income & the income of the firm is exempt in the hands of the partners. In some countries, taxation is transparent i.e. it may not tax the income of the firm in the hands of the firm but it may tax the partners individually on income earned through the firm. There are also several other entities like US LLP, UK LLP, Dutch CV, German KG * Co., trust, partnership, co-operative societies, venture capital funds & collective investment vehicles, etc.; taxation of which may be separate in separate countries. This may give rise to conflict in classification of cross border scenario. Hybrid entities may also give rise to complication in application of treaty provisions.
17. Tax Sparing:
Developing countries often attempt to attract foreign investors with incentives in the form of reduced rates of taxation or, in some cases, the exemption of certain types of income from tax. In order to preserve the resultant investment revenues to the developing country, the country of residence of the investor (that is, the
developed country) "spares" the tax that it would normally impose on the low-taxed or untaxed income earned by its resident abroad by granting foreign tax credits equal to, or possibly greater than, the tax that would otherwise have been exigible in the developing country. Tax sparing is intended to promote economic development among developing nations by ensuring that tax incentives offered to foreign investors by these countries were not eroded through the tax treatment of the income from the advantaged activities in the
investor's country of residence.
Developing countries often attempt to attract foreign investors with incentives in the form of reduced rates of taxation or, in some cases, the exemption of certain types of income from tax. In order to preserve the resultant investment revenues to the developing country, the country of residence of the investor (that is, the
developed country) "spares" the tax that it would normally impose on the low-taxed or untaxed income earned by its resident abroad by granting foreign tax credits equal to, or possibly greater than, the tax that would otherwise have been exigible in the developing country. Tax sparing is intended to promote economic development among developing nations by ensuring that tax incentives offered to foreign investors by these countries were not eroded through the tax treatment of the income from the advantaged activities in the
investor's country of residence.
18. Underlying Tax Credit:
Credit is available in residence country for taxes paid by subsidiaries of companies in foreign countries. The above can be explained with the help of following example:
Say, for e.g.: Company A in India has a wholly owned subsidiary in a foreign country. During the year, foreign subsidiary earns a profit of $ 1,000. Assuming tax rate in foreign country is 35 %, foreign subsidiary is liable to pay $ 350 in foreign country itself & shall remit the balance $ 650 in India. Foreign subsidiary will also have to pay a dividend distribution tax on this, say 15 % i.e. $ 97.5 on $ 650.
In India, Co. A will be taxed on its overseas subsidiary's profit. Since corporate taxes in India is, say we assume 30 %, then this translates to a tax of $ 300. But since a tax greater than this has been paid in the foreign country, no taxes are paid in India. In effect, Co. A has paid a tax of 44.75 % ($ 350 + $ 97.50) & tax credits of $ 147.5 is lost. Pooling of foreign tax credits:
If however India would have permitted pooling of foreign tax credit, then even $ 147.5 would have been available as credit. Many international treaties signed provide for underlying & pooling tax credits.
19. Non-Discrimination Clause:
Article 24 of OECD & UN Model Convention provide for subjecting the residents of one country to taxation & requirement connected therewith in other country similar to that of the residents of that other country i.e. the taxation & connected requirements should not be more burdensome than subjected to residents of that other country.
20. Limitation of Benefits:
Many persons were using the provisions of treaties to their own benefits. Some persons have even misused the treaty provisions by forming conduit, shelf, offshore companies or SPVs i.e. Special Purpose Vehicles.
Limitations on benefits provisions generally prohibit third country residents from
misusing treaty benefits. For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the treaty country.
Article 23 of the UK - USA treaty provides for limitation of benefits clause.
Recently Indo- Singapore treaty was amended to insert the limited version of limitation of benefits clause. Indian tax authorities are also trying to re-negotiate tax treaties with UAE, Cyprus, Mauritius to insert this limitation of benefits clause.
21. Mutual Agreement Procedure (MAP):
Article 25 of the OECD & UN Model Convention state that where a person considers that the actions of his domestic country or the other country shall result in taxation not in accordance with the treaty provisions, irrespective of the remedies provided by the domestic law of those states, he can present his case to the competent authority in the country of his residence. The competent authority of residence country shall verify the arguments stated whether the arguments are justified & if the case of unable to arrive at a satisfactory solution as regards elimination of the double taxation or interpretation of tax treaty, competent authorities of both the countries shall resolve the difficulties by mutual agreement.
22 Advanced Pricing Arrangements (APA):
An APA is an arrangement between a taxpayer and the tax authority wherein the method of determining the transfer pricing for inter-company transactions are set out in advance. Such programmes are designed to resolve actual or potential transfer pricing disputes in a cooperative manner. The tax payer must submit a formal APA application, tax authorities shall review & evaluate the proposal & then negotiate and execute the APA. An APA:
provides your business with certainty on an appropriate transfer pricing methodology, enhancing the predictability of tax treatment of your international dealings, substantially reduces or eliminates the possibility of double taxation in the future, provides a possible solution to situations where there is no realistic alternative way of both avoiding double taxation and ensuring that all profits are correctly attributed and taxed, limits the prospect of a potentially costly and time-consuming examination of major transfer pricing issues that would arise in the event of a transfer pricing audit, and lessens the possibility of protracted and expensive litigation, places your business in a better position to predict costs and expenses, including tax liabilities, reduces the record keeping burden on your business as you know in advance what records you are required to keep to substantiate the agreed methodology, and reduces your business costs, as no fee is charged for the APA.
23. Withholding tax at source:
Withholding tax is additional tax imposed by the country of source when various types of remuneration (dividends, interest, royalties etc.) are paid in favour of non-residents of that country. The principle of a withholding tax is that it is withheld (retained) by the payer and given directly to the taxation authorities. The payee is given only the balance after the withholding tax amount. The primary motivation is to reduce tax evasion or failure to pay.
Withholding tax is additional tax imposed by the country of source when various types of remuneration (dividends, interest, royalties etc.) are paid in favour of non-residents of that country. The principle of a withholding tax is that it is withheld (retained) by the payer and given directly to the taxation authorities. The payee is given only the balance after the withholding tax amount. The primary motivation is to reduce tax evasion or failure to pay.
24. Force of Attraction rule:
Normally, business profits are taxed in the country of residence except when the entity functions or performs business in the other country with the help of a dependent agent or a permanent establishment. In such cases, income attributable to the permanent establishment is taxed in the country of source. The Contracting States will attribute to a permanent establishment the profits that it would have earned had it been an independent enterprise engaged in the same or similar activities under the same or similar circumstances. As the name suggests, the force of attraction approach focuses on the actual economic connection between a particular item of income and the permanent
establishment. Under the "force of attraction" approach, all domestic sourced income is attributed to the permanent establishment, irrespective of whether the relevant item of income is in fact economically connected with the activity of such a permanent establishment.
