TAXATION OF NON-RESIDENTS
[Based on the law as amended by the Finance Act, 2018]
Committee on International Taxation
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, NEW DELHI
All rights reserved. No part of this publication may be reproduced, stored in a
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First Edition : January, 2005
Second Edition : February, 2013
Third Edition : September, 2018
Committee / Department : Committee on International Taxation
E-mail : citax@icai.org
Website : www.icai.org
Price : Rs. 300/-
ISBN No : 978-81-87080-61-9
Published by : Publication Department on behalf of
The Institute of Chartered Accountants of India,
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Contents
Particulars Page No.
Chapter 1. Residential Status 1-16
Scope of total income 1
Residents 1
Not Ordinarily Residents 1
Non Residents 2
Residence in India 2
Test for Individual Resident 2
Test for Individual Not Ordinarily Resident 6
Test for HUF/FIRM/AOP 7
Test for Company 8
Different sources of income 16
Chapter 2. Income Deemed to Accrue or Arise in India 17-56
Specific cases when income shall not be deemed to accrue or 17
arise
Business connection 18
Property asset or source of income in India 27
Transfer of capital asset situated in India 28
Salaries 34
Salaries and perquisites payable by the Govt. to citizen of India 37
Dividend 37
Interest 38
Royalty 39
Fees for technical services 49
Place of Residence or Business or Business Connection and 55
Place of Rendering Services Immaterial
Taxability of pension 55
iii
Chapter 3. Income not to be included in the total income 57-72
Interest to non-resident 57
Salary of diplomatic personnel 58
Salary of foreign employee 58
Salary received by a crew of foreign ship 59
Remuneration of a foreign trainee 59
Tax paid on royalty/fees for technical services of foreign 59
company
Tax paid on behalf of non-resident 60
Tax paid by foreign states/foreign enterprise 60
Technical fees received by notified foreign company 60
Income of foreign government employee under co-operative 61
technical assistance programme
Remuneration or fees received by non-resident consultants and 61
their employees and family members.
Interest 62
Income of non-resident from lease of aircraft etc 63
Income of European Economic Community 64
Income of SAARC fund 64
Income of the secretariat of Asian Organisation of Supreme Audit 64
Institutions
Income from Specified Services chargeable to equalization levy 64
Other incomes exempt from total income 65
Special provisions in respect of newly established units in SEZ 67
Chapter 4. Presumptive Taxation 7387
Taxation of shipping profits derived by non-residents 73
Comparison with section 172 74
Profits and gains in connection with the business of exploration 76
etc. of mineral oils
Profits and gains of the business of operation of aircraft in the 82
case of Non-resident
Profits and gains of foreign companies engaged in the business 82
of civil construction
Non-Applicability of section 115JB 83
Head office expenditure in the case of non-resident 83
Special provisions for computing income by way of Royalties etc 86
in case of foreign companies
Special provisions for computing income by way of Royalties etc 87
in case of non-residents
Chapter 5. Capital Gains 88-98
Chapter 6. Deductions 99143
General Principles 99
Deduction not to be allowed unless return furnished 101
Deduction in respect of life insurance premium etc 102
Deduction in respect of pension fund 102
Deduction in respect of contribution to pension scheme of central 103
government
Limit on deductions under sections 80C, 80CCC and 80CCD 105
Deduction in respect of medical insurance premium 105
Deduction in respect of interest on loan taken for higher 105
education
Deduction in respect of interest on loan taken for residential 106
house property
Deduction in respect of donations to certain fund, charitable 107
institutions etc
Deduction in respect of rent paid 112
Deduction in respect of certain donations for scientific research 113
or rural development
Contributions to political parties 115
Deduction in respect of certain incomes 115
Deductions in respect of profits and gains from industrial 115
undertakings or enterprises engaged in infrastructure
development etc.
Deduction in respect of profits and gains by an undertaking or 122
enterprise engaged in development of special economic zone
v
Deduction in respect of profits and gains from certain industrial 123
undertaking other than infrastructure development undertakings
Deductions in respect of profits and gains from housing projects 135
Special provisions in respect of certain undertakings or 137
enterprises in certain special category states
Deduction in respect of profits and gains from business of 140
collecting and processing of bio-degradable waste
Deduction in respect of employment of new employees 140
Deduction in respect of incomes of offshore Banking Units and 141
International Financial Services Centre
Deduction in respect of deposits in saving account 142
Other deductions available in respect of all assesses (including 143
non-residents)
Chapter 7. Double taxation relief 144-155
Chapter 8. Transfer Pricing 156-226
Backdrop 156
Conditions 157
Enterprise 158
Associated Enterprises 158
Transaction 161
International Transaction 161
Specified Domestic Transactions 164
Arm's length Price 165
Arm's Length Principle and Most Appropriate Method 167
Uncontrolled transaction 169
Market conditions 170
Multiple year data 171
Application of range 172
Different methods as prescribed in the Rules 173
Comparable Uncontrolled Price Method (CUP) 173
Resale Price Method (RPM) 174
Cost Plus Method (CPM) 175
Profit Split Method (PSM) 176
Transaction Net Margin Method (TNMM) 177
Other Method 177
How to determine the Most Appropriate Method 178
Secondary Adjustment 179
Documentation and verification 181
Enterprise wise documents 182
Transaction specific documents 182
Computation related documents 183
Country by Country Reporting and Master File 184
CbC reporting 185
Master file 187
Local file 190
Report from an Accountant 191
Power of Assessing Officer 191
Reference to Transfer Pricing Officer 193
Penalties 195
--For concealment 195
--Under reporting and misreporting of income 196
--Failure to keep and maintain information & document 196
-- Failure to furnish report 197
-- Failure to furnish information and document 197
-- Furnishing incorrect information in reports or certificates 197
-- Failure to furnish information or documents under Section 286 197
Filing of appeal against the order of TPO 198
Provisions in the Act relating to dispute resolution panel 199
Advance Pricing Arrangement 202
-- APA Scheme 202
-- Effect to advance pricing arrangement 204
-- Progress of APA and MAP in India 206
Safe Harbour 207
Multilateral exchange of information 213
Other Recent Developments Budget Updates and Board 215
Circulars and Important Judicial Precedents
--Interest Deduction Rule 215
vii
--R&D circular Guidelines on characterization of Indian 215
development centres
--Advertising, marketing and Promotion (AMP) Expenses 217
-- Applicability of TP regulations in case of international relating 218
to Issue of Shares
Chapter 9. General Anti Avoidance Rules 227238
Introduction 227
Applicability 227
Meaning and scope of impermissible avoidance agreement 228
Meaning of arrangement lacking commercial substance 228
Irrelevant considerations for determining whether transaction 229
lacks commercial substance or not
Meaning of round trip financing 229
Meaning of accommodating party 230
Consequence of impermissible avoidance agreement 230
Treatment of connected person and accommodating party 231
Application of chapter X-A 231
Chapter to be applied in accordance with prescribed guidelines 231
Meaning of key terms used in the chapter X-A 236
Chapter 10. Concessional Tax Rates for NRIs 239-253
Special provisions for computing income by way of royalties etc. 243
in the case of foreign companies
Tax on dividend, royalty and technical service fee in the case of 245
foreign companies
Tax on income from units purchased in foreign currency or 246
capital gains arising from their transfer in case of Offshore Fund
Tax on income from bonds or shares purchased in foreign 248
currency or capital gains arising from the transfer in case of non-
resident
Tax on income of foreign Institutional Investors from Securities or 249
Capital gains arising from their transfer
Tax on non-resident sportsman or sports association 250
Special Provisions relating to conversion of Indian branch of a 251
foreign bank into a subsidiary Indian co.
Special provisions relating to foreign company said to be resident 252
in India
Chapter 11. Tax deduction at source in respect of payments 254264
to non-residents
Payment to non-resident sportsmen or sports association 254
Income by way of interest from infrastructure debt fund 255
Income by way of interest from Indian company 255
Other sums [Section 195] 256
Income from units 262
Income from foreign currency bonds or Global Depository 262
Receipts
Income of Foreign Institutional Investors from securities 263
Non furnishing of PAN 263
Chapter 12. Advance Rulings 265275
Backdrop 265
Meaning of Advance ruling 265
Meaning of applicant 266
Non-resident in which year 267
Authority for advance ruling 267
Application for advance ruling 268
Procedure on receipt of application 269
No application be proceeded 269
Performance of natural justice 272
Pronouncement of advance ruling 272
Appellate authority not to proceed 272
Applicability of advance ruling 272
Advance ruling to be void 273
ix
Powers of the Authority 273
Procedure of Authority 273
Chapter 13. Equalisation Levy 276277
Introduction 276
Charge of Levy 276
Collection and recovery 277
Equalisation Levy Rules, 2016 277
Chapter 14. Securitisation Trusts 278-281
Tax on income from securitisation trusts 278
Income in respect of investment in securitization trust 279
Tax on income of unit holder and business trust 280
Certain income from units of a business trust 280
Chapter 15. Base erosion and profit shifting 282-288
Action Plan 1 Addressing the Challenges of Digital Economy 282
Action Plan 2- Neutralizing the effect of hybrid mismatch 282
arrangements
Action Plan 3 - Designing Effective Controlled Foreign Company 283
( `CFC') Rules
Action Plan 4 Limiting Base Erosion Involving Interest 284
Deductions and other financial payments
Action Plan 5 Countering harmful tax practices more 284
effectively, taking into account transparency and substance
Action Plan 6 Preventing the granting of treaty benefits in 285
inappropriate circumstances
Action Plan 7 Additional guidance on Attribution of Profits to 286
Permanent Establishments
Other Action Plans 287
Chapter 16. Multi-lateral Instrument 289-293
List of Cases Cited
Citation Page No
AB Holdings In. re [2018] 90 taxmann.com 177 (AAR New 14
Delhi)
AB Mauritius In re [2018] 90 taxmann.com 182 (AAR New 15
Delhi)
ACIT Cir 15(2) vs Luxottica India Eyewear Pvt. Ltd. (ITA No. 222
1117/2015)
ACIT v. Robert Arthur Keltz, [2013] 59 SOT 203 (Delhi 35
Tribunal)
ACIT v. Jyotinder Singh Randhawa [2014] 64 SOT 323 (Delhi 5
Tribunal)
Advance Ruling P. No.8 of 1995. In re [1997] 223 ITR 416 25
(AAR)
Advance Ruling P. No.6 of 1995. In re 234 ITR 371 (AAR) 77
Advance Ruling P. No.11 of 1995. In re [1997] 228 ITR 55 147
(AAR)
Advance Ruling P. No.7 of 1995 [1997] 223 ITR 462 (AAR 5
Delhi)
Advance Ruling P.NO. 20 of 1995 (1999) 237 ITR 382 (AAR) 273
ADIT vs. Baan Global BV [2016] 49 ITR(T) 73 (Mumbai 47
Tribunal)
ADIT v. First Advantage (P.) Ltd. [2017] 163 ITD 165 (Mumbai 45
Tribunal)
AEG Aktiengesllschaft v. CIT [2004] 267 ITR 209 (Karnataka 52
HC)
Airport Authority of India, In Re (2008) 299 ITR 102 (AAR) 274
Anchor Line Ltd. v. ITO [1990] 32 ITD 403 (Mumbai Tribunal) 74
Anglo French Textile Co. Ltd. v. CIT [1953] 23 ITR 101 (SC) 24
A.P.Moller Maersk v. DDIT [2014] 149 ITD 434 (Mumbai 74
Tribunal)
Asia Satellite Telecommunication Co. Ltd. [2010] 232 CTR 177 26
(Delhi HC)
Asia Satellite Telecommunications Co. Ltd v DIT [2011] 332 44
ITR 340 (Delhi HC)
Atos Information Technology HK Ltd. V. DCIT [2017] 79 46
taxmann.com 26 (Mumbai Tribunal)
AXA Technologies Shared Services Pvt. Ltd Vs DCIT, [2017] 224
80 taxmann.com 197 (Bengaluru Tribunal)
B.J. Services Company Middle East Ltd. v. ADIT [2017] 77 80
Taxmann.com 218 (Delhi Tribunal)
B4U International Holdings Ltd vs. DCIT [2012] 52 SOT 545 45
(Mumbai Tribunal)
Bangalore Woollen Cotton & Silk Mills Co. Ltd. v. CIT [1950] 18 24
ITR 423 (Madras HC)
Barendra Prasad Ray v. ITO [1981] 129 ITR 295 (SC) 22
Bharat Heavy Plate & Vessels Ltd. v. Addl. CIT [1979] 119 ITR 23
986 (Andhra Pradesh HC)
Bharti Airtel Ltd. v. ITO [2016] 47 ITR(T) 418 (Delhi Tribunal) 45
BIOCON Biopharmaceuticals (P.) Ltd. v. ITO [2013] 144 ITD 259
615 (Bangalore Tribunal)
Biyani & Sons P, Ltd. v. CIT [1979] 120 ITR 887 (Calcutta HC) 25
Blue Star Engineering Co. (Born) P. Ltd. v. CIT [1969] 73 ITR 24
283 (Bombay HC)
Bosch Ltd. v. ITO [2013] 141 ITD 38 (Bangalore Tribunal) 264
Bringtons Carpets Asia (P) Ltd v Dy CIT 57 DTR 121 (Pune 221
Tribunal)
British Gas India (P.) Ltd., In re [2006] 285 ITR 218 (AAR) 5
Cairn UK Holdings Ltd. v. DCIT (Intl. Taxation) [2017] 79 27
taxmann.com 128 (Delhi Tribunal)
Cairn UK Holdings Ltd v. DIT [2013] 359 ITR 268 (Delhi HC) 90
Capgemini Business Services (India) Ltd. v. ACIT [2016] 158 46
ITD 1 (Mumbai Tribunal)
Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) 26
Central Mine Planning & Design Institute Ltd. v. DCIT [1998] 67 54
ITD 195 (Patna Tribunal)
Columbia Sportswear Company Vs Director of Income Tax, 274
Bangalore (SLP (C) No. 3318 & 31543 of 2011)
Columbia Sportswear Co. vs. DIT, 346 ITR 161 (SC) 274
CIT v. R. D. Aggarwal and CO. [1956] 56 ITR 20 (SC) 21
CIT v. Asandas Khatri [2006] 283 ITR 346 (Madhya Pradesh 58
HC)
CIT v. Bombay Burmah Trading Corporation Ltd. [2003] 259 149
ITR 423 (Bombay HC)
CIT v. Bombay Trust Corp. Ltd. AIR [1930] PC 54 24
CIT v. Cement Distributors Ltd. [1994] 208 ITR 355 (Delhi HC) 125
CIT v. Chennai Metropolitan Water Supply & Sewerage Board 259
[2012] 348 ITR 530 (Madras High Court)
CIT v. CGI Information Systems & Management Consultants 45
(P.) Ltd. [2014] 226 Taxman 319 (Karnataka HC)
CIT v. Copes Vulcan Inc. [1987] 167 ITR 884 (Madras HC) 54
CIT v Delhi Race Club (1940) Ltd. [2015] 273 CTR 503 (Delhi 47
HC)
CIT v. Emirates Commercial Bank Ltd. [2003] 262 ITR 55 85
(Bombay HC)
CIT v. Ensco Maritime Ltd [2009] 317 ITR 14 (Uttaranchal HC) 78
CIT v. Evans Medical Supplies Ltd. [1959] 36 ITR 418 (Bombay 22
HC)
CIT v. Farida Leather Company [2016] 287 CTR 565 (Madras 261
HC)
CIT v. Goslino Maria [2000] 241 ITR 312 (SC) 35
CIT v Havells India Ltd [2013] 352 ITR 376 (Delhi HC) 52
CIT v. HEG Ltd. [2003] 263 ITR 230 (Madhya Pradesh HC) 44
CIT v. Hughes Services [Far East] P. Ltd. [2003] 87 ITD 137 36
(Delhi Tribunal)
CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158 (Andhra 23
Pradesh HC)
CIT v. Indo Oceanic Shipping Co. Ltd. [2001] 247 ITR 247 4
(Bornbay HC)
CIT v. Japan Lines Ltd. [2003] 260 ITR 656 (Madras HC) 73
Pr. CIT vs Kusum Healthcare Pvt. Ltd. (I.T.A. No. 765/ 2016) 225
(Delhi HC)
xiii
CIT v. K.C. John [2003] 264 ITR 715 (Kerala HC) 240
CIT v. Maggronic Devices (P.) Ltd [2010] 329 ITR 442 44
(Himachal Pradesh HC)
CIT v. M.C. George [2011] 243 CTR 404 (Kerela HC) 243
CIT v National Mutual Life Association of Australasia [1933] 1 22
ITR 350 (Bombay HC)
CIT v. Navbharat Ferro Alloys Ltd. [2000] 244 ITR 261 (Andhra 26
Pradesh HC)
CIT v. Neyveli Lignite Corporation Ltd. [2000] 243 ITR 459 43
(Madras HC)
CIT v. Nike Inc. [2014] 264 CTR 508 (Karnataka HC) 23
CIT v. O. Abdul Razak [2011] 337 ITR 350 (Kerela HC) 5
CIT v. Oil & Natural Gas Commission [2002] 225 ITR 413 78
(Rajasthan HC)
CIT v. Podar Cement (P) Ltd. [1997] 226 ITR 625 (SC) 36
CIT v. PVAL Kulandagan Chettiar [2004] 267 ITR 654 (SC) 147
CIT v. Quantas Airways Ltd. [2002] 256 ITR 84 (Delhi HC) 28
CIT v. Remington Typewriter Co. (Bombay) Ltd. [1930] 5 ITC 24
177 (PC)
CIT v. Ruti Machinery Works Ltd. [2000] 243 ITR 442 (Madras 43
HC)
CIT v. S. G. Pgnatale [1980] 124 ITR 391 (Gujarat HC) 34, 35
CIT v. Saudi Arabian Airlines [1985] 155 ITR 65 (Bombay HC) 85
CIT v. Sedco Forex International Drilling Co. Ltd. [2003] 264 36
ITR 320 (Uttaranchal HC)
CIT v Samsung Electronics Co. Ltd, [2012] 345 ITR 494 43
(Karnataka HC)
CIT v Savumiamurthy [1946] 14 ITR 185 (Madras HC) 7
CIT v. Sham L. Chellaram [2015] 373 ITR 292 (Bombay HC) 241
CIT v. Stratex Net Works (India) Pvt. Ltd., [2013] 33 221
taxmann.com 168 (Delhi)
CIT v. Sundwiger EMFG & Co. [2003] 262 ITR 110 (Andhra 51
Pradesh HC)
CIT v. Suresh Nanda [2015] 375 ITR 172 (Delhi HC) 5
CIT v Toshoku Ltd [1980] 125 ITR 525 (SC) 25
CIT vs. Vinzas Solutions India (P.) Ltd. [2017] 392 ITR 155 46
(Madras HC)
CIT v. Visakhapatnam Port Trust [1983] 144 ITR 14 (Andhra 146
Pradesh HC)
CIT v Wipro Ltd [2013] 355 ITR 284 (Karnataka HC) 43
CIT vs. EKL Appliances Ltd, [2012] 24 taxmann.com 199 223
(Delhi)
CIT vs. Cushman and Wakefield India Pvt Ltd., [2014] 46 223
taxmann.com 317 (Delhi)
CUB pty Limited (formerly known as Foster 's Australia Ltd.) vs. 27
UOI & Ors [2016] 388 ITR 617 (Delhi HC)
Danisco India P.Ltd v. Union of India (2018) 301 CTR 360 264
(Delhi HC)
Daler Singh Mehndi v. DCIT [2018] 91 taxmann.com 178 (Delhi 146
HC)
Diageo India Pvt. Ltd v ACIT 47 SOT 252 220
DCIT v. Geoservices Eastern Inc. [1995] 55 ITD 227 (Mumbai 77
Tribunal)
DCIT v. Infosys BPO Ltd. [2015] 154 ITD 816 (Bangalore 264
Tribunal)
DCIT v. Mitsubishi Heavy Industries Ltd. [1999] 102 Taxman 85
301 (Delhi Tribunal)
DCIT v. Siroya Developers [2017] 162 ITD 718 (Mumbai 101
Tribunal)
DCIT v. Tata Yodogawa Ltd. [1999] 68 ITD 47 (Patna Tribunal) 258
DCIT v Whirlpool of India Ltd., [2015] 64 taxmann.com 324 222
(Delhi)
DDIT v. IMG Media Ltd. [2016] 67 taxmann.com 343 (Mumbai 47
Tribunal)
DDIT v. A.P. Moller Maersk [2014] 64 SOT 50 (Mumbai 53
Tribunal)
DDIT v. Serum Institute of India Ltd. [2015] 68 SOT 254 (Pune 264
Tribunal)
DIT v. A.P. Moller Maersk A S [2017] 392 ITR 186 (SC) 53
xv
DIT v. LG Cable Ltd. [2011] 237 CTR 438 (Delhi HC) 26
DIT v. Ericsson A.B [2012] 343 ITR 470 (Delhi HC) 26
DIT v. Infrasoft Ltd., [2014] 264 CTR 329 (Delhi HC) 45
DIT v. Mitchell Drilling International (P.) Ltd. [2016] 380 ITR 81
130 (Delhi HC)
DIT v. OHM Ltd. [2013] 352 ITR 406 (Delhi HC) 79
DIT v. Ravva Oil (Singapore) (P.) Ltd. [2008] 300 ITR 53 (Delhi 86
HC)
DIT v. Sheraton International Inc. [2009] 313 ITR 267 (Delhi 44
HC)
Dr. M. Manohar v. ACIT [2011] 339 ITR 49 (Madras HC) 242
Elkem Technology v. DCIT [2001] 250 ITR 164 (Andhra 51
Pradesh HC)
Elitecore Technologies (P.) Ltd. v. DCIT [2017] 184 TTJ 166 151
(Ahmedabad Tribunal)
Ensco Maritime Ltd. v. ADIT [2017] 244 Taxman 261 81
(Uttarakhand HC)
Ericsson Telephone Corporation India v. CIT [1997] 224 ITR 270
203 (AAR Delhi)
Essar Oil Ltd. v. ACIT [2014] 28 ITR (T) 609 146
GEA Refrigeration Technologies GmbH, In re [2018] 401 ITR 32
115 (AAR)
General Electric Pension Trust, IN RE, (2007) 289 ITR 335 274
(AAR)
G.E. India Technology Centre (P) Ltd v CIT [2010] 327 ITR 456 259
(SC)
Geodis Overseas (P) Ltd v Dy CIT 45 SOT 375 (Delhi )(Trib) 221
Google India (P.) Limited v. ACIT [2017] 86 taxmann.com 48
237 (Bangalore ITAT)
Godaddy.com LLC v. ACIT [2018] 92 taxmann.com 241 49
(Mumbai Tribunal)
GVK Industries Ltd. v. ITO [2015] 371 ITR 453 (SC) 21, 50
Global Geophysical Services Ltd, In re [2011] 332 ITR 418 78
(AAR)
Great Lakes Carbon Corporation v. CIT [1993] 202 ITR 64 23
(Calcutta HC)
Grindlays Bank Ltd. v. CIT [1992] 193 ITR 457 (Calcutta HC) 37
G.V. K. Industries Ltd. v. ITO [1998] 228 ITR 564 (Andhra 50
Pradesh HC)
Hari Gopal Chopra v. CIT [1999] 237 ITR 135 (AAR) 241
Hazoora Singh v. CIT [1986] 160 ITR 746 (Punj) 28
Hyder Consulting Ltd. v. CIT [1999] 236 ITR 640 (AAR Delhi) 270
Hyosung Corporation [2016] 382 ITR 371 (Delhi HC) 270
Hyosung Corporation 244 Taxman 286 (SC) 271
Hyundai Motor India Limited Vs DCIT, (I.T.A. No. 739 and 853 223
/Chny/2014, 563 and 614 /Chny/2015, 842 and 761/Chny/16
and CO 73/Chny/16 AYs: 2009-10, 2010-11 and 2011-12)
Hyundai Motor India Ltd. v. DCIT, [2017] 81 taxmann.com 5 261
(Chennai Tribunal)
3i Infotech Ltd. vs. Dy. CIT 136 TTJ 641 (Mumbai Tribunal) 220
Indocom v. CIT 335 ITR 485 (Calcutta HC) 251
Indian Farmers Fertilizers Co-operative Ltd. v. Principal 153
CIT [2016] 51 ITR(T) 162 (Delhi Tribunal)
Instrumentarium Corporation Limited, Finland (ITA No. 1548 225
and 1549/Kol/2009)
Ishikawajma-Harima Heavy Industries Ltd v. DIT [2007] 288 26,52
ITR 408 (SC)
Islamic Republic of Iran Shipping Lines v DCIT (Intl Taxation) 73
[2011] 46 SOT 101 (Mumbai Tribunal)
ITO v. Primenet Global Ltd. [2016] 48 ITR(T) 451 (Delhi 53
Tribunal)
J. K. Synthetics Ltd. v. ACIT [1990] 185 ITR 540 (Del). 39
J.P. Morgan Services P. Ltd. vs. DCIT, [2016] 70 taxmann.com 224
228 (Mumbai - Trib.)
K. Anji Reddy v. DCIT [2013] 59 SOT 92 (Hyderabad 115
Tribunal)(URO)
K. Sambasiva Rao v. ITO [2014] 62 SOT 167 (Hyderabad 6
Tribunal)
Kanchanaganga Sea Foods Ltd. v. CIT [2010] 325 ITR 540 258
(SC)
xvii
Krishak Bharati Co-operative Ltd. [2017] 80 taxmann.com 153
326 (Delhi HC)
Kusumben D. Mahadevi v.CIT [1963] 47 ITR 214 (Bombay HC) 27
L.Chandra kumar v. Union of India 274
Lloyd Helicopters International Pty. Ltd. v. CIT [2001] 249 ITR 266
162 (AAR)
Lloyd's Register Asia (India Branch Office) v. ACIT [2015] 69 86
SOT 441 (Mumbai Tribunal)
LS Cable & System Ltd v. CIT [2016] 385 ITR 99 (Delhi HC) 271
Lucent Technologies GRL LLC vs. ADIT(Int. tax) [ITA Nos. 48
7001 to 7004/Mum/2010] (Mumbai Tribunal)
Luxottica India Eyewear Pvt. Ltd. vs ACIT Cir-15(2) (ITA No. 222
1492/ 2015, ITA 1205/2016 and ITA 344/2017)
Marks & Spencer Reliance India Pvt. Ltd. (ITA No.893 of 2014) 261
(Mumbai HC)
McLeod Russel Kolkata Ltd In re. (2008) 215 CTR 230 (AAR) 273
Monte Harris v. CIT [1996] 218 ITR 413 (AAR Delhi) 267, 270,
274
MC Dermott International Inc v. DCIT [1994] 49 ITD 590 (Delhi 77
Tribunal)
Meteor Soctellite Ltd. v. ITO [1980] 121 ITR 311 (Gujarat HC) 54
Mrs. Smita Anand, China In re [2014] 362 ITR 38 (AAR) 5
Munibhai v CIT [1953] 23 ITR 27 (Bombay HC) 6
Nagarjuna Fertizers & Chemicals Ltd. [2017] 55 ITR(T) 1 264
(Hyderabad Special bench tribunal)
National Oil Well Maintenance Company [2018] 89 79
taxmann.com 24 (Jaipur Tribunal)
Nivea India Pvt. Ltd [I.T.A. No./7744/Mum/2012 (A.Y 2008-09); 223
1792/Mum/2014 (A.Y. 09-10); 105/Mum/2015, (A.Y.10-11);
903/Mum/2016, (A.Y. 11-12);674/Mum/2017,(A.Y- 12-13)]
(Mumbai Tribunal)
Novo Nordisk India Pvt Ltd Vs DCIT, IT(TP)A 221
No.122/Bang/2014
Nitin Shantilal Muthiyan v. DCIT [2015] 154 ITD 543 (Pune 106
Tribunal)
OHM Ltd, In re [2011] 335 ITR 423 (AAR) 78
Oil & Natural Gas Corporation Ltd. v. CIT [2015] 376 ITR 306 78
(SC)
Oil India Ltd. v. CIT [1995] 212 ITR 225 (Orissa HC) 77
Oman International Bank, S.A.O.G v. DDIT [2014] 62 SOT 98 86
(Mumbai Tribunal)
ONGC as Representative Assessee of University of Calgary, 80
Alberta, Canada v. ADIT [2017] 81 Taxmann.com 419 (Delhi
Tribunal)
Pandian Chemicals Ltd. Vs. CIT [2003] 262 ITR 278 (SC) 125
PCIT v M. Tech India (P.) Ltd. [2016] 381 ITR 31 (Delhi HC) 46
Pfizer Corporation v. CIT [2003] 259 ITR 391 (Bombay HC) 38
Platinum Investment Management Ltd. v. DDIT [2013] 33 250
taxmann.com 298 (Mumbai Tribunal)
Pr. Commissioner Vs. Ameriprise India Pvt Ltd., ITA 206/2016 224
(High Court) (Delhi)
Praveen Soni v. CIT [2011] 333 ITR 324 (Delhi HC) 124
Production Testing Services Inc. [2018] 89 taxmann.com 416 80
(Mumbai Tribunal)
Qad Europe B. V. v. DDIT [2017] 53 ITR(T) 259 (Mumbai 47
Tribunal)
Quark Systems 38 SOT 307 (SB) 220
Dr. Rajnikant R. Bhatt v. CIT [1996] 222 ITR 562 (AAR Delhi). 267
Rambhai L. Patel v. CIT [2001] 252 ITR 846 (Gujarat HC) 58
Ranbaxy Laboratories Ltd Vs ACIT, [2016] 68 taxmann.com 224
322 (Delhi - Trib.)
Raymond Ltd. v. ITO [2003] 81 ITD 791 (Mumbai Tribunal) 259
Robert W Smith (1995) 212 ITR 275 (AAR) 274
Roger 's Pyan Shellac & Co. v. Sea of State (11 TC 363) 24
RPS Energy Pty Ltd. [2018] 92 taxmann.com 77 (Delhi tribunal) 80
S. Inder Singh Gill v. CIT [1963] 47 ITR 284 (Bombay HC) 102
Sage Publications Ltd. U.K. v. DCIT [2016] 387 ITR 437 (Delhi 271
HC)
Samsung Electronics Co. Ltd. [2009] 185 Taxman 313 260
xix
(Karnataka HC)
Sedco Forex International Inc. v CIT [2008] 214 CTR 192 78
(Uttaranchal HC)
Sanofi Pasteur Holding SA v. Department of Revenue [2013] 147
354 ITR 316 (Andhra Pradesh HC)
Sanjay Gala v. ITO [2011] 46 SOT 482 (Mumbai Tribunal) 242
SeaBird Exploration FZ LLC., In re [2018] 92 taxmann.com 328 81
(AAR New Delhi)
Shandong Tiejun Electric Power Engineering Co. [2018] 400 83
ITR 371 (Gujarat HC)
Shashi Parvatha Reddy v. DCIT(IT) [2017] 167 ITD 587 242
(Hyderabad Tribunal)
Shell India Markets Pvt Ltd v. ACIT and others [Writ petition 219
1205 of 2013] (Bombay HC)
Shinhan Bank v. DDIT (Int. tax.) 54 SOT 140 (Mumbai 86
Tribunal)
Siem Offshore Crewing AS v. ADIT [2016] 68 Taxmann.com 79
135 (Delhi Tribunal)
Siemens Ltd. v. CIT(A) [2013] 142 ITD 1 (Mumbai Tribunal) 53
Siva Industries & Holdings Ltd (Chennai Tribunal) 220
Smt. Deivanayagam Maruthini v. DDIT [2012] 51 SOT 163 241
(Chennai Tribunal)
Sony Ericsson Mobile Communications India (P) Ltd v CIT 222
[2015] 55 taxmann.com 240 (Delhi)
Stumpp Schuele & Somappa P. Ltd. [1977] 106 ITR 399 101
(Karnataka HC)
Subbayya Chettiar v. CIT [1951] 19 ITR 168 (SC) 7
Sunderdas Haridas v. ACIT [1998] 67 ITD 89 (Mumbai 240
Tribunal)
Surinder Singh v. AO [2003] 1 SOT 96 (Delhi Tribunal) 113
Synco Industries Ltd. v. AO [2008] 299 ITR 444 (SC) 99, 102
Synopsis International Ltd. vs. DDIT [2016] 76 taxmann.com 43
118 (Karnataka HC)
Swiwar Offshore Pte. Ltd. [2018] 89 taxmann.com 346 (Mumbai 81
Tribunal)
Taj TV Ltd. v. ADIT [2017] 162 ITD 674 (Mumbai Tribunal) 45
Tejas Networks Ltd. v. DDIT [2015] 64 Taxmann.com 439 43
(Bangalore Tribunal)
Technip UK Ltd. v. DIT [2017] 81 Taxmann.com 311 (Delhi 80
Tribunal)
Tally Solutions, Bangalore ITAT 219
T. Satish U. Pai v. CIT [1979] 119 ITR 877 (Karnataka HC) 118
Textile Machinery Corporation Ltd. [1977] 107 ITR 195 (SC) 119
Transmission Corporation of A.P. Ltd. And Another v. CIT 259
[1999] 239 ITR 587 (SC)
TVS Suzuki Ltd. v. ITO [2000] 73 ITD 91 (Madras Tribunal) 258
UOI v. Azadi Bachao Andolan and Another [263] ITR 706 (SC) 147
UCO Bank vs. CIT [1999] 237 ITR 889 (SC) 274
Valentine Maritime (Gulf) LLC v. ADIT [2017] 163 ITD 32 80
(Mumbai Tribunal)
Van Oord ACZ. BV, In re [2001] 248 ITR 399 (AAR Delhi) 82
Vijay Mallya v. ACIT [2003] 263 ITR 41 (Calcutta HC) 4
V. M. Salgaocer & Bros Ltd. v. Deputy Controller [1991] 187 75
ITR 381 (Karnataka HC)
V. Ravi Narayanan, In re [2008] 300 ITR 62 (AAR Delhi) 240
Vodafone International Holdings B.V. v. Union of India, [2012] 29, 226,
341 ITR 1 (SC) 260
Vodafone India Services Private Limited vs DCIT [ITA No. 226
565/Ahd/17, AY 2012-13] (Ahmedabad Tribunal)
Watson Pharma Pvt Ltd (ITA No.1423/Mum/2014) (Mumbai 225
Tribunal)
Wipro Limited [2016] 382 ITR 179 (Karnataka HC) 152
Wipro Limited [2016] 240 Taxman 299 (SC) 152
Wipro Ltd. v. ACIT [2013] 55 SOT 3 (Bangalore Tribunal)(URO) 140
X Ltd., In re [1996] 220 ITR 377 (AAR Delhi) 271
Y Ltd., In re [1996] 221 ITR 172 (AAR Delhi) 271
Yokogawa India Ltd. [2017] 391 ITR 274 (SC) 68
xxi
Chapter 1
Residential Status
Scope of Total Income
Section 5 prescribes different scope of taxable total income for residents, not
ordinarily residents and non residents. It is important to determine the
residential status, because the scope of taxable income and the tax liability
varies with the residential status of the assessee. Ordinary resident does not
attract any additional tax, but being "not ordinarily resident " entitles a person
to partial exemption from chargeability as a resident, to which exemption a
person who is ordinarily resident is not entitled. Therefore, the ambit of
taxation varies with the factor of residence in the previous year.
Scope of Total Income Residents Section 5 (1)
Persons who are `Resident and ordinarily resident' are charged to tax on
(a) income received or deemed to be received in India in the accounting
year, by or on behalf of such person, the date or place of its accrual
being immaterial [section 5(1)(a)].
(b) Income which accrues or is deemed to accrue or arise in India during
the accounting year, the date or place of its receipt being immaterial
[section 5(1)(b)].
(c) Income which accrues or arise outside India during the accounting
year, even if it is not received in or brought into India [section 5(1)(c)]
Scope of Total Income Not Ordinarily Residents
Persons resident in India but not ordinarily resident, are assessed exactly in
the same manner as persons who are resident and ordinarily resident but
subject to one special exemption. Persons who are not ordinarily resident are
chargeable in respect of all the three items of income enumerated above, but
they are exempt from tax in respect of income accruing outside India unless
it is derived from a business controlled in or a profession or vocation set up
in India. [proviso to section 5 (1)]
1
Taxation of Non-Residents
Scope of Total Income Non Residents
Persons who are not resident in India in the previous year are charged to tax
on
(a) income received or deemed to be received in India in the previous
year, by or on behalf of such person, the date or place of its accrual
being immaterial [section 5(2)(a)];
(b) income which accrues or arises or is deemed to accrue or arise in
India during the previous year, the date or place of its receipt being
immaterial [section 5(2)(b)];
To sum up the general position in a sentence, all assessees, whether
resident or not, are chargeable in respect of income accruing or arising , or
deemed to accrue or arise or received or deemed to be received, in India;
while ordinarily residents alone are chargeable in respect of income which
accrues or arises and is received outside India.
Residence in India
Principle
As noted in section 5 of the Act, the incidence of tax varies with the
residential status of the taxable entity; therefore, the first step while
calculating the tax liability of an assessee is to determine its residential
status in accordance with section 6. The Individuals and HUF are divided into
3 residential categories (i) Resident (resident and ordinarily resident); (ii)
Resident but not ordinarily resident; (iii) Non-Resident. All other taxable
entities can be either (i) Resident; or (ii) Non Resident.
Clause (1) of section 6 lays down the tests for `Resident'; all those who do
not satisfy this test would be non residents; who are defined in section 2(30).
Test of residence or ordinarily residence is applied in each previous year; the
finding of the status of `Resident' during one previous year does not
automatically make one `Resident' during the next year.
Test for Individual Resident
Clause (1) of section 6 lays down two alternative tests for an individual to
qualify as `Resident' in India; thus on satisfying either of them individual
becomes Resident in India (excepting the cases covered by explanation):
2
Residential Status
Test 1: Clause (1)(a)
If during the relevant previous year he is physically present in India for a
period aggregating to 182 days or more; or
Test 2: Clause (1)(c)
If he is physically present in India for a period aggregating to 365 days or
more in the 4 immediately preceding years and 60 days or more in the
relevant previous year.
Meaning of India
As per section 2(25A) "India" means the territory of India as referred to in
article 1 of the Constitution, its territorial waters, seabed and subsoil
underlying such waters, continental shelf, exclusive economic zone or any
other maritime zone as referred to in the Territorial Waters, Continental
Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of
1976), and the air space above its territory and territorial waters.
The aforesaid rule of residence is subject to exceptions. By virtue of
Explanation (a) to section 6(1) in the case of an Indian citizen who leaves
India in the relevant previous year as a member of the crew of an Indian ship
as defined in section 3(18) of the Merchant Shipping Act, 1958 or for the
purpose of employment outside India, the period of 60 days referred to in
section 6(1) (c) will be extended to 182 days.
As per Explanation 2 (inserted with effect from April 1, 2015), while, in the
case of an Indian citizen and a member of the crew of a foreign bound ship
leaving India, the period of stay in India shall in respect of such voyage, be
determined in the manner and subject to such conditions as prescribed under
Rule 126 of Income-tax Rules, 1962.
As per Rule 126, the period or periods of stay in India , in respect of an
eligible voyage, will not include the period beginning on the date entered into
the Continuous Discharge Certificate in respect of joining the ship by the
individual and ending on the date entered into this certificate in respect of
signing off by that individual from the ship in respect of that voyage. Terms
viz. Continuous Discharge Certificate and eligible voyage in the context of
shipping activities are also separately defined under the above Rules.
By virtue of clause (b) of the Explanation to section 6(1), an Indian citizen or
a person of Indian origin being outside India who comes on a visit to India in
any previous year, the limit of 60 days referred to in section 6(1)(c) shall also
be extended to 182 days per year. Therefore, an Indian citizen or a person of
3
Taxation of Non-Residents
Indian origin can stay in India upto 364 days in two years, if he plans his visit
in such way.
If the assessee's stay in India is of the requisite duration, he would be
deemed to be a resident although he may put up at hotels, and not always at
the same hotel, and never for long together.
Again a man might well be compelled to reside here completely against his
will, the exigencies of business often forbid the choice of residence, and
though a man may make his home elsewhere and stay in this country only
because business compels him nonetheless, if the conditions of section 6 are
satisfied he must be held to be a resident. In law a man may be resident in
two different countries, in the same year, although he can have only one
domicile.
Important Judicial Precedents & Board Circulars:
1. Indian members of the crew of a foreign going Indian ship would be
non-resident in India, if they are on board such ship outside the
territorial waters of India for 182 days or more during any year.
Accordingly, such seaman will be charged to tax in India only in
respect of earnings received in India or the earnings for the period
when they are working within Indian waters on coastal ships etc
[Circular No. 586, dated November 28, 1990]
2. While deciding the residential status of an assessee, the Assessing
Officer should consider the provisions of both sections 6(1)(a) and
6(1)(c) and this is mandatory requirement of law [Vijay Mallya v. ACIT
[2003] 263 ITR 41 (Calcutta HC)]. Each of the two tests requires the
personal presence of the assessee in India in the course of the
previous year.
3. The Bombay High Court in CIT v. Indo Oceanic Shipping Co. Ltd.
[2001] 247 ITR 247 has therefore, held that, merely because the
contract entered into in India, it will not be conclusive test to decide
as to whether an employee was employed in India or outside India.
The terms of the contract, the nature of the work, the nature of
business and all other relevant facts are required to be considered to
decide as to whether the employment was in India or outside India.
There is no merit in the contention of the department that for the
purposes of the Act, remuneration paid to an employee working on an
Indian ship would show that the employee was employed in India and
not outside India. There was also no merit in departments' contention
4
Residential Status
that ship bearing Indian flag constitutes Indian territory and remains
so even when it goes outside territorial waters of the country. Indian
ships operating beyond Indian territorial waters do not come within
the term "India " as defined in section 2(25A).
4. For calculating period of stay in India for the purpose of determining
residential status of an individual under section 6(1)(a) number of
days during which he was present in India in a previous year
including days of arrival and departure have to be taken into account.
Even if for some hours on these dates a person can be said to have
been out of India, it would have to be taken that, the person was in
India on these dates however short the period may be. [See P. No. 7
of 1995, In re. [1997] 223 ITR 462 (AAR Delhi)]
5. The Delhi High Court in CIT v. Suresh Nanda [2015] 375 ITR 172 has
held that in determining the residential status of assessee in India
during relevant assessment year, number of days of his forced stay
due to untenable impounding of assessee's passport were to be
excluded while computing days of his stay in India for purposes of
Section 6(1)(a) of the Act. This ruling does not seem to be consistent
6. As Rowlart J. observed in Levene V.I.R. (13 TC 468) a complete
wanderer, an absolute tramp or a rich person of the same type
wandering from hotel to hotel and never staying two nights in the
same place may still be a resident although he cannot be called a
resident in any particular spot. Stay on a yacht moved in the territorial
waters of India would be a stay in India for the purpose of section 6.
7. For purpose of Explanation (a) to section 6(1)(c), `employment'
includes self employment like business or profession taken up by
assessee abroad [CIT v. O. Abdul Razak [2011] 337 ITR 350 (Kerela
HC) & ACIT v. Jyotinder Singh Randhawa [2014] 64 SOT 323 (Delhi
Tribunal)]
8. Return to India after resigning from job abroad is not visit to India
under explanation (b) to section 6(1)(c). [Mrs. Smita Anand, China In
re [2014] 362 ITR 38 (AAR)]
9. A careful reading of Explanation (a) would show that the requirement
of the Explanation is not leaving India for employment but it is leaving
India for the purposes of employment outside India. For the purpose
of the Explanation (a), an individual need not be an unemployed
5
Taxation of Non-Residents
person who leaves India for employment outside India. [British Gas
India (P.) Ltd., In re [2006] 285 ITR 218 (AAR)]
10. In K. Sambasiva Rao v. ITO [2014] 62 SOT 167, the Hyderabad
Tribunal has held that for the purpose of determining residential
status in India under section 6, the term 'going abroad for purpose of
employment' means travelling abroad on business visa to take up any
employment or for any business carried outside India.
Test for Individual- Not Ordinarily Resident
An individual is taxed as `not ordinarily resident' if he fulfills any of the two
alternative conditions laid down in clause (6)(a) i.e.
(i) he has been non-resident in India in nine out of the ten previous
years preceding the relevant previous year; or
(ii) he has during the seven previous years preceding that year been in
India for a period aggregating to 729 days or less
In other words an Individual remains `Resident and ordinarily resident' if both
the conditions mentioned in section 6(6)(a) remain unsatisfied. Thus an
Individual is classified as `Resident and ordinarily resident' when in addition
to any one of the conditions specified in section 6(1), both the following
conditions are fulfilled:
(i) he has been resident in India in at least two out of the ten years
preceding the relevant previous year; and
(ii) he has during the seven years preceding that year been in India
aggregating to at least 730 days
The word `resident' in first part of section 6(6)(a) means resident within the
meaning of section 6(1) whereas second part refers to only physical
presence in India.
Important Judicial Precedents & Board Circulars:
1. Under the second part of sec 6(6)(a) the relevant condition is that the
Individual's aggregate physical presence in India should not have
exceeded 729 days; it cannot be construed to mean that absence
from India for an aggregate period of over 729 days during the
preceding 7 years qualified the assessee to be taxed as `resident but
not ordinarily resident' [Munibhai v CIT [1953] 23 ITR 27 (Bombay
HC)]
6
Residential Status
2. The expression four years preceding should be taken as referring to
the period of four years of 12 calendar months each, immediately
preceding the commencement of the relevant accounting year and
not to the period of four calendar years ending on 31 Dec
immediately preceding the commencement of such year. [CIT v
Savumiamurthy [1946] 14 ITR 185 (Madras HC)]
Test for HUF/Firm/AOP etc Resident
A Hindu undivided family, firm, association of persons etc is resident in India
if the control and management of its affairs is situated wholly or partly in
India. But if the control and management is situated wholly outside India,
then, a HUF, Firm, AOP etc is to be regarded as non-resident. Since partial
control is sufficient for the purpose of residence, these units of assessment
may have in law two places of residence.
The residence of partners or of individual members of a Hindu undivided
family or association of persons is immaterial for the purpose of determining
the residence of the firm or the family or AOP except in so far as such
residence affects the control and management of the affairs of the firm or the
family.
The residence of partners in India normally raises the presumption that the
firm is resident in India, but the presumption may be rebutted by showing that
the control and management of the affairs of the firm is situated wholly
outside India.
Test for HUF Not Ordinarily Resident
It may be noted that in order to determine whether a Hindu Undivided family
is `resident but not ordinary resident', the residential status of the Karta of the
family has to be considered on the basis of criteria laid down for individual.
[Clause (6)(b) to section 6]
Important Judicial Precedents & Board Circulars:
The leading case on the construction of section 6(2) is Subbayya Chettiar v.
CIT, [1951] 19 ITR 168 (SC), which was concerned with the residence of a
Hindu undivided family. In this case, the Supreme Court laid down the
following proposition:
(i) Normally a Hindu undivided family is presumed to be resident in
India unless assessee proves that the control and management of
affairs is situated wholly outside India
7
Taxation of Non-Residents
(ii) The word "affairs " in sub section (2) means affairs which are
relevant for the purpose of this Act and which have some relation to
the income sought to be assessed.
(iii) The seat of the management and control of the affairs of the family
may be divided and if so, the family may have more than one
residence.
(iv) If the seat of management and control is abroad, it would need much
more than have `activities' in India to support a finding that the seat
of management and control has been started in India. Occasional or
sporadic visit of a non-resident karta to the place where the family
business is carried on in India, or causal directions given in respect
of the business while on such visits would be insufficient to make the
family resident in India.
So, the mere receipt in India, by the Karta or a partner of copies of the
business books would not by itself amount to exercise of control. Nor is the
business necessarily controlled and managed at the place where the
accounts are submitted and the division of profits decided on.
Test for Company
Two alternative tests are provided for determining the residence of company.
A company is resident here; if (i) it is an Indian company [defined in sec
2(26)] or (ii) its place of effective management ( `PoEM'), in that year, is in
India.
Thus, each Indian company, as that expression is defined in section 2(26) is
deemed to be resident in India even its control and management is situated
wholly or partly abroad, while a non-Indian company is deemed to be
resident only if its PoEM is in India. The PoEM criterial for determination of
residency has been made applicable for assessment years commencing on
or after 1 April 2017.
POEM has been defined to mean a place where key management and
commercial decisions that are necessary for the conduct of business of an
entity as a whole are, in substance made.
Initially, The CBDT had issued the final Guidelines for determination of PoEM
vide Circular No.6 of 2017 dated 24 January 2017, which are summarized as
below:
i. General principles
8
Residential Status
· The determination of PoEM depends on the facts and circumstances
of a given case.
· It recognizes the concept of substance over form.
· The place of effective management differs from a place of
management and an entity can have only one place of effective
management at any point of time.
· The determination of PoEM shall be an annual exercise.
· The process of determining PoEM would be primarily based on the
fact whether or not the company is engaged in active business
outside India.
ii. Active business outside India
· A company is said to be engaged in Active business outside India if
the passive income is not more than 50% of its total income; and-
a) Less than 50% of its total assets are situated in India; and
b) Less than 50% of total number of employees are situated /
resident in India and
c) Payroll expenses incurred on such employees is less than 50%
of its total payroll expenditure
The said guidelines further provide explanation on the terms
`income', `value of assets', `number of employees', `payroll' used for
determination of active business outside India.
· It has been clarified that any income by way of interest shall not be
considered to be passive income in case of company engaged in the
business of banking or is a public financial institution (PFIs), and its
activities are regulated as such under the applicable laws of the
country of incorporation.
· In case of a company engaged in an active business outside India,
the PoEM shall be presumed to be outside India if the majority of
board meetings of the company are held outside India.
· Where it is established that such powers of management are
exercised by the holding company / other person(s) resident in India,
then the PoEM shall be in India.
· For this purpose, merely because the Board of Directors (BOD)
follows general and objective principles of global policy of the group
9
Taxation of Non-Residents
laid down by the parent entity which may be in the field of pay-roll
functions, Accounting, Human resource (HR) functions, IT
infrastructure and network platforms, Supply chain functions,
Routine banking operational procedures, and not being specific to
any entity or group of entities per se; would not constitute a case of
Board of Directors of the company standing aside.
iii. Other cases (i.e. Companies not engaged in active business outside
India)
· In case of companies other than those engaged in active business
outside India, the determination of PoEM would be a two stage
process, namely:
a) Identification or ascertaining of person (s) who actually make
the key management and commercial decision for conduct of
the company's business as a whole; and
b) Determination of place where these decisions are in fact being
made.
· The place where the key management and commercial decisions are
taken would be more important than the place where such decisions
are implemented.
As regards determination of PoEM in case of companies other than
those engaged in active business outside India, specific guiding
principles are provided such as location of Board meetings, location of
Head office, etc., which are as covered below:
Location of Board Meeting
· The location where a company's Board meets regularly and makes
decisions would be relevant provided that the Board:
i. Retains and exercises its authority to govern the company; and
ii. Does, in substance, make the key management and commercial
decisions necessary for the conduct of the company's business
as a whole.
Delegation by Board
· Where the Company's Board delegates some/all of its authority to a
committee (s) consisting of key members of senior management,
PoEM would be the location where the members of the committee
10
Residential Status
are based and where it develops and formulates the key strategies
for mere formal approval by the full Board.
Location of Head Office
· The location of a company's head office will be a very important
factor as it often represents the place where key decisions are
made. The Guidelines provide for various points which are to be
considered for determination of the location of Head office
depending on whether the management is centralized or
decentralized and cases where the members of the senior
management participate in meetings via telephone or video
conferencing.
Meetings through Video Conference / technology
· The use of modern technology may not necessitate persons taking
decisions to be physically present at a particular location. Therefore
physical location of board meeting or executive committee meeting
or meeting of senior management may not be where the key
decisions are in substance being made. In such cases, the place
where the directors or the persons taking the decisions or majority of
them usually reside may also be a relevant factor.
Circular resolution or round robin voting
· In case decisions are made through circular resolutions or round
robin voting, the frequency with which it is used, the type of
decisions made in that manner and where the parties involved in
those decisions are located etc. needs to be considered. The
location of the person who has the authority and who exercises the
authority to take decisions would be more important in determination
of PoEM.
Shareholders activity
· Decisions taken by the shareholder, which are reserved for them
under the company law, which typically affect the existence of the
company itself or the rights of the shareholders as such (rather than
the conduct of the company's business from a management or
commercial perspective) are not relevant for the determination of
PoEM.
11
Taxation of Non-Residents
· Whether the shareholder involvement is crossing the line into that of
effective management is one of fact and has to be determined on
case-to-case basis only.
Secondary factors
· If the above factors do not lead to clear identification of PoEM,
secondary factors such as place where main and substantial activity
of the company is carried out or place where the accounting records
of the company are kept can be considered.
Non-relevant factors
· Day to day routine operational decisions in relation to oversight of
the day-to-day business operations and activities of a company
undertaken by junior and middle management shall not be relevant
for the purpose of determination of PoEM.
The Guidelines emphasize that the determination of PoEM is based on all the
relevant facts rather than on isolated facts. The following examples illustrate
where PoEM is not established based on isolated facts-
· the fact that a foreign company is completely owned by an Indian
Company
· the fact that there exist a Permanent Establishment of a foreign
company in India
· cases where one / some of the directors of a foreign company reside
in India
· the fact of local management situated in India in respect of activities
carried out by a foreign company in India
· the existence of support function in India that are preparatory and
auxiliary
Additional clarifications provided
· The place where management decisions are taken would be more
important than the place where such decisions are implemented.
· The principles for determining PoEM are only for guidance purposes
and no principle is decisive in itself.
· The activities performed over a period of time, during the previous
year, needs to be considered. A `snapshot' approach is not to be
adopted.
12
Residential Status
· In cases where PoEM is determined to be in India and also outside
India, then the PoEM shall be presumed to be in India if it has been
mainly / predominantly in India.
Administrative safeguards
Administrative safeguards have been incorporated in the Guidelines by
mandating that the Assessing Officer ( `AO') before initiating inquiry for PoEM
in the case of a tax payer, to seek approval from Principal Commissioner /
Commissioner. The AO shall also obtain approval from Collegium of Principal
Commissioners of Income-tax before holding that PoEM of a non-resident
Company is in India. The collegium so constituted shall provide an
opportunity of being heard to the company before issuing any directions in
the matter.
Illustrations
The Guidelines also includes illustrations on interpretation and determination
of PoEM. Specifically, the illustration clarifies that,
i. Only transactions where both purchase and sale is from/to
associated enterprise needs to be considered in computing passive
income;
ii. All conditions viz. income, value of assets and number of employee
in India and payroll expenses needs to be seen on a collective
basis.
iii. For a company engaged in active business outside India, even in a
case wherein all the directors are Indian residents, the PoEM shall
be presumed to be outside India if the majority of the board
meetings have been held outside India.
iv. In case shareholders involvement results in effective management of
the Company, then the same needs to be considered in
determination of PoEM.
v. Merely because the PoEM of an intermediate holding company is in
India, the PoEM of its subsidiaries shall not be taken to be in India.
Each subsidiary needs to be examined separately.
Thus, the Final Guidelines provide more clarity on,
· Transactions with associated enterprises;
· Shareholder activity;
· Adoption of global policy laid down by the parent company;
13
Taxation of Non-Residents
· Circular resolutions / round robin voting;
· Scope of operational decisions;
· Interest income of Banks/ Public Financial Institutions for
determination of passive income;
· Examination of certain terms used in the determination of active
business outside India.
The CBDT vide press release dated 24 January 2017 read with circular no.8
of 2017 dated 23 February 2017 stated that the aforementioned guidelines
shall not apply to companies having turnover or gross receipts of INR 50
crore or less in a financial year. Further, the CBDT vide circular no. 25 of
2017 dated 23 October 2017 clarified that so long as the regional
headquarter in India operates for subsidiaries/group companies in a region
within the general and objective principles of global policy of the group laid
down by the parent entity in the field of pay roll functions, accounting, human
resource functions, IT infrastructure and network platforms, supply chain
functions, routine banking operational procedures, and not being specific to
any entity or group entities per se; it would, in itself, not constitute a case of
board of directors of companies standing aside and such activities of regional
headquarter in India alone will not be a basis for establishment of PoEM for
such subsidiaries/group companies. Thus, a parent company laying down
the standard policies and guidance for support of its group entities will not
trigger PoEM.
As per section 115JH of the Act, computation mechanism for computing total
income, treatment of unabsorbed depreciation, set-off or carry forward and
set-off of losses, collection and recovery and special provisions relating to
avoidance of tax in respect of such foreign company said to be resident in
India were to be notified. In this connection, CBDT has issued notification
on -- 29/2018 dated June 22, 2018.----------
Important Judicial Precedents:
1. In AB Holdings In re [2018] 90 taxmann.com 177 (AAR - New Delhi), the
findings of the AAR which may be relevant for determination of PoEM are:
· Mr. S was the MD in C Group and a director in the applicant and
other group companies. Hence, his persuasive influence on the
investment decisions of the company, irrespective of his location
was logical.
14
Residential Status
· With advancement of technology, it cannot be expected that all
directors would be physically present for all meetings.
· Nevertheless, Mr. S had visited India and Mauritius few times during
period of decision making.
· Control and management wasn't solely dependent on Mr. S. Other
directors were qualified enough.
· Minutes of Board meetings were signed by the Mauritian resident
Directors, which showed that meetings were held in Mauritius.
· When a Director signs an agreement or a resolution, it has to be
assumed that he is in the know of things and represents a company
decision regarding purchase of shares, unless something is amiss in
the document itself or is done on hindsight, is backdated or is
deduced from some unwritten clauses.
· Certificate from tax authorities, address in returns and conduct of
Board meetings showed that office/ place of management of the
Applicant was in Mauritius.
· in the case of Investment companies, investment decisions do not
require huge offices and staff.
· Applicant was the legal and beneficial shareholder in the investee
companies.
· Held, in favour of the assessee.
2. In AB Mauritius, In Re [2018] 90 taxmann.com 182 (AAR New Delhi),
the findings of the AAR which may be relevant for determination of PoEM
are:
· No independent decisions taken regarding where and in which
sector the investments were to be made, leave alone the quantum
and the source thereof.
· The BoD merely reiterated what the holding company had decided.
Similarly, the FIPB approval at best only shows the intent of the
holding company
· SPA was a tripartite agreement between C Group, the sellers (AB
Inc. and US Inc.) and the applicant. SPA signed by the MD of C
group and not by any directors of applicant.
· No mention in SPA of how the applicant was going to fund the
acquisition. This showed that applicant was not a party to the
investment decision making.
· Letter of Authorisation for Mr. S was produced for the first time in
2016 which made it obvious that it was to plug the loophole of
absence of authorization for Mr. S at the time of actual investment.
15
Taxation of Non-Residents
· Investment decisions are made after appropriate deliberation by
BoD. SPA should have complete details about consideration paid
and in whose name shares are transferred.
· Inspite of the significant investment by the assessee, there was no
mention on the liability incurred by it for this acquisition.
· This makes it clear that the applicant's name was only superimposed
in the SPA
· Point of time of acquisition to be seen and not subsequent events.
· On facts, no connection between loan agreement and SPA.
· The BoD of the applicant were informed about the investment
decision by Mr. S, a year after it was done.
· Hence, BoD was neither managing nor controlling its crucial
investment decisions, for which it was stated to be set up.
Different Sources of Income
Sec 6(5) provides that, if a person is resident in India in a previous year
relevant to an assessment year in respect of any source of income, he shall
be deemed to be resident in India in the previous year relevant to the
assessment year in respect of each of his other sources of income.
16
Chapter 2
Income Deemed to Accrue or Arise in
India
Under section 5(1), a resident is chargeable to income tax in respect of
income from whatever source derived which is received or is deemed to be
received in India in such previous year by or on behalf of such person, or
which accrues or arises or is deemed to accrue or arise to him in India during
such year or accrues or arises to him outside India during such year.
As per section 5(2) a non-resident is chargeable to income tax in respect of
income from whatever source derived which is received or is deemed to be
received in India in such previous year by or on behalf of such person, or
which accrues or arises or is deemed to accrue or arise to him in India during
such year.
Section 9(1), therefore, by fiction, deems certain income, in the
circumstances mentioned therein, as income accruing or arising in India. The
fiction embodied in these provisions does not apply to the income which
actually accrues or arises to the assessee in India. By these provisions, only
income accruing or arising outside India is sought to be brought within the
net of the income tax.
Sub section (1) to section 9 has clauses (i) to (vii) enumerating various
categories of incomes which shall be deemed to accrue or arise in India.
Clause (i) provides four different sources, from which if income accrues or
arises, directly or indirectly, is deemed to accrue or arise in India:
a) through or from any business connection in India, or
b) through or from any property in India, or
c) through or from any asset or source of income, in India; or
d) through the transfer of a capital asset situate in India.
Specific Cases when Income shall not be deemed
to Accrue or Arise under Clause (i)
1) Clause (a) to explanation 1 restricts the scope of taxability in the case of
business of which all the operations are not carried out in India, to only
17
Taxation of Non-Residents
such part of income as is reasonably attributable to the
operations carried out in India.
Therefore, in case of business of which some operations are carried outside
India, the income attributable to operations carried outside India shall not be
taxed in India.
2) in the case of a non-resident, no income shall be deemed to accrue or
arise in India to him through or from operations which are confined to the
purchase of goods in India for the purpose of export;
3) in the case of a non-resident, being a person engaged in the business of
running a news agency or of publishing newspapers, magazines or
journals, no income shall be deemed to accrue or arise in India to him
through or from activities which are confined to the collection of news
and views in India for transmission out of India;
4) in the case of a non-resident, being--
(a) an individual who is not a citizen of India ; or
(b) a firm which does not have any partner who is a citizen of India or
who is resident in India ; or
(c) a company which does not have any shareholder who is a citizen of
India or who is resident in India,
no income shall be deemed to accrue or arise in India to such individual,
firm or company through or from operations which are confined to the
shooting of any cinematograph film in India
5) In the case of a foreign company engaged in the business of mining of
diamonds, no income shall be deemed to accrue or arise in India through
or from the activities which are confined to the display of uncut and
unassorted diamond (without any sorting or sale) in the special zone
notified by the Central Government in the Official Gazette in this behalf.
Business Connection
Explanation 2 has been inserted to section 9(1)(i) of the Income tax Act,
1961 with effect from assessment year 2004-05, to define the term business
connection. Clause (a) to the said Explanation has been amended by the
Finance Act 2018 w.e.f 1.4.2019. Now, therefore, the term `business
connection' shall include any business activity carried out through a person
if:
18
Income Deemed to Accrue or Arise in India
(i) the person is acting on behalf of the non-resident; and
(ii) the person:
(a) has and habitually exercises in India an authority to conclude
contracts on behalf of the non-resident or habitually concludes
contracts or habitually plays the principal role leading to
conclusion of contracts by that non-resident and the contracts
are-
· in the name of the non-resident or
· for the transfer of the ownership of, or for the granting of the
right to use, property owned by that non-resident or that
non-resident has the right to use; or
· for the provision of services by 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 and other non residents controlling, controlled by or
subject to the same common control, as that non-resident.
It appears that the aforesaid amendments are effected to align the
provisions to those in the tax treaties, which will shortly be subject to
modification by India through a Multi-Lateral Instrument ( `MLI') route.
The `business connection', however, shall not be held to be established in
cases:
(i) where the non-resident carries on business through a broker, general
commission agent or any other agent of an independent status; and
(ii) if such broker, general commission agent or any other agent of an
independent status is acting in the ordinary course of his business.
For this purpose, it is further provided that where such broker, 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 that non-resident and other non-resident 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 non-
resident, he shall not be deemed to be a broker, general commission agent
or an agent of an independent status.
19
Taxation of Non-Residents
A reference of this definition has been given in section 163 of the Act also.
Thus, for the purpose of section 163 of the Act business connection shall
also include the aforesaid agent.
Business connection can exist in number of ways e.g. branch, agency,
subsidiary, local assistance etc; there cannot be laid down an exhaustive list
of the business arrangements between the entities giving rise to business
connection.
Explanation 3 restricts the scope of taxability in case of business carried on
in India through a person referred to in clause (a) or clause (b) or clause (c)
of Explanation 2 to only so much income as is attributable to the operations
carried out in India.
With effect from April 1, 2019, vide Explanation 2A, the term `business
connection' has been further widened to cover the cases of significant
economic presence of a non-resident in India. The said amendment is in line
with recommendations related to BEPS Action Plan 1 on addressing tax
challenges of the digital economy.
The meaning of term `significant economic presence' is provided as-
(a) transaction in respect of any goods, services or property carried out
by a non-resident in India including provision of download of data or
software in India provided the revenue therefrom exceeds monetary
threshold as may be prescribed; or
(b) systematic and continuous soliciting of its business activities or
engaging in interaction with users (exceeding the number as may be
prescribed) in India through digital means.
The above provisions will apply-
· Whether or not the agreement for such transactions or activities is
entered in India or
· Whether or not, the non-resident has a residence or place of
business of business in India or
· Whether or not, the services are rendered in India
It is further provided that income deemed to accrue or arise in India will be
only so much of income as is attributable to the transactions or activities
covered at clause (a) or (b) above. The specific mechanism for computation
of income if the said provisions are applied will be laid down.
20
Income Deemed to Accrue or Arise in India
Important Judicial Precedents & Board Circulars:
1. The meaning of the expression `business connection' is not restricted
by the definition of `business' contained in section 2(13) of the Act.
`Business connection' is not equivalent to carrying on a business. A
business connection involves a relation between a business carried
on by a non-resident which yields profits or gains and some activity in
India which contributes directly or indirectly to the earning of those
profits or gains. It predicates an element of continuity between the
business of the non-resident and the activity in India. The expression
`business connection' in this section is an expression of wide import
and it is both exclusive and inclusive. The term business connection
predicates an element of continuity between the business of the non-
resident and the activity in the taxable territories: A stray or isolated
transaction is normally not to be regarded as a business connection.
Business connection may take several forms: it may include carrying
on a part of the main business or activity incidental to the non
resident through an agent or it may merely be a relation between the
business of the non resident and the activity in the taxable territory
which facilitates or assists the carrying on of that business. A relation
to be a business connection must be real and intimate.[CIT v. R. D.
Aggarwal and Co. [1956] 56 ITR 20 (SC)]
2. The Apex Court in GVK Industries Ltd. v. ITO [2015] 371 ITR 453
reiterating the principles laid down in R.D. Aggarwal and also while
affirming the decision of Andhra Pradesh High Court has laid down
the following principles of business connection:
i. Whether there is a business connection between an Indian person
and a non-resident is a mixed question of fact and law which has to
be determined on the facts and circumstances of each case;
ii. The expression business connection is too wide to admit of any
precise definition; however it has some well known attributes;
iii. The essence of business connection is the existence of close, real,
intimate relationship and commonness of interest between the non-
resident and the Indian person;
iv. Where there is control or management or finances or substantial
holding of equity shares or sharing of profits by the non-resident of
the Indian person, the requirement of principle (iii) is fulfilled;
21
Taxation of Non-Residents
v. To constitute business connection there must be continuity of activity
or operation of the non- resident with the Indian party and a stray or
isolated transaction is not enough to establish a business
connection.
3. The Apex Court in Anglo-French Textile Co. Ltd. v. CIT [1953] 23 ITR
101 has held that activities which are not well-defined or are of a
casual or isolated character would not ordinarily fall within the ambit
of the words "Business Connection". An isolated transaction between
a non-resident and a resident in British India without any course of
dealings such as might fairly be described as a business transaction
does not attract the application of section 42, but when there is a
continuity of business relationship between the person in British India
who helps to make the profits and the person outside British India
who receives or realizes the profits, such relationship does constitute
a business connection.
4. In CIT v. National Mutual Life Association of Australasia [1933] 1 ITR
350, the Bombay High Court noted that a relation to be a `business
connection' must be real and intimate and through or from which
income must accrue or arise whether directly or indirectly to non-
resident. All that is necessary is that, there should be (i) a business in
India, (ii) a connection between non-resident person or company and
that `business' and (iii) that the non-resident person or company has
earned income through such connection.
5. It is not necessary that the profit or gain should directly flow from the
business connection; it is deemed to be the income of the assessee,
who may well be a non-resident, even if it has arisen indirectly
through the business connection in India [CIT v. Evans Medical
Supplies Ltd. [1959] 36 ITR 418 (Bombay HC)].
6. The word `business' in the expression `business connection' of widest
import and an inclusive one and it means an activity carried on
continuously and systematically by a person by the application of his
labour or skill, with a view to earn income. It does not necessarily
mean trade or manufacture only. It is used as including within its
scope profession, vocations and callings from a fairly long time.
Professions are generally regarded as business. Thus, it also include
`professional connection' [Barendra Prasad Ray v. ITO [1981] 129
ITR 295 (SC)].
22
Income Deemed to Accrue or Arise in India
7. To conform with the requirements of the expression `business
connection', it is necessary that a common thread of mutual interest
must run through the fabric of the trading activity carried on outside
and inside India and the same can be described as `real and intimate
connection'. The commonness of interest may be by way of
management control or financial control or by way of sharing of
profits. It may come into existence in some other manner but there
must be something more than mere transaction of purchase and sale
between principal and principal in order to bring the transaction within
the purview of `business connection' [CIT v. Hindustan Shipyard Ltd.
109 ITR 158 (Andhra Pradesh HC)].
8. In CIT v. Nike Inc. [2014] 264 CTR 508, Karnataka High Court laid
down that Nike USA was not carrying on any business & activities of
India. Liaison Office (LO) was not taxable in India under section 5 as
well as under section 9. Contract between manufacturer and Nike
USA entered into outside India, no income accrued or arose in India.
Mere activity of purchase from India confined to exports also does not
create deeming charge under section 9.
9. The assessee company had entered into two agreements with a
foreign company for the latter 's supply of machinery, equipment,
instruments and spare parts and rendering technical co-operation
during the construction of the former plant at Vishakhapatnam. The
technical co-operation spread over a period of years, involved, inter-
alia, rendering services for constructions of the plant, deputation of
foreign experts to India, assigning production rights, continued
exchange of information, supply of personnel and training of local
personnel. The Andhra Pradesh High Court in Bharat Heavy Plate &
Vessels Ltd., [1979] 119 ITR 986, held that the two agreements in
question secured a continuous and intimate business relation of two
parties, thereby establishing non-resident's business connection in
India. Further, the assessee could be treated as an agent of the non-
resident.
10. Similarly, in Great Lakes Carbon Corporation v. CIT [1993] 202 ITR
64 (Calcutta HC), under an agreement, the assessee, a non resident
company, agreed to erect a plant for an Indian company in India for
the production of graphite and rendering services in connection
therewith. Employees of the assessee company were deputed for
work in India. An agreement between the assessee company and
23
Taxation of Non-Residents
its employees showed that the employees who had been sent to India
continued to the assessee company's employees. Certain amounts
were received by the assessee company from an Indian company for
the services rendered by the former 's employees. It has been held
that a part of the amounts so received by the assessee company
could be deemed to accrue or arise in India.
11. In order to constitute a `business connection' there must be some
continuity of relationship between a person who receives them.
[Bangalore Woollen Cotton & Silk Mills Co. Ltd. v. CIT [1950] 18 ITR
423 (Madras HC)]
12. Maintaining in India branch office for the purchase or sale of goods or
transacting other business [Roger 's Pyan Shellac & Co. v. Sea of
State (11 TC 363)].
13. Appointing an agent, who may not be the sole agent, in the country
for systematic and regular purchase of raw materials or other
commodities or for sale of the non-resident's goods or for other
purposes. [Anglo French Textile Co. Ltd. v. CIT [1953] 23 ITR 101
(SC)].
14. Close financial association between a resident and or non-resident
company [CIT v. Bombay Trust Corp. Ltd. AIR 1930 PC 54]
15. The Indian company was a subsidiary to an American company. In
respect of profits made by the American company through the Indian
company by sale of the machines sent by the former to the latter, as
also in respect of the dividends received by the American company
from its shareholding in the Indian company, it was held that a
"business connection" did exist so as to make the Indian company
liable as a statutory agent to pay tax on these incomes of the
American company [CIT v. Remington Typewriter Co. (Bombay) Ltd.
[1930] 5 ITC 177 (PC)].
16. In Blue Star Engineering Co. (Born) P. Ltd. v. CIT [1969] 73 ITR 283,
the Bombay High Court held that the assessee's activity
corresponded to an organization set up by the foreign company in
India for the purpose of ensuring a regular and proper supply of raw,
material and part played by the assessee in the activity of
procurement of raw material was real and intimate part which
contributed to the improvement of the profits of the foreign company.
24
Income Deemed to Accrue or Arise in India
17. The assessee company was appointed as an agent of a German firm,
a non-resident, for mediating export transactions of the products of
the German firm manufactured in Germany. It was held that there
was a business connection between the assessee and the German
firm [Biyani & Sons P. Ltd. v. CIT [1979] 120 ITR 887 (Calcutta HC)].
18. In view of the continue process in respect of the series of purchase
and sale transactions undertaken by the applicant and its subsidiary
in India there exist an intimate and continuous relationship which
constitutes a business connection for the purpose of section 9(1)(c).
[Advance Ruling Application No. P-8 of 1995, In re [1997] 223 ITR
416 (AAR)].
19. An Indian exporter sold tobacco abroad through non-resident sales
agents (assessees). Sales agents were entitled to commission, as
per agreement, sale price received on sale abroad was remitted
wholly to Indian exporter who debited commission account and
credited amount of commission payable to non-resident agents (i.e.
assessees). Amount of commission was later remitted to non-resident
agents. It was held the non-resident assessees did not carry on any
business operations in the taxable territories. They acted as selling
agents outside India. The receipt in India of the sale proceeds of
tobacco remitted or caused to be remitted by the purchasers from
abroad did not amount to an operation carried out by the assessee in
India as contemplated by clause (a ) of the Explanation to section
9(1)(i). The commission amounts which were earned by the non-
resident assessees for services rendered outside India could not,
therefore, be deemed to be incomes which had either accrued or
arisen in India. [CIT v Toshoku Ltd [1980] 125 ITR 525 (SC)]
20. The entire transaction having been completed on the high seas, the
profits on sale did not arise in India. Only such part of income, as is
attributable to the operations carried out in India can be taxed in India
as contemplated in Explanation 1(a) of section 9(1)(i);......Since all
parts of the transaction in question, i.e. the transfer of property in
goods as well as the payment, were carried out outside the Indian
soil, the transaction could not have been taxed in India;.... The fact
that the contract was signed in India is of no material consequence,
since all activities in connection with the offshore supply are carried
outside India, and therefore cannot be deemed to accrue or arise in
India;... Clause (a) of Explanation 1 to section 9(1)(i) states that only
25
Taxation of Non-Residents
such part of the income as is attributable to the operations carried out
in India, are taxable in India. [Ishikawajma-Harima Heavy Industries
Ltd [2007] 288 ITR 408 (SC) followed by Delhi HC in DIT v. LG Cable
Ltd. [2011] 237 CTR 438 and DIT v. Ericsson A.B [2012] 343 ITR
470]
21. In Asia Satellite Telecommunication Co. Ltd. [2010] 232 CTR 177
(Delhi HC), the assessee, a non-resident company engaged in
operating telecommunication satellites, under an agreement, leased
out transponder capacity to TV channel companies and was
broadcasting various programmes in India via its satellite. The
revenue's argument was that the relaying of the programmes in India
amounted to the operations carried out in India and sought to tax it
u/s 9(1)(i)/(iv). The hon'ble HC held that argument was not
sustainable. Merely because the footprint area included India and the
ultimate consumers/viewers were watching the programmes in India,
even when they were uplinked and relayed outside India, would not
mean that the assessee was carrying out its business operations in
India. No man, material or machinery or any combination thereof was
used by the assessee in the Indian territory, therefore amount cannot
be taxed u/s 9(1)(i)
22. In Carborandum Co. v. CIT [1977] 108 ITR 335 (SC), an American
company rendered service to the Indian company for the starting of a
factory in India in the shape of examination of the factory design and
layout prepared by the latter, and sending its advice by post. The
pamphlets and bulletins incorporating the result of research made by
the American company were also furnished to the Indian company by
post. The American company made the services of the foreign
technical personal available to Indian company. The Indian company
employed such personnel in India on the basis of various agreements
of employment entered into between the Indian company and such
personnel. They were employees of the Indian company for their day
to day work. It was held that the services rendered by the American
company were wholly and solely rendered outside India and,
therefore, the technical services fees paid by the Indian company to
the American company did not accrue or arise in India nor could it be
deemed to have accrued or arisen in India.
23. Similarly, in CIT v. Navbharat Ferro Alloys Ltd. [2000] 244 ITR 261
(Andhra Pradesh HC), an Indian company purchased machinery from
26
Income Deemed to Accrue or Arise in India
a foreign company. The foreign company had no other interest in the
Indian company except that the sale of machinery, accessories and
deputation of personnel for the erection of the same and putting into
operation. It could not be said that there was a business connection
between the foreign company and Indian company within the
meaning of section 9.
Property, Asset or Source of Income In India
The next limb of section 9(1)(i) is that, all income accruing or arising directly
or indirectly through or from any property in India shall be deemed to accrue
or arise in India.
The third limb of section 9(1)(i) is, income through or from any asset or
source in India, shall be deemed to accrue or arise in India.
In Cairn UK Holdings Ltd. v. DCIT (Intl. Taxation) [2017] 79 taxmann.com
128, Delhi Tribunal held that as the Indian Wholly owned subsidiary ( `WOS'),
which controls the oil and gas sector in India, will be regarded as the
property in which the shareholders have the right to manage and control the
business in India. Therefore, any income arising through or from any property
in India shall be chargeable to tax as income deemed to accrue or arise in
India in terms of the indirect transfer provisions under section 9(1)(i) of the
Act.
The Delhi High Court in the case of CUB pty Limited (formerly known as
Foster 's Australia Ltd. vs. UOI & Ors [2016] 388 ITR 617 held that the
location of IPRs to be determined based on the location of its owner.
Accordingly, the income was held to be not taxable in India.
In the above case, IPRs such as logos, brands, trademarks, which were
capital assets (intangible assets) were used in India. AAR considering the
said fact pattern held that the IPRs pertain to India as they were used in
India, nurtured in India and some of them were registered in India. Thus, the
same had taken roots in India and were therefore completely situated in
India. These observations of the AAR were overturned by the Delhi High
Court.
The Bombay High Court in Kusumben D. Mahadevi v. CIT [1963] 47 ITR 214
has held that expression "source" in section 9(1)(i) and the expression
"heads of income' in section 14 are used in one and the same sense and it
means property, movable or immovable, belonging to an assessee or the
27
Taxation of Non-Residents
activity of an assessee that yields or brings income to him, within the
meaning of that Act.
Further, the court has also pointed out that the word "source" used in relation
to a dividend income can have more than one meaning. In the sense as
pointed out above, the source of dividend income is the packet of shares
held by an assessee which brings the said income to him. In the other sense,
speaking generally, the source of dividend income may mean the fund out of
which the dividend is paid to an assessee.
Even if there is no known or disclosed source of income, the income may still
be deemed to have accrued to a non-resident in India from undisclosed
source if it is actually found in the hands of statutory agent having nexus or
relationship, with the non-resident principle [Hazoora Singh v. CIT, 160 ITR
746 (Punj)].
Transfer of Capital Asset Situated In India
In terms of section 9, the transfer of capital asset situated in India is deemed
income.
Important Judicial Precedents & Board Circulars:
1. In terms of section 9 the transfer of capital asset situated in India has
been brought within the purview of the deemed income under section
9 and rule 10(2), it is clear that the intention of the Parliament was
not to bring within its purview any income derived out of sale or
purchase of a capital asset effected outside India. The profits
therefore, arising from the sale of capital assets located outside India
were to be excluded from the income of the assessee. Thus, profits
arising to the assessee from the sale of capital assets outside India
were to be excluded from the assessee's income. [CIT v. Quantas
Airways Ltd. [2002] 256 ITR 84 (Delhi HC)].
2. Transfer of shares of a foreign company which has an Indian
Company as its subsidiary does not amount to transfer of any capital
asset situated in India within meaning of 4th limb of section 9(1)(i).
Legal fiction in section 9(1)(i) does not mean that if a foreign
company has a subsidiary in India, shares of foreign company are
deemed to be situated in India. Section 9(1)(i) is not a 'look through'
provision and, thus, it cannot by a process of interpretation be
extended to cover indirect transfers of capital assets/property situated
in India. Source in relation to an income is construed to be where
28
Income Deemed to Accrue or Arise in India
transaction of sale takes place and not where item of value, which
was subject of transaction, was acquired or derived from.
Even otherwise, since there was an offshore transaction between two non-
resident companies, and, subject-matter of transaction was transfer of
another non-resident company, Indian tax authorities had no territorial tax
jurisdiction under section 9(1)(i) to tax said offshore transaction. [Vodafone
International Holdings B.V v. UOI [2012] 341 ITR 1 (SC)]
Board's Clarifications
The Central Board of Direct Taxes has clarified vide its circular no. 23 [F.
No. 7A/38/69-IT (A-II)] dated July 23, 1969, the applicability of provisions of
section 9 as under:
(i) Non-resident exporters selling goods from abroad to Indian importers:
No liability will arise on accrual basis to the non-resident on the profits made
by him where the transactions of sale between the two parties are on a
principal to principal basis.
(ii) Non-resident company selling goods from abroad to its Indian
subsidiary:
In such a case, if the transaction are actually on a principal to principal basis
and are at arm's length and the subsidiary company functions and carries on
business on its own instead of functioning as an agent of the parent
company, the mere fact that the Indian company is a subsidiary of the non-
resident company will not be considered a valid ground for invoking section 9
for assessing the non resident.
(iii) Sale of plant & machinery to an Indian importer on installment basis :
Where the transaction of sale and purchase is on a principal to principal
basis and the exporter and the importer have no other business connection,
the fact that the exporter allows the importer to pay for the plant and
machinery installments will not, by itself, render the exporter liable to tax on
the ground that the income is deemed to arise to him in India.