25. Controlled Foreign Corporations (CFC) rules:
Income from a foreign source is taxed usually after it is accrued or received as income in the country of residence of the taxpayer. The use of intermediary entities in a tax-free or low-tax jurisdiction enables a tax resident to defer (or avoid) the domestic tax on the income until it is repatriated to the residence state. This tax deferral could lead to an unjustifiable loss of domestic tax revenue. A CFC is a legal entity that exists in one jurisdiction but is owned or controlled primarily by taxpayers of a different jurisdiction. CFC laws can be introduced to stop tax evasion through the use of offshore companies in
low-tax or no-tax jurisdictions such as tax havens. It is rarely illegal to have a financial or controlling interest in a foreign legal entity; however, many governments require taxpayers to declare their interests and pay taxes on them, and CFC laws (combined with a no-tax jurisdiction or a double taxation agreement) sometimes mean that a company is only taxed in one jurisdiction. The CFC rules are designed to stop companies avoiding tax in residence country by diverting income to subsidiaries situated in low tax regimes.
Important sections in the Indian Income-tax Act:
Sec. 2 (31) - Definition of a Person.
Sec. 2 (7) - Definition of an Assessee.
Sec. 6 - Conditions of Residence.
Sec. 5 - Scope of Total Income.
Sec. 9 - Income deemed to accrue or arise in India.
Sec. 4 - Charge of Income-tax.
Sec. 90 - Agreement with Foreign Countries.
Sec. 91 - Countries with which no agreement exists.
Sec. 92 - Computation of income from international transaction having regard to arms length price.
Sec. 92A - Meaning of Associated Enterprise.
Sec. 92 B - Meaning of International Transaction.
Sec. 92C - Computation of Arms Length Price.
Sec. 92D - Reference to Transfer Pricing Officer.
Sec. 93 - Avoidance of income-tax by transactions resulting in transfer of income tonon-residents.
Secs. 115 A-F - Provisions relating to non-residents.
Apart from these important sections, students must not forget to study the other relevant sections also.
Sec. 2 (7) - Definition of an Assessee.
Sec. 6 - Conditions of Residence.
Sec. 5 - Scope of Total Income.
Sec. 9 - Income deemed to accrue or arise in India.
Sec. 4 - Charge of Income-tax.
Sec. 90 - Agreement with Foreign Countries.
Sec. 91 - Countries with which no agreement exists.
Sec. 92 - Computation of income from international transaction having regard to arms length price.
Sec. 92A - Meaning of Associated Enterprise.
Sec. 92 B - Meaning of International Transaction.
Sec. 92C - Computation of Arms Length Price.
Sec. 92D - Reference to Transfer Pricing Officer.
Sec. 93 - Avoidance of income-tax by transactions resulting in transfer of income tonon-residents.
Secs. 115 A-F - Provisions relating to non-residents.
Apart from these important sections, students must not forget to study the other relevant sections also.
'Business connection' to include SEP
The implementation of the concept of 'Significant Economic Presence' (SEP) in the Indian Income tax law is yet another landmark step taken by the Indian tax authority in their tryst to lay claim to what they feel is their fair share of the burgeoning revenues of technology companies such as Amazon, Netflix, Google, Microsoft – most of whom are located overseas.
Indian lawmakers have created scenarios where such foreign corporations are deemed to have "business connection" in India, thus bringing their Indian operations within the ambit of the Indian tax system. In the Finance Act, 2018, the Indian income tax law was amended to widen the scope of the existing term 'business connection' to include SEP
What is SEP?
SEP was defined to mean, inter-alia, transaction of goods and services with any person in India, including provision of download of data or software in India, if one of two conditions are satisfied:
(1) the aggregate of payments arising from such transactions exceeds a specified limit, or
(2) the engagement with Indian consumers exceeds a specified number.
To be fair on its part, India did wait for a couple of years to specify what those numbers were, so as to activate the provision. The official position was to let a consensus develop (lest trade disputes should arise) amongst OECD nations (where most of the tech-giants are headquartered), which was to come by end of December 2020. But that didn't come by.
So, India went ahead and specified the threshold limits in May 2021 (effective April 1, 2021) to operationalise the SEP for non-resident e-commerce companies by including 'download of data or software' worth revenues exceeding ₹2 crore from Indians or a threshold of 3 lakh number of Indian users with whom such companies 'solicit systematic and continuous business activities or engage in interaction'.
Points of interest
The first is that how will the Indian taxman implement the concept in practice? How will the data required be gathered? And even if it is gathered, how will the same be verified?
Most of the terms used in defining SEP for services have not been defined. For instance, how do you define systematic and continuous soliciting of business or engaging in interactions? The biggest legal stumbling blocks that I envisage are the heralding of protracted litigation given the grey areas in interpretation and the (in)ability of the Indian regime to enforce tax collection from non-resident tech corporates.
The second legal point that merits attention notice is that whilst India has amended the domestic law for SEP, the bilateral double taxation avoidance treaties that India has signed remain unaltered. Until such a time, taxing the foreign tech giants in India could still be a mirage. But, the legal significance of India's action is to convey an important message to stakeholders – India is getting impatient and wants this vexed tax issue to be addressed soon. Are the stakeholders listening?
(The author is Partner, Bhuta Shah & Co. LLP, a tax consultancy)
Repatriation of funds outside india, on sale of property by NRI
Repatriation of the Principal Amount invested while purchasing the property:
1. Funds brought into India through banking channels: Funds held in any overseas account and brought in India via bank transfer to make payment for the purchase is one aspect of 'principal amount'. Another could be through funds already parked in his NRE (Non-resident external) account, which, via drawing to a cheque can be paid to the seller and will be considered in the principal amount. This principal invested can be repatriated back to his foreign country in the foreign currency without any restrictions and permission from RBI. This also does not have any upper cap on the amount. However, this is applicable for a maximum number of 2 residential properties plus an unlimited number of commercial properties in the lifetime of the NRI buyer.
Restriction: From the 3rd property onwards, even this principal portion has to be deposited in an NRO(Non Resident Ordinary) account of the NRI, from which a maximum of USD 1 Million (approx Rs.6 crores) can be repatriated per financial year to the overseas bank account.
2. Property is purchased entirely with funds lying in NRO account in India: the complete sale proceeds(both principal and profits) must first be deposited in an NRO account and then a maximum amount of USD 1 Mn can be repatriated out of that sum, per financial year.
3. It's a combination of 1 and 2, i.e., some funds lying in NRO account and fresh foreign currency remitted from abroad or from balances existing in NRE/FCNR accounts: then the respective rules explained above apply in proportion of funds invested. It means, the principal invested out of the NRO account can be repatriated only to the extent of USD 1 Mn per annum and the principal invested from external sources or NRE/FCNR funds can be repatriated completely without any limit at one go initially(but subject to same restriction on number of residential properties as explained earlier).
A qualified chartered accountant needs to certify the amounts initially invested in the property during purchase, which can be substantiated with the bank statement reflecting those transactions.
The Short and Long term capital gains tax matter also need to be understood from your chartered accountant and then only an NRI investor can decide a crucial thing- when to sell the property and save maximum.
Indian Income taxes applicable are also to be noted. Taxation in the foreign country on the amount invested in India also requires special notation.