(iv) Foreign agents of Indian exporters:-
Where a foreign agent of Indian exporter operates in his own country and his
commission is usually remitted directly to him and is, therefore, not received
by him or on his behalf in India. Such an agent is not liable to income in India
on the commission.
29
Taxation of Non-Residents
(v) Sales by a non-resident to Indian customers either directly or through
agents:
(a) Where non-resident allows an Indian customer facilities of extended
credit for payment, there would be no assessment merely for this
reason provided that (i) the contracts to sell were made outside India;
and (ii) the sales were made on a principal to principal basis.
(b) Where a non-resident has an agent in India and makes sales directly
to Indian customers, section 9 of the Act will not be invoked, even if
the non-resident pays his agent an overriding commission on all sales
to India, provided that (i) the agent neither performs nor undertakes
to perform any service directly or indirectly in respect of these direct
sales: (ii) the contracts to sell are made outside India, and (iii) the
sales are made on a principal to principal basis.
(c) Where a non resident's sales to Indian customers are secured though
the services of an agent in India, the assessment in India of the
income arising out of the transaction will be limited to the amount of
profit which is attributable to the agents's service, provided that (i) the
non-resident principal's business activities in India are wholly
channeled through his agents, (ii) the contracts to sell are made
outside India, and (iii) the sales are made on a principal to principal
basis.
(d) Where a non-resident principal's business activities in India are not
wholly channeled through his agent in India the assessment in India
will be on the sum total of the amount of profits attributable to his
agent's activities in India, and the amount of profit attributable to his
own activities in India less the expenses incurred in making the sales.
(vi) Extent of the profit assessable under section 9:
If a non resident has a business connection in India, it is only the portion of
the profit which can be reasonably be attributed to the operations of the
business carried out in India, which is liable to income tax.
The above circular no. 23 dated July 23,1969 and subsequent circulars
providing clarification on circular no. 23 viz circular no. 163 dated May 29,
1975 and No. 786, dated February 7, 2000 have been withdrawn by CBDT by
Circular no. 7/2009 [F. NO. 500/135/2007-FTD-I], dated October 22, 2009
with the reasoning that interpretation of the Circular by some of the taxpayers
to claim relief is not in accordance with the provisions of section 9 of the
Income-tax Act, 1961 or the intention behind the issuance of the Circular.
30
Income Deemed to Accrue or Arise in India
It should be noted that circular no. 23 was only clarificatory in nature
therefore withdrawal of the same does not impair the interpretation of the
provisions of the Act.
Further, the Board vide its circular no. 382 [F.No. 484/12/78FD] dated May 4,
1984 has clarified that where shares in Indian companies are allotted to non-
resident in consideration for machinery and plant, the income embedded in
payment would be received in India as the shares in the Indian companies
are located in India and would accordingly attract liability to income tax as
income received in India.
The Finance Act 2012 has inserted explanation 4 and 5 to section 9(1)(i).
The explanation 4 clarifies that the expression "through" used in section
9(1)(i) mean and include "by means of", "in consequence of" or "by reason
of".
The object of adding this explanation is to avoid frivolous arguments adopted
by the assessee that income deemed to accrue or arise is not through
business connection or source of income in India.
Explanation 5 to section 9(1)(i) clarifies that an asset or a capital asset being
any share or interest in a company or entity registered or incorporated
outside India shall be deemed to be and shall always be deemed to have
been situated in India, if the share or interest derives, directly or indirectly, its
value substantially from the assets located in India;
These amendments will take effect retrospectively from April 1, 1962 and will,
accordingly, apply in relation to the assessment year 1962-1963 and
subsequent assessment years
However, the said explanation 5 shall not apply to the below mentioned
categories-
i. To an asset or capital asset which is held by a non-resident by way
of investment, directly or indirectly in a Foreign Institutional Investor
( `FII') as referred to in explanation to section 115AD of the Act (for
assessment years falling in between April 1, 2012 and April 1, 2015)
ii. To an asset or capital asset, which is held by a non-resident by way
of investment, directly or indirectly, in Category-I and Cateogry II
Foreign portfolio investor ( `FPI') under the Securities and Exchange
Board of India ( `SEBI') [FPI] Regulations, 2014 made under the
SEBI Act, 1992 (inserted with effect from April 1, 2015)
31
Taxation of Non-Residents
Circular no. 28 of 2017 dated November 7, 2017 provides that explanation
5 shall not apply in respect of income accruing or arising to a non-resident on
account of redemption or buyback of its share or interest held indirectly (i.e.
through upstream entities registered or incorporated outside India) in the
specified funds if such income accrues or arises from or in consequence of
transfer of shares or securities held in India by the specified funds and such
income is chargeable to tax in India. However, the above benefit shall be
applicable only in those cases where the proceeds of redemption or buyback
arising to the non-resident do not exceed the pro-rata share of the non-
resident in the total consideration realized by the specified funds from the
said transfer of shares or securities in India.
Circular no.4/2015 dated March 26, 2015 provides that declaration of
dividend by a foreign company outside India in respect of shares which
derive their value substantially from assets situated in India would not be
deemed to be income accruing or arising in India by virtue of the provisions
of Explanation 5 above.
Further, explanation 6 to section 9(1)(i) provides that the share or interest
shall be deemed to derive its value substantially from the assets (whether
tangible or intangible) located in India, if on the specified date, the value of
such assets exceeds the amount of ten crore rupees and represents at least
50% of the value of all the assets owned by the company or entity as the
case may be.
The same has been reiterated by the AAR while analyzing the exception
mentioned in explanation 6 in the case of GEA Refrigeration Technologies
GmbH, In re [2018] 401 ITR 115
The value of an asset shall be the fair market value as on the specified date,
without reduction of liabilities, if any, in respect of the asset, determined in
such manner as may be prescribed. CBDT vide notification no. 55/2016
[F.No. 142/26/2015-TPL]/SO 2226 (E), dated June 28, 2016 has notified
Income-tax (19th Amendment), Rules, 2016 ( `Indirect transfer rules'), which
prescribes the manner of determination of fair market value in various cases
and also reporting requirement for Indian concern viz. insertion of rules
11UB, 11UC, 114DB, Form no. 3CT and Form no. 49D. These rules were to
come into effect from June 28, 2016. These rules basically prescribe the
rules for computation of FM/V of tangible and intangible assets of an Indian
company or entity held directly or indirectly by a foreign company or entity on
the specified date as well as for computation of FMV of all the assets of a
foreign company or an entity on the specified date. Similarly, the said rules
32
Income Deemed to Accrue or Arise in India
also provide for determination of income attributable to assets in India. Rule
114DB lays down the information and documents to be furnished by the
Indian concern for reporting the indirect transfer under section 285A of the
Act. The transferor of the share of, or interest in, a company or an entity that
derives its value substantially from assets located in India, shall obtain and
furnish along with the return of income a report in Form No.3CT duly signed
and verified by an accountant providing the basis of the apportionment in
accordance with the formula and certifying that the income attributable to
assets located in India has been correctly computed. The Indian concern
whose shares have been indirectly transferred is required to report the same
in the Form 49D within 90 days of the end of the financial year in which any
transfer of the share of, or interest in "foreign company or entity" has taken
place and where the transaction in respect of the share or the interest has
the effect of directly or indirectly transferring the rights of management or
control in relation to the Indian concern, the information shall be furnished in
the said Form within 90 days of the transaction. The notified details will help
the tax authority in ascertaining the functional profile of the Indian concern
and the factual details in respect of the transaction. Similar other details are
prescribed under the notification.
Meaning of accounting period provided to be each period of twelve months
ending on 31st March. A period of twelve months ending on day other than
31st March would be considered, if it has been so adopted for complying with
the provisions of the tax laws of the territory, of which it is a resident for tax
purposes; or it has been adopted for the purpose of reporting to persons
holding the share or interest.
Further, the first accounting period of the company or of an entity shall begin
from the date of its registration or incorporation and end with the 31st March
or such other day as the case may be following the date of such registration
or incorporation. Later accounting period shall be the successive period of
twelve months.
If the company or entity ceases to exist before the end of accounting period,
then the accounting period shall end immediately before the company or as
the case may be, the entity ceases to exist.
Under explanation 6, further, meaning of specified date is provided as the
date on which the accounting period of the company or of the ends preceding
the date of transfer of a share or interest or it could be the date of transfer, if
the book value of the assets of the company or of the entity on the date of
transfer exceeds 15% compared to the book value of the assets as on date
33
Taxation of Non-Residents
on which the accounting period of the company or of the entity ends
preceding the date of transfer of a share or an interest.
Explanation 7, however, provides a carve out from the applicability of
Explanation 5 to small investors holding no right of management or control of
such company/entity and holding less than 5% of the total voting
power/share capital/interest of the company/entity that directly or indirectly
owns the assets situated in India. As per clause (b) to the said explanation,
where all the assets owned, directly or indirectly by a company or by entity
registered or incorporated outside India, the income of the non-resident
transferor from the transfer of share or interest outside India shall be deemed
to accrue or arise in India only such part of the income as is reasonably
attributable to assets located in India and determined in such manner as may
be prescribed.
CBDT vide circular no.41 of 2016 on December 21, 2016 had provided
answers to 19 specific questions raised on the applicability of indirect
transfer provisions to FPI and their investors.
Circular no.4 of 2017 dated January 20, 2017 states that the operation of
circular no.41/2016, dated December 21, 2016 kept in abeyance for time
being in force in view of representations received from Foreign Portfolio
Investors ( `FPIs'), FIIs, Venture Capital Funds etc.
Salaries
Section 9(i)(ii) provides that any income which falls under the head "salaries"
if it is earned in India would be deemed to accrue or arise in India.
Important Judicial Precedents & Board Circulars:
1. In CIT v S. G. Pgnatale [1980] 124 ITR 391 (Gujarat HC), the facts
were "the assessee was an employee of French company which had
entered into an agreement with the Gujrat State Fertilizer Co. Ltd. for
rendering certain services in Europe and also providing back up
service and other assistance in installing a plant in India. The Indian
company agreed to pay a lump sum for all these services. The
assessee accordingly worked in India and rendered services in India
in the shape of supervisory and advisory assistance to the Gujarat
State Fertilizers Co. In lieu of the said services, the assessee was to
be paid outside India by the French Company certain fixed
emoluments. On these facts, the question was whether the Tribunal
34
Income Deemed to Accrue or Arise in India
was right in holding that the income computable under the head
"salaries" had been earned in India?
The Court observed that the word "earned" has two meanings. One is
the narrow meaning of rendering of services etc. The word `earned' is
also used in the wide sense treating income as earned only if the
assessee has contributed to its accrual or arisal by rendering services
and in respect of which a debit is created in his favour. Unless there
is a debt in favour of the assessee by reason of his rendering
services it cannot be said to be "income earned " in the wide sense.
The Court, therefore, held that in view of the clear indication given by
the Legislature itself by using a different phraseology in clause (iii) as
compared with clause (ii), the words "earned in India" occurring in
clause (ii) must be interpreted as "arising" or "accruing in India" and
not "from service rendered in India". So long as the liability to pay the
amount under the head "salaries" arises in India, clause (ii) can be
invoked. If the liability to pay arises outside India and amount is
payable outside India clause (ii) cannot be invoked.
2. In ACIT v. Robert Arthur Keltz, [2013] 59 SOT 203, the Delhi Tribunal
has held that only proportionate amount of stock option benefit
relating to the period of services rendered in India during the grant
period would be taxable in India. As an employee had not rendered
any services in India for part of the grant period before he came to
India, only a proportionate amount of the stock option benefit relating
to Indian assignment would be taxable in India.
3. In CIT v. Goslino Maria [2000] 241 ITR 312 (SC), the assessee was
technician who come to India to work with the Fertilizer Corporation of
India Ltd. (FCI). The service of the assessee technician was obtained
by the FCI under an agreement with the Italian concern Mentecatini
Edison (subsequently called Technimont) which deputed them to
work with the FCI. Under the agreement the salaries of the assessee
were to be paid by the FCI in Italian Lira to the said Italian concern.
The question was as to whether the payment towards salary made to
the foreign company Technimout was an income deemed to accrue or
arise in India.
The Supreme Court held that in view of the Gujarat High Court
decision in CIT v. S. G. Pgnatale (supra) as in the present case, the
liability to pay salary to the assessee arose outside India in view of
35
Taxation of Non-Residents
the contract between the FCI and Technimout, and as the salary was
payable outside India, section 9(i)(ii) did not apply.
Further, the Supreme Court also agreed with the view of the Gujarat
High Court in Pgnatale's case (Supra) that living allowance paid to
foreign technician is exempt in his hands under section 10(14) of the
Act.
To overcome these decisions, a new Explanation to section 9(1)(ii)
was introduced by the Finance Act 1983, with retrospective effect,
from assessment year 1979/80. The Explanation declares, that
income chargeable under the head "salaries' payable for `services
rendered in India' will be regarded as income earned in India
4. The Delhi Tribunal in Addl. CIT v. Hughes Services (Far East) P. Ltd.
[2003] 87 ITD 137, after considering the decision of the Supreme
Court in CIT v. Podar Cement (P) Ltd [1997] 226 ITR 625, has held
that the said amendment cannot be considered either as declaratory
or clarificatory since it enlarges the scope of the main section by
including new item of income and therefore it cannot have
retrospective effect.
5. In CIT v. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR
320 (Uttaranchal HC), the assessee entered into a contract of
employment with a foreign company. He was the resident of the U.K.
Under the contract he was required to work on oil rigs in Bombay
High as per alternating time schedule of 35/28 days i.e. on period
followed by 35/28 days of off period in U.K. Before the Assessing
Officer it was contended on behalf of the assessee, that off period
salary was not eligible to tax under section 9(i)(ii) as it was not
earned in India. It was argued that the field break which followed the
on period was not a rest period. The Assessing Officer rejected that
contention.
The High Court held that the contract provided for on-period and off-
period. The contract was for two years. It referred to alternating time
schedule. It covered both the periods. The off-period followed the on-
period. Therefore, both the periods formed an integral part of the
contract. It was not possible to give separate tax treatment to on-
period and off period salaries.
Further, the payment which he received was for his services in India.
The Explanation to section 9(i)(ii) introduced by the Finance Act 1983
36
Income Deemed to Accrue or Arise in India
with effect from April 01,1979, refers to what constitutes `income
earned in India'. It explains the expression `income earned in India' to
mean payment for the services in India even if the contract is
executed outside India or amount is payable outside India. Therefore,
the payment of salary for off-period was income earned in India i.e.
for services rendered in India under section 9(i)(ii). Hence, the entire
salary for both the periods was taxable in India under section 9(i)(ii).
Furlough Pay
In Grindlays Bank Ltd. v. CIT [1992] 193 ITR 457 (Calcutta HC), the
assessee bank had an expatriate Officer working in India. These officers
were entitled to proceed on furlough on completion of a specific period of
service in India and while on furlough they were entitled to furlough pay to be
disbursed outside India. Consequently, furlough pay was disbursed in pound
sterling in the U.K. The Calcutta High Court after referring to section 9(1)(ii)
held that, the labour or service which entitled the employees to the furlough
pay was rendered in India and liable to tax in India.
Again the Explanation to section 9(1)(ii) of the Act, was amended by the
Finance Act, 1999 with effect from assessment year 2000-01 to provide that
not only furlough pay is taxable in the hands of the employee but any salary
payable for the rest period or leave period which is preceded and succeeded
by service in India, is also taxable.
Salaries and Perquisites Payable by the
Government to Citizen of India
Salaries payable to citizen of India for service rendered to Government at
any place outside India are, by section 9(i)(iii), deemed to have accrued or
arisen in India irrespective of the place of services or the place of salary
payment.
However, by virtue of section 10(7), any allowance or perquisite paid or
allowed outside India by the Government to a citizen of India for rendering
services outside India, is fully exempt from tax.
Dividend
Under section 9(1)(iv), any dividend paid by an Indian company outside India
is deemed to accrue or arise in India and therefore, such dividend falls within
the scope of total income as defined in section 5, both in the case of resident
as well as non-resident assesses.
37
Taxation of Non-Residents
Important Judicial Precedents & Board Circulars:
1. In Pfizer Corporation v. CIT [2003] 259 ITR 391 (Bombay HC), an
Indian Company having a registered office in India issue shares, the
situs of the shares is the place where the register is kept, that is, in
India. But in cases where the question arises of taxing income and
not the corpus, one has to consider the place of accrual of the
dividend income and the situs of the shares will have no importance.
A dividend declared by an Indian company, therefore, would be
deemed to accrue in India if the source of income is situated in India.
But what happens when dividend is declared in India and paid to a
non-resident out of India. To cover such a situation, section 5(2)(b)
has to be read with section 9(1)(iv). Under section 9(1)(iv), it is clearly
stipulated that a dividend paid by an Indian company outside India
will constitute income deemed to accrue in India on effecting such
payment. In section 9(1)(iv), the words used are `a dividend paid by
an India company outside India'. This is in contradistinction to section
8 which refers to a dividend declared, distributed or paid by a
company. The words `declared or distributed' occurring in section 8
do not find place in section 9(1)(iv). Therefore it is clear that dividend
income paid to non-resident is deemed to accrue in India only on
payment and not on declaration.
Thus, where the dividend was declared by the Indian company but
the permission of the RBI to remit it to the non-resident was obtained
later, dividend became taxable in the year when the RBI granted
approval and not in the year when the dividend was declared by the
company.
Interest
Under section 9(1)(v), interest income is deemed to accrue or arise in India
in the following circumstances:
(a) Interest payable by the Government; or
(b) Interest payable by a resident except:
(i) interest payable by a resident, of a any money borrowed and
used for the purpose of business or profession carried on by
such person outside India or
38
Income Deemed to Accrue or Arise in India
(ii) interest payable by a resident in respect of any debt incurred
or any money borrowed and used for the purpose of making
or earning any income from any source outside India.
It may be noted that where money borrowed by a resident for the
purpose of a business or profession carried on by him outside India
are actually used for any other purpose, interest payable thereon will
be deemed to accrue or arise in India. (Refer circular no. 202 of July
5, 1976)
Similarly, interest payable on money borrowed by a resident for the
purpose of making or earning any income from any source outside
India will be deemed to accrue or arise in India if the moneys are
actually used for any purpose in India (Refer circular no. 202 of July
5, 2000)
(c) Interest payable by a person who is non-resident, if it is in respect of
any debt incurred or money borrowed and used for purposes of a
business or profession carried out by such person in India
It may be noted that interest payable by a non resident in respect of
any debt incurred, or moneys borrowed and used for the purposes of
making or earning any income from any source, other than a
business or profession carried on by such person in India, will not be
deemed to accrue or arise in India, (Refer. Circular no. 202 of July 5,
1976).
Important Judicial Precedents & Board Circulars:
1. In J. K. Synthetics Ltd. v. ACIT [1990] 185 ITR 540 (Delhi HCs)], the
interest payable by the petitioner to its foreign supplier of raw
materials had been held to be covered by the deeming provision of
section 9(1)(v).
Royalty
Under section 9(1)(vi), royalty income shall be deemed to accrue or arise in
India if:
(a) Royalty payable by the Government;
or
(b) Royalty payable by a resident, except where the royalty is payable in
respect of any right, property or information used or services utilized:
39
Taxation of Non-Residents
(i) for the purpose of business or profession carried on by such
person outside India; or
(ii) for the purpose of making or earning any income from any
source outside India;
or
(c) Royalty payable by a non-resident, where the royalty is payable in
respect of any right, property or information used or services utilized
(i) for the purposes of a business or profession carried on by
such person in India or
(ii) for the purposes of making or earning any income from any
source in India;
Royalty income consisting of lump sum consideration for the transfer outside
India of or the imparting of information outside India in respect of any data,
documentation, drawings or specification relating to any patent, invention,
model, design, secret formula or process or trade mark or similar property
will ordinarily be chargeable to tax in India.
For the purpose of the aforesaid source rule "royalty' has been defined in
Explanation 2 to section 9(1)(vi). It will be seen that the definition is wide
enough to cover both industrial royalties as well as copyright royalties. The
definition specifically exclude income which would be chargeable to tax
under the head "capital gain" and accordingly such income will be charged to
tax as capital gains on a net basis under the relevant provisions of the law.
"Royalty " means consideration for
(i) the transfer of all or any right (including granting of license) in respect
of a patent, invention, model, design, secret formula or process or
trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use
of, a patent, invention, model, design secret formula or process or
trade mark or similarly property;
(iii) the use of any patent, invention, model, design secret formula or
process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial
commercial or scientific knowledge, experience or skill;
(v) the use or right to use, any industrial, commercial or scientific
equipment but not including the amounts referred to in section 44BB
40
Income Deemed to Accrue or Arise in India
(vi) transfer of all or any rights (including the granting of a license) in
respect of any copyright ,literary, artistic or scientific work including
films or video tapes for use in connection with television or tapes for
use in connection with radio broadcasting but excluding consideration
for the sale, distribution or exhibition of cinematographic films, or
(vii) the rendering of any services in connection with the aforesaid
activities.
Explanation 3 to section 9(1)(vi) defines "computer software" to mean any
computer programme recorded on any disc, tape, perforated media or other
information storage device and includes any such programme or any
customized electronic data.
The Finance Act 2012 has inserted Explanation 4, 5 & 6 to clause (vi) of
section 9(1) applicable w.r.e.f June 1, 1976.
Explanation 4 clarifies that the transfer of all or any rights in respect of any
right, property or information includes and has always included transfer of all
or any right for use or right to use a computer software (including granting of
a licence) irrespective of the medium through which such right is transferred.
Explanation 5 clarifies that the royalty includes and has always included
consideration in respect of any right, property or information, whether or
not--
(a) the possession or control of such right, property or information is with
the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.
Explanation 6 clarifies that the expression "process" includes and shall be
deemed to have always included transmission by satellite (including up-
linking, amplification, conversion for down-linking of any signal), cable, optic
fibre or by any other similar technology, whether or not such process is
secret
Exceptions to the Royalty Income
In the following two cases income shall not be deemed to accrue/arise in
India.
(i) Approved agreements made before April 1, 1976- In order to
ensure that foreign suppliers of technical know-how who had finalized
proposals for the receipt of lump sum royalties with the approval of the
41
Taxation of Non-Residents
Central Government on the understanding that such payment would be
exempt from income tax, it has been provided that such lump sum payment
received under approved agreement made before April 1, 1976 is not
deemed to accrue or arise in India.
If an agreement is made on or after April 1, 1976 it will be deemed to have
been made before that date, if the following conditions are fulfilled:
(a) in the case of a taxpayer other than a foreign company, if the
payment is made in accordance with proposals approved by the
Central Government before that date;
(b) in the case of foreign company, if the agreement is made in
accordance with proposals approved by the Central Government
before that date and the company exercise an option by furnishing a
declaration in writing to the Assessing Officer that the agreement may
be regarded as having been made before April 1,1976
The option in this behalf has to be exercised before the expiry of the
time allowed under section 139(1) or section 139(2) (whether fixed
originally or on extension) for furnishing the return of income for the
assessment year 1977-78 or the assessment year in which the
royalty income first become chargeable to tax, whichever assessment
year is later. For option so exercised is final not only for the
assessment year in relation to which it is made but also for every
subsequent year.
(ii) Computer software
With effect from the assessment year 1991-92 onwards so much of the
income by way of royalty as consists of lump sum payment made by a
person, who is resident, for the transfer of all or any rights (including the
granting of a licence) in respect of computer software supplied by a non
resident manufacturer alongwith computer hardware under any scheme
approved under the Policy on Computer software Export, Software
Development and Trading 1986 of the Government of India shall not be
deemed to accrue or arise in India.
For the purposes of meaning of Royalty, "computer Software" means any
computer programme recorded on any disc, tape, perforated media or other
information storage device and including any such programme or any
customized electronic data.
42
Income Deemed to Accrue or Arise in India
Important Judicial Precedents & Board Circulars:
1. The term `royalty' normally connotes the payment made to a person
who has exclusive right over a thing for allowing another to make use
of that thing which may be either physical or intellectual property or
thing. The exclusivity of the right in relation to the thing for which
royalty is paid should be with the grantor of that right. [CIT v Neyveli
Lignite Corporation Ltd. [2000] 243 ITR 459 (Madras HC)].
2. Royalty received by the assessee foreign company under a
collaboration agreement with Indian company, according to which
Indian company was to manufacture certain machines and pay
royalty to foreign company on products manufactured, would be
income deemed to accrue or arise in India. [CIT v. Ruti Machinery
Works Ltd. [2000] 243 ITR 442 (Madras HC)].
3. Consideration paid by the Indian customers or end users to the
assessee a foreign supplier, for transfer of the right to use the
software/computer programme in respect of the copyrights falls within
the mischief of 'royalty' as defined under sub-clause (v)
to Explanation 2 to clause (vi) of section 9(1) of the Income-tax Act,
1961 [CIT v Samsung Electronics Co. Ltd [2012] 345 ITR 494
(Karnataka HC)]
This decision is followed by the Karnataka HC in the case of
Synopsis International Ltd. vs. DDIT [2016] (76 taxmann.com 118).
The Special leave petition has been granted by the Supreme Court
[2016] 76 Taxmann.com 138.
The decision is followed by the Bangalore ITAT in the case of Tejas
Networks Ltd. v. DDIT [2015] 64 Taxmann.com 439 (Bangalore
Tribunal).
4. Payment made by assessee to a non-resident in order to obtain
licence to use database maintained is to be regarded as royalty. [CIT
v Wipro Ltd [2013] 355 ITR 284 (Karnataka HC)]
5. The assessee-company was engaged in the manufacture of audio
magnetic sound heads. It entered into an agreement with a
Singaporean company whereby the foreign company was to supply
plant know-how and product know-how to the assessee and, if
required, would also make available the services of trained
technicians for setting up the plant and machinery in accordance with
the printed material and data. The documents and the agreement
43
Taxation of Non-Residents
clearly showed that the assessee had purchased the entire drawings,
sketches, designs, etc. It might be true that the foreign company was
required to provide technical assistance, if required, but the fact was
that no such technical assistance was ever required nor was
provided. The payment of 15 million yen was the price of the
documents purchased and would not fall within the meaning of
royalty. [CIT v. Maggronic Devices (P.) Ltd [2010] 329 ITR 442
(Himachal Pradesh HC)]
6. The main service rendered by the assessee to its clients-hotels was
advertisement, publicity and sales promotion, the use of trademark,
trade name or the stylized `S' or other enumerated services referred
to in the agreement with the assessee were incidental to the said
main service. It was held that payment was neither in the nature of
royalty under section 9(1)(vi), read with the Explanation 2, nor in the
nature of fee for technical services under section 9(1)(vii). [DIT v.
Sheraton International Inc. [2009] 313 ITR 267 (Delhi HC)]
7. In Asia Satellite Telecommunications Co. Ltd v DIT [2011] 332 ITR
340, Delhi HC has clarified that the term `royalty' in respect of the
copyright, literary, artistic or scientific work, patent, invention,
process, etc., does not extend to the outright purchase of the right to
use an asset. In the case of `royalty' the ownership of the property or
right remains with the owner and the transferee is permitted to use
the right in respect of such a property. In this case the assessee was
deriving income from the lease of the transponder capacity of its
satellites. It was amplifying and relaying the signals in the footprint
area after having been linked up by the TV channels. It also remained
in the control of the satellites. It had not leased out the equipments to
the customers. Where the operator has entered into an agreement for
lease of the transponder capacity and has not given any control over
parts of the satellite/transponder, the provisions of clause (vi) would
not apply. [Ruling of the AAR in ISRO Satellite Centre (ISACT), In
re [2008] 307 ITR 59 (New Delhi) followed]
8. In the case of CIT v. HEG Ltd. [2003] 263 ITR 230 (Madhya Pradesh
HC), the question whether subscribing to a journal which gave
information on a particular industry, and which was commercial in
nature could be termed royalty came up for consideration. Rejecting
the CIT's contention that the since the journal was of a commercial
nature, payments made for it would be royalty, the High Court held
44
Income Deemed to Accrue or Arise in India
that the mere characteristic of being commercial in nature would not
make it a thing for which royalty would be payable. Some sort of
expertise or skill was required. So, in the absence of such skill in the
journal, payments made to it would not be royalty.
9. In the case of DIT v. v Infrasoft Ltd., [2014] 264 CTR 329 (Delhi HC),
it was held that the amount received by a non-resident company for
granting license to use its copyrighted software for licencee's own
business purpose only, could not be brought to tax as 'royalty' under
article 12(3) of India-US DTAA. Decision was rendered applying the
provisions of section 9(1)(vi) of the Act vis-à-vis provisions of DTAA.
10. This decision is followed by the Mumbai Tribunal in the case of ADIT
v. First Advantage (P.) Ltd. [2017] 163 ITD 165.
11. In the case of CIT v. CGI Information Systems & Management
Consultants (P.) Ltd. [2014] 226 Taxman 319 (Karnataka HC), it was
held that intranet facility is similar to availing the leased line facilities.
Therefore, the cost sharing agreement cannot be considered as
reimbursement of cost and payments made for utilizing the said
facilities is royalty under section 9(1)(vi) read with Explanation 4 of
the Act and under Article 12 of the India-Canada DTAA.
12. In the case of Bharti Airtel Ltd. v. ITO [2016] 47 ITR(T) 418 (Delhi
Tribunal), it was held that Inter-connect Usage Charges paid by a
telecommunication service provider in India to Foreign Telecom
Operators in connection with its International Long Distance telecom
service business, was not royalty under the Act as well as under the
DTAA.
13. In the case of, B4U International Holdings Ltd vs. DCIT [2012] 52
SOT 545, Mumbai Tribunal held that the amendments made by the
Finance Act, 2012 does not change the position regarding taxability
of payment by TV broadcaster, of hiring charges for transponder and
charges for facilities in relation to reception and transmission of
signals under Section 9(1)(vi) as there is no change in the DTAA
between India and USA and a taxpayer can opt for DTAA or Act
whichever is more favourable.
14. This decision is affirmed by the Bombay High Court (ITA No. 1274 of
2013).
15. In the case of Taj TV Ltd. v. ADIT [2017] 162 ITD 674, Mumbai
Tribunal held that Payment of transponder fee to US based company
45
Taxation of Non-Residents
for utilizing its transponder facilities in India cannot be treated as a
consideration for 'use' or 'right to use' any copyright of various terms
used in para 3(a) of India-USA DTAA. It is also not use or right to use
any industrial, commercial, or scientific equipment. Hence, the
payment do not fall within ambit of royalty in terms article 12 of India-
USA DTAA. The amended definition of 'royalty' as given in section
9(1)(vi) of the Act, will not affect Article 12 of the DTAAs. In the case
of PCIT v M. Tech India (P.) Ltd. [2016] 381 ITR 31, Delhi HC held
that payment made for purchase of software as a product would be
treated as purchase of software rather than payment made for use or
right to use software to be treated as royalty under section 9(1)(vi) of
the Act.
16. In the case of CIT vs. Vinzas Solutions India (P.) Ltd. [2017] 392 ITR
155, Madras HC held that the provisions of section 9(1)(vi) dealing
with and defining 'royalty' cannot be made applicable to a situation of
outright purchase and sale of a product. Income from purchase and
sale of software is not in the nature of royalty under section 9(1)(vi) of
the Act as it amounts to a transaction for sale of `copyrighted article'
and not of `copyright' itself. Regarding the retrospective amendment
inserting Explanation 4 and 7 to section 9(1)(vi), the High Court held
that Explanations 4 and 7 relied by the authorities would thus have to
be read and understood only in that context and cannot be expanded
to bring within its fold transaction beyond the realm of the provision.
17. In the case of Capgemini Business Services (India) Ltd. v. ACIT
[2016] 158 ITD 1, Mumbai Tribunal held that 'Computer software' has
neither been included nor is deemed to be included within the scope
or definition of 'literary work' in any definition or Explanation provided
under the Act. The term 'literary work' has been separately mentioned
under clause (v) to Explanation 2 to include the consideration paid for
the same within the scope of royalty, whereas, the term 'computer
software' has been recognized as a separate item not only in 2nd
proviso to clause (vi) but in Explanation 4 also and has been included
in the definition and within the scope of the words 'right', 'property' or
'information'.
18. In the case of Atos Information Technology HK Ltd. V. DCIT [2017] 79
taxmann.com 26, the assessee provided services/facilities for data
processing through computer hardware and software to Standard
Chartered Bank (SCB).The Mumbai Tribunal held as under:
46
Income Deemed to Accrue or Arise in India
· There is absolutely no transfer of any technology, information,
knowhow or any of the terms used in Explanation 2 or any kind of
providing of technology in the form of data centre, infrastructure,
connectivity and application technology to fall within the definition
of 'royalty' under section 9(1)(vi) of the Act.
· Explanation 5 is to be read with section 9(1)(vi) which was there
on the statute as on 1-4-1976. Clause (iva) to Explanation 2 was
inserted from 1-4-2002. Thus, retrospective effect of clause (iva)
cannot be deemed from 1-6-1976 and hence it cannot be held
that Explanation 5 also applies to the said clause.
19. In the case of DDIT v. IMG Media Ltd. [2016] 67 taxmann.com 343,
Mumbai Tribunal held that Consideration received for live audio and
visual coverage of cricket matches is neither `fees for technical
services' nor `royalty'. It was held that the concept of make available
was not satisfied in case of production of `program content' by using
technical expertise and the consideration was not taxable as `fees for
technical services'. Further, it was also held that live coverage of
events and broadcast does not have a `copyright' and hence not
royalty.
20. In the case of CIT v Delhi Race Club (1940) Ltd. [2015] 273 CTR 503,
Delhi HC examined in detail provisions of clause (v) of Explanation 2
to section 9(1)(vi) and also the provisions of Copyrights Act, 1957.
The High Court held that the provisions of clause (v) of Explanation 2
to section 9(1)(vi) would be more meaningful if the word 'in' is read by
implication in between the words 'copyright' and 'literary.' The High
Court also held that live broadcasting of a live sports event is not a
copyright and therefore does not amount to royalty under section
9(1)(vi) of the Act. The High Court also held that broadcasting also
does not amount to use or right to us `scientific work.'
21. In the case of Qad Europe B. V. v. DDIT [2017] 53 ITR(T) 259,
Mumbai Tribunal held that , where Indian company has paid the
consideration for 'use of computer software' and not 'copyright of the
computer software', the payment do not fall within the ambit of
'Royalty' defined in article 12(4) of the India-Netherlands DTAA.
Decision was rendered after considering the provisions of section
9(1)(vi) of the Act read with the provisions of DTAA.
22. In the case of ADIT vs. Baan Global BV [2016] 49 ITR(T) 73, Mumbai
Tribunal held that the consideration received for pure sale of 'shrink
47
Taxation of Non-Residents
wrapped software' off shelf, cannot be considered as a 'royalty' within
meaning of Article 12(4) of India-Netherlands DTAA. Further,
'Royalty' has been specifically defined in the treaty and amendment
to the definition of such term under the Act would not have any
bearing on the definition of such term in the context of DTAA since, a
treaty which has entered between the two sovereign nations, then
one country cannot unilaterally alter its provision.
23. Mumbai Tribunal in the case of Lucent Technologies GRL LLC vs.
ADIT(Int. tax) [ITA Nos. 7001 to 7004/Mum/2010], order dated 2 May
2018 following the decision in the case of tax deductor Reliance
Communications Ltd., held that the consideration received by the
assessee from the supply of software is not royalty under the Act as
well as under India US DTAA and not liable to tax in India. The
Tribunal while deciding the case has taken into consideration the
specific observations in Reliance's case (ITA No. 837 and others) that
the use of software is for operation of wireless network only viz.
software is not meant for commercial purposes.
24. In the case of Google India (P.) Limited v. ACIT [2017] 86
taxmann.com 237 (Bangalore ITAT), Google India Private
Limited ["Google India"] is a wholly-owned subsidiary of Google
International LLC, US. Google India had been appointed by
Google Ireland Ltd. ["GIL"] as a non-exclusive authorized
distributor of "Adwords Programs" to advertisers in India.
The Adwords Program Distribution Agreement allows Google
India to access all intellectual property and confidential
information which is used for activities related to the Distribution
Agreement.
Google India is also having access to the IP address of the
desktop / laptop / tablet, photographs of users and the time
spent on websites, eating habits, wearing preferences, etc.
Further, the Google search engine has access to data
pertaining to the user of the website in the form of name, sex,
age, city, state, religion, etc.
Accordingly, the Tribunal observed that the Distribution
Agreement is not merely an agreement to provide
advertisement space but is also an agreement for facilitating
48
Income Deemed to Accrue or Arise in India
display and publishing of an advertisement to the targeted
customer.
Further, the Tribunal observed that the IP of Google vests in the
search engine, technology, associated software and other
features, and hence use of these tools for performing various
activities, including accepting advertisements, providing before /
after sales services, clearly falls within the ambit of royalty.
The Tribunal also noted that as per the terms of the Distribution
Agreement, Google India was permitted to use tradename,
trademarks, service marks, domains or other distinctive brand
features of GIL solely for the use under the Distribution
Agreement, on a non-exclusive, non-sub-licensable basis for
the purposes of marketing and distribution of the Adwords
Program.
Accordingly, it was held that the payments made by Google
India under the agreement were not only for marketing and
promoting the Adwords Program but was also for the use of
Google brand features. Thus, payment made by Google India to
GIL was royalty chargeable to tax in India under the Act as well
as India Ireland DTAA.
25. In the case of Godaddy.com LLC v. ACIT [2018] 92 taxmann.com
241, the Mumbai Tribunal held that Rendering of services for domain
registration is rendering of services in connection with use of an
intangible property which is similar to trademark and therefore,
charges received by assessee for said services is royalty within
meaning of clause (iii) of Explanation 2 to section 9(1)(vi).
Fees for Technical Services
Under section 9(1)(vii), following incomes by way of "fees for technical
services" shall be deemed to accrue or arise.
(a) Payable by the Government;
or
(b) Payable by resident, except where the fees are payable in respect of
services utilized in a business or profession
(i) carried on by such person outside India; or
49
Taxation of Non-Residents
(ii) for the purposes of making or earning any income from any
source outside India;
or
(c) Payable by a non resident, where the fees are payable in respect of
services utilized in a business or profession
(i) carried on by such person in India; or
(ii) for the purposes of making or earning any income from any
source in India;
The term "fees for technical services:" means any consideration (including
any lump sum consideration) for rendering any managerial, technical or
consultancy services (including the provision of services of technical or other
personnel) but does not include consideration for any construction,
assembly, mining or like project undertaken by the recipient or consideration
which would be income of the recipient chargeable under the head "salaries".
Important Judicial Precedents & Board Circulars:
1. In G.V.K. Industries Ltd. v. ITO [1998] 228 ITR 564 (Andhra Pradesh
HC), the success fee was payable by the petitioner company to the
non-resident company. The question before the Andhra Pradesh High
Court was in respect of nature of payments. The court held that, from
a combined reading of section 9(1)(vii)(b) and Explanation 2 thereto,
it becomes clear that any consideration whether lump sum or
otherwise, paid by a person who is resident in India to a non resident
for running any managerial or technical or consultancy service, would
be income by way of fees for technical service and would, therefore,
be within the ambit of "income deemed to accrue or arise in India ".
Affirmed by the Supreme Court in GVK Industries Ltd. v. ITO [2015]
371 ITR 453.
2. From a combined reading of clause (vii)(b) of section 9(i) and
Explanation 2, thereto, it becomes abundantly clear that any
consideration, whether lump sum or otherwise paid by a person who
is resident in India to a non-resident for rendering any managerial or
technical or consultancy service would be income by way of fees for
technical services and would, therefore be within the ambit of `income
deemed to accrue or arise in India. It is also to be noted that under
section 9(1)(vii)(b), the expression used is "fees for services utilized
in India" and not the expression `fees for services rendered in India".
50
Income Deemed to Accrue or Arise in India
It may be that some of the services are rendered abroad by the
personnel employed or deputed by non-resident company under
collaboration agreement with the Indian company. But, if the fees are
paid for services utilized by the Indian company, in its business
carried on by it in India, irrespective of the place where the services
were rendered, the amounts of the fees should be deemed to accrue
or arise in India. [Elkem Technology v. DCIT [2001] 250 ITR 164
(Andhra Pradesh HC)]
3. In CIT v. Sundwiger EMFG & Co. [2003] 262 ITR 110 (Andhra
Pradesh HC), the fact were, Midhani, a resident company entered
into a contract with a non-resident company for supply of various
capital equipment in connection with setting up of special metal and
alloy projects. Further, a supplementary contract was also entered
into between the parties for providing technical services covering
supervision of erection, start-up, etc. for which the non-resident had
to send on deputation their employees who were specialist, to India.
Apart from payment on per day basis, Midhani had to meet the
expenses of travel, living and pocket expenses of the specialist
coming to India. It was also further agreed that all payments to the
contractor and the specialists under the contract would be without
deduction of taxes, assessment, duties etc., and if leviable, would be
assumed to be paid by the purchaser only.
On these facts, the Andhra Pradesh High Court held that Midhani, as
one principal had entered into an agreement with another principal,
the non-resident company in respect of purchasing of machinery. The
supplementary contract was only by way of an abundant caution and
it did not mean that the payment was either to be taxable or would be
tax free. All that it meant was that in case the payment was taxable
the same would be borne by Midhani. The expenses met by the
Midhani under the supplementary contract were part of the
consideration for setting up of the machinery. The expenses met
could not be viewed in isolation from the main contract and if that was
so, whether the payment were made on daily basis or not for any
technical services rendered, they would form part and parcel of
consideration for the purchase of machinery. Thus, the provisions of
section 9(i)(vii) would not be applicable. On the other hand, such
payments were exempted under Explanation 2 to section 9(i)(vii)
51
Taxation of Non-Residents
4. Where the object of the preparation of designs and drawings is to
bring home point as to how the manufactured equipments is required
to be erected, same should also be considered as technical advise
rendered except where it could be proven that the design and
drawings were part of plant and machinery purchased and were
therefore required to be added to the cost of plant and machinery.
[AEG Aktiengesllschaft v. CIT [2004] 267 ITR 209 (Karnataka HC)]
5. For section 9(1)(vii) to be applicable, it is necessary that services
provided by a non-resident assessee under a contract should not only
be utilized within India, but should also be rendered in India.
[Ishikawajma-Harima Heavy Industries Ltd v DIT [2007] 288 ITR 408
(SC)]
This decision stands nullified for the limited purposes of place
business or place of rendering of services in connection with "fees for
technical services" since s 9(1)(vii) has been amended by the
Finance Act 2010 w.r.e.f 1.06.1976 which provided that where the
income is deemed to accrue or arise in India under clauses (v), (vi)
and (vii) of s 9(1) such income shall be included in the total income of
non-resident whether or not the non-resident has a residence or
place of business or business connection in India; or the non-resident
has rendered services in India
6. Delhi High court in CIT v Havells India Ltd [2013] 352 ITR 376 has
put at rest the doubts surrounding the application of exception
provided by section 9(1)(vii)(b). The court clarified that the export
activity having taken place or having been fulfilled in India, the source
of income was located in India and not outside. Mere fact that the
export proceeds emanated from persons situated outside India did
not constitute them as the source of income. The manufacturing
activity is located in India. The source of income is created at the
moment when the export contracts are concluded in India. Thereafter,
the goods are exported in pursuance of the contract and the export
proceeds are sent by the importer and are received in India. The
importer of the assessee's products is no doubt situated outside
India, but he cannot be regarded as a source of income. The receipt
of the sale proceeds emanate from him from outside. He is, therefore,
only the source of the monies received. The income component of the
monies or the export receipts is located or situated only in India.
There is a distinction between the source of the income and the
52
Income Deemed to Accrue or Arise in India
source of receipt of the monies. In order to fall within the second
exception provided in section 9(1)(vii)(b ), the source of the income,
and not the source of receipt, should be situated outside India.
7. In the case of Siemens Ltd. v. CIT(A) [2013] (142 ITD 1), Mumbai
Tribunal held that any technology or machinery is developed by
human and put to operation automatically, wherein it operates without
much of human interface or intervention, then usage of such
technology cannot per se be held as rendering of 'technical services'
as contemplated in Explanation 2 to section 9(1)(vii).
8. In the case of DDIT v. A.P. Moller Maersk [2014] 64 SOT 50 (Mumbai
Tribunal), facts were that the assessee engaged in business of
operation of ships developed software for running of shipping
business globally in a more effective and efficient manner and access
of such software was provided to various agents/group companies all
over the world who used this software for facilitating the freight
receipts from shipping, for which they reimbursed the cost to the
assessee without any mark-up. It was held that Such recovery of cost
cannot be taxed as FTS or royalty independently as the assessee is
not rendering any service of managerial, technical or consultancy to
its agent or group entities by allowing its group companies to be
usage of software.
Affirmed by the Supreme Court in DIT v. A.P. Moller Maersk A S
[2017] 392 ITR 186.
9. Payment made for utilizing standard facilities which were provided by
way of use of technical gadgets, since it did not involve technical
services, payments made for utilizing such services was not in nature
of fee for technical services. [ITO v. Primenet Global Ltd. [2016] 48
ITR(T) 451 (Delhi Tribunal)]
Exception to Fee for Technical Service Income
The aforesaid provisions of section 9(1)(vii) shall not apply in relation to any
income by way of fees for technical services payable in pursuance of an
agreement made before April 1,1976 and approved by the Central
Government.
53
Taxation of Non-Residents
An agreement made on or after April 1, 1976 shall be deemed to have been
made before that date if the agreement is made in accordance with proposals
approved by the Central Government before that date.
Important Judicial Precedents & Board Circulars:
1. In Meteor Soctellite Ltd. v. ITO [1980] 121 ITR 311, the Gujarat High
Court has pointed out that clause (vi) of section 9(1) deals with a
specific type of income, viz. income by way of royalty, whereas the
first limb of clause (i) of that section is a more general provision
which deals with all incomes accruing or arising whether directly or
indirectly through or from any business connection in India. Income
by way of royalty is a species or one of the categories of a larger
class mentioned in clause (i), of section 9(1). When once one comes
across the question of royalty one has only to look at clause (vi) and
not to the more general provisions of clause (i). Similarly, income by
way of fees for technical services, which is covered by clause (vii) is
more general category as compared to the royalty which is covered
by clauses (vi). On the principle that the particular excludes the
general, clause (vii) or clause (i) cannot be applied to royalty income
which is covered only under clause (vi).
2. In another case, the Madras High Court in CIT v. Copes Vulcan Inc.
[1987] 167 ITR 884 has also noted that, having regard to the
language used in section 9(1)(vii) by way of fees for technical
services arising out of even a business connection should be taken to
have been covered by section 9.(i)(vii) and not section 9(1)(i), section
9 (1)(vii) being a special provision for that type of income.
3. In Central Mine, Planning& Design Institute Ltd. v. DCIT [1998] 67
ITD 195, the Patna Tribunal held that there is no mentioned of the
words "business connection" under section 9(1)(vii)(b). Hence, there
is no requirement for the Assessing Officer to establish the existence
of business connection for the purpose of this clause. Where the
contracts were for rendering technical assistance in preparation of
design drawings and project reports and the payments made to the
foreign company were of the nature of fees for technical services
rendered, the payments in question would have to be considered as
falling under section 9(1)(vii)(b) and there would be no need to
establish existence of business connection.
54
Income Deemed to Accrue or Arise in India
4. The Central Board of Direct Taxes vide its circular no. 384 dated May
4,1984, has clarified that where shares are issued of an Indian
Company in consideration for the transfer abroad of technical know-
how or services or delivery abroad machinery and plant, the payment
is taxable, as income is deemed to accrue or arise in India.
Place of Residence or Business or Business Connection
and Place of Rendering Services Immaterial
The Finance Act 2007 introduced an explanation to section 9 applicable
w.r.e.f June 1, 1976 which provided that where the income is deemed to
accrue or arise in India under clauses (v), (vi) and (vii) of section 9(1), such
income shall be included in the total income of non-resident whether or not
the non-resident has a residence or place of business or business
connection in India.
The above explanation was replaced by the Finance Act 2010 w.r.e.f June 1,
1976 which provided that where the income is deemed to accrue or arise in
India under clauses (v), (vi) and (vii) of sec 9(1), such income shall be
included in the total income of non-resident whether or not:
(i) non-resident has a residence or place of business or business
connection in India; or
(ii) the non-resident has rendered services in India
Taxability of Pension
Under section 9(2) pension payable outside India to a person residing
permanently outside India shall not be deemed to accrue or arise in India, if:
(a) the pension is payable to a person referred to in article 314 of the
constitution ; or
(b) the pension is payable to a person who, having been appointed
before the August 15,1947, to be a judge of Federal Court or of a
High Court within the meaning of the Government of India Act, 1935,
continues to serve on or after the commencement if the constitution
as a Judge in India.
Important Judicial Precedents & Board Circulars:
The Board vide its circular no 4 dated February 20, 1969 has clarified that,
pensions received in India from abroad by pensioners residing in the country
for past services rendered in foreign countries, will be income accruing to the
55
Taxation of Non-Residents
pensioners abroad and will not be liable to tax in India on the basis of
accrual, if the residential status of the pensioner is either "Non-resident" or
"Resident but not Ordinarily Resident". However, it will be chargeable if the
residential status is "Resident and Ordinary Resident".
56
Chapter 3
Income not to be Included in the Total
Income
Section 10 exempts from tax various income. The incomes enumerated in
this section are not only excluded from the taxable income of the assessee
but also from his total income. In other words, they are not to be taken into
computation for the purpose of determining either the taxable income or to
the rate of tax. The following incomes are specifically exempt in the hands of
the non-resident/foreigners.
Interest to non-resident
The following interest incomes are exempt from tax under section 10(4) and
10(4B) of the Act.
(a) In case of a non-resident, interest on bonds or securities, notified by
the Central Government i.e. 4¼ % National Defence Loan 1968 and
3/4% National Defence Loan 1972, including income by way of
premium on redemption of such bonds, before June 1, 2002.
(b) In case of a person resident outside India under section 2(w) of the
Foreign Exchange Management Act, 1999, (FEMA), interest on Non-
Resident (External) Account in any bank in India
(c) In the case of an Indian citizen or a person of Indian origin who is a
non-resident, the interest from notified Central Government securities
i.e. National Saving Certificates VI & VII issue, if such certificates
were issued before June 1,2002 and were subscribed in convertible
foreign exchange remitted from outside through official channels.
A person shall be deemed to be of Indian Origin if he, or either of his parents
or any of his grandparents, was born in undivided India.
`Convertible foreign exchange' means foreign exchange which is for the time
being treated by the Reserve Bank of India (RBI) as convertible foreign
exchange for the purpose of FEMA 1999.
The Board has clarified that the joint holders of Non-resident (external)
Account do not constitute an "association of persons" by merely having these
accounts in joint names. The benefit of exemption will be available to such
57
Taxation of Non-Residents
joint account holders subject to fulfillment of other conditions contained in
that section by each of the individual joint account holder [CBDT Circular No.
592 dated February 04, 1991]
In Rambhai L. Patel v. CIT [2001] 252 ITR 846, the Gujarat High Court held
that the legislative intent underlying the provisions is to provide exemption in
respect of interest earned only on funds which are repatriable outside India.
It is further clear that the exemption will be available in respect of moneys
credited in `Non-resident (External) Account' in case of `non-resident' and
such account has to be maintained in accordance with FERA and Rules
made thereunder and such Rules are to be made and notified by the RBI.
In CIT v. Asandas Khatri [2006] 283 ITR 346, the Madhya Pradesh High
Court held that the interest earned on fixed deposits made out of money
deposited in Non-resident (External) Account is also exempt under section
10(4)(ii) of the Act.
Salary of Diplomatic Personnel
Section 10(6)(ii) provides for exemption in respect of remuneration received
by foreign citizen as an official by whatever name called of an embassy, high
commission, legation, commission, consulate or trade representation of
foreign state, or a member of staff of any of that official, if corresponding
Indian official in that foreign country enjoys a similar exemption. Further such
members of the staff are subjects of the country represented and are not
engaged in any other business or profession or employment in India.
Salary of Foreign Employee
The remuneration received by a foreign national as an employees of a
foreign enterprises, for services rendered by him during his stay in India, is
totally exempt under section 10(6)(vi) from tax, provided:
(a) the foreign enterprise is not engaged in any business or trade in India
(b) his stay in India does not exceed a period of ninety days in such
previous year and
(c) such remuneration is not liable to be deducted from the income of the
employer chargeable under the Income tax Act.
58
Income not to be Included in the Total Income
Salary Received by a Crew of Foreign Ship
Section 10(6)(viii) provides for exemption in respect of salary received by or
due to, a non-resident foreign national as a member of a crew of foreign ship
provided his total stay in India does not exceed ninety days during the
previous year.
Remuneration of a Foreign Trainee
Under section 10(6) (xi) remuneration received by a foreign national as an
employee of a foreign Government during his stay in India, is exempt from
tax, if remuneration is received in connection with training in an undertaking
owned by
(a) the Government, or
(b) any company owned by the Central Government or any State
Government or
(c) any company which is subsidiary of a company referred to in (b)
above, or
(d) any statutory corporation; or
(e) any co-operative society, wholly financed by the Central Government;
or any State Government.
Tax Paid on Royalty/Fees for Technical Services
of Foreign Company
Under section 10(6A) any tax paid by the Government or Indian concern in
respect of income by way of royalty or fees for technical services of foreign
company is exempt, if such payment is received from Government or an
Indian concern in pursuance of an agreement made between April 01,1976
and May 31,2002 and
(a) such agreements relates to a matter included in the industrial policy
for the time being in force, of the Government of India and the
agreement is in accordance with the policy; or
(b) in any other case, the agreement is approved by the Central
Government.
59
Taxation of Non-Residents
Tax Paid on Behalf of Non-Resident
Section 10(6B) exempts the amount of tax paid by the Government or an
Indian concern on behalf of a non-resident or a foreign company in respect of
its income, (other than salary, royalty or fee for technical services). Where
such income arises to a non resident or a foreign company in pursuance of
an agreement entered into before June 1, 2002 between the Central
Government and the Government of a foreign state or an international
organization under the terms of that agreement or any related agreement
made before that date which has been approved by the Central Government.
Tax Paid by Foreign States/Foreign Enterprise
Under section 10(6BB) the tax payable by the Indian Company under an
agreement to the Central Government on behalf of the Government of foreign
states or foreign enterprise deriving income from an Indian company
engaged in the business of operation of air craft as a consideration of
acquiring an aircraft or an aircraft engine (other than payment for providing
spares, facilities or services in connection with the operation of leased air
craft) on lease under an agreement entered after March 31,1977 but before
April 1,1999 or entered after March 31, 2007 and approved by the Central
Government.
Technical Fees Received by a Notified Foreign
Company
Income by way of royalty or fees for technical services received by notified
foreign company is exempt under section 10(6C), if such income is received
in pursuance of an agreement entered into by the Central Government with
the Government of foreign state to provide in or outside India in project
connected with security of India
CBDT vide notification no. 74/2015 [200/18/2014-ITA-I] dated September 22,
2015 has notified M/s Thales Systemes Aeroportes SAS, having its office at
S.A. au capital de 81 007 176 Euros RCS Paris B 712 042 as a notified
foreign company.
Similarly, section 10(6D) provides an exemption to income by way of royalty
or fees for technical services arising to the National technical research
organization.
60
Income not to be Included in the Total Income
Income of a Foreign Government Employee under
Co-Operative Technical Assistance Programme
Section 10(8) provides for exemption in respect of income of an individual
serving in India in connection with any co-operative technical assistance
programme in accordance with an agreement entered into by the Central
Government and a foreign Government, if:
(a) the remuneration received by him directly or indirectly from the
foreign Government; and
(b) any other income of such individual which accrue or arises outside
India, provided that such individual is required to pay any income or
social security tax to the foreign Government.
Remuneration or Fees Received by Non-resident
Consultants and their Employees and Family
Members
Under section 10(8A), the following incomes in case of a consultant are
exemption from tax
(a) any remuneration is received by him or it, directly or indirectly, out of
the funds made available to an international organization (hereinafter
referred to as the agency) under the technical assistance grant
agreement between the agency and the Government of a foreign
state; and
(b) any other income which accrues or arise to him or it outside India,
and is not deemed to accrue or arise in India in respect of which such
consultant is required to pay any income or social tax to the
Government of the country of his or its origin.
The expression "consultant" has been defined to mean:
(a) any individual who is either not a citizen of India or being a citizen of
India, is not ordinarily resident in India
or
(b) any other person being a non resident; engaged by the agency for
rendering technical services in India in accordance with the
agreement entered into by the Central Government and the said
agency and the agreement relating to the engagement of the
61
Taxation of Non-Residents
consultant is approved by the Department of Economic Affairs in
Ministry of Finance, Government of India.
The remuneration received by an employees of the consultant referred to in
the aforesaid para is exempt from Income tax provided such employees is
either not a citizen of India or, being a citizen of India is not ordinarily
resident in India and the contract of his service is approved by the prescribed
authority before the commencement of his service [Section 10(8B)].
Any family member of an employee, mentioned above, accompanying him to
India enjoys tax exemption in respect of foreign income or an income not
deemed to accrue or arise in India, if the family member is required to pay
income tax or social security tax to the foreign Government.[Section 10(9)].
Interest
(a) On Bonds: Section 10(15)(iid) exempts interest received by a non
resident Indian from notified bonds (notified before June 1, 2002) i.e. NRI
Bonds, 1988 and NRI Bonds (Second series) issued by the State Bank of
India or an individual owning such bonds by virtue of being nominee or
survivor of such non-resident Indian or by individual to whom the bonds have
been gifted by a non resident Indian.
This exemption is available only if the bonds are purchased by a non-
resident Indian in foreign exchange. The interest and principal received in
respect of such bonds, whether on their maturity or otherwise is not allowable
to be taken out of India.
If an individual who is a non-resident Indian in the previous year in which the
bonds were acquired becomes a resident in India in any subsequent year,
the interest received on such bonds will continue to be exempt in the
subsequent years as well.
If the bonds are encashed in a previous year prior to their maturity by an
individual who is so entitled, the exemption in relation to the interest income
shall not be available to such individual in the assessment year relevant to
such previous year in which the bonds have been en-cashed.
(b) On any deposits: Interest payable to any bank incorporated in a
country outside India and authorised to perform central banking functions in
that country on any deposits made by it, with the approval of the Reserve
Bank of India, with any scheduled bank. [Section 10(15)(iiia)]
(c) On loan for projects approved by central government: Interest
payable to the Nordic Investment Bank, being a multilateral financial
62
Income not to be Included in the Total Income
institution constituted by the Governments of Denmark, Finland, Iceland,
Norway and Sweden, on a loan advanced by it to a project approved by the
Central Government in terms of the Memorandum of Understanding entered
into by the Central Government with that Bank on November 25, 1986
[Section 10(15)(iiib)].
(d) On loan in pursuance of financial co-operation agreement:
Interest payable to the European Investment Bank, on a loan granted by it in
pursuance of the framework-agreement for financial co-operation entered
into on November 25, 1993 by the Central Government with that Bank
[Section 10(15)(iiic)].
(e) On foreign currency deposits: Interest payable by a scheduled
bank to a non-resident or to a person who is not ordinarily resident with the
meaning of section 6(6) on deposits in foreign currency and where the
acceptance of deposits is approved by RBI is exempt under section
10(15)(iv)(fa).
(f) On deposits in an offshore Banking Unit of SEZ: Any income by
way of interest received by a non-resident or a person who is not ordinarily
resident, in India on a deposit made on or after the April 1, 2005, in an
Offshore Banking Unit referred to in clause (u) of section 2 of the Special
Economic Zones Act, 2005 [Section 10(15)(viii)]
Income of the Non-resident from Lease of Aircraft
etc.
Any payment made, by an Indian company engaged in the business of
operation of aircraft, to acquire an aircraft or an aircraft engine (other than a
payment for providing spares, facilities or services in connection with the
operation of leased aircraft) on lease from the Government of a foreign State
or a foreign enterprise under an agreement not being an agreement entered
into between the April 1, 1997 and March 31, 1999 and approved by the
Central Government in this behalf
This clause shall not apply to any agreement entered into on or after April 1,
2007
The expression "foreign enterprise" means a person who is a non-resident
[Section 10(15A)]
63
Taxation of Non-Residents
Income of the European Economic Community
Section 10(23BBB) exempts any income of the European Economic
Community derived in India by way of interest, dividends or capital gains
from investments made out of its funds under such scheme as the Central
Government may notify in this behalf. European Community International
Institutional Partners (ECIP) Scheme, 1993 was notified by Notification no.
SO 115(E) dated February 2, 1995.
European Economic Community means such Community established by the
Treaty of Rome of March 25, 1957.
Income of SAARC Fund
Section 10(23BBC) exempts any income derived by the SAARC fund for
Regional Projects set up by Colombo Declaration of December 21, 1991 by
the heads of state or Government of the Member Countries of South Asian
Association for Regional Co-operation established on December 8, 1985 by
the charter of the South Asian Association for Regional Co-operation.
Income of the Secretariat of Asian Organization of
Supreme Audit Institutions
Income of the secretariat of the Asian Organization of the Supreme Audit
Institutions which has been registered as "ASOSAI SECRETARIAT" under
the Societies Registration Act, 1960 was exempt from the assessment year
2001-02 to assessment year 2010-11. [Section 10(23BBD)]
Income from Specified Services chargeable to
equalization levy
Section 10(50) exempts any income from specified services covered by the
provisions of Chapter VIII of the Finance Act, 2016 and which are chargeable
to equalization levy.
`Specified services' as covered by section 164(i) of Chapter VIII
Equalization levy means online advertisement, any provision for digital
advertising space or any other facility or service for the purpose of online
advertisement and includes any other service as notified by the Central
Government.
64
Income not to be Included in the Total Income
Other Income Exempt from Total Income
Even following incomes are exempt in the hands of non-residents, like any
other assessee, on fulfillment of conditions mentioned in the respective sub
sections:
(a) Agricultural income [Section 10(1)].
(b) Receipts by a members from a Hindu Undivided family [Section
10(2)].
(c) Share of profits from partnership firm [Section 10(2A)].
(d) Leave travel concession to Indian citizen [Section 10(5)].
(e) Allowance to Government employees out of India [Section 10(7)].
(f) Gratuity [Section 10(10)].
(g) Pension and leave salary [Section 10(10A)/(10AA)].
(h) Retrenchment compensation [Section 10(10B)].
(i) Compensation received by victims of Bhopal leak disaster [Section
10(10BB)].
(j) Payment from an approved public sector company and other entities
at the time of voluntary retirement [Section 10(10C)].
(k) Tax on perquisites paid by employer [Section 10(10CC)].
(l) Amount received under Life Insurance Policies [Section 10(10D)]
(m) Payment from provident fund [Section 10(11)/(12)]
(n) Payment from National Pension Trust on closure / opting out of the
scheme and on partial withdrawal [Section 10(12A) and 10(12B)]
(o) Payment from an approved superannuation fund [Section 10(13)].
(p) House rent allowance [Section 10(13A)].
(q) Special allowances [Section 10(14)]
(r) Income by way of interest on premium etc on redemption of notified
securities [Section 10(15)(i)].
(s) Interest on notified capital investment bonds [Section 10(15)(iib)].
(t) Interest on notified relief bonds [Section 10(15)(iic)].
65
Taxation of Non-Residents
(u) Interest on Gold Deposit Bond Scheme, 1999 or deposit certificates
issued under the Gold Monetisation Scheme, 2015 [Section
10(15)(vi)].
(v) Interest on notified bonds issued by a local authority [Section
10(15)(vii)]
(w) Scholarship granted to meet cost of education [Section 10(16)].
(x) Daily allowance of members of Parliament [Section 10(17)].
(y) Payment in cash/kind as award instituted by Central/State
Government or award instituted by the Central Government approved
body [Section 10(17A)].
(z) Pension to gallantry award winners [Section 10(18)].
(za) Income received from specified funds / charities under section
10(23C)
(zb) Any distributed income, referred to in section 115UA, received by a
unit holder from the business trust, not being that proportion of the
income which is of the same nature as the income referred to in
section 10 (23FC)(a) or section 10(23FCA) [Section 10(23FD)]
(zc) Subsidy received by planters [Section 10(31)].
(zd) Income of minor [Section 10(32)].
(ze) Dividend income and interest from UTI/Mutual Fund [Section
10(33)/(34)/35)].
(zf). Income arising to a shareholder on buy-back of shares (as referred to
in section 115QA) [Section 10(34A)]
(zg). Income of an investor by way of distributed income (section 115TA)
received from a securitization trust [Section 10(35A)]
(zh) Long term capital gains on transfer of eligible equity shares [Section
10(36)].
(zi) Capital gains arising by way of compulsory acquisition [Section
10(37)].
(zj) LTCG on transfer of equity shares in a company or a unit of an equity
oriented fund where such transaction of sale is entered into on or
after 1.10.2004 and is subjected to securities transaction tax (STT)
[Section 10(38)]
66
Income not to be Included in the Total Income
Proviso to section 10(38), as inserted by the Finance Act, 2016,
provides that exemption may also be available to a transaction
undertaken on a recognized stock exchange located in any
International Financial Services Centre and where the consideration
for such transaction is paid or payable in foreign currency.
Third proviso to section 10(38) as inserted by the Finance Act, 2017
further provides that exemption under this section will not be
available in respect of capital gains arising from the transfer of equity
shares, where such equity shares were acquired on or after October
1, 2014, however, which were not subjected to STT earlier.
The above exemption is withdrawn w.e.f. 1 April 2018 after the
introduction of section 112A in the Act.
(zk) Any income received in India in Indian currency by a foreign company
on account of sale of crude oil to any person in India [Section 10(48)].
(zl) Any income accruing or arising to a foreign company on account of
storage of crude oil in a facility in India and sale of crude oil therefrom
to any person resident in India [Section 10(48A)]
(zm) Any income accruing or arising to a foreign company on account of
sale of leftover stock of crude, if any, from the facility in India after the
expiry of the expiry of agreement or arrangement referred to section
10(48A) of the Act or on termination of the agreement subject to the
prescribed conditions [Section 10(48B)]
Special provisions in respect of Newly
Established units in Special Economic Zones
[Section 10AA]
This section provides deduction in computing the total income of an
assessee, being an entrepreneur as referred to in clause (j) of section 2 of
the Special Economic Zones Act, 2005, from his Unit, who begins to
manufacture or produce articles or things or provide any services during the
previous year relevant to any assessment year commencing on or after April
1, 2006 but before April 1, 2021, a deduction of--
(i) hundred per cent of profits and gains derived from the export, of such
articles or things or from services for a period of five consecutive
assessment years beginning with the assessment year relevant to the
previous year in which the Unit begins to manufacture or produce
67
Taxation of Non-Residents
such articles or things or provide services, as the case may be, and
fifty per cent of such profits and gains for further five assessment
years and thereafter;
(ii) for the next five consecutive assessment years, so much of the
amount not exceeding fifty per cent of the profit as is debited to the
profit and loss account of the previous year in respect of which the
deduction is to be allowed and credited to a reserve account (to be
called the "Special Economic Zone Re-investment Reserve Account")
to be created and utilized for the purposes of the business of the
assessee in the manner laid down in sub-section (2).
Explanation to section 10AA as inserted by the Finance Act 2017 provides
that the amount of deduction under this section shall be allowed from the
total income of the assessee computed in accordance with the provisions of
this Act, before giving effect to the provisions of this section and the
deduction under this section shall not exceed such total income of the
assessee. Rationale for introducing the explanation was provided as to
overcome the controversy, wherein courts on various occasions including the
ruling of Supreme Court in the case of Yokogawa India Ltd. [2017] 391 ITR
274 in respect of a similar issue with respect to section 10A, have taken a
view that such deduction is to be allowed at the stage of computing the gross
total income of the undertaking and not at the stage of computation of total
income.
As per section 10AA(2) the deduction under clause (ii) of sub-section (1)
shall be allowed only if the following conditions are fulfilled, namely :--
(a) the amount credited to the Special Economic Zone Re-investment
Reserve Account is to be utilised--
(i) for the purposes of acquiring machinery or plant which is first
put to use before the expiry of a period of three years
following the previous year in which the reserve was created;
and
(ii) until the acquisition of the machinery or plant as aforesaid, for
the purposes of the business of the undertaking other than for
distribution by way of dividends or profits or for remittance
outside India as profits or for the creation of any asset outside
India;
(b) the particulars, as may be specified by the Central Board of Direct
Taxes in this behalf, under clause (b) of sub-section (1B) of section
68
Income not to be Included in the Total Income
10A have been furnished by the assessee in respect of machinery or
plant along with the return of income for the assessment year
relevant to the previous year in which such plant or machinery was
first put to use.
Sub section (3) provides that where any amount credited to the Special
Economic Zone Re-investment Reserve Account under clause (ii) of sub-
section (1),--
(a) has been utilised for any purpose other than those referred to in sub-
section (2), the amount so utilised; or
(b) has not been utilised before the expiry of the period specified in sub-
clause (i) of clause (a) of sub-section (2), the amount not so utilised,
shall be deemed to be the profits,--
(i) in a case referred to in clause (a), in the year in which the amount
was so utilised; or
(ii) in a case referred to in clause (b), in the year immediately following
the period of three years specified in sub-clause (i) of clause (a) of
sub-section (2),
and shall be charged to tax accordingly :
Provided that where in computing the total income of the Unit for any
assessment year, its profits and gains had not been included by application
of the provisions of sub-section (7B) of section 10A, the undertaking, being
the Unit shall be entitled to deduction referred to in this sub-section only for
the unexpired period of ten consecutive assessment years and thereafter it
shall be eligible for deduction from income as provided in clause (ii) of sub-
section (1).
Explanation.--For the removal of doubts, it is hereby declared that an
undertaking, being the Unit, which had already availed, before the
commencement of the Special Economic Zones Act, 2005, the deductions
referred to in section 10A for ten consecutive assessment years, such Unit
shall not be eligible for deduction from income under this section :
Provided further that where a Unit initially located in any free trade zone or
export processing zone is subsequently located in a Special Economic Zone
by reason of conversion of such free trade zone or export processing zone
into a Special Economic Zone, the period of ten consecutive assessment
years referred to above shall be reckoned from the assessment year relevant
to the previous year in which the Unit began to manufacture, or produce or
69
Taxation of Non-Residents
process such articles or things or services in such free trade zone or export
processing zone :
Provided also that where a Unit initially located in any free trade zone or
export processing zone is subsequently located in a Special Economic Zone
by reason of conversion of such free trade zone or export processing zone
into a Special Economic Zone and has completed the period of ten
consecutive assessment years referred to above, it shall not be eligible for
deduction from income as provided in clause (ii) of sub-section (1) with effect
from the April 1, 2006.
Section 10AA(4) lays down the undertakings to which this section applies.
This section applies to undertakings which fulfill the following conditions:--
(i) it has begun or begins to manufacture or produce articles or things or
provide services during the previous year relevant to the assessment
year commencing on or after the April 1, 2006 in any Special
Economic Zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business
already in existence:
Provided that this condition shall not apply in respect of any
undertaking, being the Unit, which is formed as a result of the re-
establishment, reconstruction or revival by the assessee of the
business of any such undertaking as is referred to in section 33B, in
the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business, of machinery or
plant previously used for any purpose.
Explanation.--The provisions of Explanations 1 and 2 to sub-section (3)
of section 80-IA shall apply for the purposes of clause (iii) of this sub-section
as they apply for the purposes of clause (ii) of that sub-section.
Where any undertaking being the Unit which is entitled to the deduction
under this section is transferred, before the expiry of the period specified in
this section, to another undertaking, being the Unit in a scheme of
amalgamation or demerger [Section 10AA(5)],--
(a) no deduction shall be admissible under this section to the
amalgamating or the demerged Unit, being the company for the
previous year in which the amalgamation or the demerger takes
place; and
70
Income not to be Included in the Total Income
(b) the provisions of this section shall, as they would have applied to the
amalgamating or the demerged Unit being the company as if the
amalgamation or demerger had not taken place.
(6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-
section (3) of section 74, in so far as such loss relates to the business of the
undertaking, being the Unit shall be allowed to be carried forward or set off.
For the purposes of sub-section (1), the profits derived from the export of
articles or things or services (including computer software) shall be the
amount which bears to the profits of the business of the undertaking, being
the Unit, the same proportion as the export turnover in respect of such
articles or things or services bears to the total turnover of the business
carried on by the undertaking [Section 10A(7)]:
Provided that the provisions of this sub-section [as amended by section 6 of
the Finance (No. 2) Act, 2009 (33 of 2009)] shall have effect for the
assessment year beginning on April 1, 2006 and subsequent assessment
years.
Section 10AA(8) provides for the applicability of the provisions of sub-
sections (5) and (6) of section 10A to the articles or things or services
referred to in sub-section (1) as if--
(a) for the figures, letters and word "1st April, 2001", the figures, letters
and word "1st April, 2006" had been substituted;
(b) for the word "undertaking", the words "undertaking, being the Unit"
had been substituted.
Section 10AA(9) provides for the applicability of the provisions of sub-section
(8) and sub-section (10) of section 80-IA shall, so far as may be, apply in
relation to the undertaking referred to in this section as they apply for the
purposes of the undertaking referred to in section 80-IA.
Section 10AA(10) provides that where a deduction under this section is
claimed and allowed in respect of profits of any of the specified business,
referred to in section 35AD(8)(c), for any assessment year, no deduction
shall be allowed under the provisions of section 35AD in relation to such
specified business for the same or any other assessment year.
Explanation 1.--For the purposes of this section,--
(i) "export turnover" means the consideration in respect of export by the
undertaking, being the Unit of articles or things or services received
in, or brought into, India by the assessee but does not include freight,
71
Taxation of Non-Residents
telecommunication charges or insurance attributable to the delivery of
the articles or things outside India or expenses, if any, incurred in
foreign exchange in rendering of services (including computer
software) outside India;
(ii) "export in relation to the Special Economic Zones" means taking
goods or providing services out of India from a Special Economic
Zone by land, sea, air, or by any other mode, whether physical or
otherwise;
(iii) "manufacture" shall have the same meaning as assigned to it in
clause (r) of section 2 of the Special Economic Zones Act, 2005;
(iv) "relevant assessment year" means any assessment year falling within
a period of fifteen consecutive assessment years referred to in this
section;
(v) "Special Economic Zone" and "Unit" shall have the same meanings
as assigned to them under clauses (za) and (zc) of section 2 of the
Special Economic Zones Act, 2005.
Explanation 2.--For the removal of doubts, it is hereby declared that the
profits and gains derived from on site development of computer software
(including services for development of software) outside India shall be
deemed to be the profits and gains derived from the export of computer
software outside India.
72
Chapter 4
Presumptive Taxation
Taxation of Shipping Profits Derived by Non
Residents [Section 44B]
Section 44B provides that profits or gains of a non-resident from the
business of operation of ships are to be taken @ 7.5% of the aggregate of
the following amounts:
(a) paid or payable, whether in or out of India, to the assessee or to any
person on his behalf on account of carriage of passengers, livestock,
mail or goods shipped at any port in India.
(b) received or deemed to be received in India by or on behalf of the
assessee on account of the carriage of passengers, livestock mail or
goods shipped at any port outside India.
Explanation to Section 44B provides that the amounts referred to above will
also include the amount paid or payable or received or deemed to be
received by way of demurrage charges or handling charges or any other
amount of similar nature.
Important Judicial Precedents & Board Circulars:
1. The amounts paid or payable or the amounts received or deemed to
be received will also include the amount paid or payable or received
or deemed to be received by way of demurrage charges or handling
charges or any other amount of similar nature [CIT v. Japan Lines
Ltd. [2003] 260 ITR 656 (Madras HC)].
Thus 7.5% of the gross amounts mentioned above would be liable to
tax and no deduction would be allowed for any expenditure, (i.e. the
provisions of section 28 to 43A are not to be taken into account)
however carried forward losses would be allowed to be set off from
such income.
2. Service tax a statutory liability would not involve any element of
profit and a service provider collects same from its customers,
therefore the same cannot be included in total receipt for
determining presumptive income under section 44B [Islamic
73
Taxation of Non-Residents
Republic of Iran Shipping Lines v DCIT (Intl Taxation) [2011] 46 SOT
101 (Mumbai Tribunal)]
3. Once it is accepted that assessee is into a shipping business, then
either the provisions of DTAA shall apply or section 44B of the Act.
[A.P.Moller Maersk v. DDIT [2014] 149 ITD 434 (Mumbai Tribunal)].
4. In Anchor Line Ltd. v. ITO, [1990] 32 ITD 403, the Mumbai Tribunal
has observed that, "set off of carry forward of losses" has been
discussed in sections 70 to 80 and these provisions have to be
applied in the case of a non resident when profits and gains of
shipping business are computed under the special provision viz.
section 44B. Therefore, business loss would be allowed to be
carried forward and set off irrespective of provisions of section 44B,
subject to limitation that it could not be allowed to be carried forward
and set off beyond period of eight years.
Comparison with Section 172
At this juncture, it is appropriate to compare section 172 on this topic which
is placed under chapter XV, "Liability in special cases". The heading of the
section is "Shipping business of non-residents". It creates a tax liability in
respect of occasional shipping by making a special provision for the levy and
recovery of tax in the case of a ship belonging to or chartered by a non
resident which carries passengers, livestock, mail or goods shipped at any
port in India.
The object of the section is to ensure the levy and recovery of tax in the case
of ships belonging to or chartered by non-residents. The section brings to tax
the profits made by them from occasional shipping by means of summary
assessment in which 7.5% of the gross amount received by them is deemed
to be assessable profit.
It is significant to note that there is a difference between section 44B and
section 172. In section 44B, no procedure for assessment and collection of
tax is provided.
The incidence of tax under section 44B is on a non-resident engaged in the
business of operation of ships or chartered by him or it, and if such income
constituted the amount paid to payable on account of the carriage of
passengers, livestock, mail or goods shipped to any port in India.
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Presumptive Taxation
While section 172 refers to levy and recovery of tax in the case of any ship
belonging to or chartered by a non-resident which carries passengers,
livestock, mail or goods shipped from any port in India.
The difference between section 44B and section 172 has been explained by
the Karnataka High Court in V. M. Salgaocer & Bros Ltd. v. Deputy Controller
[1991] 187 ITR 381. Those who do regular shipping business are covered by
section 44B and they will be assessed in accordance with the provision of the
Act applicable to the rates specified in section 44B, while causal visit of
Indian port is covered by section 172.
Section 172(3) imposes an obligation on the master of the ship to prepare
and furnish to the Assessing Officer a return of the full amount paid or
payable to the owner or charterer or any person on this behalf, on account of
the carriage of all passenger, livestock, mail or goods shipped at any port in
India since the last arrival of the ship thereat. Such return is, ordinarily, to be
furnished by the master of the ship before the departure, from that port in
India, of the ship.
The proviso to section 172(3) however, provides that a return may be filed by
the person authorized by the master of the ship within 30 days of the
departure of the ship from the port, if:
(a) the Assessing Officer is satisfied that it is not possible for the master
of the ship to furnish the return required by section 172(3) before the
departure of the ship from the port and
(b) the master of the ship has made satisfactory arrangement for the
filing of the return and payment of tax by any other person on this
behalf.
Section 172(4) provides for a summary procedure of assessment. On receipt
of the return filed by the master of the ship or by any person on this behalf,
the Assessing Officer has to determine the taxable income by virtue of
provision of section 172(2), the taxable income is a sum equal to 7.5% of the
amount paid or payable on account of carriage of passengers etc. to the
owner or charterer or to any person on his behalf, whether that amount is
paid or payable in or out of India. The tax payable on such taxable income is
to be calculated at the rate or rates in force applicable to the total income.
The master of the ship is liable for payment of such tax.
Under section 172(4A), it is incumbent on the AO to pass the order of
assessment within 9 months from the end of the financial year in which the
return of income under section 172(3) is filed.
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Taxation of Non-Residents
Section 172(5) empowers the Assessing Officer, for the purpose of
determining the tax payable, to call for such accounts and documents as he
may require.
Section 172(6) prohibits grant of a port clearance to the ship until the
Collector of customs or other authorized officer, is satisfied that the tax
assessable under section 172 has been duly paid or that satisfactory
arrangements have been made for the payment thereof.
Under section 172(7), the owner or charter has option to claim before the
expiry of the assessment year relevant to the previous year in which the date
of departure of the ship from the Indian port falls, that an assessment in
respect of his total income for the previous year may be made in the normal
course under section 143. In such a case, any payment made under section
172 is to be treated as a payment in advance of the tax leviable for that
assessment year and the difference between the sum so paid and the
amount of tax found payable by him on such assessment is to be paid by him
or refunded to him as the case may be.
Under section 172(8) the sum chargeable to tax includes amounts payable
by way of demurrage charge or handling charge or any other amount of
similar nature.
Profits and gains in connection with the business
of exploration etc. of mineral oils [Section 44BB]
Section 44BB provides for determination of income of taxpayer being a non
resident engaged in the business of providing services or facilities in
connection with, or supplying plant and machinery on hire used or to be used
in the exploration for and exploitation of mineral oils.
In such case, income shall be calculated @ 10% of the amounts paid or
payable to the taxpayer or to any person on his behalf whether in or out of
India, on account of the provisions of such services or facilities or supply of
plant & machinery on hire for the aforesaid purposes. This amount also
includes the amounts received or deemed to be received in India on account
of such service or facilities or supply of plant and machinery used or to be
used in the exploration for and exploitation of mineral oils.
The proviso to section 44BB(1) makes it clear that the section shall not apply
in case where the provisions of the following sections apply:
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Presumptive Taxation
(i) Section 42 Special provision for deductions in the case of
business for prospecting etc. for mineral oil, or
(ii) Section 44D Special provision for computing income by way of
royalties etc. in the case of foreign companies, or
(iii) Section 44DA Special provision for computing income by way of
royalties etc. in the case of non-residents.
(iv) Section 115A Tax on dividends, royalty and fees for technical
services in the case of foreign companies, or
(v) Section 293A Power to make exemption etc., in relation to
participation in the business of prospecting for,
extraction etc., of mineral oil.