1. Funds brought into India through banking channels: Funds held in any overseas account and brought in India via bank transfer to make payment for the purchase is one aspect of 'principal amount'. Another could be through funds already parked in his NRE (Non-resident external) account, which, via drawing to a cheque can be paid to the seller and will be considered in the principal amount. This principal invested can be repatriated back to his foreign country in the foreign currency without any restrictions and permission from RBI. This also does not have any upper cap on the amount. However, this is applicable for a maximum number of 2 residential properties plus an unlimited number of commercial properties in the lifetime of the NRI buyer.
Restriction: From the 3rd property onwards, even this principal portion has to be deposited in an NRO(Non Resident Ordinary) account of the NRI, from which a maximum of USD 1 Million (approx Rs.6 crores) can be repatriated per financial year to the overseas bank account.
2. Property is purchased entirely with funds lying in NRO account in India: the complete sale proceeds(both principal and profits) must first be deposited in an NRO account and then a maximum amount of USD 1 Mn can be repatriated out of that sum, per financial year.
3. It's a combination of 1 and 2, i.e., some funds lying in NRO account and fresh foreign currency remitted from abroad or from balances existing in NRE/FCNR accounts: then the respective rules explained above apply in proportion of funds invested. It means, the principal invested out of the NRO account can be repatriated only to the extent of USD 1 Mn per annum and the principal invested from external sources or NRE/FCNR funds can be repatriated completely without any limit at one go initially(but subject to same restriction on number of residential properties as explained earlier).
A qualified chartered accountant needs to certify the amounts initially invested in the property during purchase, which can be substantiated with the bank statement reflecting those transactions.
The Short and Long term capital gains tax matter also need to be understood from your chartered accountant and then only an NRI investor can decide a crucial thing- when to sell the property and save maximum.
Indian Income taxes applicable are also to be noted. Taxation in the foreign country on the amount invested in India also requires special notation.
CASE LAWS
Amarchand & Mangaldas & Suresh A Shroff & Co Vs ACIT (ITAT Mumbai)
uniformity of interpretation in the treaty -
On the subject uniformity of interpretation in the treaty partner jurisdictions, Lord Denning, in the case of Corocraft, said: “If such be the view of the American Courts, we surely should take the same view. This convention should be given the same meaning throughout all the countries who were parties to it” (1 Q.B. 616). The importance of uniformity of interpretation of expressions which are used in global treaty networks can thus hardly be overemphasized. As was said in the Federal Court in Canadian Pacific Ltd. v. Queen 76 DTC 6120 at p. 6135) in interpreting the 1942 Canada-US Treaty, “While it is true that this Court has the right to interpret the Canada-US Tax Convention and Protocol itself and is no way bound by the interpretation given to it by the United States Treasury, the result would be unfortunate if it were interpreted differently in the two countries when this would lead to double taxation. Unless, therefore, it can be concluded that the interpretation given in the United States is manifestly erroneous it is not desirable to reach a different conclusion,f and I find no compelling reason for doing so.” That situation is to be best avoided, and it can only be so avoided when unless the view of the treaty partner jurisdiction is wholly unreasonable or, to borrow the words of Canadian Federal Court, “manifestly erroneous,” it should be adopted, at least in respect of that transaction, by the other treaty partner as well. Here is a case in which not only the source country jurisdiction has taken the view that the legal fees received by the assessee are taxable under article 12 of the Indo Japan tax treaty, but, as discernable from the facts as recorded by the authorities below, the Japanese tax authorities have consciously taken a call rejecting the plea of the assessee for non-taxation, and even proceeded against the assessee’s Japanese clients for interest and penalties for non-deduction of tax at source from the payments in question. This view, in the light of the detailed reasons set out above, is a reasonable view in the context of Indo Japan tax treaty and, at the minimum, not a ‘manifestly erroneous.’ It is noteworthy that in the OECD Model Conventions Commentaries, which are judicially held to be in the nature of contemporanea expositio in India and which our Hon’ble Courts above have referred to, with a great degree to respect and approval, from to time in taking calls on the provisions relating to the tax treaties, also it is stated, as we have noted earlier as well, that “Article 23 A and Article 23 B, however, do not require that the State of residence eliminate double taxation in “all cases ” where the State of source has imposed its tax by applying to an item of income a provision of the Convention that is different from that which the State of residence considers to be applicable” [Emphasis, by underlining, supplied by us]. Therefore, it was a position well visualized by the multilateral bodies, developing the treaty provision in question, that in all the cases in which the interpretation of the residence country about the applicability of a treaty provision is not the same as that of the source jurisdiction about that provision, and yet the source country has levied taxes- whether directly or by way of tax withholding, the tax credit cannot be declined. To put a question to ourselves, what could possibly be the situations in which views of the source and residence jurisdictions may differ about the applicability of a treaty taxation provision, and yet the residence country could still provide the related tax credits. In our humble understanding, for the detailed reasons set out above, these are the cases in which the treaty partner source jurisdiction has taken a reasonable bonafide view which is not manifestly erroneous- even though it is not the same as is the view taken by the residence jurisdiction. That aspect alone, however, is not the sole determinative factor in the present context since we have already held that, on the peculiarities of Indo Japanese tax treaty provisions, the legal fees paid to a partnership firm of lawyers can indeed be subjected to levy of tax under article 12 as the exclusion clause under article 12(4) does not get triggered for payments to persons other than individuals, and the provisions of article 14 are required to be read in harmony with the provisions of article 12(4).
11. In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on the 18th day of December, 2020.
AIRCOM
S. 9(1) : Income deemed to accrue or arise in India- Business connection-Royalty-Deduction at source. [S. 9(1)(vi),40(a)(i), 195]
Assesseempany entered into an agreement with 'F', a foreign firm, to provide investment advice for investments to be carried outside India. AO held that payment made by assessee to 'F' were in nature of royalty. Tribunal held that in assessee's own case for earlier assessment year, it was held that said payment could not be treated as royalty as it did not include any information provided in course of advisory services and further, since services were rendered abroad, no part of income had accrued or arise in India and no tax would be deducted. Following said decision, assessee would not be liable to deduct tax on said payment made. (AY. 2009-10, 2010-11)
ACIT .v. Sundaram Asset Management Co. Ltd. (2014) 52 taxmann.com 466 / (2015) 67 SOT 67 (URO)(Chennai)(Trib.)