For the purpose of this section, "plant" includes ships, aircraft, vehicles,
drilling units, scientific apparatus and equipment, used for the purposes of
the said business and "mineral oil" includes petroleum and natural gas.
Important Judicial Precedents & Board Circulars
1. In Advance Ruling Petition no. P6 of 1995, In re [234 ITR 371 (AAR)],
has been held that section 44BB deals with non-resident assessee
which may be Indian or foreign nationals, hence, the concessional
treatment under this section would be available to both.
2. In DCIT v. Geoservices Eastern Inc., [1995] 55 ITD 227, the Mumbai
Tribunal has observed that as per the scheme of section 44BB the
assessee is not required to maintain regular books of account. It is
open to the assessee to adopt the system of accounting of his choice
only when he maintains the books of account. If there are no books of
account, no question arises in regard to the choice of methods.
Section 145 is, therefore, not relevant for deciding such case.
3. The Delhi Tribunal in MC Dermott International Inc v. DCIT, [1994] 49
ITD 590, held that amount of tax paid on behalf of the assessee is to
be added to the receipts of the assessee and aggregate amount
would be treated as total receipts and the factor of income have to be
limited to 10% of this aggregate.
4. Similar view has been expressed by the Orissa High Court in Oil India
Ltd. v. CIT [1995] 212 ITR 225. The Court held that the tax liability of
the non-resident, firm which had been undertaken and paid by the
Indian firm would be a perquisite arising from the business of oil
77
Taxation of Non-Residents
exploration under the agreement entered into by the non resident firm
with the Indian firm and would be taxable as such. The computation
of the same would have to be made under sub section (2) of section
44BB and, therefore, only 10% of the same would be deemed to be
the profits of such business chargeable to tax.
5. In CIT v. Oil & Natural Gas Commission [2002] 255 ITR 413, the
Rajasthan High Court held that no provisions of sections 28 to 41 as
a whole and sections 43 and 43A could be resorted to for the purpose
of computing the income from business of exploration of mineral oil.
6. In OHM Ltd In re [2011] 335 ITR 423, AAR has held that scheme of
computation of income under section 44BB does not provide any
leeway to apply both sub-section (1) and (3) of section 44BB to
income arising from business activities falling under ambit of section
44BB(1). Even if part of the income falls under `Royalties' or `Fees for
Technical Services', there is no scope to assess such receipts under
these heads, once it is held that income is from oil exploration and
production activities as envisaged under section 44BB.
7. In Global Geophysical Services Ltd, In re [2011] 332 ITR 418, AAR
has held that where seismic survey and data acquisition activities are
performed with the aim to increase the chances of success of oil and
gas exploration and increasing the production; the amount payable
towards such services is chargeable to tax under section 44BB
8. Reimbursement of catering charges is liable to be included in amount
chargeable under section 44BB. CIT v Ensco Maritime Ltd [2009] 317
ITR 14 (Uttaranchal HC)
9. Mobilisation charges received by the assessee for mobilizing
equipment from outside India to a site in India is includible in the
amounts chargeable to tax under section 44BB. Sedco Forex
International Inc. v CIT [2008] 214 CTR 192 (Uttaranchal HC). This
view has been confirmed by the Supreme Court in 2017 in 399 ITR 1
(SC).
10. The Supreme Court in the case of Oil & Natural Gas Corporation Ltd.
v. CIT [2015] 376 ITR 306, held that payment for providing various
services in connection with prospecting, extraction or production of
mineral oil, would be assessed under section 44BB, and not under
section 44D. The Supreme Court while arriving at above conclusion
observed that Explanation (a) to section 44D, specifies that 'fees for
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Presumptive Taxation
technical services' as mentioned in section 44D would have the same
meaning as in Explanation 2 to clause (vii) of section 9(1) and has
taken cognizance of the Circular dated 22 October 1990.
11. The Jaipur Tribunal in the case of National Oil Well Maintenance
Company [2018] 89 taxmann.com 24 has held that where
consideration for provision of comprehensive cementing services in
respect of exploratory and development wells planned to be drilled
through equipment, material and personnel will qualify for exclusion
from fee for technical services under Explanation 2 to section 9(1)(vii)
and, in such a case, provisions of section 44BB being more specific,
shall be applicable and provisions of section 44DA are not applicable.
12. The Delhi High Court in the case of DIT v. OHM Ltd. [2013] 352 ITR
406, observed that the proviso to sub-section (1) of section 44BB can
only mean that the flat rate of 10 per cent of the revenues cannot be
deemed to be the profits of the non-resident where the services are of
the type which do not fall under that section, but are more general in
nature so as to fall under section 44DA. Similarly, the second proviso
to sub-section (1) of section 44DA can only be interpreted to mean
that where the services are general in nature and fall under the sub-
section read with Explanation 2 to section 9(1)(vii), then an assessee
rendering such services as provided in section 44BB cannot claim the
benefit of being assessed on the basis that 10 per cent of the
revenues will be deemed to be the profits as provided in section
44BB.
13. The Delhi Tribunal in the case of Siem Offshore Crewing AS v. ADIT
[2016] 68 Taxmann.com 135, held that a proviso was also inserted to
section 44BB which, inter alia, excluded the royalty or FTS
contemplated under section 44D or section 115A. Section 44DA was
inserted by Finance Act 2010 w.e.f. 1-4- 2011. From the combined
reading of these sections it is evident that all the sections relating to
royalty/FTS operate in different fields and that is the reason for
insertion of proviso to sections 44BB/44DA/115A. Where the
assessee was imparting services which entitled it to royalty or FTS
simpliciter then the same continues to be assessed u/s 9(1)(vi)/(vii)
read with section 115A of the Act. However, where the assessee is
imparting services in relation to oil exploration, the Royalty/FTS
would be taxable under section 44BB. Specific services are
contemplated only under section 44BB and, therefore that being
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Taxation of Non-Residents
special provision, the same will prevail over all other provisions
dealing with royalty/FTS.
14. A Similar ruling has been also rendered by the Delhi Tribunal in the
case of RPS Energy Pty Ltd. [2018] 92 taxmann.com 77 wherein it
was held that Sections 9, 44BB, 44DA and 115A relating to
royalty/fees for technical services operate in different fields; where
assessee is imparting services which could be a simple royalty or
fees for technical services, then same would be taxed under section
9(1)(vi)/(vii) read with section 115A, but where assessee is imparting
any services in relation to exploration of mineral oil then royalties/
fees for technical services would be taxable under section 44BB.
15. The Mumbai Tribunal in the case of Production Testing Services Inc.
[2018] 89 taxmann.com 416 has held that prospecting for or
extraction or production of mineral oil is not to be treated as technical
services for purpose of Explanation 2 of section 9(1)(vii) and,
therefore, payments received by assessee for rendering of Fracturing
Flow Back Services for extraction or production of mineral oil as sub-
contractor would not fall within realm of 'fees for technical services'
16. The Delhi Tribunal in the case of ONGC as Representative Assessee
of University of Calgary, Alberta, Canada v. ADIT [2017] 81
Taxmann.com 419 held that Section 44BB applies in a case where
consideration is for services relating to exploration activity which are
not in nature of technical services; if consideration is in nature of fee
for technical services, provisions of either section 44DA or section
115A will be applicable.
17. Provisions of section 44BB are applicable to taxpayer being a second
leg contractor/sub-contractor. [Technip UK Ltd. v. DIT [2017] 81
Taxmann.com 311 (Delhi Tribunal)]
18. Section 44BB does not envisage only direct use of plant and
machinery in prospecting for or extraction or production of mineral
oils. Hence, amount received by a foreign company from hiring of
barge used for offshore accommodation of employees was also liable
to be taxed under section 44BB. [Valentine Maritime (Gulf) LLC v.
ADIT [2017] 163 ITD 32 (Mumbai Tribunal)]
19. In case, the Service-tax and/or VAT have been separately charged in
the bills and accordingly accounted for, then it would not form part of
the receipts under Section 44BB of the Act and if it is found that these
80
Presumptive Taxation
items are included in the consolidated amount of bills, then it should
form part of the receipts under Section 44BB of the Act [B.J. Services
Company Middle East Ltd. v. ADIT [2017] 77 Taxmann.com 218
(Delhi Tribunal)].
20. In the case of DIT v. Mitchell Drilling International (P.) Ltd. [2016] 380
ITR 130, the Delhi High Court held that service tax collected and
passed on to Government does not have any element of income and
therefore cannot form part of gross receipts for purposes of
computing 'presumptive income' of under section 44BB of the Act.
21. In Swiwar Offshore Pte. Ltd. [2018] 89 taxmann.com 346, the Mumbai
Tribunal held that where a non-resident assessee gave vessels on
hire to Indian companies, in view of fact that said vessels were used
by hirers for transporting men and machines to locations where it was
doing exploration/production of mineral oil, said service being 'in
connection with' prospecting for and exploration activities, income
arising out of such activities had to be assessed under section 44BB
and not under section 44B. Further, it also held that where assessee
had charged service tax as a part of billing for charter hire charges,
said amount being in nature of a statutory payment, which had to be
deposited with Government, it could not be included in gross receipts
for purpose of computing presumptive income of assessee under
section 44BB.
22. In Ensco Maritime Ltd. v. ADIT [2017] 244 Taxman 261, the
Uttarakhand High Court held that section 44BB is a complete code in
itself and the amount received, be it by way of reimbursement, is not,
in any way, excluded from the ambit of Section 44BB of the Act. The
Special leave petition has been granted by the Supreme Court [2017]
244 Taxman 190.
23. In SeaBird Exploration FZ LLC., In re [2018] 92 taxmann.com 328,
the AAR New Delhi held that where activities of applicant relating to
offshore seismic data acquisition and other associated services to
ONGC were in connection with exploration of mineral oils, special
provisions of section 44BB would apply, and income of applicant in
respect of contract with ONGC was to be computed as laid out
therein
The Act has amended section 44BB with effect from assessment year 2004-
05 to provide that an assessee may claim lower profits and gains than the
profits and gains specified under sub section (1), if he keeps and maintains
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Taxation of Non-Residents
such books of account and other documents as required under section
44AA(2) and get his accounts audited and furnishes a report of such audit as
required under section 44AB.The Assessing Officer shall then make an
assessment of the total income or loss of the assessee under section 143(3).
Profits and gains of the business of operation of
aircraft in the case of non-resident [Section
44BBA]
Section 44BBA is a non-obstante, so sections 28 to 43A are not applicable in
the case of a non-resident engaged in the business of operation of aircraft.
Income from such business is calculated at a flat rate of 5% of the following:
(a) amount paid or payable whether, in or out of India, to the tax payer
or to any person on his behalf on account or carriage of passenger,
livestock, mail or goods from any place in India
and
(b) amount received or deemed to be received in India by or on behalf of
the taxpayer on account of carriage of passenger, livestock, mail or
goods from any place outside India.
Profits and gains of foreign companies engaged
in the business of civil construction [Section
44BBB]
Section 44BBB provides that notwithstanding anything to the contrary
contained in sections 28 to 44AA, the income of foreign companies engaged
in the business of civil construction or erection or testing or commissioning of
plant or machinery in connection with a turnkey power project shall be
deemed @ 10% of the amount paid or payable to such assessee or to any
person on his behalf whether in or out of India. For this purpose, the Central
Government should approve turnkey power project.
The Central Board of Direct Taxes vide its circular no. 557 dated February
09,1990 clarified that an approval issued by the Department of Power in the
Ministry of energy shall be deemed to be the approval of the Central
Government for the purpose of section 44BBB of the Act.
In Van Oord ACZ. BV, In re [2001] 248 ITR 399 (AAR Delhi), held that
section 44BBB literally applies to a foreign company engaged in the
construction and other specified business in connection with a power project
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Presumptive Taxation
financed under an international aid programme. The assessee is taxed on
ten per cent of the entire amount received by it under the contract without
any deduction or allowance permissible under chapter IV-D of the Act.
The Act has amended section 44BBB with effect from assessment year
2004-05 to provide that an assessee may claim lower profits and gains than
the profits and gains specified under sub section (1), if he keeps and
maintains such books of account and other documents as required under
section 44AA(2) and get his accounts audited and furnishes a report of such
audit as required under section 44AB. The Assessing Officer shall then make
an assessment of the total income or loss of the assessee under section
143(3).
In Shandong Tiejun Electric Power Engineering Co. [2018] 400 ITR 371, the
Gujarat High Court held that where assessee engaged in execution of
turnkey projects, maintained books of account under section 44AA(2),
audited the said accounts and audit report had been furnished before
Assessing Officer, its claim for being taxed as per provisions of section
44BBB(2) was to be allowed.
Non-applicability of section 115JB
Explanation 4A to Section 115JB as inserted by the Finance Act 2018
(retrospectively made applicable from 1 April 2001) provides that the MAT
provisions will not apply to foreign companies covered by section 44B, 44BB,
44BBA or section 44BBBA and that is the only source of profits or gains from
business.
Head office expenditure in the case of non-
resident [Section 44C]
In case of a non-resident, head office expenditure is allowed in accordance
with the provision of section 44C. This section is a non-obstante provision
and anything contrary contained in sections 28 to 43A is not applicable.
Deduction in respect of head office expenditure is restricted to the least of
the following:
(a) an amount equal to 5% of " adjusted total income" or in the case of
loss, 5% of the "average" adjusted total income;
or
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Taxation of Non-Residents
(b) the amount of so much of the expenditure in the nature of head office
expenditure incurred by the assessee as is attributable to the
business or profession of the assessee in India.
"Adjusted total income" means the total income computed in accordance with
the provisions of the Act without giving effect to the following.
(i) Unabsorbed depreciation allowance under section 32(2).
(ii) Investment allowance under section 32A.
(iii) Development rebate under section 33.
(iv) Development allowance under section 33A.
(v) Expenditure incurred by a company for the purpose of promoting
family planning amongst its employees under first proviso to section
36(1)(ix).
(vi) Allowance under this section.
(vii) Business loss carried forward under section 72(1).
(viii) Speculation loss brought forward under section 73(2).
(ix) Loss under the head "capital gain" under section 74(1).
(x) Loss from certain specified source brought forward under Section
74A(3).
(xi) Deduction under section 80C to 80U.
"Average adjusted total income" means the total income of the assessee,
assessable for each of the three assessment years immediately preceding
the relevant assessment year, one third of the aggregate amount of the
adjusted total income in respect of previous years relevant to the aforesaid
three assessment years is average adjusted total income.
When the total income of the assessee is assessable only for two of the
aforesaid three assessment years, one half of the aggregate amount of the
adjusted total income in respect of the previous years relevant to the
aforesaid two assessment years is taken on average adjusted total income.
Where the total income of the assessee is assessable only for one of the
aforesaid three assessment years, the amount of the adjusted total income in
respect of the previous year relevant to that assessment year is average
adjusted total income.
84
Presumptive Taxation
"Head office expenditure" means executive and general administration
expenditure incurred by the assessee outside India, including expenditure
incurred in respect of:
(a) rent, rates, taxes, repairs or insurance of any premises outside India
used for the purpose of the business or profession.
(b) salary, wages, annuity, pension, fees, bonus, commission, gratuity,
perquisites or profit in lieu of or in addition to salary, whether paid or
allowed to any employee or other person employed in, or managing
the affairs of, any office outside India;
(c) traveling by any employee or other person employed in, or managing
the affairs, of any office outside India; and
(d) such other matters connected with executive and general
administrative as may be prescribed.
Important Judicial Precedents & Board Circulars:
1. The purpose of this section has been explained by the Bombay High
Court in CIT v. Emirates Commercial Bank Ltd. [2003] 262 ITR 55.
The court explained that section 44C is applicable only in the cases
of those non-residents, who carry on business in India through their
branches The said section was introduced to get over difficulties in
scrutinizing claims in respect of general administrative expenses
incurred by the foreign head office in so far as such expenses stand
related to their business or profession in India having regard to the
fact that foreign companies operating through branches in India
sometimes try to reduce the incidence of tax in India by inflating their
claims in respect of the head office expenses. In other words, section
44C seeks to impose a ceiling/restriction on head office expenses.
2. In CIT v. Saudi Arabian Airlines [1985] 155 ITR 65 (Bombay HC), the
Indian income of the assessee a non resident was computed in
accordance with the provisions contained in rule 10(ii) of the Income
tax Rules, 1962. For this purpose, the world income of the business
of the assessee was required to be computed. Hence, the Bombay
High Court held that section 44C is not applicable, where the
computation of non-resident is made in accordance with rule 10(ii).
3. Similarly, in DCIT v. Mitsubishi Heavy Industries Ltd. [1999] 102
Taxman 301, the Delhi Tribunal held that in view of the Article III (3)
of the DTA with Japan, the provision of section 44C were not
85
Taxation of Non-Residents
applicable, and the assessee was entitled to claim head office
expenses at higher amount.
4. CBDT circular no 649 dated March 31, 1993 provides for the
treatment of the technical expenses remitted to head office of a non
resident enterprise by a branch office in India. It provides that the
technical fee paid to head office on account of reimbursement
towards third party expense shall be allowed as deduction without
any limit while computing the profits of branch. The provisions of TDS
shall apply to the payment made towards such third party
reimbursement of technical expenses.
5. The assessee did not carry any business outside India therefore
entire head office expenses attributable to business in India are to be
allowed. [DIT v. Ravva Oil (Singapore) (P.) Ltd. [2008] 300 ITR 53
(Delhi HC)]
6. The Mumbai Tribunal in the case of Lloyd's Register Asia (India
Branch Office) v. ACIT [2015] 69 SOT 441, held that `license fees'
and `management service fees' paid by an Indian branch to its UK
Head office does not fall in nature of `Head office expenses' under
section 44C of the Act.
7. In Oman International Bank, S.A.O.G v. DDIT [2014] 62 SOT 98, the
Mumbai Tribunal held that payment made to employee deputed to
India exclusively for work performed by him for Indian branch of
assessee bank, does not fall under section 44C of the Act but is fully
allowable under section 37 of the Act.
8. In Shinhan Bank v. DDIT (Int. tax.) 54 SOT 140 (Mumbai Tribunal), it
was held that head office expenditure under section 44C includes
common expenditure that benefits both head office and branch.
Salary paid to expatriate employees deputed from head office to
Indian branch is an expenditure to be allowed in full without restriction
of section 44C.
Special provisions for computing income by way
of royalties etc, in case of foreign companies
[Section 44D]
Section 44D(a) provides that while computing the income from royalty or fees
for technical services in pursuance of agreements entered into by foreign
companies with Government of India or Indian company before April 1, 1976,
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Presumptive Taxation
shall not exceed 20% of the gross amount of such royalty or fees for
technical services as reduced by gross amount of royalty or fees for technical
services which consist of lump sum consideration for the transfer of data,
documentation, drawing or specification relating to any patent, invention,
model, design, secret formula or process or trademark of similar property.
No deduction in respect of any expense or allowance is allowed where the
agreement is entered into after March 31, 1976 but before April 1, 2003
[Section 44D(b)]
Special provisions for computing income by way
of royalties etc, in case of non-residents [Section
44DA]
Section 44DA provides the method of computation of income by way of
royalty or fees for technical services arising from the agreement made by the
non-resident with the Indian company or Government of India after March 31,
2003 where:
(a) such non-resident carries business/profession in India through
permanent establishment or fixed place of profession; and
(b) the right, property or contract in respect of which the royalty or fees
for technical services in respect of which the royalty or fees for
technical services is paid is effectively connected with such
permanent establishment or fixed place of profession.
While computing the income chargeable to tax under this section following
expenses are allowed as deduction:
(i) actual expenses incurred wholly and exclusively for such permanent
establishment or fixed place of profession in India
(ii) reimbursement of actual expenses to head office or to any of its other
offices
The provisions of section 44BB do not apply in respect of income covered by
this section.
Under this section the non-resident is mandatorily required to maintain the
books of accounts and get them audited.
The assessee is required to furnish the audit report in Form 3CE alongwith
return of income.
87
Chapter 5
Capital Gains
A non-resident or a foreign company is liable to capital gains tax in India, if
he/it transfers a property (capital asset) in India. Section 45 of the Act
provides for capital gains. In order that section 45 may be attracted there
must be a transfer of a capital asset. The expression `transfer ' is defined
under section 2(47) and `capital asset' is defined in section 2(14) of the Act.
The transfer must be effected in the previous year and some profit or gain
must arise from such transfer. If these conditions are fulfilled the section
provides that such profit or gain is chargeable to income-tax under the head
`Capital gains' and the same shall be deemed income of the previous year in
which the transfer has taken place. Thus the section brings to charge capital
gains and its ingredients are:
(i) the existence of a capital assets; owned by the assessee;
(ii) a transfer of such asset during the previous year;
(iii) profits and gains arising from transfer of such asset, and
(iv) such profits and gains must accrue or arise to the assessee.
If these conditions are satisfied then such profits shall be deemed to be
income of such previous year and attract charge of tax.
Section 48 lays down the mode of computation of capital gain and provides
that the income chargeable under the head `Capital gains' shall be computed
by deducting the full value of consideration received or accruing as a result
of the transfer of the capital asset from the following amounts viz:-
(i) expenditure incurred wholly and exclusively in connection with such
transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement
thereto.
The first proviso to the said section provides that in case of a non-resident,
capital gains arising from transfer of a capital asset being shares in or
debentures of an Indian company shall be computed by converting the cost
of acquisition, the expenditure incurred wholly and exclusively in connection
with such transfer and the full value of consideration received or accruing as
a result of the transfer of the capital asset into the same foreign currency as
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Capital Gains
was initially utilized in the purchase of the shares or debentures. Thereafter,
the capital gains so computed in such foreign currency shall be re-converted
into Indian currency.
Rule 115A of the Income tax Rules, 1962 provides for the purpose of
computing capital gains arising from the transfer of a capital asset being
shares in, or debentures of, an Indian company, in case of an assessee who
is a non-resident Indian, the rate of exchange shall be:
(a) for converting the cost of acquisition of capital asset, the average of
the telegraphic transfer buying rate and telegraphic transfer selling
rate of the foreign currency initially utilized in the purchase of the said
asset, as on the date of its acquisition;
(b) for converting expenditure incurred wholly and exclusively in
connection with transfer of capital asset referred to in clause (a), the
average of the telegraphic transfer buying rate and telegraphic
transfer selling rate of the foreign currency initially utilized in the
purchase of the said asset, as on the date of transfer of capital asset;
(c) for converting the full value of consideration received or accruing as a
result of transfer of capital asset referred to in clause (a), the average
of the telegraphic transfer buying rate and telegraphic transfer selling
rate of the foreign currency initially utilized in the purchase of the said
asset, as on the date of transfer of capital asset;
(d) for reconverting capital gains computed in the foreign currency
initially utilized in the purchase of the capital asset into rupees, the
telegraphic transfer buying rate or such currency, as on the date of
transfer of the capital asset.
For the purposes of this rule, `telegraphic transfer buying rate' in relation to a
foreign currency, means the rate or rates of exchange adopted by the State
Bank of India for buying such currency having regard to the guidelines
specified from time to time by the RBI for buying such currency where such
currency, made available to that bank through a telegraphic transfer.
Further, for this rule, `telegraphic transfer selling rate', in relation to a foreign
currency, means the rate of exchange adopted by the State Bank of India for
selling such currency where such currency is made available by that bank
through telegraphic transfer.
It is also provided that the aforesaid manner of computation of capital gains
shall be applicable in respect of capital gains accruing or arising from every
re-investment thereafter in and sale of shares in or debentures of an Indian
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Taxation of Non-Residents
company. Proviso to section 48 provides that for computing the full value of
consideration, any gains arising to a non-resident on account of appreciation
of rupee against a foreign currency at the time of redemption of rupee
denominated bonds of an Indian company subscribed by him, shall be
ignored.
Additional proviso to section 48 inserted by the Finance Act 2018 (applicable
from April 1, 2018) states that the provisions related to conversion of
currency conversion as discussed above shall not apply to the long-term
capital gains arising from the transfer of equity shares or unit of an equity
oriented fund etc. covered by section 112A.
In Cairn UK Holdings Ltd v. DIT [2013] 359 ITR 268, the Delhi High Court
has held that the long-term capital gain earned by the assessee non-resident
on off-market sale of shares of listed Indian company is taxable at 10% under
the proviso to section 112. Proviso to section 112(1) does not state that an
assessee, who avails benefit of the first proviso to section 48, is not entitled
to the benefit of lower rate of tax at 10%.
If the total income of an assessee includes any income chargeable under the
head `capital gains' arising from transfer of a capital asset being an equity
share in a company or unit of an equity oriented fund and transaction of sale
of such security has been entered on or after October 1, 2004 on which
Securities Transaction Tax ( `STT') is chargeable, then, short term capital
gains shall be payable @ 15% and no long term capital gains shall be
payable on such securities.
Proviso to section 10(38) as inserted by Finance Act 2017 and which is made
applicable from April 1, 2018 states that long term capital gains from transfer
of listed equity shares acquired on or after October 1, 2004, other than the
acquisition notified by the Central Government in this behalf, would be
exempt from tax under section 10(38) of the Act only if the STT was paid at
the time of acquisition of such shares. However, to protect the exemption in
genuine cases, it was proposed to notify transfers for which the pre-condition
of chargeability to STT on acquisition would not be applicable.
The CBDT had issued guidelines vide notification dated June 5, 2017, which
would come into force with effect from April 1, 2018 and shall accordingly
apply to assessment year 2018-19 onwards. Provisions of final notification
are as under:
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Capital Gains
The Government, for the purposes of the proviso to section 10(38) notifies all
the transactions of acquisition of equity shares entered into on or after 1
October 2014 which are not chargeable to STT, other than the following-
I. Preferential allotment
a) Where acquisition is made through a preferential issue of existing
listed equity shares in a company whose equity shares are not
frequently traded on a recognized stock exchange of India.
However, the exemption under section 10(38) of the Act would
continue to be available in respect of acquisition of listed equity
shares in a company-
· Which has been approved by the Supreme Court, High Court,
National Company Law Tribunal, Securities and Exchange
Board of India or Reserve Bank of India in this behalf;
· by any non-resident in accordance with foreign direct
investment guidelines issued by the Government of India;
· by an investment fund referred to in clause (a) of Explanation 1
to section 115UB of the Income-tax Act or a venture capital fund
referred to in clause (23FB) of section 10 of the Act or a
Qualified Institutional Buyer;
· through preferential issue to which the provisions of chapter VII
of the Securities and Exchange Board of India (Issue of Capital
and Disclosure Requirements) Regulations, 2009 does not
apply.
II. Off-market acquisitions
b) Where transactions for acquisition of existing listed equity shares in
a company is not entered through a recognized stock exchange of
India
· However, exemption would continue to be available in respect of
the following transactions of acquisition of listed equity shares
even if such acquisition is not routed through a recognized stock
exchange in India, provided the same is made in accordance
with the provisions of the Securities Contracts (Regulation) Act,
1956, if applicable;
· Acquisition through an issue of shares by a company other than
the issue referred to in above;
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Taxation of Non-Residents
· Acquisition by scheduled banks, reconstruction or securitization
companies or public financial institutions during their ordinary
course of business;
· Acquisition which has been approved by the Supreme Court,
High Courts, National Company Law Tribunal, Securities and
Exchange Board of India or Reserve Bank of India in this behalf;
· Acquisition under employee stock option scheme or employee
stock purchase scheme framed under the Securities and
Exchange Board of India (Employee Stock Option Scheme and
Employee Stock Purchase Scheme) Guidelines, 1999;
· Acquisition by any non-resident in accordance with foreign
direct investment guidelines of the Government of India;
· Where acquisition of shares of a company is made under
Securities and Exchange Board of India (Substantial Acquisition
of Shares and Takeovers) Regulations, 2011
· Acquisition by any non-resident in accordance with foreign
direct investment guidelines of the Government of India;
· Where acquisition of shares of company is made under
Securities and Exchange Board of India (Substantial Acquisition
of Shares and Takeovers) Regulation, 2011;
· Acquisition from the Government;
· Acquisition by an investment fund referred to in clause (a) of
Explanation 1 to section 115JB of the Act or venture capital fund
referred to in clause (23FB) of section 10 of the Act or a
Qualified Institutional Buyer;
· Acquisition by mode of transfer referred to in section 47
(transfers under a gift/will/irrevocable trust, transfers between
holding/subsidiary, amalgamation, demerger etc.) or 50B
(slump sale) of the Act, if the previous owner of such shares has
not acquired them by any mode referred to in point (a)/(b) or (c)
(other than the carve outs) mentioned under (a) or (b) above].
III. Acquisition during de-listed period
c) Acquisition of equity shares of a company during the period
beginning from the date on which the company is delisted from a
recognized stock exchange and ending on the date immediately
preceding the date on which the company is again listed on a
recognized stock exchange in accordance with the Securities
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Capital Gains
Contracts (Regulation) Act, 1956 read with Securities and Exchange
Board of India Act, 1992 and the rules made thereunder.
Explanation, for the purpose of this notification,
(a). "Frequently traded shares" means shares of a company, in which the traded
turnover on a recognized stock exchange during the twelve calendar months
preceding the calendar month in which the transfer is made, is at least ten
per cent of the total number of shares of such class of the company:
Provided that where the share capital of a particular class of shares of the
company is not identical throughout such period, the weighted average number
of total shares of such class of the company shall represent the total number of
shares
(b). "Listed' means listed in a recognized stock exchange in India in accordance
with the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and any
rule made there under
(c). "Recognised stock exchange" shall have the same meaning as in clause (f)
of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).
Other terms defined under the notification are preferential issue, Qualified
Institutional Buyer, public financial institution, scheduled bank, reconstruction
company and securitization company. Subsequent proviso to section 10(38)
of the Act (as inserted by the Finance Act 2018) provides that the exemption
therein shall not apply to any long-term capital gains arising from the transfer
of an equity shares or units of an equity oriented fund etc. effected on or
after April 1, 2018 vis-à-vis section 112A.
New Section 112A as inserted by the Finance Act 2018 provides that the
10% tax will apply on all long-term capital gains arising from the transfer of
equity share in a company or a units of an equity oriented fund or a unit of a
business trust on an amount exceeding Rs. 1 lakh.
For the purpose of section 112A, `equity oriented fund' means a fund set up
under a scheme of mutual fund specified under section 10(23D) and:
· The fund invests in the units of another fund which is traded on a
recognized stock exchange:
o At least 90% of the total proceeds is invested in the units of
such other fund; and
o Such other fund also invests at least 90% of its total
proceeds in the equity shares of domestic companies listed
on recognized stock exchange; and
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Taxation of Non-Residents
· Other case at least 65% of the total proceeds of such fund is
invested in the equity shares of domestic companies listed on
recognized stock exchange.
However, the aforementioned percentage of holding shall be computed with
reference to the annual average of the monthly averages of the opening and
closing figures.
Following conditions to be fulfilled for applying the concessional tax rate of
10% viz.
· STT has been paid on
o acquisition and transfer of equity shares being transferred;
o Transfer of unit of equity oriented fund or a unit of a
business trust
Condition of payment of STT not to apply to-
· Transfers undertaken on recognized stock exchange located in
International Financial Services Centre and where sales
consideration is received in foreign currency
· Acquisitions to be specified by the Central Government. In this
connection, the CBDT has issued a draft notification on 24 April
2018 inviting suggestions of the stakeholders on the same by 30
April 2018.
Benefit under chapter VIA and rebate under section 87A cannot be availed.
However, the application of section 112A provisions are relaxed to an extent
by providing the cost step-up benefit based on fair value as on January 31
2018, subject to conditions. The cost for acquisitions prior to January 31,
2018 may be computed by comparing the higher of-
· Actual cost of acquisition And
· Lower of fair Market value and full value of consideration received
or accruing on transfer of capital asset
Fair market value for the above purpose shall be computed in the following
manner-
· In case the specific capital asset listed on stock exchange traded on
January 31, 2018 Highest price of the capital asset quoted on
stock exchange on that date
· In case the capital asset listed on stock exchange but not traded on
31 January 2018 - Highest price of the capital asset quoted on stock
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Capital Gains
exchange on a date immediately preceding 31 January 2018 when
such asset was traded on stock exchange
· In case the capital asset is a unit and is not listed on stock exchange
- Net asset value of such asset on 31 January 2018
· In case the capital asset is an equity share in a company which is:
o Not listed on stock exchange on 31 January 2018 but listed
on the date of transfer; or
o Listed on stock exchange on the date of transfer and which
became the property in consideration of share which is not
listed as on 31 January 2018 by way of transaction not
regarded as transfer under section 47
Cost of acquisition of the capital asset after comparing with the cost
inflation index for the financial year 2017-18 and for the year of
acquisition or the financial year 2001-2002, whichever is later.
Further, Section 47 provides that nothing contained in section 45 shall apply
to the following transfers:-
(1) Any transfer of a capital asset under a gift or will or an irrevocable
trust
(2) Any transfer, in a scheme of amalgamation, of capital asset being a
share or shares held in an Indian company, by the amalgamating
foreign company to the amalgamated foreign company, if
(a) at least twenty-five per cent of the shareholders of the
amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company, and
(b) such transfer does not attract tax on capital gains in the
country, in which the amalgamating company is
incorporated.
(2) Any transfer, in a scheme of amalgamation, of a capital asset, being
a share of a foreign company referred to in the Explanation 5 to
section 9(1)(i) of the Act, which derives its value directly or indirectly
substantially from the sale of share or shares of an Indian company,
held by the amalgamating foreign company to the amalgamated
foreign company. Conditions prescribed are same as (1) above.
(3) Any transfer of a capital asset, being bonds or Global Depository
Receipts referred to in sub-section (1) of section 115AC, made
outside India by a non-resident to another non-resident.
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Taxation of Non-Residents
(4) Any transfer made outside India of a capital asset being rupee
denominated bond of an Indian company issued outside India, by a
non-resident to another non-resident.
(5) Any transfer of a bond or Global Depository Receipts covered by
section 115AC(1), rupee denominated bond or derivatives made by a
non-resident on a recognized stock exchange located in any
International Financial Service Centre and where the consideration
for the transaction is paid or payable in foreign currency
(5) Any transfer made outside India of a capital asset being a
Government Security carrying a periodic payment of interest through
an intermediary dealing in settlement of securities, by a non-resident
to another non-resident.
(6) Any transfer in a demerger of a capital asset, being a share or shares
held in an Indian company by the demerged foreign company to the
resulting company, if
(a) the share holder holding not less than three-fourths in value
of shares of the demerged foreign company continue to
remain shareholders of the resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the
country, in which the demerged foreign company is
incorporated.
The provision of section 391 to 394 of the Companies Act, 1956 shall not be
applicable to such demerger.
(7) Any transfer in a demerger, of a capital asset, being a share of a foreign
company, referred to in Explanation 5 to clause (i) of sub-section (1) of
section 9, which derives, directly or indirectly, its value substantially from the
share or shares of an Indian company, held by the demerged foreign
company to the resul-ting foreign company. Conditions prescribed are same
as (4) above.Thus, in the aforesaid cases a non-resident or a foreign
company is not liable to capital gains.
Further, section 50C provides that the consideration received or accruing as
a result of the transfer by an assessee of a capital asset, being land or
building or both, is less than the value adopted or assessed by any authority
of a State Government for the purpose of payment of stamp duty in respect
of such transfer, the value so adopted or assessed shall, for the purpose of
section 48, be deemed to be the full value of the consideration received or
accruing as a result of such transfer. Proviso to section 50C provides that
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Capital Gains
where the date of agreement fixing the amount of consideration and the date
of registration for transfer of the capital asset are not the same, the value
adopted by the stamp valuation authority on the date of agreement may be
taken for computing the full value of consideration for such transfer. The
second proviso provides that the first proviso shall apply only in a case
where the amount of consideration, or a part thereof, has been received by
way of an account payee cheque or account payee bank draft or by use of
electronic clearing system through a bank account, on or before the date of
the agreement for transfer. Third Proviso has been inserted by the Finance
Act, 2018 w.e.f. 1-4-2019 to provide that where the value adopted or
assessed or assessable by the stamp valuation authority does not exceed
one hundred and five per cent of the consideration received or accruing as a
result of the transfer, the consideration so received or accruing as a result of
the transfer shall, for the purposes of section 48, be deemed to be the full
value of the consideration.
Section 50CA inserted by the Finance Act 2017 w.e.f 1.04.2018 provides that
where the consideration received or accruing on transfer of a capital asset,
being an unquoted shares of a company is less than the fair market value of
such share determined in such manner as may be prescribed, for the
purpose of section 48 of the Act, the value so determined shall be deemed to
be the full value of consideration received or accruing as a result of such
transfer.
Explanation to section 50CA provides the meaning of `quoted share' as the
share quoted on any recognized stock exchange with regularity from time to
time, where the quotation of such share is based on current transaction
made in the ordinary course of business.
Similarly, Section 50D provides that where the consideration received or
accruing as a result of the transfer of a capital asset by an assessee is not
ascertainable or cannot be determined, then for the purpose of computing
income chargeable to tax as capital gains, the fair market value of the asset
on the date of transfer shall be deemed to be the full value of consideration
received or accruing as a result of such transfer.
Section 112(1)(c) provides that where the total income of an assessee
includes any income, arising from the transfer of a long-term capital asset,
which is chargeable under the head "Capital gains", the tax payable by the
assessee, non-resident (not being a company) or a foreign company, on the
total income shall be the aggregate of:
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Taxation of Non-Residents
(i) the amount of income-tax payable on the total income as reduced by
the amount of such long-term capital gains, had the total income as so
reduced been its total income ; and
(ii) the amount of income-tax calculated on long-term capital gains [except
where such gain arises from transfer of capital asset referred to in sub-
clause (iii)] at the rate of twenty per cent; and
(iii) the amount of income-tax on long-term capital gains arising from the
transfer of a capital asset, being unlisted securities or shares of a
company not being a company in which the public are substantially
interested, calculated at the rate of ten per cent on the capital gains in
respect of such asset as computed without giving effect to the first and
second proviso to section 48.
Further, section 112 provides that an assessee shall not be eligible for deduction
under Chapter VIA and rebate under section 88 in respect of any income arising
from the transfer of a long-term capital asset.
98
Chapter 6
Deductions
The Chapter VI of the Income tax Act 1961, provides for deduction from
gross total income. The deductions available to non-resident are stated in
this topic.
General Principles
Section 80A provides certain general principles, for the purpose of
deductions to be allowed, while computing the total income.
Section 80A(2) limits the aggregate of deduction under section 80C to 80U to
the amount of the gross total income of the assessee.
If the gross total income of the assessee is determined as `nil ', then there is
no question of any deduction being allowed under Chapter VI-A in computing
the total income. The gross total income must be determined, by setting off
against the income, the business losses of earlier years, before allowing
deduction under Chapter VI-A and if the resultant income was `nil', then the
assessee could not claim deduction under Chapter VI-A. [Synco Industries
Ltd. v. AO [2008] 299 ITR 444 (SC)]
Section 80A(3) provides that where, in computing the total income of an
association of persons or body of individuals any deduction is admissible in
either of sections, viz, 80G, 80GGA, 80GGC, 80HH, 80HHA, 80HHB,
80HHC, 80HHD, 80I, 80-IA, 80-IB, 80IC, 80ID, 80IE, 80-J or 80JJ, no
deduction under the same section shall be made in computing the total
income of a member of the association of persons or body of individuals in
relation to the share of such member in the income of the association of
persons or body of individuals.
Section 80A(4) puts rider on allowability of deduction under this section. It
provides that notwithstanding anything to the contrary contained in section
10A or section 10AA or section 10B or section 10BA or in any provisions of
this Chapter where, in the case of an assessee, any amount of profits and
gains of an undertaking or unit or enterprise or eligible business is claimed
and allowed as a deduction under any of those provisions for any
assessment year, deduction in respect of, and to the extent of, such profits
and gains shall not be allowed under any other provisions of this Act for such
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Taxation of Non-Residents
assessment year and shall in no case exceed the profits and gains of such
undertaking or unit or enterprise or eligible business, as the case may be.
Where the assessee fails to make a claim in his return of income for any
deduction under section 10A or section 10AA or section 10B or section
10BA or under any provision of this Chapter under the heading "C.--
Deductions in respect of certain incomes", no deduction shall be allowed to
him thereunder.[Section 80A(5)]
Section 80A(6) provides that the price of transfer of goods or services from
one undertaking or unit to another undertaking or unit of the assessee is to
be taken at arm's length. That is, notwithstanding anything to the contrary
contained in section 10A or section 10AA or section 10B or section 10BA or
in any provisions of this Chapter under the heading "C--Deductions in
respect of certain incomes",
- where any goods or services held for the purposes of the undertaking
or unit or enterprise or eligible business are transferred to any other
business carried on by the assessee, or
- where any goods or services held for the purposes of any other
business carried on by the assessee are transferred to the
undertaking or unit or enterprise or eligible business
and, the consideration, if any, for such transfer as recorded in the accounts
of the undertaking or unit or enterprise or eligible business does not
correspond to the market value of such goods or services as on the date of
the transfer,
then, for the purposes of any deduction under this Chapter, the profits and
gains of such undertaking or unit or enterprise or eligible business shall be
computed as if the transfer, in either case, had been made at the market
value of such goods or services as on that date.