S. 9(1)(i) : Income deemed to accrue or arise in India-Concept of “source rule” vs. "residence rule" explained. Definition of expression "fees for technical services" in s. 9(1)(vii) explained with reference to "consultancy" services.[S.9(1)(vii)]
The assessee paid fees to a non-resident (NRC). The obligation of the NRC was to: (i) Develop comprehensive financial model to tie-up the rupee and foreign currency loan requirements of the project.(ii) Assist expert credit agencies world-wide and obtain commercial bank support on the most competitive terms. (iii) Assist the appellant company in loan negotiations and documentation with the lenders. The assessee claimed that as the fees were paid for services rendered outside India, the same were not chargeable to tax in India and that the assessee was under no obligation to deduct TDS u/s
195. However, the AO and CIT rejected the claim of the assessee. The High Court (228 ITR 564) held that the said payment was not assessable u/s 9(1)(i) but that it was assessable u/s 9(1)(vii). The assessee claimed that s. 9(1)(vii) was constitutionally invalid as it taxed extra-territorial transactions. However, this claim was rejected by the Constitution Bench of the Supreme Court in 332 ITR 130. On merits, the matter was remanded to the Division Bench of the Supreme Court. HELD by the Division Bench dismissing the appeal:
(i) Re S. 9(1)(i): The NRC is a Non-Resident Company and it does not have a place of business in India. The revenue has not advanced a case that the income had actually arisen or received by the NRC in India. The High Court has recorded the payment or receipt paid by the appellant to the NRC as success fee would not be taxable under Section 9(1)(i) of the Act as the transaction/activity did not have any business connection. The conclusion of the High Court in this regard is absolutely defensible in view of the principles stated in C.I.T. v. Aggarwal and Company 56 ITR 20,C.I.T. v. TRC 166 ITR 1993 and Birendra Prasad Rai v. ITC 129 ITR 295;
(ii) Re S. 9(1)(vii): The principal provision is Clause (b) of Section 9(1)(vii) of the Act. The said provision carves out an exception. The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilized for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside India.
(iii) Re “Source Rule” in s. 9(1)(vii): On a studied scrutiny of the said Clause (b) of Section 9(1)(vii), it becomes clear that it lays down the principle what is basically known as the “source rule”, that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The Clause further mandates and requires that the services should be utilized in India.
(iv) Re “Source Rule” vs. “Residence Rule”: The two principles, namely, “Situs of residence” and “Situs of source of income” have witnessed divergence and difference in the field of international taxation. The principle “Residence State Taxation” gives primacy to the country of the residency of the assessee. This principle postulates taxation of world-wide income and world-wide capital in the country of residence of the natural or juridical person. The “Source State Taxation” rule confers primacy to right to tax to a particular income or transaction to the State/nation where the source of the said income is located. The second rule, as is understood, is transaction specific. To elaborate, the source State seeks to tax the transaction or capital within its territory even when the income benefits belongs to a non-residence person, that is, a person resident in another country. The aforesaid principle sometimes is given a different name, that is, the territorial principle. It is apt to state here that the residence based taxation is perceived as benefiting the developed or capital exporting countries whereas the source based taxation protects and is regarded as more beneficial to capital importing countries, that is, developing nations. Here comes the principle of nexus, for the nexus of the right to tax is in the source rule. It is founded on the right of a country to tax the income earned from a source located in the said State, irrespective of the country of the residence of the recipient. It is well settled that the source based taxation is accepted and applied in international taxation law.
(v) 
Re meaning of the expression, managerial, technical or consultancy service in s. 9(1)(vii): The expression “managerial, technical or consultancy service” have not been defined in the Act, and, therefore, it is obligatory on our part to examine how the said expressions are used and understood by the persons engaged in business. The general and common usage of the said words has to be understood at common parlance. By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it. The word “consultancy” has been defined in the Dictionary as “the work or position of a consultant; a
Re meaning of the expression, managerial, technical or consultancy service in s. 9(1)(vii): The expression “managerial, technical or consultancy service” have not been defined in the Act, and, therefore, it is obligatory on our part to examine how the said expressions are used and understood by the persons engaged in business. The general and common usage of the said words has to be understood at common parlance. By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it. The word “consultancy” has been defined in the Dictionary as “the work or position of a consultant; a
department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter.
(vi) Re Facts: On facts, the NRC had acted as a consultant. It had the skill, acumen and knowledge in the specialized field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of activities undertaken by the NRC has earlier been referred to by us. The nature of service referred by the NRC, can be said with certainty would come within the ambit and sweep of the term ‘consultancy service’ and, therefore, it has been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable under the head ‘fee for technical service’. Once the tax is payable paid the grant of ‘No Objection Certificate’ was not legally permissible. Ergo, the judgment and order passed by the High Court are absolutely impregnable.
GVK Industries Ltd. .v. ITO (2015)371 ITR 453 / 115 DTR 313 275 CTR 121/ 231 Taxman 18 (SC)
S. 9(1)(i) : Income deemed to accrue or arise in India - Business connection –Telecasting of TV channels such as B4U Music, MCM etc.-Advertisement-Amount received from advertisers was not liable to tax in India-DTAA-India-Mauritius. [Art. 5, 7 . ]
Assessee, a Mauritius based company, was engaged in business of telecasting of TV channels such as B4U Music, MCM etc. Assessee's income from India consisted of collections from time slots given to advertisers through its affiliates. Assessing Officer held that affiliated entities of assessee constituted permanent establishment of assessee within meaning of article 5 of India-Mauritius DTAA
.Accordingly, amount received from advertisers was brought to tax in India. Tribunal held that the assessee carried out entire activities from Mauritius and all contracts were concluded in Mauritius. It was also undisputed that activity carried out in India was incidental or auxiliary/preparatory in nature which was carried out in a routine manner. On facts, affiliates/agents of assessee in India did not constitute its PE in India in terms of paragraph 5 of article 5 of India-Mauritius DTAA and, thus, amount in question received from advertisers was not liable to tax in India. Appeal of revenue was dismissed by High Court.
DIT .v. B4U International Holdings Ltd. (2015) 231 Taxman 858 (Bom.)(HC)
S.9(1)(i):Income deemed to accrue or arise in India-Business connection-Non-resident-Income from purchase of goods for export-Liaison office in India-Income of liaison office not deemed to accrue or arise in India.
Income from purchase of goods for export. Income of liaison office not deemed to accrue or arise in India. Appeal of revenue was dismissed.(AY. 2003-2004 to 2007-2008 )
DIT(IT) v. Tesco International Sourcing Ltd. (2015) 373 ITR 421 (Karn.)(HC)
S. 9(1)(i) : Income deemed to accrue or arise in India - Business connection –Agent-Revenue has not challenged the order of Tribunal holding that the amount received by non-resident from assesse was not taxable-Question of treating the assesse became academic. [S.195]
Where revenue did not prefer appeal against order of Tribunal holding that amount received by non- resident from assessee was not taxable in India, question as to whether assessee could be treated as agent of those non-residents or not became academic.