The expression "market value" means,--
(i) in relation to any goods or services sold or supplied, the price that
such goods or services would fetch if these were sold by the
undertaking or unit or enterprise or eligible business in the open
market, subject to statutory or regulatory restrictions, if any;
(ii) in relation to any goods or services acquired, means the price that
such goods or services would cost if these were acquired by the
undertaking or unit or enterprise or eligible business from the open
market, subject to statutory or regulatory restrictions, if any.
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Deductions
(iii) in relation to any goods or services sold, supplied or acquired means
the arm's length price as defined in clause (ii) of section 92F of such
goods or services, if it is a specified domestic transaction referred to
in section 92BA.
80A(7) debars the allowability of deduction under section 35AD if a deduction
under any provision of this Chapter under the heading "C.--Deductions in
respect of certain incomes" is claimed and allowed in respect of profits of any
of the specified business referred to in section 35AD(8)(c)
The deductions are to be allowed only if the assessee claims and establishes
the circumstances warranting such deduction. [Stumpp Schuele & Somappa
P. Ltd. [1977] 106 ITR 399 (Karnataka HC)].
Section 80AB states that the deduction in respect of certain income in
respect of any income of the nature specified in that section which is
included in the `gross total income' of the assessee, then notwithstanding
anything contained in that section, for the purpose of computing the
deduction under that section, the amount of income of the nature as
computed in accordance with the provisions of the Act before making any
deduction under this chapter, shall alone be deemed to be the amount of
income of that nature which is derived or received by the assessee and
which is included in his gross total income.
1. Deduction not to be allowed unless return
furnished [Sec 80AC]
In respect of previous year beginning April 1, 2006 but upto March 31, 2018
and thereafter, where any deduction is admissible under section 80-
IA or section 80-IAB or section 80-IB or section 80-IC or section 80-
ID or section 80-IE, no such deduction shall be allowed to him unless he
furnishes a return of his income for such assessment year on or before the
due date specified under sub-section (1) of section 139. [DCIT v. Siroya
Developers [2017] 162 ITD 718 (Mumbai Tribunal)]Similarly, for Assessment
years beginning on or after April 1, 2018, no deduction under part C of
Chapter VIA viz. section 80HH, 80HHA, 80HHB, 80HHBA, 80HHC, 80HHD,
80HHE and 80HHF, etc. shall be allowed unless the return of income is
furnished on or before the due date specified under section 139(1) of the Act.
Section 80B defines "Gross Total Income" to mean the total income
computed in accordance with the provisions of this Act, before making any
deductions under this chapter.
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Taxation of Non-Residents
It was held by the Supreme Court in the case of Synco Industries Ltd. v. AO
[2008] 299 ITR 444 that the effect of clause (5) of section 80B is that gross
total income will be arrived at after making the computation as follows:--
(i) making deductions under the appropriate computation provisions;
(ii) including the incomes, if any, under sections 60 to 64 in the total
income of the individual;
(iii) adjusting intra-head and/or inter-head losses; and
(iv) setting off brought forward unabsorbed losses and unabsorbed
depreciation, etc.
2. Deduction in respect of life insurance premia,
deferred annuity, contributions to provident fund,
subscription to certain equity shares or debentures
etc [Section 80C]
Deduction under this section is available to residents as well as non- resident
assesses being individual or HUF. The maximum permissible deduction is
Rs.1,50,000/-
The payments towards life insurance, deferred annuity, provident fund,
Superannuation fund, ULIPS, Pension fund, repayment of Housing loan
installment, tuition fee of children, investment in equity linked schemes etc
are eligible for deduction.
The assessee in order to claim exemption under section 80C must, at least,
establish that sums in question have quality of entering the field of taxation,
apart from exemptions and exclusions. Thus, if the foreign income of non-
resident assessee does not enter his total income, sums paid for life
insurance by him out of his foreign income which was not assessable to tax
in India, could not be deducted in computing his income assessable to tax in
India. [S. Inder Singh Gill v. CIT [1963] 47 ITR 284 (Bombay HC)]
3. Deduction in respect of pension fund [Section
80CCC]
Section 80CCC provides that, where an assessee being an individual has in
the previous year paid or deposited any amount out of his income chargeable
to tax, to effect or keep in force a contract for any annuity plan of LIC of India
or any other insurer for receiving pension from fund set up by the said
corporation as approved by the Controller of Insurance, be allowed a
102
Deductions
deduction in respect of whole of the amount paid or deposited but not
exceeding Rs.1,50,000/-.
Where the assessee or his nominee surrenders the annuity before maturity
date of such annuity, the surrender value shall be taxable in the hands of the
assessee or his nominees, as the case may be, in the year of receipt.
The amount received by the assessee or his nominee as pension will be
taxable, in the hands of the assessee or nominee, as the case may be, in the
year of receipt.
No rebate under section 88 to person to whom deduction under this section
has been allowed for any assessment year before April 1, 2006.
No deduction is allowed u/s 80C on the amount on which deduction u/s
80CCC has been allowed for any assessment year beginning on or after April
1, 2006.
4. Deduction in respect of contribution to pension
scheme of central government [Section 80CCD]
(1)Deduction under this section is available to all individual assesses
resident or non-resident. The deduction is available on fulfillment of following
conditions:
a. An assessee, being an individual is employed by the Central
Government on or after January 1, 2004, or any other employer,
b. Any other assessee, being an individual has in the previous year paid
or deposited any amount in his account under a pension scheme
notified or as may be notified by the Central Government;
he shall be allowed a deduction in the computation of his total income, of the
whole of the amount so paid or deposited as does not exceed,--
(a) in the case of an employee, ten per cent of his salary in the previous
year; and
(b) in other case, twenty per cent of his gross total income in the
previous year.
(1B) An assessee referred to in sub-section (1), shall be allowed a deduction
in computation of his total income, whether or not any deductions is allowed
under sub-section (1), of the whole of the amount paid or deposited in the
previous year in his account under a pension scheme notified or as may be
notified by the Central Government, which shall not exceed fifty thousand
rupees.
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Taxation of Non-Residents
However, no deduction under this sub-section shall be allowed in respect of
the amount on which a deduction has been claimed and allowed under sub-
section (1).
(2) The amount contributed by the Central Government as an employer or
any other employer, to assessee employee's pension scheme account, the
assessee employee shall be allowed a deduction in the computation of his
total income, of the whole of the amount contributed by the Central
Government or any other employer as does not exceed ten per cent of his
salary in the previous year.
(3) Where any amount standing to the credit of the assessee in his account
referred to in sub-section (1) or (1B), in respect of which a deduction has
been allowed under those sub-sections or sub-section (2), together with the
amount accrued thereon, if any, is received by the assessee or his nominee,
in whole or in part, in any previous year,--
(a) on account of closure or his opting out of the pension scheme
referred to in sub-section (1) or (1B); or
(b) as pension received from the annuity plan purchased or taken on
such closure or opting out,
the whole of the amount referred in (a) or (b) shall become taxable in the
previous year in which such amount is received.
However, the amount received by the nominee, on the death of the assesee,
under the circumstances referred to in clause (a) above, shall not be deemed
to be the income of the assessee.
Where deduction is allowed under sub-section (1) or (1B):
(a) no rebate for such amount shall be allowed under section 88 for any
assessment year ending before April 1, 2006;
(b) no deduction with reference to such amount shall be allowed under
section 80C for any assessment year beginning on or after April 1,
2006;
The amount is deemed not to have received for the purposes of this section,
if such amount is used for purchasing an annuity plan in the same previous
year.
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Deductions
5. Limit on deductions under section 80C, 80CCC and
80CCD [Section 80CCE]
The aggregate amount of deductions under section 80C, section
80CCC and section 80CCD(1) shall not, in any case, exceed Rs. 1,50,000.
6. Deduction in respect of medical insurance premia
[Section 80D]
Section 80D provides that, if an individual or a HUF has paid by cheque in
the previous year out of his/its income chargeable to tax, any sum to effect or
to keep in force an insurance on the health of or any contribution made to the
Central Government Health Scheme or such other scheme as may be
notified by the Central Government in this behalf or any payment made on
account of preventive health check-up of the assessee or wife or husband or
dependent parents or dependent children or any member of the family, then
a deduction to the extent of amount deposited or Rs.25,000/- whichever is
lower.
Where the assessee or his wife or her husband or dependant parents or any
member of the family is a senior citizen or a very senior citizen i.e. who is
resident in India and has attained60 or 80 years of age respectively at any
time during the year and insurance premium is paid to effect or keep in force
an insurance on the health or any contribution made to the Central
Government Health Scheme or such other scheme as may be notified by the
Central Government in this behalf or any payment made on account of
preventive health check-up, then, the aforesaid limit of Rs. 25,000/- would be
increased to Rs. 50,000/-.
Where the amounts are paid on account of preventive health check-up, the
deduction for such amounts shall be allowed to the extent, it does not exceed
in the aggregate Rs. 5,000/-.
Further, Sub-section (4A) has been inserted w.e.f. April 1, 2019 to provide a
fractional deduction for amounts paid in lump sum for more than one
previous year.
7. Deduction in respect of interest on loan taken for
higher education [Section 80E]
The deduction is available to all individual assessees
Quantum of deduction is amount paid in the previous year out of income
chargeable to tax, by way of interest on loan taken by individual assessee
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Taxation of Non-Residents
from any financial institution or any approved charitable institution for the
purpose of pursuing his higher education or for the purpose of higher
education of his relative.
The deduction is available in 8 assessment years beginning the year in which
assessee starts paying interest or until the interest is paid in full whichever is
earlier.
"Higher education" means any course of study pursued after passing the
Senior Secondary Examination or its equivalent from any school, board or
university recognised by the Central Government or State Government or
local authority or by any other authority authorised by the Central
Government or State Government or local authority to do so;
"relative", in relation to an individual, means the spouse and children of that
individual or the student for whom the individual is the legal guardian.
For claiming deduction under section 80E, there is no condition that higher
education should be in India only. [Nitin Shantilal Muthiyan v. DCIT [2015]
154 ITD 543 (Pune Tribunal)]
8. Deduction in respect of interest on loan taken for
residential house property [Section 80EE]
The deduction is available to all individual assesses in respect of interest
payable on loan taken by him from any financial institution for the purpose of
acquisition of a residential property.
The deduction shall not exceed Rs. 50,000 and shall be allowed in computing
the total income of the individual for the assessment year 2017-18 and
onwards.
The deduction shall be subject to the following conditions:
· the loan has been sanctioned by the financial institution during the
period beginning on between April 1, 2016 and March 31, 2017;
· the amount of loan sanctioned for acquisition of the residential
house property does not exceed Rs. 35,00,000;
· the value of residential house property does not exceed Rs.
50,00,000;
· the assessee does not own any residential house property on the
date of loan sanction .
Where a deduction under this section is allowed for any interest referred
to in sub-section (1), deduction shall not be allowed in respect of such
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Deductions
interest under any other provision of this Act for the same or any other
assessment year.
9. Deduction in respect of donations to certain funds
charitable institutions etc. [Section 80G]
(A) Under section 80G of the Act, in computing the total income of an
assessee an amount equal to the 100% of the sum is entitled for
deduction as donation irrespective of limit of 10% of the gross total
income.
(i) the National Defence Fund set up by the Central
Government, or
(ii) the Prime Minister 's National Relief Fund; or
(iii) the Prime Minister 's Armenia Earthquake Relief Fund; or
(iv) the Africa (Public contributions India) Fund; or
(v) the National Children's Fund; or
(vi) the National Foundation for Communal Harmony; or
(vii) a University or any educational institution of national
eminence as may be approved by the prescribed authority in
this behalf; or
(viii) the Maharashtra Chief Minister 's Relief Fund during the
period beginning on October 1, 1993 and ending on October
6, 1993 or to the Chief Minister 's Earthquake Relief Fund,
Maharashtra; or
(ix) any fund set up by the State Government of Gujarat
exclusively for providing relief to the victims of earthquake in
Gujarat, or
(x) any Zila Saksharta Samiti constituted in any district under
the chairmanship of the collector of that district for the
purposes of improvement of primary education in villages
and towns in such district and for literacy and post literacy
activities. For this clause `town' means a town which has a
population not exceeding one lakh according to the last
preceding census of which the relevant figure have been
published before the first day of the previous year; or
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Taxation of Non-Residents
(xi) the National Blood Transfusion Council or to any State Blood
Transfusion Council which has its sole object the control,
supervision, regulation or encouragement in India of the
services related to operation and requirements of blood
banks. For this purposes, "National Blood Transfusion
Council" means a society registered under the Societies
Registration Act, 1860 and has an officer not below the rank
of an Additional Secretary to the Government of India dealing
with the AID Control Project as its chairman by whatever
named called; and "State Blood Transfusion Council" means
a society registered in consultation with the National Blood
Transfusion Council, under the Societies Registration Act,
1860 or under any law corresponding to that Act in force in
any part of India and has secretary to the Government of that
state dealing with the Department of Health, as its chairman,
by whatever named called; or
(xii) any fund set up a State Government to provide medical relief
to the poor; or
(xiii) the Army Central Welfare Fund or the Indian Naval
Benevolent Fund or the Air Force Central Welfare Fund
established by the armed forces of the union for the welfare
of the past and present members of such forces, as their
dependents; or
(xiv) the Andhra Pradesh Chief Minister 's Cyclone Relief Fund
1996; or
(xv) the National illness Assistance Fund, or
(xvi) the Chief Minister 's Relief Fund or the Lieutenant Governor 's
Relief Fund in respect of any state or union territory, as the
case may be; provided that such fund is
(a) the only fund of its kind established in the state or the
union territory as the case may be;
(b) under the overall control of the Chief Secretary or the
Department of Finance of the State of the Union
territory, as the case may be;
(c) administered in such manner as may be specified by
the State Government or the lieutenant Governor as
the case may be ; or
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Deductions
(xvii) the National Sports Fund to be set up by the Central
Government; or
(xviii) the National Cultural Fund set up by the Central
Government; or
(xix) the fund for Technology Development and Application set up
by the Central Government; or
(xx) the National Trust for welfare of Persons with Autism,
Cerebral Palsy, Mental Retardation and Multiple Disabilities
constituted under section 3(1) of the National Trust for
welfare of Persons with Autism Cerebral Palsy, Mental
Retardation and Multiple Disabilities Act, 1999; or
(xxi) the Swachh Bharat Kosh, set up by the Central Government,
other than the sum spent by the assessee in pursuance of
Corporate Social Responsibility under sub-section (5) of
section 135 of the Companies Act, 2013; or
(xxii) the Clean Ganga Fund, set up by the Central Government,
where such assessee is a resident and such sum is other
than the sum spent by the assessee in pursuance of
Corporate Social Responsibility under sub-section (5) of
section 135 of the Companies Act, 2013; or
(xxiii) the National Fund for Control of Drug Abuse constituted
under section 7A of the Narcotic Drugs and Psychotropic
Substances Act, 1985 (61 of 1985); or
(xxiv) any sums paid by the assessee, during the period beginning
on January 26, 2001 and ending on September 30, 2001, to
any trust, institution or fund to which this section applies for
providing relief to the victims of earthquake in Gujarat.
(B) Under section 80G, in computing the total income deduction to the
extent of 50% of donation made of the following amounts irrespective
of limit of 10% of gross total income.
(i) The Jawaharlal Nehru Memorial Fund referred to in the Deed
of Declaration of Trust adopted by the National committee at
its meeting held on August 17, 1964; or
(ii) the Prime Minister 's Drought Relief Fund; or
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Taxation of Non-Residents
(iii) the Indira Gandhi Memorial Trust, the deed of declaration in
respect whereof was registered at New Delhi on February
21, 1985; or
(iv) the Rajiv Gandhi Foundation, the deed of declaration in
respect of whereof was registered at New Delhi on June 21,
1991; or
(C) Under section 80G, in computing the total income of an assessee an
amount equal to 100% of the sum is entitled for deduction as
donation subject to limit 10% of gross total income as reduced by
deductions permissible under other provisions of chapter VIA:
(i) the Government or to any such local authority, institution or
association as may be approved in this behalf by the Central
Government to be utilized for the purpose of promoting
family planning;
or
(ii) any sums paid by the assessee being a company, in the
previous year as donation to the Indian Olympic Association
or to any other association or institution established in India,
as the Central Government may having regard to the
prescribed guidelines, by notification in Official Gazette
specify, specify in this behalf for:-
(a) the development of infrastructure for sports and
games in India, or;
(b) the sponsorship of sports and games in India.
(D) Under section 80G in computing the total income of an assessee an
amount equal to 50% of the sums in entitled for deduction as
donation, subject to limit of 10% of gross total income as reduced by
deduction permissible under the provisions of chapter VIA.
(i) Any other final or any institution to which this section applies;
or
(ii) the Government or any local authority, to be utilized for any
charitable purpose other than the purpose of promoting family
planning; or
(iii) an authority constituted in India by or under any law enacted
either for the purpose of dealing with and satisfying the need
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Deductions
for housing accommodation or for the purpose of planning,
development or improvement of cities, towns and villages, or
for both.
(iv) any sums paid by the assessee in the previous year as
donations for the renovation or repair of any such temple,
mosque, gurdware, church or other place as notified by the
Central Government in the Official Gazette to be of historic,
archeological or artistic importance or to be place of public
worship of renown though out any state or states.
(v) any corporation referred to in clause (26BB) of section 10
As per Explanation 5 to section 80G, only donation in form of money and not
in kind will qualify for deduction.
As per section 80G(5A) where deduction in respect of donations is claimed
and allowed under this section for any assessment year, deduction in relation
to such sum shall not be allowed under any other provision of the Act for the
same or any other assessment year.
Any other fund or institution referred to in D(i) above should comply the
following conditions:
(i) where the institution or fund derives any income such income would
not be liable to inclusion of its total income under the provisions of
section 11 and 12 or section 10(23AA) or section 10(23C).
Provided that where an institution or fund derives any income being
profits and gains of business, the conditions that such income would
not be liable to inclusion in its total income under the provisions of
section 11 shall not apply in relation to such income, if -
(a) the institution or fund maintains separate books of account
in respect of such business;
(b) the donations made to the institution or fund are not used
by it, directly or indirectly, for the purpose of such business;
and
(c) the institution or fund issues to a person making the
donation a certificate to the effect that it maintains separate
books of account in respect of such business and that the
donations received by it will not be used, directly or
indirectly, for the purposes of such business;
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Taxation of Non-Residents
(ii) the instrument under which the institution or fund is constituted does
not, or the rules governing the institution or fund do not, contains any
provision for the transfer or application at any time of the whole or
any part of the income or assets of the institution or fund for any
purpose other than a charitable purpose;
(iii) the institution or fund is not expressed to be for the benefit of any
particular religious community or caste;
(iv) the institution or fund maintains regular accounts of its receipts and
expenditure;
(v) the institution or fund is either constituted as a public charitable trust
or is registered under the Societies Registration Act, 1860 or under
any law corresponding to that Act in force in any part of India or
under section 25 of the Companies Act, 1956 or is a University
established by law, or is any other educational institution recognized
by the Government or by a university established by law, or affiliated
to any university established by law, or is an institution financed
wholly or in part by the Government or a local authority and
(vi) in relation to donations made after March 31,1992 the institution or
fund is for the time being approved by the Commissioner in
accordance with the rules made in this behalf.
No deduction shall be allowed under this section in respect of any donation
in excess of Rs. 2,000 unless the payment is made by any mode other than
cash.
10. Deductions in respect of rents paid [Section 80GG]
The assessee, being an employee who is entitled to house rent allowance
from the employer is eligible for exemption under section 10(13A) of the Act,
but however, no such deduction is available in all other cases.
Therefore, under section 80GG, self-employed person and/or a salaried
employee who is not in receipt of any house rent allowance from his
employer at to any time during the previous year; is entitled to claim
deduction out of his total income, in respect of an expenditure towards
payment of rent for any furnished or unfurnished accommodation occupied
by him for the purpose of his own residence.
However, he or his spouse or minor child or a Hindu undivided family of
which he is a member, should not own any residential accommodation at the
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Deductions
place where the tax payer ordinarily resides or performs the duties of his
office or employment or carries on his business or profession.
If taxpayer owns any residential accommodation at any other place and the
concession in respect of self occupied house property is claimed by him in
respect of such accommodation under section 23(2)(a) or 23(4)(a), no
deduction would be allowed under this section.
The amount of deduction would be least of the following amounts:
(a) Rs. 5,000/- per month
(b) 25% of total income before allowing deduction for any expenditure
under this section
or
(c) the excess of actual rent paid over 10% of total income before
allowing deduction for any expenditure under this section.
The deduction under section 80GG cannot be allowed where there were no
facts on record to show that assessee had satisfied all conditions for
allowance of deduction. [Surinder Singh v. AO [2003] 1 SOT 96 (Delhi
Tribunal)]
11. Deduction in respect of certain donations for
scientific research or rural development [Section
80GGA]
Under section 80GGA of the Act, in computing the total income of an
assessee, there shall be deducted, the following amounts:
(a) any sum paid to a research association having object of scientific
research or a university college or other institution to be used for
scientific research which has been approved by the prescribed
authority for the purpose of section 35(i)(ii);
The deduction shall not be denied merely on the ground that
subsequent to the payment of such sum by the assesee the approval
to such association, university, college or other institution has been
withdrawn;
(b) any sum paid by the assessee in the previous year to a research
association which has as its object the undertaking of research in
social science or statistical research or to a university, college or
other institution to be used for research in social science or stastical
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Taxation of Non-Residents
research provided that such association, university, college or
institution is approved for the purposes of section 35(1)(iii);
The deduction shall not be denied merely on the ground that
subsequent to the payment of such sum by the assesee the approval
to such association, university, college or other institution has been
withdrawn;
(d) any sum paid to an association or institution which has its object the
undertaking of any programme of rural development to be used for
carrying out any programme of rural development approved for the
purposes of section 35CCA or to an association or institution which
has its object the training of persons for implementing programmes of
rural development, provided the assessee furnishes the certificate
referred to in section 35CCA(2) or section 35CCA(2A), as per case
may be;
The deduction shall not be denied merely on the ground that
subsequent to the payment of such sum by the assesee the approval
to such association, university, college or other institution has been
withdrawn;
(d) any sum paid to a public sector company or a local authority or to an
association or institution approved by the National Committee, for
carrying out any eligible project or scheme, provided the assessee
furnishes a certificate referred to in section 35AC(2)(a);
The deduction shall not be denied merely on the ground that
subsequent to the payment of such sum by the assesee the approval
to such association or institution has been withdrawn;
(e) any sum paid to a rural development fund set up and notified by the
Central Government for the purpose of section 35CCA(1)(c);
(f) any sum paid to the National Urban Poverty Eradication Fund set up
and notified by the Central Government for the purposes section
35CCA(1)(d);
No deduction shall be allowed under this section in respect of any sum
exceeding Rs. 10,000 unless such sum is paid by any mode other than cash;
No deduction under this section to an assessee whose gross total income
includes income which is chargeable under the head "Profit and gains of
business or profession";
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Deductions
Where assessee has incurred business loss which is included in its gross
total income, deduction under section 80GGA will not be allowable [K. Anji
Reddy v. DCIT [2013] 59 SOT 92 (Hyderabad Tribunal)(URO)].
If a deduction under this section is claimed and allowed for any assessment
year in respect of payments referred above, no deduction shall be allowed in
respect of such payments under any other provision of this act, for the same
or any other assessment year.
12. Contributions to political parties [Section 80GGC]
In computing the total income of any person, other than local authority or
every artificial juridical person wholly or partly funded by the Government,
there shall be deducted any contribution made by him to political party or to
an electoral trust under section 80GGC of the Act.
No deduction shall be allowed under this section in respect of any sum
contributed by way of cash.
For this section, `political party' means a political party registered under
section 29A of the Representation of the People Act, 1951.
13. Deduction in respect of certain incomes
(1) Deductions in respect of profits and gains from
industrial undertakings or enterprises engaged in
infrastructure development etc. [Section 80-IA]
Section 80-IA provides for deduction in respect of profits and gains of the
following undertakings.
(A) Infrastructure facility
(B) Telecommunication services
(C) Industrial Park and
(D) Power generation, transmission and distribution.
(E) Reconstruction or revival of power generating plant (available only to
Indian Company).
(A) Infrastructure facility
An enterprise must carry on the business of (a) developing or (b) maintaining
and operating or (c) developing maintaining and operating any infrastructure
facility.
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Taxation of Non-Residents
The term "infrastructure facility" means
(a) a road including toll road, a bridge or a rail system;
(b) a highway project including housing or other activities being an
integral part of the highway project;
(c) a water supply project, water treatment system, irrigation project,
sanitation and sewerage system or solid waste management system;
(d) a port, airport, inland waterway or inland port or navigational channel
in sea.
An undertaking is owned by a company registered in India or by consortium
of such companies or by an authority or a board or a corporation or any other
body established or constituted under any Central or State Act;
It has entered into an agreement with the Central Government or a state
government, a local authority or any other statutory body for (i) developing or
(ii) operating and maintaining or (iii) developing, operating and maintaining a
new infrastructure facility.
It has started or starts operating and maintaining the infrastructure facility on
or after April 1, 1995. However, where an infrastructure facility is transferred
on or after April 1, 1999 by an enterprise which developed such infrastructure
facility to another enterprises for the purpose of operating and maintaining
the infrastructure facility on its behalf in accordance with the agreement with
the Central Government, State Government, Local authority or statutory
body, the provisions of this section shall apply to the transferee enterprise as
if it were the enterprise to which this clause applies and the deduction from
profits and gains would be available to such transferee enterprise for the
unexpired period.
Nothing contained in this section shall apply to any enterprise which starts
the development or operation and maintenance of the infrastructure facility
on or after April 1, 2017.
100% profit is deductible for 10 consecutive assessment years, falling within
a period of twenty assessment years beginning with the assessment year in
which an assessee begins development, operating and maintaining
infrastructure facility (applicable w.r.t clause a), b), and c) above).
100% profit is deductible for 10 consecutive assessment years, falling within
a period of twenty assessment years beginning with the assessment year in
which an assessee begins development, operating and maintaining
infrastructure facility (applicable w.r.t clause d)).
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Deductions
By virtue of section 80IA(6), the profit of housing or other activities, which are
integral part of a highway project, shall be computed on the basis and
manner specified in rule 18BBE, then, such profit shall not be liable to tax if
the profit is transferred to special reserve account and utilized for the
highway project (excluding housing and other activities) before the expiry of
the three years, following the year in which such amount was transferred to
the reserve account. The amount not so utilized shall be chargeable to tax as
income of the year in which such transfer to reserve account was made.
(B) Telecommunication Services
Any undertaking which has started or starts providing telecommunication
services whether basic or cellular, including radio paging, domestic satellite
service, network of trunking, broad band net work and internet services on or
after April 1,1995 but on or before March 31,2005 shall be entitled for
deduction to the extent of 100% of profits and gains of such business for the
first five assessment years and thereafter 30% of such profits and gains for
further five assessment years, commencing from the initial assessment year.
Initial assessment year means the assessment year specified by the
assessee at his option to be the initial year not falling beyond the fifteenth
assessment year starting from the previous year in which the undertaking
begins providing telecommunication services.
"Domestic Satellite " for this purpose, means a satellite owned and operated
by an Indian company for providing telecommunication services.
(C) Industrial Park:
Any undertaking which develops, develops and operates or maintains and
operates an industrial park or special economic zone notified for this purpose
in accordance with any scheme framed and notified by the Central
Government starts operating from April 1, 1997 but before March 31,2006,
shall be entitled for deduction @ 100% of profit for ten years commencing
from initial assessment year.
However, if an undertaking develops an industrial park on or after April 1,
1999 or a SEZ on or after April 1,2001 and transfers the operation and
maintenance of such industrial park or such special park or such special
economic zone, as the case may be to another undertaking (i.e. transferee
undertaking), the deduction shall be allowed to such transferee undertaking
for the remaining period in the ten consecutive assessment years as if the
operation and maintenance were not so transferred to the transferee
undertaking.
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Taxation of Non-Residents
In case of any undertaking which develops, develops and operates or
maintains and operates an industrial park, the provisions of this clause shall
apply to schemes framed and notified by central government and which
starts operating from April 1, 1997 but before March 31, 2011
(D) Power generation transmission and distribution
An undertaking is set up in any part of India for the generation or generation
and distribution of power, if it begins to generate power at any time during
April 1, 1993 and March 31, 2017 or it starts transmission or distribution by
laying a network of new transmission or distribution line at any time between
April 1, 1999 and March 31, 2017 shall be entitled for deduction @ 100% of
profit for ten consecutive years, commencing from initial assessment year.
An undertaking which undertakes substantial renovation and modernization
of the existing network of transmission or distribution lines at any time during
the period beginning on April 1, 2004 and ending on March 31, 2017.
Substantial renovation and modernization means an increase in the plant and
machinery in the network of transmission or distribution of lines by at least
50% of the book value of such plant and machinery as on April 1, 2004
In case transmission or distribution by laying a network of new transmission
or distribution lines, the deduction shall be allowed only in relation to the
profits derived from such activities.
However the undertaking set up for the generation or generation and
distribution or transmission or distribution or substantial renovation and
modernization of the existing network of transmission or distribution lines of
power has to comply with following conditions:
(i) It is not formed by splitting up or the reconstruction of a business
already in existence. This condition shall not apply in respect of an
undertaking which is formed as a result of the re-establishment,
reconstruction or revival by the assessee of the business of any such
undertaking as a result of (a) flood, typhoon, hurricane, cyclone, earth
quake or other convulsion of the nature, or (b) riot or civil
disturbance, or (c) accidental fire or explosion, or (d) action by any
enemy or action taken in combating an enemy.
In T. Satish U. Pai v. CIT [1979] 119 ITR 877, the Karnataka High
Court held that in order to hold that an industrial undertaking was
formed by splitting up of a business already in existence, there must
be some material to hold that either some asset of the existing
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Deductions
business is divided and another business is set up from such splitting
up of assets. Where there is no tangible evidence of transfer of any
asset from an earlier business to the new business, a conclusion
cannot be reached that the new business is formed by the splitting up
of the business already in existence.
The aforesaid view has been accrued by the Supreme Court in
Textile Machinery Corporation Ltd. [1977] 107 ITR 195. The Court
observed that a new industrially recognizable unit of an assessee
cannot be said to be re-construction of his old business where there
is no transfer of any assets of old business to the new undertaking,
which takes place when there is re-construction of old business. If,
the new industrial undertaking is separate and independent
production unit in the sense that the commodities produced or the
result achieved are commercial tangible products and the undertaking
carried on separately without complete absorption and loosing its
identity in the old business, it is not to be treated as being formed by
reconstruction of the old business.
(ii) It is not formed by the transfer of a new business to machinery or
plant previously used for any purpose.
For this purposes, any machinery or plant which was used outside India by
any person other than the assessee shall not be regarded as machinery or
plant previously used for any purpose, if the following conditions are fulfilled,
viz.
(a) such machinery or plant was not, at any time previous to the date of
the installation by the assessee, used in India;
(b) such machinery out plant is imported into India from any country
outside India; and
(c) no deduction on account of depreciation in respect of such machinery
or plant has been allowed or is allowable under the provisions of the
Act in computing the total income of any person for any period prior
to the date of the installation of machinery or plant by the assessee.
Further, any machinery or plant or any part thereof previously used for any
purpose is transferred to a new business and the total value of the machinery
or plant or part so transferred does not exceed 20% of the total value of the
machinery or plant used in the business, then, the condition specified
hereinabove shall be deemed to have been complied with.
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Taxation of Non-Residents
This condition of not formed by transfer to a new business of machinery or
plant previously used for any purpose shall not apply also in case where
machinery or plant has been previously used by State Electricity Board
referred to in section 2(7) of Electricity Act 2003 whether or not such transfer
is in pursuance of splitting up or reconstruction or reorganization of the board
under Part XIII of that Act
Section 80-IA(5) provides that, notwithstanding anything contained in any
other provisions of this Act, for the purpose of determining the quantum of
deduction under section 80IA for the assessment year immediately
succeeding the initial assessment year or any subsequent assessment year,
the profits and gains from the eligible business shall be computed as if such
eligible business were the only source of income of the assessee during the
previous year relevant to the initial assessment year and to every
subsequent assessment year upto and including the assessment year for
which the determination is to be made.
The CBDT vide Circular No. 1/2016 dated February 15, 2016 has clarified
that the term `initial assessment year ' referred to in section 80-IA(5) would
mean the first year opted by the assessee for claiming deduction under
section 80-IA.
The deduction under section 80-IA is admissible only if the accounts of the
undertaking have been audited by a Chartered Accountant and the audit
report duly signed and verified by such accountant is furnished along with the
return of income [Section. 80-IA(7)].
Section 80-IA(8) provides that, if any goods or services held for the purposes
of the eligible business are transferred to any other business carried on by
the assessee, or where any goods or services held for the purposes of any
other business carried on by the assessee are transferred to the eligible
business and in either case, the consideration, if any, for such transfer as
recorded in the accounts of the eligible business does not correspond to the
market value of such goods or services as on the date of transfer, profit and
gains of the eligible business shall be computed as if the transfer in either
case, had been made at the market value of such goods or services as on
that date. If, in the opinion of the Assessing Officer, the computation of the
profits and gains of eligible business in the manner herein before specified
exceptional difficulties, the Assessing Officer may compute such profits and
gains on such reasonable basis as he may deem fit. For this purpose `market
value' in relation to any goods or services means the price that such goods
or services would ordinarily fetch in the open market or the arm's length price
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Deductions
as defined in clause (ii) of section 92F, where the transfer of such goods or
services is a specified domestic transaction referred to in section 92BA.
Section 80-IA(9) provides that where an amount of profits and gains of an
industrial undertaking is claimed and allowed as deduction under section 80-
IA, the profits to that extent shall not qualify for deduction for any
assessment year under any other provisions of chapter VIA and in no case
shall exceed the eligible profit of the industrial undertaking as the case may
be.
Section 80-IA(10) provides that, if it appears to the Assessing Officer that
owing to the close connection between the assessee carrying on the eligible
business and any other person or for any other reason, the course of
business is so arranged that the business transacted between them
produces to the assessee more than the ordinary profits which might be
expected to arise in such eligible business, then the Assessing Officer shall
take the amount of profit as may be reasonable deemed to have been
derived therefrom. However, in case the aforesaid arrangement involves a
specified domestic transaction referred to in section 92BA, the amount of
profits from such transaction shall be determined having regard to arm's
length price as defined in clause (ii) of section 92F.
As per section 80-IA(12), where any undertaking of an Indian company which
is entitled to the deduction is transferred before the expiry of the period
specified in this section, to another Indian company in a scheme of
amalgamation or demerger.
(a) no deduction shall be admissible to the amalgamating or demerged
company for the previous year in which the amalgamation or the
demerger takes place, and
(b) the amalgamated or the resulting company would be entitled to
deduction for unexpired period, if the amalgamation or demerger had
not taken place.
The benefit of deduction shall not be available to an enterprise under
sub-section (12) which is transferred in the scheme of amalgamation
or demerger on or after April 1, 2007
This section does not apply to SEZ notified on or after April 1, 2005
The Finance Act 2009 has inserted an explanation to section 80IA applicable
w.r.e.f April 1, 2000 to clarify that nothing contained in this section shall
apply to business which is in the nature of works contract awarded by any
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Taxation of Non-Residents
person (including the central or state government) and executed by the
undertaking or enterprise.
(2) Deduction in respect of profits and gains by an
undertaking or enterprise engaged in development of
special economic zone [section 80-IAB]
Section 80-IAB provides that where the gross total income of an assessee,
being a Developer, includes any profits and gains derived by an undertaking
or an enterprise from any business of developing a Special Economic Zone,
notified on or after April 1,, 2005 under the Special Economic Zones Act,
2005, there shall be allowed, in computing the total income of the assessee,
a deduction of an amount equal to 100% of the profits and gains derived from
such business for ten consecutive assessment years.
The provisions of this section shall not apply to an assessee, being a
developer, where the development of Special Economic Zone begins on or
after April 1, 2017
The deduction may at the option of the assessee, be claimed by him for any
ten consecutive assessment years out of fifteen years beginning from the
year in which a Special Economic Zone has been notified by the Central
Government.
Where in computing the total income of any undertaking, being a Developer
for any assessment year, its profits and gains had not been included by
application of the provisions of sub-section (13) of 80-IA i.e. SEZ notified on
or after April 1, 2005 in accordance with 80-IA(4)(iii), the undertaking being
the Developer shall be entitled to deduction referred to in this section only for
the unexpired period of ten consecutive assessment years and thereafter it
shall be eligible for deduction from income as provided this section.
Where an undertaking, being a Developer who develops a Special Economic
Zone on or after April 1, 2005 and transfers the operation and maintenance
of such Special Economic Zone to another Developer (hereafter in this
section referred to as the transferee Developer), the deduction under sub-
section (1) shall be allowed to such transferee Developer for the remaining
period in the ten consecutive assessment years as if the operation and
maintenance were not so transferred to the transferee Developer.
For the purposes of this section, the provisions of sub-section (5) and sub-
sections (7) to (12) of section 80-IA shall apply to the Special Economic
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Deductions
Zones for the purpose of allowing deductions under sub-section (1) of section
80-IAB.
"Developer " and "Special Economic Zone" shall have the same meanings
respectively as assigned to them in clauses (g) and (za) of section 2 of the
Special Economic Zones Act, 2005
(3) Deduction in respect of profits and gains from
certain industrial undertaking other than infrastructure
development undertakings [Section 80-IB]
For the purposes of section 80-IB, the following business are eligible
business for the assessment year 2004/05 and thereafter the deduction shall
be allowed in computing the total income of the assessee from such profits
and gains of an amount equal to such percentage and such number of years
as mentioned below.
(A) Industrial undertaking manufacturing any.
(B) Industrial backward state.
(C) Industrial backward districts.
(D) Business of a ship.
(E) Hotel.
(F) Multiplex theatre.
(G) Convention center.
(H) Scientific research & development.
(I) Commercial production or refining mineral oil
(J) Developing & building housing projects.
(K) A cold chain facility for agriculture produce.
(L) Business of processing, preservation, and packaging of fruits,
vegetables or meat and meat products or poultry or marine, dairy
products handling, storage and transportation of food grains.
(M) Business of operating & maintaining a hospital in rural area.
(N) Business of operating & maintaining a hospital located anywhere in
India other than excluded area.
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Taxation of Non-Residents
(A) Industrial undertaking
In case of an industrial undertaking, the amount of deduction shall be @ 25%
(30% where the assessee is a company) of the profits and gains derived from
such industrial undertaking for a period of ten consecutive assessment years
(twelve consecutive assessment years where the assessee is a co-operative
society) beginning with the initial assessment year, if:
(i) it begins to manufacture or produce, articles or things or to operate
such plant or plants before March 31,1995 or such further period as
may be notified by the Central Government with reference to any
particular undertaking.
(ii) it is an industrial undertaking being a small scale industrial
undertaking begins to manufacture or produce articles or things or to
operate its cold storage plant before March 31,2002.
For this purpose, `small scale industrial undertaking' means an industrial
undertaking which is, as on the last day of the previous year, regarded as
small-scale industrial undertaking under section 11B of the Industries
(Development and Regulation) Act, 1951.
Further `initial assessment year ' in the case of an industrial undertaking or
cold storage plant or ship or hotel, means the assessment year relevant to
the previous year in which the industrial undertaking begins to manufacture
or produce articles or things or to operate its cold storage plant or plants or
the cold chain facility or the ship is first brought into use or the business of
the hotel starts functioning.
If conditions stipulated under section 80-IB are fulfilled, benefit of deduction
cannot be denied to an assessee merely for reason that he did not claim that
benefit in initial assessment year. [Praveen Soni v. CIT [2011] 333 ITR 324
(Delhi HC)]
(B) Industrially backward State
Section 80-IB provides that the amount of deduction in case of an industrial
undertaking in an industrially backward state in the Eight Schedule shall be
hundred per cent of the profits and gains derived from such industrial
undertaking for five assessment years beginning with the initial assessment
year and thereafter twenty five per cent (or thirty per cent in case assessee is
a company) of the profits and gains derived from such industrial undertaking.
The total period of deduction should not exceed ten consecutive assessment
years or twelve consecutive assessment years in case of a co-operative
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Deductions
society, subject to condition that it begins to manufacture or produce article
or thing or to operate its cold storage plant or plants before March 31, 2004.
However, in case of such industries in the North-Eastern Region as may be
notified by the Central Government, the amount of deduction shall be 100%
for a period of ten assessment years. No deduction under this sub-section
shall be allowed from assessment year 2004-05 to an undertaking or
enterprise referred in section 80-IC(2). In case of industrial undertaking in the
state of Jammu & Kashmir, no deduction shall be allowed from assessment
year 2012-13
In CIT v. Cement Distributors Ltd. Ltd. [1994] 208 ITR 355, the Delhi High
Court observed that the word `derived' has to be assigned a restricted
meaning as compared to the words `attributable to' or `referred to' and,
therefore, the assessee must establish that he has derived profits and gains
from the industrial undertaking. In other words, the industrial undertaking
must itself be the source of that profit and gain and it is not sufficient if a
commercial connection is established between the profits and gains earned
and the industrial undertaking. This view has been reiterated by the Supreme
Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278.
(C) Industrially backward districts
(i) An industrial undertaking, located in industrial backward districts
notified by the Central Government as industrial backward district of
category `A" shall be entitled for deduction of 100% profits and gains
derived from an industrial undertaking located in such backward
districts for five assessment years beginning with the initial
assessment year and thereafter @ 25% (30% where the assessee is
a company) of the profits and gains of an industrial undertaking. The
total period of deduction shall not exceed ten consecutive
assessment years or where the assessee is a co-operative society
twelve consecutive assessment years. The industrial undertaking
must begin to manufacture or produce article or things or to operate
its cold storage plant or plants before March 31, 2004.
(ii) An industrial undertaking located in notified backward district of
category `B' shall be entitled for deduction @ 100% of the profits and
gains derived from an industrial undertaking located in such
backward district for three assessment years beginning with the initial
assessment year and thereafter @ 25% (30% where the assessee is
a company) of the profits and gains of the industrial undertaking. The
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Taxation of Non-Residents
total period of deduction shall not exceed eight consecutive
assessment years (or where the assessee is a co-operative society,
twelve consecutive assessment years). The industrial undertaking
must begin to manufacture or produce articles or things or to operate
its cold storage plant or plants before March 31, 2004.
(D) Business of ship
In case of business of ships, the amount of deduction shall be 30% of the
profits and gains derived from such ship for a period of 10 consecutive
assessment years including the initial assessment year provided that the
ship:
(i) is owned by an Indian company and is wholly used for the purpose of
the business carried on by it;
(ii) was not, previous to the date of its acquisition by the Indian company,
owned or used in Indian territorial waters by a person resident in
India, and
(iii) is brought into use by the Indian company at any time between April
1,1991 and March 31,1995.
(E) Hotel
In case of any hotel, the amount of deduction shall be:
(a) 50% of the profits and gains derived from the business of such hotel
for a period of ten consecutive years beginning from the initial
assessment year as is located in a hilly area or a rural area or a place
of pilgrimage or such other place as the Central Government may
notify having regard to the need for development of infrastructure for
tourism in any place and other relevant consideration and such hotel
should start functioning before March 31, 2001.
Nothing contained in this clause shall apply to a hotel located at a
place within the municipal jurisdiction (whether known as a
municipality, municipal corporation, notified area committee or a
cantonment board or by any other name) of Calcutta, Chennai, Delhi
or Mumbai which has started functioning before March 31, 2001.
Further, for the purpose of this clause, where the said hotel has been
approved by the prescribed authority before March 31, 1992 shall be
deemed to have been approved for the purpose of this section.
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Deductions
(b) 30% of the profits and gains derived from the business of such hotel
as is located in any place other than those mentioned in para (a)
above, for a period of ten consecutive years beginning from the initial
assessment year if such hotel has started functioning before March
31,2001
Nothing contained in this clause shall apply to a hotel located at a
place within municipal jurisdiction (whether known as a municipality,
municipal corporation, notified area committee, town area committee
or a cantonment board or by any other name) of Calcutta, Chennai,
Delhi or Mumbai which has started functioning before March 31, 2001
(c) The deduction under this sub-section shall be available if:
(i) the business of hotel is not formed by the splitting up, or the
reconstruction of a business already in existence or by the
transfer to a new business of a building previously used as a
hotel or of any machinery or plant previously used for any
purpose.
(ii) the business of hotel is owned and carried on by a company
registered in India with a paid up capital of not less than Rs.
5,00,000/-.
(iii) the hotel is for the time being approved by the prescribed
authority.
Any hotel approved by the prescribed authority before April 1, 1999
shall be deemed to have been approved under this sub section.
(F) Multiplex theatre
In case of any multiplex theatre, the amount of deduction shall be:
(a) 50% of the profits and gains derived from the business of building
owning and operating multiplex theatre, for a period of five
consecutive years beginning from the initial assessment year in any
place; provided that a multiplex theatre should not be located at a
place within the municipal jurisdiction (whether known as municipality,
municipal corporation, notified area committee or a cantonment board
or any name) of Chennai, Delhi, Kolkata or Mumbai.
(b) The deduction shall be allowed only if:
(i) such multiplex theater is constructed between April 1, 2002
and March 31, 2005;
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Taxation of Non-Residents
(ii) the business of the multiplex theatre is not formed by the
splitting up or the reconstruction of a business already in
existence or by the transfer to a new business of any building
or of any machinery or plant previously used for any purpose;
(iii) the assessee furnishes alongwith the return of income the
report of an audit in Form no. 10CCB duly signed and verified
by a chartered accountant, certifying that the deduction has
been correctly claimed.
"Multiplex theater " means a building of a prescribed area comprising
of two or more cinema theatres and commercial shops of such size
and number and having such facilities and amenities as prescribed in
rule 18DB.
Rule 18DB of the Income tax Rules 1962 prescribes, for the purpose
of sub section 7(A) and clause (da) of sub section (14) of section
80IB that the multiplex theatre shall have the following facilities and
amenities
(a) The total build-up area occupied by all the cinema theatres
comprised in the multiplex shall not be less than 22,500
square feet, and shall consist at least 50% of the total build-
up area of the multiplex excluding the area specified for
parking.
(b) The multiplex theatres shall be comprised of at least three
cinema theatres and at least three commercial shops.
(c) Total seating capacity of all the cinema theatre comprised in
the multiplex shall be at least 900 seats, and no cinema
theatre should consist of less than 100 seats.
(d) The total building area occupied by all commercial shops
comprised in the multiplex theatre shall not be less than 300
sq. ft. and the minimum built up area of each shop shall not
be less than 250 sq. ft.
(e) There shall be at least one lobby or foyer in the cinema
theatre, whose area shall be at least 3 sq. ft. per seat.
(f) The multiplex theatre shall have adequate parking, toilet
blocks and other public conveniences, as per local building or
cinema regulations and shall also fulfill all local building or
cinema regulations in respect of fire and safety.
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Deductions
(g) The cinema theatre comprised in the multiplex theatre shall
use modern stereo projection systems with at least two screen
speakers per screen and one surround speaker per 25 seats
in a theatre. The expression `modern stereo projection
system' shall consists of Xerox lamp, plattex and digital sound
systems.
(h) The cinema theatres shall use seats with seat pitch not less
than 20" (center to center).
(i) Ticketing system employed by the cinema theatre shall be
fully computerized.
(j) The multiplex theatre cinema shall be centrally air-
conditioned.
(G) Convention Center
In case of any convention centre, the amount of deduction shall be:
(a) 50% of the profits and gains derived, by the assessee from the
business of building, owning and operating a convention centre for a
period of five consecutive years beginning from the initial assessment
year.
(b) The deduction shall be allowable only if
(i) such convention centre is constructed between April 1,2003
and March 31, 2005
(ii) the business of the convention centre is not formed by the
splitting up; or reconstruction, of a business already in
existence or by the transfer to a new business of any building
or of any machinery or plant previously used for any purpose.
(iii) The assessee furnishes along with the return of income the
report of an audit in Form no. 10CCBA duly signed and
verified by a chartered accountant, certifying that the
deduction has been correctly claimed.
`Convention centre' means a building of prescribed area comprising
of convention halls to be used for the purpose of holding conferences
and seminars, being of such size and number and having such other
facilities and amenities as may be prescribed. Rule 18DC of the
Income tax Rules 1962 prescribes the conditions for the convention
centre.
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Taxation of Non-Residents
(H) Scientific research and development
In case of any company carrying on scientific research and development, the
amount of deduction, shall be 100% of the profits and gains of such business
for a period of five assessment years beginning from the initial assessment
year if such company
(a) is registered in India;
(b) has the main object of scientific and industrial research and
development;
(c) is for the time being approved by the Secretary Department of
Scientific and Industrial Research, Ministry of Science and
Technology, Government of India at any time after March 31, 2000
but before April 1, 2007; and
(d) fulfills the following conditions; viz:
· has adequate infrastructure such as laboratory facilities,
qualified manpower, scale-up facilities and prototype
development facilities for undertaking, scientific research and
development of its own;
· has a well formulated research and development programme
comprising of time bound research and development projects
with proper mechanism for selection and review of the projects
or programme.
· is engaged exclusively in scientific research and development
activities leading to technology development, improvement of
technology and transfer of technology developed by
themselves;
· submits the annual return alongwith statement of accounts and
annual report within eight months after the close of each
accounting year to the prescribed authority.
In the case of a company carrying on scientific and industrial research and
development, initial assessment year means the assessment year relevant to
the previous year in which the company is approved by the prescribed
authority.
(I) Mineral Oil
In the case of production or refining of mineral oil, the amount of deduction to
an undertaking shall be 100% of the profits for a period of seven consecutive
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Deductions
assessment years including the initial assessment year from the
commencement of commercial production. The deduction is available if the
undertaking fulfills any of the following conditions:
(i) is located in North-Eastern Region and has begun or begins
commercial production of mineral oil before April 1, 1997;
(ii) is located in any part of India and has begun or begins commercial
production of mineral oil on or after April 1, 1997 but not later than
March 31, 2017;
(iii) is engaged in refining of mineral oil and begins such refining on or
after October 1, 1998 but not later than March 31, 2012.
(iv) is engaged in commercial production of natural gas in blocks licensed
under the VIII Round of bidding for award of exploration contracts
(hereafter referred to as "NELP-VIII") under the New Exploration
Licencing Policy announced by the Government of
India vide Resolution No. O-19018/22/95-ONG.DO.VL, dated
February 10, 1999 and begins commercial production of natural gas
on or after April 1, 2009 but not later than March 31, 2017;
(v) is engaged in commercial production of natural gas in blocks licensed
under the IV Round of bidding for award of exploration contracts for
Coal Bed Methane blocks and begins commercial production of
natural gas on or after April 1, 2009 but not later than March 31,
2017.
For the purposes of claiming deduction under this sub-section, all blocks
licensed under a single contract, which has been awarded under the New
Exploration Licencing Policy announced by the Government of
India vide Resolution No. O-19018/22/95-ONG.DO.VL, dated February 10,
1999 or has been awarded in pursuance of any law for the time being in
force or has been awarded by Central or a State Government in any other
manner, shall be treated as a single "undertaking".
(J) Housing project
In case of an undertaking developing and building housing projects approved
before March 31, 2008 by a local authority, the amount of deduction shall be
100% of the profits derived from such housing projects if-
(a) such undertaking has commenced development and construction of
housing project on or after October 1,1998 and completes such
construction on or before the dates provided below:
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Taxation of Non-Residents
( i) in a case where a housing project has been approved by the
local authority before April 1, 2004, on or before March 31,
2008;
( ii) in a case where a housing project has been, or, is approved
by the local authority on or after April 1, 2004 but not later
than March 31, 2007 , within four years from the end of the
financial year in which the housing project is approved by the
local authority;
( iii) in a case where a housing project has been approved by the
local authority on or after April 1, 2005, within five years from
the end of the financial year in which the housing project is
approved by the local authority.
For the purposes of this clause,--
( i) in a case where the approval in respect of the housing project
is obtained more than once, such housing project shall be
deemed to have been approved on the date on which the
building plan of such housing project is first approved by the
local authority;
( ii) the date of completion of construction of the housing project
shall be taken to be the date on which the completion
certificate in respect of such housing project is issued by the
local authority;
(b) the project is on the size of a plot of land which has a minimum area
of one acre, and the conditions mentioned in clause ( a) or clause ( b)
shall not apply to a housing project carried out in accordance with a
scheme framed by the Central Government or a State Government
for reconstruction or redevelopment of existing buildings in areas
declared to be slum areas under any law for the time being in force
and such scheme is notified by the CBDT.
(c) the residential unit has a maximum built-up area of one thousand
square feet where such residential unit is situated within the cities of
Delhi or Mumbai or within twenty five kilometers from the municipal
limit of these cities and one thousand and five hundred square feet at
any other place.
(d) the built-up area of the shops and other commercial establishments
included in the housing project does not exceed three per cent of the
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Deductions
aggregate built-up area of the housing project or five thousand
square feet, whichever is higher;
(e) not more than one residential unit in the housing project is allotted to
any person not being an individual; and
(f) in a case where a residential unit in the housing project is allotted to
a person being an individual, no other residential unit in such housing
project is allotted to any of the following persons, namely:--
(i) the individual or the spouse or the minor children of such
individual,
(ii) the Hindu undivided family in which such individual is the
karta,
(iii) any person representing such individual, the spouse or the
minor children of such individual or the Hindu undivided family
in which such individual is the karta.]
Nothing contained in this sub-section shall apply to any undertaking which
executes the housing project as a works contract awarded by any person
(including the Central or State Government).
(K) Cold chain facility for agriculture produce
In case of industrial undertaking carrying on business of setting up and
operating a cold chain facility for agricultural produce, the amount of
deduction, shall be 100% of the profits and gains derived from such industrial
undertaking for five assessment years beginning with the initial assessment
year and thereafter, 25% (30% where the assessee is a company) of the
profits and gains derived from the operation of such facility in a manner that
the total period of deduction does not exceed ten consecutive assessment
years (twelve consecutive assessment years where the assessee is a co-
operative society) and subject to condition that it has began to operate such
facility on or after April 1, 1999 but before April 1, 2004.
(L) Business of processing, preservation and
packaging of fruits or vegetables or meat products or
poultry or marine or dairy products or integrated
business of handling, storage and transportation of food
grains
In case of an undertaking deriving profit from the business of processing,
preservation and packaging of fruits or vegetables or meat products or
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Taxation of Non-Residents
poultry or marine or dairy products or integrated business of handling,
storage and transportation of food grains, the amount of deduction shall be
100% of the profits and gains derived from such undertaking for five
assessment years beginning with the initial assessment year and thereafter
25% (30% where the assessee is a company) of the profits and gains derived
from the operation of such business for consecutive ten assessment years,
subject to fulfillment of the condition that it begins to operate such business
on or after April 1, 2001.
The provisions of this section shall not apply to an undertaking engaged in
the business of processing, preservation and packaging of meat or meat
products or poultry or marine or dairy products if it begins to operate such
business before the April 1, 2009.
(M) Business of operating & maintaining a hospital in
rural area
The amount of deduction in the case of an undertaking deriving profits from
the business of operating and maintaining a hospital in a rural area shall be
hundred per cent of the profits and gains of such business for a period of five
consecutive assessment years, beginning with the initial assessment year,
if--
( i) such hospital is constructed at any time during the period
beginning on October 1, 2004 and ending on March 31, 2008;
( ii) the hospital has at least one hundred beds for patients;
( iii) the construction of the hospital is in accordance with the regulations,
for the time being in force, of the local authority; and
( iv) the assessee furnishes along with the return of income, the report of
audit in such form and containing such particulars as prescribed in
Rule 18DD, Form no. 10CCBC, and duly signed and verified by an
accountant, as defined in the Explanation below sub-section (2)
of section 288, certifying that the deduction has been correctly
claimed.
A hospital shall be deemed to have been constructed on the date on which a
completion certificate in respect of such construction is issued by the
concerned local authority.
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Deductions
(N) Business of operating & maintaining a hospital
located anywhere in India other than excluded area.
The amount of deduction in the case of an undertaking deriving profits from
the business of operating and maintaining a hospital located anywhere in
India, other than the excluded area, shall be hundred per cent of the profits
and gains derived from such business for a period of five consecutive
assessment years, beginning with the initial assessment year, if--
( i) the hospital is constructed and has started or starts functioning at any
time during the period beginning on April 1, 2008 and ending on
March 31, 2013;
( ii) the hospital has at least one hundred beds for patients;
( iii) the construction of the hospital is in accordance with the regulations
or bye-laws of the local authority; and
( iv) the assessee furnishes along with the return of income, a report of
audit in such form and containing such particulars, as prescribed in
rule 18DDA, Form no. 10CCBD and duly signed and verified by an
accountant, as defined in the Explanation to sub-section (2) of
section 288, certifying that the deduction has been correctly claimed.
All other provisions such as computation of income, audit report,
amalgamation, re-computation of profits by the Assessing Officer,
consequences of merger/amalgamation etc. are applicable similar to section
80-IA.
(4) Deductions in respect of profits and gains from
housing projects [Section 80-IBA]
Section 80-IBA provides that where the gross total income of an assessee
includes any profits and gains derived from the business of developing and
building housing projects, there shall, subject to the provisions of this
section, be allowed, a deduction of an amount equal to hundred per cent of
the profits and gains derived from such business.
A housing project shall be a project which fulfils the following conditions,
namely:
(a) the project is approved by the competent authority after June 1, 2016, but
on or before March 31, 2019;
(b) the project is completed within a period of 5 years from the date of
approval by the competent authority:
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Taxation of Non-Residents
Provided that:
(i) where the approval in respect of a housing project is obtained more than
once, the project shall be deemed to have been approved on the date on
which the building plan of such housing project was first approved by the
competent authority; and
(ii) the project shall be deemed to have been completed when a certificate of
completion of project as a whole is obtained in writing from the competent
authority;
(c) the carpet area of the shops and other commercial establishments
included in the housing project does not exceed three per cent of the
aggregate carpet area;
(d) the project is on a plot of land measuring not less than--
(i) 1000 square metres, where the project is located within the cities of
Chennai, Delhi, Kolkata or Mumbai; or
(ii) 2000 square metres, where the project is located in any other place;
(e) the project is the only housing project on the plot of land as specified in
clause (d);
(f) the carpet area of the residential unit comprised in the housing project
does not exceed--
(i) 30 square metres, where the project is located within the cities of Chennai,
Delhi, Kolkata or Mumbai; or
(ii) 60 square metres, where the project is located in any other place;
(g) where a residential unit in the housing project is allotted to an individual,
no other residential unit in the housing project shall be allotted to the
individual or the spouse or the minor children of such individual;
(h) the project utilises--
(i) not less than 90% of the floor area ratio permissible in respect of the plot
of land under the rules to be made by the Central Government or the State
Government or the local authority, as the case may be, where the project is
located within the cities of Chennai, Delhi, Kolkata or Mumbai or
(ii) not less than eighty per cent of such floor area ratio where such project is
located in any place other than the place referred to in sub-clause (i); and
(i) the assessee maintains separate books of account in respect of the
housing project.
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Deductions
Nothing contained in this section shall apply to any assessee who executes
the housing project as a works-contract awarded by any person (including
the Central Government or the State Government).
Where the housing project is not completed within the period specified and in
respect of which a deduction has been claimed and allowed under this
section, the total amount of deduction so claimed and allowed in one or more
previous years, shall be deemed to be the income of the assessee
chargeable under the head "Profits and gains of business or profession" of
the previous year in which the period for completion so expires.
Where any amount is claimed and allowed under this section for any
assessment year, deduction to the extent of such profit and gains shall not
be allowed under any other provisions of this Act.
(5) Special provisions in respect of certain
undertakings or enterprises in certain special category
states. [Section 80-IC]
Where the gross total income of an assessee includes any profits and gains
derived by an undertaking or an enterprise from any business mentioned
below shall be entitled for deduction, from such profits and gains for ten
consecutive assessment years from the initial assessment year i.e. the
undertaking or enterprise begins to manufacture or produce articles or things
or commences operation or complete substantial expansion:
(A) Which has began or begins to manufacture or produce any article or
things not being any article or things specified in Thirteenth Schedule
or which manufactures or produces any article or thing not being any
article or thing specified in the Thirteenth Schedule an undertakes
substantial expansion during the period beginning
Percentage Number of
of profit of years
such commencing
under- with the
taking initial
assessment
year
(i) Between December 23, 2002 and
April 1, 2007, in any Export
Processing Zone or Integrated
137
Taxation of Non-Residents
Percentage Number of
of profit of years
such commencing
under- with the
taking initial
assessment
year
Infrastructure Development centre or
Industrial Growth Centre or Industrial
Estate or Industrial Park or Software
Technology Park or Industrial Area or
Theme Park, as notified by CBDT in
accordance with the scheme framed
and notified by the Central
Government in this regards, in the 100% 10
state of Sikkim; or
(ii) Between January 7, 2003 and April 1,
2012 in any Export Processing Zone
or Integrated Infrastructure
Development Centre or Industrial
Growth centre or Industrial Estate or
Industrial Park or Software
Technology park or Industrial Area or
Theme Park as notified by CBDT in 100% 5
accordance with the scheme framed 25% (30%) 5
and notified by the Central
Government in this regard in the in case of
State of Himachal Pradesh or the Company
state of Uttarachal
(iii) Between December 24, 1997 and
April 1, 2007, in any Export
Processing Zone or Integrated
Infrastructure Development Centre or
Industrial Estate or Industrial Park or
Software Technology Park or
Industrial Area or Theme Park as
notified by the CBDT in accordance
with the scheme framed and notified
138
Deductions
Percentage Number of
of profit of years
such commencing
under- with the
taking initial
assessment
year
by the Central Government in this 100% 10
regard, in any of the North-Eastern
States
(B) Which has began or begins to manufacture or produce any article or
thing specified in the Fourteenth Schedule or commences any
operation specified in that schedule, or which manufactures or
produces any article or thing specified in the Fourteenth Schedule or
commences any operation specified in that schedule and undertakes
substantial expansion during the period beginning
Percentage Number of
of profit of years
such commencing
undertaking with the
initial
assessment
year
(i) Between December 23, 2002 and
April 2007 in the State of Sikkim 100% 10
(ii) Between January 7, 2003 and April 100% 5
2012 in State of Himachal Pradesh 25% (30%) 5
or State of Uttarachal in case of
Company
(iii) Between December 24, 1997 and
April 1, 2007 in any of the North 100% 10%
Eastern State
For the purpose of this section, `substantial expansion', means increase in
the investment in the plant and machinery by at least 50% of the book value
of plant and machinery i.e. before taking depreciation of any year, as on the
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Taxation of Non-Residents
first day of the previous year in which the substantial expansion is
undertaken.
All other provisions such as splitting and reconstruction of business
computation of income, audit report, amalgamation, re-computation of profits
by the Assessing Officer, consequences of merger/amalgamation etc. are
applicable similar to section 80-IA.
Losses of section 80-IC eligible industrial undertaking can be set off against
other taxable business income. [Wipro Ltd. v. ACIT [2013] 55 SOT 3
(Bangalore Tribunal)(URO)]
(6) Deduction in respect of profits and gains from
business of collecting and processing of bio-degradable
waste [Section 80JJA]
Section 80JJA provides that if the gross total income of an assessee includes
any profits and gains derived from the business of collecting and processing
or treating of bio-degradable waste for generating power or producing bio
fertilizers, bio-pesticides or other biological agents or for producing bio-gas
or making pallets or briquettes fuel or organic manure, shall be entitled for a
deduction of an amount equal to the whole of such profits and gains of five
consecutive assessment years beginning with the assessment year relevant
to the previous year in which such business commences.
(7) Deduction in respect of employment of new
employees [Section 80JJAA]
Section 80JJAA provides for 30% of the additional employee cost for three
assessment years (including the assessment year in which the new
employment is provided) to all assessees covered under tax audit provisions
as per section 44AB of the Act.
Additionally, section 80JJAA(2) also lays down the following specific
scenarios in which the above deduction will not be available:
· If the business is formed by splitting up, or the reconstruction, of an
existing business; or
· If the business is acquired by the assessee by way of transfer from any
other person or as a result of any business reorganisation; or
· Unless the assessee furnishes alongwith the return of income the report
of the accountant, as defined in the Explanation to section 288, giving
such particulars in the report as may be prescribed.
Meaning of additional employee under the section is provided as-
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Deductions
· "additional employee" means an employee who has been employed
during the previous year and whose employment has the effect of
increasing the total number of employees employed by the employer as
on the last day of the preceding year, but does not include,--
(a) an employee whose total emoluments are more than Rs. 25,000 per
month; or
(b) an employee for whom the entire contribution is paid by the Government
under the Employees' Pension Scheme notified in accordance with the
provisions of the Employees' Provident Funds and Miscellaneous Provisions
Act, 1952 (19 of 1952); or
(c) an employee employed for a period of less than 240 days during the
previous year (150 days in respect of specific industries viz. the
manufacturer of apparels or footwear or leather products); or
(d) an employee who does not participate in the recognised provident fund;
Finance Act 2018 made an amendment to the above provision to include that
if the condition of 240/150 days as the case may be is not completed in the
first year of employment, but is complied with in the immediately succeeding
year, the deduction under this section shall be available from such
succeeding year considering that the employee deemed to have been
employed in the said succeeding year.
Similarly, one may also need to borne in mind the meaning of `additional
employee cost' and `emoluments' while computing the deduction under
section 80JJAA of the Act.
(7) Deductions in respect of certain incomes of
Offshore Banking Units and International Financial
Services Centre [Section 80LA]
Section 80LA(1) provides that where the gross total income of an
assessee,--
(i) being a scheduled bank, or, any bank incorporated by or under the
laws of a country outside India; and having an Offshore Banking Unit
in a Special Economic Zone; or
(ii) being a Unit of an International Financial Services Centre,
includes any income referred to in sub-section (2), there shall be allowed, in
accordance with and subject to the provisions of this section, a deduction
from such income, of an amount equal to--
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Taxation of Non-Residents
(a) 100% of such income for five consecutive assessment years
beginning with the assessment year relevant to the previous year in
which the permission, under clause (a) of sub-section (1) of section
23 of the Banking Regulation Act, 1949 (10 of 1949) or permission or
registration under the Securities and Exchange Board of India Act,
1992 (15 of 1992) or any other relevant law was obtained, and
thereafter;
(b) 50% of such income for five consecutive assessment years.
The income referred to in sub-section (1) shall be the income--
(a) from an Offshore Banking Unit in a Special Economic Zone; or
(b) from the business referred to in sub-section (1) of section 6 of the
Banking Regulation Act, 1949 (10 of 1949) with an undertaking
located in a Special Economic Zone or any other undertaking which
develops, develops and operates or develops, operates and
maintains a Special Economic Zone; or
(c) from any Unit of the International Financial Services Centre from its
business for which it has been approved for setting up in such a
Centre in a Special Economic Zone. [Section 80LA(2)]
As per section 80LA(3), no deduction under this section shall be allowed
unless the assessee furnishes along with the return of income,--
( i) the report, in Form no. 10CCF of an accountant certifying that the
deduction has been correctly claimed in accordance with the
provisions of this section; and
( ii) a copy of the permission obtained under clause ( a) of sub-section (1)
of section 23 of the Banking Regulation Act, 1949 (10 of 1949).
(8) Deduction on interest on deposits in saving
account (not being time deposits) [Section 80TTA]
This deduction is available to Individual/HUF. The amount subject to
maximum deduction is Rs. 10,000/-. The conditions for deduction are as
below:
The saving account is with the banking co., co-op society or post office
Where the interest is from saving a/c held by, or on behalf of a firm, AOP or
BOI, no deduction to be allowed in respect of interest in computing the total
income of any partner of the firm, or any member of AOP or BOI
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Deductions
Other deductions available in respect of all assesses
(including non-residents):
a. Deduction in respect of profits and gains from business of hotels and
convention centers in specified area [Section 80-ID]
b. Special provisions in respect of certain undertakings in north eastern
states [Section 80-IE]
143
Chapter 7
Double Taxation Relief
This chapter is intended to provide against the impact of double or multiple
taxation of the same income in the hands of the same assessee
simultaneously under the Indian income-tax law as well as under the taxation
laws of different countries. The taxability of an assessee in India on any item
of income depends upon his residential status taken in conjunction with the
situs of accrual, arisal or receipt of the particular item.
The position in many other countries being also broadly similar, it frequently
happens that a person may be found to be a resident in more than one
country or that the same item of his income may be treated as accruing,
arising or received in more than one country with the result that the same
item becomes liable to tax in more than one country. It is to prevent this
hardship that the provisions of sections 90 & 91 are incorporated under the
Income-tax Act, 1961.
It is possible to provide for relief against this hardship in two ways. One of
them, enacted in section 90, is to have the relief against double taxation in
any two countries worked out on the basis of a mutual agreement between
the two concerned sovereign States. This may be called a scheme of
`bilateral relief as both concerned States agree as to the basis of the relief to
be granted by either of them.
Agreements for `bilateral relief' may be of two kinds. One kind of agreement
is where two countries agree that income from various specified sources
which are likely to be taxed in both the countries should either be taxed only
in one of them or that each of the two countries should tax only a particular
specified portion of the income so that there is no overlapping. Such an
agreement will result in a complete avoidance of double taxation of the same
income in the two countries. The other kind of agreement is one that does
not envisage any such scheme of single taxability but merely provides that, if
any item of income is taxed in both the countries, the assessee should get
relief in a particular manner. Under this type of agreement, the assessee is
liable to have his income taxed in both the countries but is given a deduction,
from the tax payable by him in India, of a part of taxes paid by him thereon,
usually the lower of the two taxes paid.
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Double Taxation Relief
Section 90(1) provides four clauses for distinct circumstances. Clause (a)
provides for relief in certain cases where income-tax has already been
charged and paid, both in India and in another foreign country, on the same
income or to promote mutual economic relations, trade and investment.
Clause (b) on the other hand, does not provide relief against double taxation
which has already taken place, but provides for the avoidance of double
taxation. Clause (c) provides for exchange of information for the prevention
of evasion or avoidance of income-tax chargeable under this Act, or under
the corresponding law in force in that country, or investigation of cases of
such evasion or avoidance. While Clause (d) provides for recovery of
income-tax under this Act and under corresponding law in force in that
country.
From the above, it is clear that under clause (a) relief is granted after an
income has suffered taxes under the laws of both the countries, while in
clause (b) relief is allowed at the time of assessment itself i.e. provision has
been made for avoiding double taxation.
Section 90(2) provides that where the Central Government has entered into
an agreement with the Government of any country outside India under sub-
section (1) for granting relief of tax, or as the case may be, avoidance of
double taxation, then, in relation to the assessee to whom such agreement
applies, the provisions of this Act shall apply to the extent they are more
beneficial to that assessee.
Further, section 90(2A) provides that the provisions of newly inserted
Chapter X-A on General Anti Avoidance Regulations shall apply even if such
provisions are not beneficial to the assessee.
Section 90(3) read with explanation 3 provides that any term used but not
defined in treaty as well as in the Act should be considered to have a
meaning as assigned to it in the notification issued by the Central
Government and shall be deemed to have effect from the date of the tax
treaties entered into between the countries...
In this connection, notification no. 91/2008 dated 28 August 2008 provides
that the term 'may be taxed' could be considered as providing that the said
income shall also be included in the total income chargeable to tax in India in
accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and
that the relief shall be granted in accordance with the method for elimination
or avoidance of double taxation provided in tax treaties between the
countries.
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Taxation of Non-Residents
The above notification was considered by the Delhi High Court in the case of
Daler Singh Mehndi v. DCIT [2018] 91 taxmann.com 178 while deciding that
income earned by the assessee in respect of stage shows performed in
Canada, USA and Netherlands prior to the date of notification viz. upto
assessment year 2004-05 is not chargeable to tax in India. However, the
income earned outside India post assessment year 2004-05 shall be included
in the total income chargeable to tax in India under the Act and that the tax
credit shall be granted considering the relevant provisions of the treaty.
Above principles were also earlier reiterated by Mumbai Tribunal in the case
of Essar Oil Ltd. v. ACIT [2014] 28 ITR (T) 609.
Similarly, explanation 4 to section 90, as inserted by the Finance Act 2017
provides that where any term used in the treaty is defined in the treaty, such
term shall have the meaning as assigned to it in the treaty; however, where
the term is not defined in the said treaty, but it is defined in the Act, it shall
have the same meaning as assigned to it in the Act and explanation to it as
given by the Central Government.
Section 90(4) provides that non-resident shall not be entitled to claim any
relief under such agreement unless a certificate, containing prescribed
particulars namely the tax residency certificate ( `TRC'), of his being a
resident in any country outside India or specified territory outside India, as
the case may be, is obtained by him from the Government of that country or
specified territory.
Similarly, section 90(5) of the Act read with rule 21AB prescribes that Form
10F shall be furnished providing the details viz. status, nationality, tax
identification number, period for which the residential status is applicable and
address; if these information are not contained in the TRC as discussed
earlier.
Important Judicial Precedents & Board Circulars:
1. In CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (Andhra
Pradesh HC), it has been held that though under section 9(1)(i), all
income arising, whether directly or indirectly, through or from any
`business connection' in India shall be deemed to accrue or arise in
India, the charging section 4 as well as the definition of `total income'
in S.5 are expressly made subject to the provisions of the Act, which
means that they are subject to the provisions of section 90. By
necessary implication this subject to the terms of Double Taxation
Avoidance Agreement, if any, entered into by the Government of
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Double Taxation Relief
India with foreign countries. Even assuming that all the profits of a
foreign company are to be deemed to accrue or arise in India under
section 9 of the Act, the provisions of the articles of the agreement
will prevail over section 9. In effect, such profits of a foreign company
will not be liable to tax under section 9 except to the extent allowed
by the Agreement with the foreign country.
2. In Advance Ruling Petition No. P-11 of 1995, In re [1997] 228 ITR 55
(AAR) has held that it is well settled that the specific provisions of an
agreement for avoidance of double taxation is override the general
provisions of the Act.
3. Furthermore, the Supreme Court in UOI v. Azadi Bachao Andolan &
Another [2003] 263 ITR 706 has held that no provision of the Double
Taxation Avoidance Agreement can possibly fasten a tax liability
where the liability is not imposed by the Act. If a tax liability is
imposed by the Act, the Agreement may be resorted to for negativing
or reducing it; and, in case of difference between the provisions of the
Act and the Agreement, the provisions of the agreement would prevail
over the provisions of the Act and can be enforced by the appellate
authorities in the court.
4. In CIT v. PVAL Kulandagan Chettiar [2004] 267 ITR 654, Supreme
Court has held that in case of conflict between Income-tax act and
provisions of DTAA, provisions of DTAA would prevail over provisions
of Income-tax Act. Section 90(2) of the Act makes it clear that the Act
gets modified in regard to the assessee insofar as the agreement is
concerned if it falls within the category stated therein.
5. In Sanofi Pasteur Holding SA v. Department of Revenue [2013] 354
ITR 316 (Andhra Pradesh HC), wherein revenue authorities sought to
tax capital gains arising from transaction in issue on the basis of
retrospective amendments made in Explanation 2 to section 2(47)
and Explanation 4 and 5 to section 9 by the Finance Act, 2012.
According to revenue authorities, retrospective amendments to Act
would override provisions of DTAA. It was held that since
retrospective amendment sought to be relied upon by revenue were
fortified by a non-obstante clause expressed to override tax treaties,
contention raised by revenue was to be set aside.
Thus, from the above, it is clear that whichever provision either in the Act or
DTAA beneficial to the assessee, the assessee could take the advantage of
the same.
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Taxation of Non-Residents
The agreements entered into with the foreign countries for avoidance of
double taxation may be broadly divided into two categories (i) comprehensive
agreements; and (ii) other agreements covering receipts from air or shipping
trade, or both. As on date, the Government of India has entered into
comprehensive agreements for avoidance of double taxation with more than
sixty five countries and limited agreements with more than seventeen
countries.
India has signed a protocol with Mauritius, Singapore and Cyprus to amend
various articles in tax treaties related to permanent establishment, capital
gains, limitation of benefit clause, interest etc.
In March 2018, India has also entered into tax treaties with Kazakhstan and
Hong Kong. Some of the important highlights of India Hong Kong DTAA
are as under:
· `Trust' and `partnership' are also brought under the purview of
`person'
· Specific anti-avoidance rules are incorporated under the articles
dealing with dividend, interest, royalty, fees for technical services,
capital gains viz. main purpose or one of the main purposes of any
person is to take advantage of these Articles
· Under the `Other Income' article, Source Country has also been
given the taxation rights in line with UN Model Convention
· Dependent Agent PE also contains clause related to `securing orders'
Section 90A of the Act is very much similar to section 90 except the fact that
it deals with tax reliefs between specified associations. Section 91 deals with
issues related to non-treaty countries. The said section provides that if the
Government of India has not entered into agreement with any country for
avoidance of double taxation or for relief on double taxation, an assessee
who is resident in India during the previous year is entitled to relief calculated
on the following basis. The average rates of tax for the year applicable to the
assessee both in the Indian assessment and in the foreign assessment are
compared and whichever of these rates is lower is applied to the doubly
taxed income and the tax is calculated thereon. This amount of tax is
deducted from the total tax assessed on the assessee and the balance alone
recovered from him. If the assessee had already paid the tax, a
corresponding refund will be made.
Before any relief for double taxation can be granted under this section the
amount of income as statutorily computed for purposes of imposition of the
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Double Taxation Relief
tax has to be examined and the identity of the amount which has borne tax
under the law of the foreign country and the law of India has to be
established. The expression `such doubly taxed income' indicates that it is
only that portion of the income on which tax has in fact been imposed and
been paid by the assessee that is eligible for the double tax relief.
Unilateral relief from double taxation is admissible under section 91 of the
Income Tax Act, 1961 inter alia, if the following conditions are satisfied:-
(a) the assessee is resident in India in the previous year;
(b) the income accrued or arose during the previous year outside India,
(and is not deemed to accrue or arise in India);
(c) the income has been taxed both in India and the foreign country with
which there is no agreement under section 90 for the relief or
avoidance of double taxation; and
(d) the assessee has paid income tax in the foreign country.
Payment of income-tax by a person in the foreign country of his income
which accrued or arose during the previous year outside India is, therefore, a
pre-requisite for the grant of unilateral relief from double taxation under
section 91 of the Income tax Act.
In CIT v. Bombay Burmah Trading Corporation Ltd. [2003] 259 ITR 423, the
Bombay High Court held that basically under section 91(1) the expression
`such doubly taxed income' indicates that the phrase has reference to the tax
which the foreign income bears when it is against subjected to tax by its
inclusion in the computation of income under the Income-tax Act, 1961.
Further, section 91(1) shows that in case of double taxation relief to the
resident, the relief is allowed at the Indian rate of tax or at the rate of tax of
the other country, whichever is less. Therefore, the relief under section 91(1)
is by way of reduction of tax by deducting the tax paid abroad on such doubly
taxed income from tax payable in India. Under the circumstances, the
scheme is clear. The relief can be worked out only if it is implemented
country- wise. Therefore, the argument based on aggregation of income
would result in defecting the scheme of section 91(1). Thus, where the
assessee has its business in India, Tanzania and Thailand, the assessee
would be entitled to double income- tax relief under section 91(1) in respect
of income from Tanzania without adjusting losses from Thailand branch.
Section 91(2) provides that if any person, resident in India proves that in
respect of his income which accrue or arise to him, during the previous year
in Pakistan and has paid the tax in that country on agricultural income, he
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Taxation of Non-Residents
shall be entitled to a deduction from the Indian income-tax payable by him of
the amount of the tax paid in Pakistan on such income which is liable to tax
under this Act or of a sum calculated on that income at the Indian rate of tax,
whichever is less.
Note on Methods of Avoidance of Double Taxation
Accepted in Indian Treaties
Double Taxation: Double Taxation is of two types, Juridical Double Taxation
and Economic Double Taxation. Juridical Double Taxation is where the same
income or capital is taxable in the hands of the same person by more than
one state. Economic Double Taxation is where two different persons are
taxable in respect of the same income or capital.
Double Taxation Avoidance Agreement: Government of India has entered
into bilateral agreements with Government of other Countries to avoid double
taxation of Income earned by persons in India and other country under
section 90 of Income Tax Act, 1961.
Methods of elimination of double taxation:
1) Exemption Method/Principle of Exemption
2) Credit Method/Principle of Credit
3) Tax Sparing Method
4) Underlying Tax Credit Method
Exemption Method/ Principle of Exemption:
Under this method, the Country of Residence does not tax the income which
according to the Convention may be taxed in Country of Source i.e. income
which shall be taxable only in Country of Source. It has main two methods:
(a) The income taxable in Country of Source is not taken into account at
all by the Country of Residence. Country of Residence is not entitled
to take the income so exempted into consideration when determining
the tax to be imposed on the rest of the income; this method is called
"full exemption".
(b) The income which may be taxed in Country of Source is not taxed by
Country of Residence, but Country of Residence retains the right to
take that income into consideration when determining the tax to be
imposed on the rest of the income; this method is called "exemption
with progression".
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Double Taxation Relief
Following treaties has used Exemption method for following Income:
1) India-Australia: `Exemption with progression' in respect of income
which is taxable only in other contracting state.
2) India-Belarus: `Exemption with progression' in respect of income
which is taxable under the treaty in the other Contracting State only.
3) India-Canada: `Exemption with progression' in respect of income or
capital which is exempt from tax in Canada and in respect of income
which is exempt in India.
4) India-Egypt: In respect of taxes paid on other income.
5) India Austria : Article 23(c) provides for exemption with progression
Credit method/Principle of Credit:
Under this method, the Country of Residence calculates its tax on the basis
of the taxpayer's total income including the income from the other Country of
Source which, according to the Convention, may be taxed in that other
Country (but not including income which shall be taxable only in Country of
Residence). It then allows a deduction from its own tax for the tax paid in the
other State.
The principle of credit may be applied by two main methods:
(a) Country of Residence allows the deduction of the total amount of tax
paid in the other State on income which may be taxed in that State,
this method is called "full credit";
Article 23 of India Namibia tax treaty provides for full credit.