PILCOM v. CIT (2015) 228 Taxman 336 (Mag.)(Cal.)(HC)
S. 9(1)(i) : Income deemed to accrue or arise in India - Business connection-Royalty-Amount received by assessee-foreign company for hiring out dredgers to its Indian company would not be taxable in India as royalty- DTAA-India-Netherland .[ S. 2(23A),Art, 12]
The assessee was a company incorporated in Netherlands and falls within the definition of a foreign company under section 2(23A). The management and control of the assessee company was situated in Netherlands. The assessee let out dredging equipment to their Indian company. Amount received by assessee-foreign company for hiring out dredgers to its Indian company would not be taxable in India as royalty, as Article 12 of DTAA does not include said payment within its ambit. (AY.2003-04)
CIT v. Van Oord ACZ Equipment BV (2015) 373 ITR 133/273 CTR 548 / 228 Taxman 199 (Mad.)(HC)
S. 9(1)(i) : Income deemed to accrue or arise in India - Business connection - Service PE- Establishing subsidiary in other treaty country does not result in creating PE of a foreign holding company in the third country. As the employees of SRSIPL are not providing services to the assessee as if they were the employees of the assessee, there is no "service PE"- DTAA- India- Switzerland.[S.90, Art, 5]
The AO is not right in (i) treating the assessee as having a Dependent Agency Permanent Establishment; (ii) laying down that the assessee has a business connection in India; (iii) treating SRSIPL as service PE and (iv) treating SRSIPL as Agency PE. Ld. The assessee does not fulfill any of the mandatory conditions for the aforementioned allegations. Article 5(4) of the Indo-Swiss Treaty categorically excludes cases of reinsurance services. The agreement between the assessee and SRSIPL does not include contracts of reinsurance and confirmation of liability. The facts of the case in hand clearly show that the employees of the SRSIPL has only provided services to SRSIPL and there is no noting on record to prove that the employees had provided services to the assessee or the assessee is paying their salaries or perquisites. ( AY. 2010-11 )
Swiss re-insurance Co. Ltd. .v. DDIT(2015) 169 TTJ 129/ 38 ITR 568(Mum.)(Trib.)
S. 9(1)(i): Income deemed to accrue or arise in India-Royalty-Income from capacity sales under capacity sales agreement between assessee and VSNL-Question of attribution of profits does not arise-Income from capacity sales not taxable in India as business income or royalty or fees for technical services-Standby maintenance charges-Not fees for technical services under section 9(1)(vii).[S.9(1)(vi),9(1)(vii)]
The assessee was a Bermuda-based company which had built a high capacity submarine fibre optic telecommunications cable providing a telecommunication link between the United Kingdom and Japan. The assessee entered into memorandum of understanding with various other international telecommunication carriers for the purpose of planning, designing and constructing the submarine fibre optic telecommunications cable. For this purpose the memorandum of understanding elaborated the rights and obligations of the various parties involved in the fibre optic link around the global cable system (FLAG). At the time of the signing of the memorandum of understanding, there were 13 parties other than the assessee, which included VSNL. All the signatory parties intended to acquire the capacity in the FLAG cable system in terms of minimum investment unit. The memorandum of understanding was effective till construction and maintenance agreement was executed by the parties. Thereafter, the assessee entered into a capacity sales agreement with VSNL. Accordingly, VSNL had to pay US $28.94 million to the assessee towards purchase of capacity. The assessee claimed that it was from sale of goods from a non-resident to a resident which could not be taxed in India. The Assessing Officer held that the payment was in the nature of royalty or fees for technical know-how and it was taxable under section 9(1)(i). The receipts in the hands of the assessee did not arise as a consequence of sale of any article or commodity but the use of "right to use" assignable capacity in the cable system and it was taxable under section 9(1)(vi) and 9(1)(vii). Similarly, the income from standby maintenance activities required highly skilled and technical personnel and was separately received and was also taxable under the head "fees for technical services". The Commissioner (Appeals) observed that the amount received by the assessee from VSNL was on account of sale of capacity in the cable system and it was from normal business of the assessee was taxable as business income of the assessee under section 9(1)(i), that the income attributable to India could be worked out on the basis of the proportionate worldwide profits and the payment could not be taxed as royalty or fees for technical services under section 9(1)(vi) or (vii), that the payment received on account of standby maintenance in terms of the construction and maintenance agreement was taxable in India as fees for technical services under section 9(1)(vii). On appeal :
Held, (i) that in the case of a "royalty", agreement, the complete ownership is never transferred to the other party. The concept of transfer of ownership to the exclusion of the other party is denuded in the case of "royalty". What is envisaged in section 9(1)(vi) read with Explanation thereto, is that there should be transfer of rights of any kind of the property as defined therein ; or imparting of any information in respect of various kinds of property; or use of rights to use of any equipment. If the
consideration has been received for transferring the ownership with all rights and obligations then such a consideration cannot be taxed under the head "Royalty". Thus, characterisation of the transfer has to be seen in the terms of the contract and agreement entered by the parties, which here in this case is for sale and not for simple user.
(ii) That Explanation 1(a) to section 9(1)(i) clarified that the income from business deemed under clause (i) of sub-section (1), is to be attributed to the operation carried out in India. The said Explanation would not be applicable, as there was no deemed income accruing or arising to the assessee in India within the ambit of section 9(1)(i). The question of attribution would only arise, only if it was established that income had accrued or arisen to the assessee within the deeming fiction of section 9(1)(i). Therefore, the attribution made by the Commissioner (Appeals) on proportionate basis of worldwide revenue and gross profit was not correct. The Commissioner (Appeals) had not shown how there was a business connection, asset or source of income in India. Unless the deeming income fell within the parameters of section 9(1)(i), no attribution could be made. Thus, the payment of US
$28.94 million received by the assessee from sales of capacity made to VSNL was not taxable either as "royalty" or "business income" accruing or arising in India within the deeming provision of section 9(1)(i).
(iii) That standby maintenance charges were in the form of a fixed annual charge which was in the nature of reimbursement. Only actual cost incurred had been recovered from VSNL in providing the standby maintenance services. There was no profit element or mark up involved. The assessee had also provided the details of receipt and cost involved in the standby maintenance expenses. Therefore, the receipts from standby maintenance charges from VSNL could not be taxed as fees for technical services and within the definition and meaning of section 9(1)(vii) as there was no rendering of services.(AY. 1998-1999 to 2000-2001)
Flag Telecom Group Ltd. v. Dy. CIT (2015) 38 ITR 665/119 DTR 115/ 153 ITD 702 ( Mum.)(Trib.)
S. 9(1)(i) : Income deemed to accrue or arise in India - Business connection -Payment made for utilizing telecom voice services in USA –Not liable to deduct tax at source. [S.40(a)(ia),195]
The assessee made payment to a US company for utilizing telecom voice services in USA and it claimed that the said payment did not constitute fee for technical services but was in the nature of business income of the non-resident. Since the non-resident did not have a Permanent Establishment in India, said income was not chargeable to tax in the hands of the non-resident in India and, therefore, there was no obligation on the part of the assessee to deduct tax at source. The AO however, took the view that the said payment was in nature of fee for technical services and was, therefore, chargeable to tax in India in the hands of the non-resident. Since the assessee did not deduct TDS, the AO invoked the provisions of section 40(a)(i).On appeal, the CIT (A) deleted said addition. On appeal by revenue the Tribunal held that, payment made by assessee, an Indian company to a US company for utilizing telecom services in USA did not constitute fee for technical services as said payments were for use of bandwidth provided for down linking signals in US; and said payments were not in nature of managerial, consultancy or technical services nor was it for use of or right to use industrial, commercial or ascientificequipment.Order of CIT (A) was confirmed. (AY. 2010-11)
ITO .v. Clear Water Technology Services (P.) Ltd. (2014) 52 taxmann.com 115 / (2015) 67 SOT
15 (URO)(Bang.)(Trib.)
S. 9(1)(i) : Income deemed to accrue or arise in India - Business connection –Reimbursed amount- Agreement was not examined by AO- Matter remanded.
AO held that reimbursed amount had to be included in commission income earned by assessee on sales made to its AE. Tribunal held that relevant agreement provided that commission was not to be computed on sale orders which required procurement of local content by assesse, since said agreement was not examined by AO matter was to be remanded for fresh adjudication. (AY. 2008-09)
Varian India (P.) Ltd. .v. Addl. CIT (2014) 51 taxmann.com 404 / (2015) 67 SOT 17 (URO)(Mum.)(Trib.)
S. 9(1)(i) : Income deemed to accrue or arise in India - Business connection –Permanent establishment-Not a dependent agent-Commission earned could not be taxed in hands of assesee-DTAA-India- USA.[Art. 5, 7]
Assessee was Indian branch of company named VIPL which in turn was a 100 per cent subsidiary of Varian USA. VIPL entered into distribution and representation agreement with assessee for supply and sale of analytical lab instruments manufactured by them to Indian customers directly and assessee carried out pre-sale activities like liasoning and other incidental post-sale support activities for which it was entitled to commission.Assessee had no authority and also could not negotiate or conclude contracts .None of risks, like, market risk, product liability risk, R&D risk, credit risk, price risk, inventory risk or foreign currency risk was undertaken by assesse. Tribunal held that on facts, assessee was not a dependent agent of Varian group of companies and did not constitute a PE for said company in India therefore commission earned could not be taxed in hands of assesse. (AY. 2008-09) Varian India (P.) Ltd. .v. Addl. CIT (2014) 51 taxmann.com 404 / (2015) 67 SOT 17 (URO)(Mum.)(Trib.)
S.9(1)(i) : Income deemed to accrue or arise in India - Business connection –Make available- Testing-Could not be treated as fees for technical services-Not liable to deduct tax at source- DTAA-India- USA.[S. 9(1)(vii),195, Art, 12]
Assessee, engaged in business of manufacturing ultrasonic meters, paid certain amount to a US company towards calibration and testing of equipment, in view of fact that expertise connected with testing had not been passed on to assessee, payment in question could not be treated as 'fee for technical services' and, thus, assessee was not required to deduct tax at source while making said payment (AY. 2009-10)
ITO .v. Denial Measurement Solutions (P.)Ltd. (2014) 52 taxmann.com 443 / (2015) 67 SOT 76(URO)(Ahd.)(Trib.)
S. 9(1)(vi): Income deemed to accrue or arise in India - Income from supply of software embedded in hardware equipment or otherwise to customers in India - Does not amount to royalty-DTAA-India- France.[Art. 13(3)]
Held, dismissing the appeals, that the income of the assessee from supply of software embedded in the hardware equipment or otherwise to customers in India did not amount to royalty under section 9(1)(vi).
CIT v. Alcatel Lucent Canada (2015) 372 ITR 476/231 CTR 87/ 231 Taxman 87 (Delhi) (HC)
S. 9(1)(vi) : Income deemed to accrue or arise in India -Income deemed to accrue or arise in India – Royalty -Indian agent of foreign company cannot be regarded as "Dependent Agent Permanent Establishment" if agent has no power to conclude contracts. If the agent is remunerated at arms' length basis, no further profit can be attributed to the foreign company. It is doubtful whether retrospective amendment to s. 9(i)(vi) can apply the DTAA. However, question is left open-DTAA-India-Mauritius [S. 4, 5, 6, 90, 195, Art. 5(4), 5(5), 7]
The assessee is a foreign company incorporated in Mauritius. It had filed its residency certificate and pointed out that its business is of telecasting of TV channels such as B4U Music, MCM etc. During the assessment year under consideration, its revenue from India consisted of collections from time slots given to advertisers from India. The details filed by the assessee revealed that there is a general permission granted by the Reserve Bank of India to act as advertisement collecting agents of the assessee. The permissions were granted to M/s. B4U Multimedia International Limited and M/s. B4U Broadband Limited. In the computation of income filed along with the return, the assessee claimed that as it did not have a permanent establishment in India, it is not liable to tax in India under Article 7 of the DTAA between India and Mauritius. The argument further was that the agents of the assessee have marked the ad-time slots of the channels broadcasted by the assessee for which they have received remuneration on arm’s length basis. Thus, in the light of the Central Board of Direct Taxes Circular No.23 of 1969, the income of the assessee is not taxable in India. The conditions of Circular 23 are fulfilled. Therefore, Explanation (a) to section 9(1)(i) of the IT Act will have no application. The Assessing Officer did not accept the contentions of the assessee. However, the Tribunal noted that paragraph 5 of Article 5 of the DTAA indicates that an enterprise of a contracting State shall not
be deemed to have a permanent establishment in the other contracting State merely because it carries on business in that State through a broker, general commission agent, or any other agent of independent status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted exclusively or almost exclusively on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph. The Tribunal held that the assessee carries out the entire activities from Mauritius and all the contracts were concluded in Mauritius. The only activity which is carried out in India is incidental or auxiliary / preparatory in nature which is carried out in a routine manner as per the direction of the principal without application of mind and hence B4U is not an dependent agent. Nearly 4.69% of the total income of B4U India is commission / service income received from the assessee company and, therefore, also it cannot be termed as an dependent agent. As far as the alternate contentions are concerned, it was held that the assessee and B4U India were dealing with each other on arm’s length basis. 15% fee is supported by Circular No.742. Thus it was held that no further profits should be taxed in the hands of the assessee. On appeal by the department to the High Court, HELD dismissing the appeal:
(i) As per the agreement between the assessee and B4U, B4U India is not a decision maker nor it has the authority to conclude contracts Further, the Revenue has not brought anything on record to prove that agent has such powers and from the agreement any such conclusion could not have been drawn. Barring this agreement, there is no material or evidence with the Assessing Officer to disprove the claim of the assessee that the agent has no power to conclude the contract. This finding is rendered on a complete reading of the agreement. The Indo-Mauritius DTAA requires that the first enterprise in the first mentioned State has and habitually exercised in that State an authority to conclude contracts in the name of the enterprise unless his activities are limited to the purchase of goods or merchandise for the enterprise is a condition which is not satisfied. Therefore, this is not a case of B4U India being an agent with an independent status.
(ii) The findings of the Supreme Court judgment in Morgan Stanley & Co. that there is no need for attribution of further profits to the permanent establishment of the foreign company where the transaction between the two is at arm’s length but this was only provided that the associate enterprise was remunerated at arm’s length basis taking into account all the risk taking functions of the multinational enterprise. Thus, assuming B4U India is a dependent agent of the assessee in India it has been remunerated at arm’s length price and, therefore, no profits can be attributed to the assessee. The argument that the assessee had not subjected itself to the transfer price regime and cannot derive assistance from this judgment is not correct because the requirement and in relation to computation of income from international transactions having regard to arm’s length price has been put in place in Chapter-X listing special provisions relating to avoidance of tax by substituting section 92 to 92F by the Finance Act of 2001 with effect from 1st April, 2002. Therefore, such compliance has to be made with effect from assessment years 2002-03. In any event, we find that the Tribunal has rightly dealt with the alternate argument by referring to the Revenue Circular 742. There, 15% is taken to be the basis for the arm’s length price. Nothing contrary to the same having been brought on record by the Revenue. Similarly, the Division Bench judgment of this Court in the case of Set Satellite (Singapore) Pte.Ltd. vs. Deputy Director of Income Tax (IT) & Anr. (2008) 307 ITR 265 would conclude this aspect.
(iii) The argument that the transponder charges being a consideration and process as clarified in terms of Explanation (6) to section 9 of the IT Act, the assessee was obliged to deduct tax at source under section 195 and having not deducted the same, there has to be a disallowance under section 40(a)(i) of the IT Act is not required to be answered. It was doubtful whether any payment which is stated to be made to a US based company by the assessee which is a Mauritius based company, can be brought to tax in terms of Indian tax laws. We are of the opinion that any wider question or controversy need not be addressed. We clarify that the arguments based on whether the payments made could be brought within the meaning of the word “process” and within the explanation can be raised and are kept open for being considered in an appropriate case. (AY. 2001-02, 2004-05, 2005-06)
DIT v. B4U International Holding LTD ( 2015) 374 ITR 453/ 119 DTR 73/ 277 CTR 213/231 Taxman 858 (Bom.)(HC)
S. 9(1)(vi) : Income deemed to accrue or arise in India – Royalty – Lump sum consideration for supply, installation and erection of machinery with relevant know how even if the said amount was treated as royalty, it was covered by S.90 and therefore not liable to tax-DTAA-India-UK. [S. 90].
Amount paid by assessee to the foreign company for imparting technical know-how under collaboration-cum-service agreements being part of lump sum consideration for installation and erection of machinery cannot be treated as royalty. Though there is a possibility to interpret the clauses of the agreement in such a way that the foreign company retained with it the ultimate patent and prohibited sublease or other unauthorized uses thereof by the assessee, the predominant factors are suggestive of the fact that the consideration paid by the assessee under the know-how license and engineering agreement for parting with technical know-how cannot be treated as royalty. Further, it is not a case of mere licensing of know-how but the same is coupled with engineering. Therefore the impugned amount paid by the assessee to foreign company cannot be treated as royalty. Even if said amount is treated as royalty, it is covered by Indo-UK DTAA and therefore it is not liable to tax in India. (AY. 1988-89 ,1989-90)
CIT v. Andhra Petrochemicals Ltd. (2015) 114 DTR 41/275 CTR 58/230 Taxman 402 (AP)(HC)
S. 9(1)(vi) : Income deemed to accrue or arise in India-Royalty –Fees for technical services- Consideration paid for right to use technical knowhow etc. would be taxable as ‘royalty’ and consideration paid for technical services taxable in India to the extent they are performed in country of source--DTAA-India-Austria. [S. 9(1)(vii), 90, Art. 6, 7]
Assessee had agreed to furnish to an entity, knowhow and technical assistance for manufacture of hydro power equipment and marketing the same. Assessee deputed its technical experts to the entity’s factory to assist them in setting up and commissioning manufacturing facilities in the design and manufacturing of products. The agreement described lump-sum payment towards ‘information and services to be furnished’ and recurring payment as ‘royalty’. AO treated entire amount towards royalty taxable under article 6 of DTAA. Held that the agreement with the entity would fall in the category of contract involving supply of technical know-how etc. as well as technical services. Thus both article 6 & 7 of DTAA would be applicable. Consideration paid for right to use technical knowhow etc. would be taxable as ‘royalty’ and consideration paid for technical services taxable in India to the extent they are performed in country of source. (AY. 1989-90 , 1990-91)
CIT v. VOEST Alpine (2015) 114 DTR 188 / 230 Taxman 405 / 274 CTR 84 (Delhi)(HC)
S. 9(1)(vi):Income deemed to accrue or arise in India- Royalty- Fees for technical services - Consideration for supply of software (whether with or without equipment) is not taxable as "royalty" if there is no transfer of right in the copyright to the software-DTAA-India- USA [S.9(1)(vii) 115A,Art,2, 5 12, 24, Copy right Act,1957, S. 14,52(1)(aa)(ad)]
Allowing the appeal of assesse the Tribunal held that: Consideration received by the Assessee for supply of product along with license of software to End user is not royalty under Article 12 of the Tax Treaty. Even where the software is separately licensed without supply of hardware to the end users (i.e. eight out of 63 customers), we are of the view that the terms of license agreement is similar to the facts of Infrasoft Ltd . Accordingly, we hold that there was no transfer of any right in respect of copyright by the assessee and it was a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article. Hence, the payment for the same is not in the nature of royalty under Article 12 of the Tax Treaty. The receipts would constitute business receipts in the hands of the Assessee and is to be assessed as business income subject to assessee having business connection/ PE in India. Appeal of assesse was partly allowed. ( ITA No. 1124 & 1125/Del/2014, dt. 18.05.2015) (AY.2003-04 to 2010-11)
Aspect Software Inc v. ADIT (Delhi)(Trib.); www.itatonline.org
S. 9(1)(vii): Income not included in total income-Non-resident- Royalty-Mere right to use or permission to use intellectual property rights/know-how - No transfer of full ownership - Not a case of outright sale-Payment taxable in India as royalty – DTAA- India-Germany [Art. VIIIA] The proprietorship or ownership rights continued to vest with ADC, non-resident, but the right to use with trade name, technology, etc., was granted by ADC to HCL, the assessee. Thus, it was not a case
of transfer of ownership rights. Therefore, the payments by HCL to ADC were for mere right to use intellectual property rights and know-how and not for transfer of full ownership. The payments to ADC would be taxable in India as royalty. (AYs. 1989-1990, 1990-1991)
HCL Ltd.v. CIT (2015) 372 ITR 441/276 CTR 416/54 taxmann.com 231/116 DTR 89
(Delhi)(HC)
S. 9(1)(vii) : Income deemed to accrue or arise in India –Shipping business-International traffic- Fees for technical services- Amount paid by Indian entities as “share of cost” of utilizing automated telecommunications system is not assessable as “fees for technical services” if there is not profit element in it-DTAA-India- Denmark [S. 44B,90, 115A, 172, Art.7,8, 9,13(4)]
The assessee had three agents working for them viz. Maersk Logistics India Limited (MLIL), Maersk India Private Limited (MIPL) and Safmarine India (Pvt) Limited (SIPL). These agents would book cargo and act as clearing agents for the assessee. In order to help them in this business, the assessee had procured and maintained a global telecommunication facility called MaerskNet which is a vertically integrated communication system. The agents would incur pro rata costs for using the said system and the agents share of the cost was, therefore, recovered from these three agents. According to the assessee, it was merely a system of cost sharing and hence the payments received by the assessee from MIPL, MLIL and SIPL were in the nature of reimbursement of expenses. However, the AO and CIT(A) held that the amounts paid by these three agents to the assessee is consideration / fees for technical services rendered by the assessee and taxable in India under Article 13(4) of the DTAA and assessed tax at 20% under section 115A of the Income Tax Act, 1961. The assessee submitted before the Tribunal that without this system, it was not possible to conduct international shipping business efficiently and in having the system set up, the assessee had incurred costs. A share of this cost would have to be borne by each of the agents which utilise the system and, accordingly, these pro rata costs relatable to each of the agents was billed to the agents and these amounts were thus paid. It was merely a “charging back” to the agent, proportionate costs of the global shipping communications system and did not, in any manner, amount to rendering of any technical services. The Tribunal accepted the contention of the assessee. On appeal by the department to the High Court HELD dismissing the appeal:
(i) There is no finding by the Assessing Officer or the Commissioner that there was any profit element involved in the payments received by the assessee from its Indian agents. On the other hand, having considered the various submissions, we are of the view that no technical services as contemplated by the Act have been rendered in the instant case;
(ii) In Director of Income Tax (International Taxation) vs. Safmarine Container Lines NV (2014) 209 ITR 366, this Court had occasion to consider the effect of the Double Taxation Avoidance Agreement between India and Belgium in which the questions involved were whether the income from inland transport of cargo within India was covered by Article 8(2)(b)(ii) of the Tax Treaty between India and Belgium. This Court, while considering the said issue found that the assessee was not liable to tax by virtue of DTAA in that case. Moreover, in the present case, there was no occasion for the Tribunal to come to any different view. In our view, the Tribunal has correctly observed that utilization of the Maersk Net Communication system was an automated software based communication system which did not require the assessee to render any technical services. It was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business. The Maersk Net used by the agents of the assessee entailed certain costs reimbursement to the assessee. It was part of the shipping business and could not be captured under any other provisions of the Income Tax Act except under DTAA;
(iii) In Commissioner of Income-tax V/s. Siemens Aktiongeselleschaft reported in [2009] 310 ITR 320 (Bom) this Court has held that once there is a treaty between two sovereign nations, though it is open to a sovereign Legislature to amend its laws, a DTAA entered into by the Government, in exercise of the powers conferred by section 90(1) of the Act must be honoured. The provisions of Section 9 Income Tax Act were applicable and the provisions of DTAA, if more beneficial than the
I.T. Act, the provisions of DTAA would prevail. Thus, in the instant case also, it is not possible for the revenue to unilaterally decide contrary to the provisions of the DTAA. (AY.20O1-02 to 2003-04) DIT v. A. P. Moller Maersk A/S (2015) 374 ITR 497 /120 DTR 147/ 278 CTR 139/ 232 Taxman 564(Bom.)(HC)
S. 9(1)(vii) : Income deemed to accrue or arise in India- Fees for technical services-Though construction, installation and assembly activities are de facto in the nature of technical services, the consideration thereof will not be assessable under Article 12 but will only be assessable under Article 7 if an “Installation PE” is created under Article 5. As Article 5 is a specific provision for installation etc, it has to prevail over Article 12.[S. 5, Art. 7, 12]
The Tribunal had to consider whether consideration attributable to the installation,commissioning or assembly of the plant and equipment & supervisory activities thereof is assessable to tax in India under section 5(2)(b) & 9(1)(vii) of the Act and Article 5 & 7 and Article 12 of the DTAA. HELD by the Tribunal:
(i) Under s. 5(2)(b) of the Act, the consideration attributable to the installation, commissioning or assembly of the plant and equipment & supervisory activities thereof is assessable to tax in India as the said income accrues in India. S. 9(1)(vii) does not apply because the definition of ‘fees for technical services’ in Explanation 2 to s. 9 (1)(vii) specifically excludes “consideration for any construction, assembly, mining or like project undertaken by the recipient”. Even though the exclusion clause does not make a categorical mention about ‘installation, commissioning or erection’ of plant and equipment, these expression, belonging to the same genus as the expression ‘assembly’ used in the exclusion clause and the exclusion clause definition being illustrative, rather than exhaustive, covers installation, commissioning and erection of plant and equipment;
(ii) However, the said receipt is not assessable as business profits under Article 7(1) of the DTAA if the recipient does not have an “installation PE” in India. Under the DTAA, an installation or assembly project or supervisory activities in connection therewith can be regarded as an “Installation PE” only if the activities cross the specified threshold time limit (or in the case of Belgian & UK, where the charges payable for these services exceeds 10% of the sale value of the related machinery or equipment). The onus is on the revenue authorities to show that the conditions for permanent establishment coming into existence are satisfied. That onus has not been discharged on facts;
(iii) On the question as to whether the said receipt for installation, commissioning or assembly etc activity can be assessed as “fees for technical services”, it is seen that the DTAA has a general provision in Article 12 for rendering of technical services and a specific provision in Article 5 for rendering of technical services in the nature of construction, installation or project or supervisory services in connection therewith. As there is an overlap between Article 5 and Article 12, the special provision (Article 5) has to prevail over the general provision (Article 12). What is the point of having a PE threshold time limit for construction, installation and assembly projects if such activities, whether cross the threshold time limit or not, are taxable in the source state anyway. If we are to proceed on the basis that the provisions of PE clause as also FTS clause must apply on the same activity, and even when the project fails PE test, the taxability must be held as FTS at least, not only the PE provisions will be rendered meaningless, but for gross versus net basis of taxation, it will also be contrary to the spirit of the UN Model Convention Commentary. Accordingly, though construction, installation and assembly activities are de facto in the nature of technical services, the consideration thereof will not be assessable under Article 12 but will only be assessable under Article 7 if an “Installation PE” is created;
(iv) In any event, the said consideration cannot be assessed as “fees for technical/ included services” as the “make available” test is not satisfied. The said installation or assembly activities do not involve transfer of technology in the sense that the recipient of these services can perform such services on his own without recourse to the service provider (this is relevant only for the DTAAs that have the “make available” condition). (AY. 2010-11, 2011-12)
Birla Corporation Ltd. .v. ACIT( 2015) 153 ITD 679 (Jab.)(Trib.)
S. 9(1)(vii) : Income deemed to accrue or arise in India –Fees for technical services-DTAA- India- Singapore-Matter remanded. [S.40(a)(i),195, Art. 12]
The assessee-company was engaged in the business of manufacturing and installation of structural glazing works in India. Assessee entered into a management services agreement with its Singapore holding company and made payment for same without deduction of tax at source .AO opined that payment was towards 'Fees for Technical Services' and assessee was liable to deduct TDS before making payment to non-resident holding company and thus invoked provisions of section 40(a)(i).
Assessee stated that services received by it from its holding company was not 'Fees for Technical Services' as per DTAA between India and Singapore and therefore TDS was not required to be deducted and provisions of section 40(a)(i) were not attracted. Tribunal held that AO had only considered applicability of definition of term 'Fees for Technical Services' under section 9(1)(vii) and had not considered applicability of definition of 'Fees for Technical Services' under DTAA between India and Singapore and had also not examined as to which of provisions was beneficial to assessee, matter required readjudication. Matter remanded. (AY. 2008-09)