(b) The deduction given by Country of Residence for the tax paid in the
other State is restricted to that part of its own tax which is appropriate
to the income which may be taxed in the other State; this method is
called "ordinary credit".
Article 25 of India USA tax treaty contains provisions related to ordinary
credit.
In Elitecore Technologies (P.) Ltd. v. DCIT [2017] 184 TTJ 166, Ahmedabad
Tribunal has held that where assessee-company receives certain amount
from AEs after deduction of tax at source, tax credit has to be allowed to
assessee only to the extent corresponding income suffers tax in India and it
is not correct approach to take into account gross receipts for the purpose of
computing admissible tax credit.
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Taxation of Non-Residents
Karnataka High Court in Wipro Limited [2016] 382 ITR 179 has allowed credit
allowed on income under section 10A. However, we also need to note that
the special leave petition filed by revenue against the order has been
accepted by the Supreme Court [2016] 240 Taxman 299.
India has followed Credit method in most of the treaties.
Tax Sparing:
Where tax incentives are granted by Country of Source to foreign taxpayers
by reducing a tax that, absent such measure, would be higher, the taxpayer
is denied the effect of the intended benefit if Country of Residence, in a tax
credit situation, allows the deduction only for the tax actually paid. In such a
case, the treasury of Country of Residence would obtain the benefit and the
goal of the incentive provision would not be attained. To avoid this effect,
countries running such incentive programs often insist on the inclusion of a
so-called "tax sparing" provision in tax treaties. By means of such a
provision, the taxpayer is given a tax credit for taxes which have not been
paid, hence `spared', in the Country of Source. This means that, Country of
Resident gives credit of tax which may have been paid in Country of Source,
if tax was not spared by Country of Source.
Following treaties has used Tax Sparing Method for following Income:
1) India-Brazil: In respect of Interest (Article 11/2) and Royalties (Article
12/2b) in Article 23/2.
2) India-Bulgaria: In respect of tax which would have been payable in
the other Contacting State but for any relief allowed under the laws of
that State in Article 25/3.
3) India-Canada: In respect of taxes not paid in India under certain
provisions of Indian Income Tax Act, as listed in Article 23/4 of the
treaty, provided that such relief shall not be given if the income
relates to a period starting more than 10 years after the exemption
from, or reduction of, Indian tax is first granted to the resident of
Canada, in respect of the source.
4) India-China, India-Cyprus, India-Korea, India-Sweden, India-Trinidad
& Tobago, India-Turkmenistan, India-Ukraine, India-UAE, India-
Uzbekistan, India-Vietnam, : In respect of income which is not taxed
for economic development.
5) India-Syria, India-Tanzania, India-Thailand, India-UK, India-Zambia.
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Double Taxation Relief
Important Judicial Precedents & Board Circulars:
1) In Krishak Bharati Co-operative Ltd. [2017] 80 taxmann.com 326,
Delhi High Court while analyzing the tax treaty between India and
Oman, which contains tax sparing clause had held that foreign tax
credit is available in respect of dividend income received from Oman
company even though no taxes thereon have been paid in Oman
under its domestic law.
2) In Indian Farmers Fertilizers Co-operative Ltd. v. Principal CIT [2016]
51 ITR(T) 162 while dealing with tax sparing credit provisions viz.
Article 25 of India and Oman tax treaty, the Delhi Tribunal had held
that from the combined reading of Articles 25(2), 25(4) and section
90(1)(a)(ii), it is clear that actual payment of taxes is not a sina qua
non for the claim of the tax credit. However, the two conditions which
still need to be satisfied for the claim of the Tax Credit are that the tax
should have been "payable" and that the tax is not actually paid on
account of the tax incentive provisions aimed at promoting economic
development. Where both these conditions are fulfilled, assessee is
entitled to claim the credit of deemed dividend which would have
been payable in Oman.
Underlying Tax Credit/Indirect Credit:
As regards dividends/distributions received from the subsidiary, the Country
in which the parent company is a resident gives credit as of taxes paid in the
Country of Source, by deduction, payment, withholding taxes, etc, as
appropriate, not only for the tax on dividends as such, but also for the tax
paid by the subsidiary on the profits distributed in the Country of Subsidiary's
Resident. "Tax Paid" by the subsidiary on Corporate Profit also includes the
tax which has not been paid, actually, due to exemption or deduction
available under domestic laws. Example: If Indian Subsidiary availing the
Exemption or deduction under section 10A, 10AA, 80IA, or 80IB then Holding
Company can claim the underlying tax credit of the tax payable on Corporate
Profit by Subsidiary even if such tax has not been paid.
Following treaties has used Underlying Tax Credit Method for following
Income:
1) India-Mauritius: In respect of tax on dividends received from other
contracting Country's subsidiaries if holding is not less than 10% of
the shares.
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Taxation of Non-Residents
2) India-Singapore: In respect of tax on dividends received from a
subsidiary which is a resident of other contracting country if the
holding is not less than 25%.
3) India-Spain: In respect of dividends received from a subsidiary which
is a resident of India if holding is not less than 25%.
4) India UK : In respect of tax on dividends received from an Indian
entity which controls directly or indirectly atleast 10% of the voting
power
Under the Income-tax Rules, CBDT vide Rule 128 prescribed rules regarding
`procedure for granting relief or deduction of any foreign tax paid against the
Indian tax payable', which were made applicable from April 1, 2017. The
Rules provide clarity on the mechanism of obtaining foreign tax credit in India
for resident tax payers in respect of taxes paid overseas. Salient features of
this Rule are as under:
· Any resident assessee shall be allowed a credit of FTC in the year in
which the income corresponding to such tax has been offered to tax or
assessed to tax in India and in case income is taxed in multiple years in
India, FTC is allowed in all years in the same proportion as the income
has been taxed in India in that particular year
· FTC shall be available against the amount of tax, surcharge and cess
payable under the Act but not in respect of any sum payable by way of
interest, fee or penalty.
· FTC Rules provide that in case of foreign taxes which are disputed, FTC
shall not be available on such taxes until such dispute is resolved and
the taxpayer furnishes evidence of payment of such disputed tax along
with undertaking of no refund within 6 months from the settlement of
dispute.
· FTC shall be allowed in the relevant year in which such income is offered
or assessed to tax in India.
· The FTC shall be the aggregate of the credit computed separately for
each source of income and the credit shall be the lower of the tax
payable under the Act on such income and foreign tax paid on such
income but restricting the credit to the extent of tax liability under the act
and excess shall be ignored;
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Double Taxation Relief
· FTC is also available against tax liability under section 115JB or 115JC
of the Act, but credit is restricted to the extent of tax liability. Any excess
FTC to be ignored.
In order to avail FTC, a taxpayer is required to furnish certain details in a
specified form no.67 along with evidence of taxes deducted or paid in
overseas jurisdiction on or before the due date of filing of the tax return.
Current development in the treaty front is India's signing of multi-lateral
instruments. India being part of G20 countries is committed to the Base
Erosion and Profit Shifting [BEPS] project. India has gradually amended its
domestic law to implement the actions under the BEPS project.
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Chapter 8
Transfer Pricing
Backdrop
The Finance Act 2001 ubstituted section 92 of the Income-tax Act, with new
sections 92 and 92A to 92F; referred to a transfer pricing provisions. These
provisions lay down that income arising from an international transaction
between associated enterprises shall be computed having regard to the
arm's length price. It further provides that the allowance of expense or
interest arising from an international transaction shall also be determined
having regard to the arm's length prices.
Over the years, there have been significant developments in the Indian
Transfer Pricing regulations. Some of the key developments are as follows:
The Finance Act 2012 has introduced significant amendments including inter
alia clarifying the coverage of the term `international transactions', expanding
the scope of transfer pricing provisions, to specified domestic transactions
(Section 92BA) and providing an Advance Pricing Agreement framework
(Section 92CC and Section 92CD).
Further, section 92B extended application of transfer pricing provisions to
transaction entered by an Indian entity with a resident independent third
party.
The Finance Act 2015 increased the threshold limit for the applicability of
specified domestic transaction from INR 5 crores to INR 20 crores with effect
from Financial Year 2015-16. Finance Act 2017 further rationalized
regulations relating to specified domestic transactions by excluding (from the
ambit of transfer pricing) the transactions relating to expenditure in respect of
which payment has been made by the taxpayer to a person referred to in
under section 40A(2)(b).
The Finance Act 2016, in line with Organisation for Economic Co-operation
and Development ( "OECD ") recommendations of the Base Erosion and Profit
Shifting ( "BEPS") Action Plan 13, inserted section 286 for furnishing of
country-by-country report and inserted proviso to section 92D(1) for
maintenance of Master File, with effect from Financial Year 2016-17.
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Transfer Pricing
The CBDT thereafter released the final rules on CbC reporting and Master
File requirements in India (vide notification no. 92/2017 dated 31 October
2017).
The existing penalty provisions have been rationalized along-with insertion of
additional penalties for non-furnishing/ maintenance of country-by-country
report and master file.
Finance Act 2017 has inserted section 92CE with effect from 1 April 2018
where, as a result of primary adjustment to the transfer price, there is an
increase in the total income or reduction in the loss, as the case may be, of
the taxpayer, the excess money which is available with its AE, if not
repatriated to India within the time as may be prescribed, shall be deemed to
be an advance made by the taxpayer to such AE and the interest on such
advance, shall be computed in such manner as may be prescribed.
Also, the time limits for completion of assessment, re-assessment, re-
computation and search assessments have been amended.
Conditions
The provisions are applicable only if all the following conditions are fulfilled:
· There are two or more enterprises.
· They are associated enterprises
· The associated enterprises enter into a transaction.
· The transaction is an international transaction (as per the Section
92B) or specified domestic transaction (as per the Section 92BA).
If all these conditions are fulfilled; then the following may be noted:
(i) The income arising from an international transaction or specified
domestic transaction (if applicable) shall be computed having regard
to the arm's length price.
(ii) The Assessing Officer ( "AO ") / Transfer Pricing Officer ( "TPO") may
determine the arm's length price.
(iii) The AO may compute the total income of the assessee having regard
to the arm's length price.
(iv) Every person entering into an international transaction shall maintain
documents and information as per Rule 10D of the Income tax Rules,
1962.
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Taxation of Non-Residents
(v) Every person entering into an international transaction shall obtain
and furnish a report from an accountant in Form No. 3CEB on or
before 30th November of the relevant assessment year.
Enterprise
Section 92F(iii) of the Act defines an `enterprise'. The definition is very wide
and it attempts to cover almost every type of business or activity that an
entity would normally be engaged in. An entity is an enterprise if it is or has
been or is proposed to be engaged in, specified categories of activities or
business, mentioned below:
(a) any activity relating to the production, storage, supply, distribution,
acquisition or control of articles or goods or know-how, patents,
copyrights, trademarks, licenses, franchises or any other business or
commercial rights of similar nature or any data, documentation,
drawing or specification relating to any patent, invention, model,
design, secret formula or process, of which the other enterprise has
exclusive rights;
(b) any activity relating to the provision of services of any kind in carrying
out any work in pursuance to contract;
(c) investment activity;
(d) activity relating to providing of loans;
(e) business of acquiring, holding, underwriting or dealing with shares,
debenture or other securities of any body corporate.
Thus, the definition covers tangible and intangible assets, services,
investments, loans and shares/securities etc.
The definition of a person includes `permanent establishment of such person'
as defined in Article 5 of the OECD/UN model.
The definition provides that a person would be an enterprise if it carries on
the specified activities/business directly or through one or more of its units or
divisions or subsidiaries.
Associated Enterprises
Under section 92A(1) an enterprises would be regarded as `associated
enterprise' of another enterprise, if:
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Transfer Pricing
(a) it participates, directly or indirectly, or through one or more
intermediaries, in the management or control or capital of the other
enterprise;
or
(b) the persons participating, directly or indirectly or through one or more
intermediaries in its management or control or capital also participate
in the management or control or capital of other enterprise.
Section 92A(2) clarifies that where any of the criteria specified below is
fulfilled, two enterprises shall be deemed to be an associated enterprises:
(a) One enterprise holds, directly or indirectly, shares carrying at least
26% voting power in other enterprises.
(b) Any person or enterprise holds, directly or indirectly, shares carrying
at least 26% voting power in both these enterprises.
(c) A loan advanced by one enterprise to the other enterprise constitutes
at least 51% of the book value of the total assets of the other
enterprises.
(d) One enterprises guarantees at least 10% of the total borrowing of the
other enterprise.
(e) More than half of the board of directors or members of the governing
board or one or more of the executive directors or members of the
governing board of one enterprise is appointed by the other
enterprise.
(f) More than half of the directors or members of the governing boards or
one or more of the executive directors or members of governing
board of each of the two enterprises are appointed by the same
person or persons.
(g) The manufacture or processing of goods or articles of business
carried out by one enterprise is wholly dependent upon the use of
know-how, patents, copyrights, trademarks, licenses, franchises or
any other business or commercial rights of similar nature or any other
business data, documentation, drawings or specification relating to
any patent, invention, model, design, secret formula or process of
which the other enterprises is the owner or has exclusive rights.
(h) Ninety percent or more of the raw materials and consumables
required for the manufacture or processing of goods or articles
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Taxation of Non-Residents
carried out by one enterprise, are supplied by the other enterprise or
by the persons specified by the other enterprise and the prices and
other conditions relating to the supply are influenced by such other
enterprise;
(i) The goods or articles manufactured or processed by one enterprise,
are sold to the other enterprise or to persons specified by the other
enterprise, and the prices and other conditions relating thereto are
influenced by such other enterprise.
(j) Where one enterprise is controlled by an individual, the other
enterprise is also controlled by such individual or his relative or jointly
by such individual and relative of such individual.
(k) Where one enterprise is controlled by a HUF, the other enterprise is
controlled by a member of such HUF or by a relative of a member of
such HUF, or jointly by such member and his relative.
(l) Where one enterprise is a firm, AOP or BOI, the other enterprise
holds at least 10% interest in such firm, AOP or BOI.
(m) There exists between two enterprises, any relationship of mutual
interests, as may be prescribed.
As per section 94A(1), the Central Government may specify a country or
territory as a notified jurisdictional area.
This clause seeks to cover transactions with persons located in notified
jurisdictional areas where there is a lack of effective exchange of information.
The relationship with the "person" is not specified in the section. Accordingly,
a person could be a related or an unrelated person and therefore a person
could also include an AE [i.e. an enterprise covered under section 92A(1)/(2)]
The central government on 1 November 2013 vide notification No. 86/2013
notified Cyprus as a notified jurisdictional area under section 94A of the Act.
This step was taken as Cyprus was not providing the information requested
by the Indian tax authorities under the exchange of information provisions.
However, subsequently, Cypriot and Indian officials agreed to renegotiate the
double taxation agreement and to improve efforts to facilitate effective
exchange of information.
The Union Cabinet vide press release dated 24 August 2016 approved the
new DTAA between India and Cyprus following which Cyprus has been de-
notified as notified jurisdictional area under section 94A with retrospective
effect from 1 November 2013.
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Transfer Pricing
Currently, no country or territory has been specified as a notified
jurisdictional area.
Transaction
Section 92F(v) defines `transaction' to include an arrangement,
understanding or action in concert:
(a) Whether or not such arrangement, understanding or action is formal
or in writing;
or
(b) Whether or not such arrangement, understanding or action is
intended to be enforceable by legal proceedings.
This definition is an inclusive definition and therefore wider in its scope. As
per this definition, a transaction includes any arrangement, understanding or
action, whether formal or informal, whether oral or in writing, whether legally
enforceable or not.
International Transaction
The term "international transaction", has been defined in section 92B of the
Act as a "transaction" between two or more AEs, either or both of which
could be non-residents. The "transactions" covered, inter alia, include
purchase, sale or lease of tangible or intangible property, provision of
services, lending or borrowing of money , cost-sharing arrangement or any
other transaction, which has a bearing on the profits, income, losses or
assets of an enterprise and includes a mutual agreement or arrangement
between two or more AEs for the allocation or apportionment of, or any
contribution to, any cost or expense incurred or to be incurred in connection
with a benefit, service or facility provided or to be provided to any one or
more of such enterprises.
The Finance Act 2012 has inserted explanation to section 92B to clarify the
meaning of term international transactions and intangible property. This
amendment is applicable retrospectively from 1st April, 2002.
Explanation.--For the removal of doubts, it is hereby clarified that--
(i) the expression "international transaction" shall include--
(a) the purchase, sale, transfer, lease or use of tangible property
including building, transportation vehicle, machinery,
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Taxation of Non-Residents
equipment, tools, plant, furniture, commodity or any other
article, product or thing;
(b) the purchase, sale, transfer, lease or use of intangible
property, including the transfer of ownership or the provision
of use of rights regarding land use, copyrights, patents,
trademarks, licences, franchises, customer list, marketing
channel, brand, commercial secret, know-how, industrial
property right, exterior design or practical and new design or
any other business or commercial rights of similar nature;
(c) capital financing, including any type of long-term or short-term
borrowing, lending or guarantee, purchase or sale of
marketable securities or any type of advance, payments or
deferred payment or receivable or any other debt arising
during the course of business;
(d) provision of services, including provision of market research,
market development, marketing management, administration,
technical service, repairs, design, consultation, agency,
scientific research, legal or accounting service;
(e) a transaction of business restructuring or reorganisation,
entered into by an enterprise with an associated enterprise,
irrespective of the fact that it has bearing on the profit,
income, losses or assets of such enterprises at the time of the
transaction or at any future date;
(ii) the expression "intangible property" shall include--
(a) marketing related intangible assets, such as, trademarks,
trade names, brand names, logos;
(b) technology related intangible assets, such as, process
patents, patent applications, technical documentation such as
laboratory notebooks, technical know-how;
(c) artistic related intangible assets, such as, literary works and
copyrights, musical compositions, copyrights, maps,
engravings;
(d) data processing related intangible assets, such as, proprietary
computer software, software copyrights, automated
databases, and integrated circuit masks and masters;
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(e) engineering related intangible assets, such as, industrial
design, product patents, trade secrets, engineering drawing
and schema-tics, blueprints, proprietary documentation;
(f) customer related intangible assets, such as, customer lists,
customer contracts, customer relationship, open purchase
orders;
(g) contract related intangible assets, such as, favourable
supplier, contracts, licence agreements, franchise
agreements, non-compete agreements;
(h) human capital related intangible assets, such as, trained and
organised work force, employment agreements, union
contracts;
(i) location related intangible assets, such as, leasehold interest,
mineral exploitation rights, easements, air rights, water rights;
(j) goodwill related intangible assets, such as, institutional
goodwill, professional practice goodwill, personal goodwill of
professional, celebrity goodwill, general business going
concern value;
(k) methods, programmes, systems, procedures, campaigns,
surveys, studies, forecasts, estimates, customer lists, or
technical data;
(l) any other similar item that derives its value from its
intellectual content rather than its physical attributes.
Besides the above, under section 92B(2), a transaction between an
enterprise and a third party is deemed to be a transaction between
associated enterprises if there is a prior agreement between the enterprise's
associated enterprise and the third party (referred to as "such other person"
in the Income-tax Act); or the terms of relevant transactions are determined,
in substance, between this associated enterprise and the third party (i.e.
such other person).
Finance (No. 2) Act, 2014 has amended sub-section (2) of section 92B of the Act
to clarify that the said third party (i.e., such other person) may or may not be a
non-resident.
Thus, pursuant to this amendment, any transaction between two Indian entities
(one of them being the enterprise under consideration and the other being an
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Taxation of Non-Residents
Indian third party) would be deemed to be an "international transaction", if the
same has been undertaken in pursuance of a prior agreement between the
enterprise's associated enterprise and the Indian third party, or the key terms
and conditions of the transaction are being influenced by the enterprise's
associated enterprise and the Indian third party.
Specified Domestic Transactions
Transfer pricing regulations were extended vide Finance Act 2012 to include
transactions entered into with domestic related parties or by an undertaking
with other undertakings of the same entity for the purposes of section 40A,
Chapter VI-A and section 10AA. Domestic transfer pricing provisions are
applicable from Assessment Year 2013-14 onwards.
All of the transfer pricing compliance requirements apply to specified
domestic transactions, as well.
Section 92BA defined Specified Domestic Transaction (SDT) as under:
"For the purposes of this section and sections 92, 92C, 92D and 92E,
"specified domestic transaction" in case of an assessee means any of the
following transactions, not being an international transaction, namely:--
· any expenditure in respect of which payment has been made or is to be
made to a person referred to in clause (b) of sub-section (2) of section
40A;
· any transaction referred to in section 80A;
· any transfer of goods or services referred to in sub-section (8) of section
80-IA;
· any business transacted between the assessee and other person as
referred to in sub-section (10) of section 80-IA;
· any transaction, referred to in any other section under Chapter VI-A or
section 10AA, to which provisions of sub-section (8) or sub-section (10)
of section 80-IA are applicable; or
· any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee
in the previous year exceeds a sum of Rupees Five crores. This threshold
was increased to Rupees Twenty Crores from 1 April 2015 onwards.
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Transfer Pricing
Finance Act 2017 restricted the scope of the transfer pricing provisions to the
specified domestic transactions by excluding the expenditure in respect of
which payment has been made by the taxpayer to a person referred to in
under section 40A(2)(b) from the scope of `specified domestic transactions'.
This amendment was made effective FY 2016-17.
It may be noted that transfer pricing provisions as discussed in the following
subsections are applicable in case of Specified Domestic Transactions, as
well. However, the same is not discussed with respect to taxation of non-
residents.
Arm's length Price
Section 92 provides that income arising from an international transaction
shall be computed having regards to the arm's length price. Any expense or
outgoing in an international transaction is also to be computed having regard
to arm's length price. Thus in the case of a manufacture, for example, the
provision will apply to exports made to the associated enterprise as also to
imports from the same or any other associated enterprise. The provision is
also applicable in a case where the international transaction comprises only
an outgoing from the Indian assessee.
The section further provides that cost or expenses allocated or apportion
between two or more associated enterprises under a mutual agreement or
arrangement shall be at arm's length price. Examples of such transactions
could be where one associated enterprise carries out centralized functions
which also benefit one or more other associated enterprises, or two or more
associated enterprises agreed to carry out joint activity, such as research
and development, for their mutual benefit.
Further, the section is intended to ensure that profits taxable in India are not
understated (or losses are not overstated) by declaring lower receipts or
higher outgoings than those which would have been declared by persons
entering into similar transactions with unrelated parties in the same or similar
circumstances.
The basic intention underlining the transfer pricing regulations is to prevent
shifting of profits by manipulating prices charged or paid in international
transactions, thereby eroding the country's tax base. The section is not be
applied in cases where the adoption of arm's length price determined under
the regulations would result in decrease in the overall tax incidence in India
in respect of the parties involved in the international transaction.
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Taxation of Non-Residents
In commercial parlance, an arm's length price is the price at which
independent enterprises deal with each other, where the conditions of their
commercial and financial relations ordinarily are determined by market
forces. Section 92F(ii) of the Act, however, defines the arm's length price as
a price which is applied or proposed to be applied in a transaction between
persons other than associated enterprises, in uncontrolled conditions.
The steps involved in the determination of the arm's length price can be
summarized as follows:
(i) identification of the "international transaction/(s) ";
(ii) deciding if the international transactions are closely linked Rule 10A(d);
(iii) Identification of the functions performed, assets employed and risks
assumed by the taxpayer and the associated enterprise being parties to the
transaction/(s);
(iv) deciding the characterisation of the entities who are party to the
transaction based on the analysis of functions performed, assets employed
and risks assumed;
(v) identification / selection of the tested party (for application of resale price
method, cost plus method and transactional net margin method);
(vi) identification of the most appropriate method which will inter-alia include
a) identification of an "uncontrolled transaction" - Rule 10A (a);
- Review of existing internal uncontrolled transaction, if any;
- Determination of available sources of information on external
comparables where such external comparables are needed taking
into account their relative reliability.
- Identification and comparison of specific characteristics embodied
in international transactions and uncontrolled transactions - Rule
10B (2);
b) finding out whether uncontrolled transactions and international
transactions can be compared by reconciling/resolving differences, if any
- Rule 10B (3);
(vii) ascertaining the most appropriate method by applying the tests laid
down - Rule 10C;
(viii) determination of the arm's length price by applying the method chosen -
Rule 10B (1).
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Arm's Length Principle and Most Appropriate
Method
Sections 92 to 92F read together with relevant Rules 10A and 10E of the
Rules stipulate the maintenance of necessary documents to demonstrate the
conduct of the transaction at arm's length price.
Rules 10A to 10E provide for the factors which are to be considered in
selecting the most appropriate method. The major considerations in this
regard have been specified to be the availability, coverage and reliability of
data necessary for application of the method, the extent and reliability of
assumptions required to be made, and the degree of comparability existing
between the international transaction and the uncontrolled transaction. The
rules also lay down in detail the manner in which the methods are to be
applied in determining the arm's length price.
Section 92C(1) of the Act stipulates that the arm's length price is to be
determined by adopting any one of the following methods, which is the most
appropriate method , in connection with the transfer of services or products:
· Comparable Uncontrolled Price Method;
· Resale Price Method;
· Cost Plus Method;
· Profit Split Method;
· Transactional Net Margin Method;
· Such other method as may be prescribed by the CBDT.
Rule 10C(1) lays down the general guidelines in the selection of the most
appropriate method. The Rule states that the method to be selected shall be
the one best suited to the facts and circumstances of each international
transaction and that provides the most reliable measure of the arm's length
price.
Rule 10C(2) lists the specific factors that should be taken into account in the
process of selecting the most appropriate method. These factors are as
under:
(i) nature and class of international transactions;
(ii) class or classes of associated enterprises entering into the transaction
and the functions performed by them taking into account the assets
employed or to be employed and risks assumed by such enterprises;
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Taxation of Non-Residents
(iii) availability, coverage and reliability of data necessary for application of
the method. For instance, data relating to transactions entered into by the
enterprise itself would be more reliable than the data relating to transactions
entered into by third parties;
(iv) the degree of comparability existing between the international transaction
and uncontrolled transaction and between enterprises entering into such
transactions
(v) the extent to which reliable and accurate adjustments can be made to
account for the difference between the transactions.
(vi) the nature, the extent and reliability of assumptions required to be made
in application of a method.
The factors referred above are to be applied cumulatively in selecting the
most appropriate method. The reference therein to the terms `best suited'
and `most reliable measure' indicates that the most appropriate method will
have to be selected after a meticulous appraisal of the facts and
circumstances of the international transaction. Further, the selection of the
most appropriate method shall be for each particular international
transaction. The term `transaction' itself is defined in rule 10A(d) to include a
number of closely linked transactions. Therefore, though the reference is to
apply the most appropriate method to each particular transaction, keeping in
view, the definition of the term `transaction', the most appropriate method
may be chosen for a group of closely linked transactions. Two or more
transactions can be said to be linked when these transactions emanate from
a common source being an order or a contract or an agreement or an
arrangement and the nature, characteristics and terms of these transactions
are substantially flowing from the said common source.
Section 92C(2) provides that the most appropriate method referred to in
section 92C(1) shall be applied for determination of arm's length price, in the
manner as prescribed in Rule 10B. The first proviso to section 92C(2)
provides that where more than one price is determined by the most
appropriate method, the arm's length price shall be taken to be the
arithmetical mean of such prices.
The second proviso to section 92C(2) provides that if the variation between
the arm's length price, so determined and price at which the transaction has
actually been undertaken does not exceed the price at which the
international transaction has been undertaken will be deemed to be the arm's
length price. The variation is to be computed with reference to the actual
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Transfer Pricing
price at which the international transaction has been undertaken. Central
Government has laid down the notification on the tolerance band specifying
the variation between the arm's length price determined under section 92C of the
Act and the price at which the international transaction has actually been
undertaken shall not exceed one percent of the latter in respect of wholesale
trading and three percent of the latter in all other cases. This proviso shall be
applicable for assessment or reassessment proceedings pending before an
Assessing Officer as on 1 October 2009.
A third proviso to this section has been inserted vide Finance (No. 2) Act
2014 stating that "where more than one price is determined by the most
appropriate method, the arm's length price in relation to an international
transaction undertaken on or after the 1st day of April, 2014, shall be
computed in such manner as may be prescribed and accordingly the first and
second proviso shall not apply". With introduction of the new mechanism, the
provisions of first and second proviso (i.e. arithmetic mean and tolerable
range) shall not apply. CBDT vide Notification No. 83/2015 has introduced
the use of the range concept as well as the use of multiple year data.
Uncontrolled transaction
Rule 10A(ab) defines an "Uncontrolled transaction" to mean "a transaction
between enterprises other than Associated Enterprises, whether resident or
non-resident". In other words, these are "transactions between enterprises
that are independent enterprises with respect to each others". An
uncontrolled transaction can, therefore, be between:
· a resident and a non resident; or
· a resident and a resident; or
· a non-resident and a non-resident.
When an uncontrolled transaction has been entered into. It could be said that
it has been contracted in an "uncontrolled condition".
Rule 10B(2), lays down the criteria for comparability between international
transactions and uncontrolled transactions. This process is not quantitative
but qualitative and judgmental in nature.
Comparability has to be judged with reference to the following:
· Distinctive nature of the property transferred or services provided:
· Functions performed taking into account the assets employed or to be
employed:
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Taxation of Non-Residents
· Risks assumed by the respective parties:
· Contractual terms of the transaction:
· Market conditions, etc.:
Market Conditions
The market conditions in which uncontrolled transactions and international
transaction are conducted must be evaluated to judge their comparability.
Some of the parameters that effect market conditions are:
· geographical location and size
· regulatory laws and government orders
· level of competition
· nature of market whether wholesale/retail
· overall economic development
The above analyses are carried out to determine whether the uncontrolled
transactions and international transactions are comparable at all. If there are
no differences, the transactions are comparable straightaway. If there is a
difference, the difference can be adjusted with reasonable accuracy. Then,
the transactions are comparable, subject to adjustments. If however, the
differences cannot be adjusted with reasonable accuracy, the transactions
are to be ignored and the search for comparable transactions would need to
commence all over again.
The analysis of the uncontrolled transactions is made to assess their
comparability with the international transaction. The rules do not specify the
number of transactions to be selected. It would be fair to conclude that a
reasonable number of transactions, as would be justified by the facts and
circumstances of the case, are to be selected and analysed.
After identifying uncontrolled transactions and then determining that the
characteristics of the uncontrolled transactions and international transaction
are comparable, the next step would be to assess whether the differences, if
any, are so material as to vitiate comparability or otherwise.
Rule 10B(3) states that an uncontrolled transaction shall be comparable to
an international transaction if:
(i) none of the differences between transactions or enterprises are likely
to materially affect the price or cost charged or paid in or profit arising
from, such transactions in the open market; or
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(ii) reasonably accurate adjustments can be made to eliminate material
effects of such differences.
Clause (ii) stipulates that where differences in the characteristics of
uncontrolled transactions and international transactions exist and if
reasonably accurate adjustments can be made to eliminate the material
effects of such differences, then the transactions can be used a
comparables.
If the adjustments as specified in Rule 10B(3) cannot be made, the
transactions cannot be taken as a comparable transactions and will have to
be ignored.
It is important to note that the transactions entered into by associated
enterprises with unrelated party (called `internal comparables") would provide
more reliable and accurate data as compared to transactions by and between
third parties (called "external comparables"). OECD's Guidelines on Transfer
Pricing recognizes the fact that external comparables are difficult to obtain
and, also, it may be incomplete and difficult to interpret. Hence, for these
reasons, internal comparable are preferred to external comparables
Rule 10B(4) provides that the data to be used in analyzing the comparability
of an uncontrolled transaction with an international transaction shall be the
data relating to the financial year in which the international transaction has
been entered into. The proviso to Rule 10B(4), further states that data
relating to a period of not more than two years preceding such financial year
may also be considered, if such data reveals facts which could have an
influence on the determination of the price in an international transaction.
Multiple year data
As per the notification issued by CBDT, use of multiple year data (of the
comparable companies for the purpose of comparability analysis) is
applicable only in cases where Resale Price Method (RPM), Cost Plus
Method (CPM) or Transactional Net Margin Method (TNMM) has been
selected as the Most Appropriate Method.
Thus, in cases where CUP, PSM or Other Method are selected as the Most
Appropriate Method, multiple year data of comparable companies cannot be
used.
For each comparable selected (under RPM, CPM or TNMM), the data of the
current year is required to be considered. In cases where such data is not
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available at the time of furnishing the return of income, data pertaining to
upto two preceding financial years may be used.
When using multiple year data, data for each comparable shall be the
weighted average of the selected years.
Further, the notification provides that in the event where current year data
becomes available during the course of the assessment proceedings, then
the same shall be used by the TPO for the purpose of the analysis.
The OECD in its Transfer Pricing Guidelines (2017) in Para 3.76 to 3.79 also
supports the use of multiple year data. It states that in order to obtain a
complete understanding of the facts and circumstances surrounding the
controlled transaction, it generally might be useful to examine data from both
the year under examination and prior years. The analysis of such information
might disclose facts that may have influenced (or should have influenced) the
determination of the transfer price.
Multiple year data can also improve the understanding of long term
arrangements. Multiple year data will also be useful in providing information
about the relevant business and product life cycles of the comparables.
Differences in business or product life cycles may have a material effect on
transfer pricing conditions that needs to be assessed in determining
comparability. The data from earlier years may show whether the
independent enterprise engaged in a comparable transaction was affected by
comparable economic conditions in a comparable manner, or whether
different conditions in an earlier year materially affected its price or profit so
that it should not be used as a comparable. Multiple year data can also
improve the process of selecting third party comparables e.g. by identifying
results that may indicate a significant variance from the underlying
comparability characteristics of the controlled transaction being reviewed, in
some cases leading to the rejection of the comparable, or to detect
anomalies in third party information
Application of range
As per the notification, the `range concept' shall be applicable when:
(a) the Most Appropriate Method is either Comparable Uncontrolled Price
(CUP) Method, RPM, CPM, or TNMM; and (b) there are at least 6 entries in
the dataset. Where these conditions are not fulfilled, `arithmetic mean' shall
continue to apply, as before, along with the tolerance range benefit (1% for
wholesale trading and 3% for others).
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For determination of the quartiles, the margins in the data set (i.e., set of
comparable companies) are required to be arranged in ascending order and
the arm's length range would be data points lying between the 35th and 65th
percentile of the data set.
The section below discusses in brief each of the methods prescribed by the
CBDT.
Different methods as prescribed in the Rules:
Comparable Uncontrolled Price Method (CUP)
The OECD in its Transfer Price Guidelines has observed that:
"This method is particularly good where an independent enterprise sells the
same product or service as is sold between two associated enterprises".
The uncontrolled transactions should reflect goods of similar type, quality
and quantity as those between the associated enterprises, and relate to
transactions taking place at a similar time and stage in the
production/distribution chain, with similar conditions applying.
Generally CUP method is adopted in the following circumstances:
(a) Transfer of goods/ tangibles;
(b) Provisions of services;
(c) Loans, provision of finance etc.
The steps involved in the application of this method are:
(i) Identify the price charged or paid for property transferred or services
provided in comparable uncontrolled transaction or a number of such
transactions;
(ii) Adjust such price to account for the differences if any, between the
international transaction and the comparable uncontrolled transaction
or between enterprises entering into such transaction which could
materially affect the price in the open market;
(iii) The adjusted price is taken to be the Arm's Length Price;
(iv) The arm's length price is compared with the price charged in the
international transaction;
(v) If the price charged in the international transaction is lower than the
arm's length price or the price paid in the international transaction is
higher than the arm's length price then an adjustment is to be made
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to the price charged or paid in the international transaction by the
amount of such variance. The adjustment is required to be made only
in cases where variance exceeds the permissible tolerance limit
prescribed in second proviso to section 92C
Resale Price Method (RPM)
The OECD in its Transfer Pricing Guidelines has observed that:
"It is generally accepted amongst most tax authorities that the Resale Price
method is applicable and preferable where the entity performs basic sales,
marketing and distribution functions (i.e. where there is little or no value
addition by the reseller prior to the reselling of the goods acquired from
related parties). The method is applicable even with differences in products,
as long as the functions performed are similar. It is less useful where goods
are further processed or incorporated into other products".
RPM is applicable in case of:
(a) Distribution of finished products or other goods involving no or little
value addition.
(b) Sale to unrelated party.
The steps involved in the application of this method are:
(i) Identify the international transaction of purchase of property or
services;
(ii) Identify the price at which such property or services are resold or
provided to an unrelated party;
(iii) Deduct the normal gross profit margin derived by the enterprise from
the resale price of such property or services. The normal gross profit
margin is that margin which the enterprise would earn from purchase
of the similar product from an unrelated party and the resale of the
same to another related party;
(iv) Deduct also expenses incurred in connection with the purchase of
goods from the price so arrived;
(v) Adjust the price so computed for the differences between the
uncontrolled transaction and the international transaction. These
differences could be functional and other differences including
differences in accounting practices. Further these differences should
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Transfer Pricing
be such as would materially affect the amount of gross profit margin
in the open market;
(vi) The adjusted price arrived at is the arm's length price for the property
purchased or services obtained;
(vii) Substitute the arm's length price for the price charged in the
international transaction and make adjustments to the income
returned accordingly. The adjustment is required to be made only in
cases where variance exceeds the permissible tolerance limit
prescribed in second proviso to section 92C.
Cost Plus Method (CPM)
The OECD in its Transfer Pricing Guidelines has observed as under:
"This method is particularly useful where semi finished goods are sold
between associated enterprises, where there are long term buy and supply
arrangements, or in the case of the provision of services or contract
manufacturing, particularly where these are of a subsidiary or peripheral
nature".
Typical transactions, where the cost plus method may be adopted are:
(a) provision of services;
(b) joint facility arrangements;
(c) transfer of semi finished goods;
(d) long term buying and selling arrangements.
The steps involved in the application of this method are:
(i) Determine the direct and indirect cost of production in respect of
property transferred or service provided to an associated enterprise;
(ii) Identify a comparable uncontrolled transaction or a series of
transactions with an unrelated party for same or similar property or
service;
(iii) Determine gross profit mark up in the comparable uncontrolled
transaction;
(iv) Adjust the gross profit mark-up to account for functional and other
differences between the international transaction and the comparable
uncontrolled transaction;
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(v) The direct and indirect cost of production in the international
transaction is to be increased by such adjusted gross profit mark-up.
(vi) The resultant figure is the Arm's length price;
(vii) The actual price charged in the international transaction is to be
compared with the arm's length price and adjustment to the income
accordingly.
Profit Split Method (PSM)
The observations of the OECD in its Transfer Pricing Guidelines on this
method are:
"This method aims to determine what division of total profit independent
enterprise would expect in relation to the relevant transactions. The profit
should be split on an economically valid basis that reflects the functions and
risks of each of the parties. In order to apply this method, it is necessary to
identify the total profit arising from the related party transactions and split
that profit between the parties according to their respective contributions".
Typical transactions where the profit split method may be used are
transactions involving:
(a) integrated services provided by more than one enterprise;
(b) transfer of unique intangibles;
(c) multiple inter-related transactions, which cannot be separately
evaluated.
The steps involved in the application of this method are:
(i) determine the combined net profit of all associated enterprise
engaged in the international transactions or;
(ii) evaluate relative contribution made by each of them with regard to:
(a) functions performed;
(b) assets employed;
(c) risks assumed;
(d) reliable external market data indicting how such contribution
would be evaluated.
(iii) Split the combined net profit in proportion to the relative net
contribution.
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(iv) The profit so apportioned is taken to arrive at the arm's length price in
relation to the international transaction.
Transaction Net Margin Method (TNMM)
Typical kinds of transactions where the Transactional Net Margin Method
may be used are:
(a) Provision of Services;
(b) Distribution of finished products where resale price method cannot be
adequately applied;
(c) Transfer of semi finished goods.
The steps involved in the application of this method are:
(i) Identify the net profit margin realized by the enterprise from an
international transaction. The net profit margin may be computed in
relation to costs incurred or sales effected or assets employed or any
other relevant base;
(ii) Identify the net profit margin from comparable uncontrolled
transaction or a number of such transactions having regard to the
same base;
(iii) The net profit margin is adjusted to take into account the differences
if any between the international transaction and the comparable
uncontrolled transaction. The differences should be those that could
materially affect the net profit margin in the open market;
(iv) The adjusted net profit margin is taken into account to arrive at the
arm's length price in relation to the international transaction.
Other Method
The CBDT notified the Other Method vide Notification No. 18/2012 [F. No.
142/5/2012-TPL], dated 23 May 2012, and Rule 10AB was inserted in the
Rules for computation of the arm's length price.
As per the Other Method, it is possible to use "any method" which takes into
account (i) the price which has been charged or paid, or (ii) would have been
charged or paid for the same or similar uncontrolled transactions, with or
between non-AEs, under similar circumstances, considering all the relevant
facts. The various data that may be used for comparability purposes could
be:
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(i) Third party quotations
(ii) Valuation reports
(iii) Tender/Bid documents
(iv) Documents relating to negotiations
(v) Standard rate cards
(vi) Commercial and economic business models
It is relevant to note that the text of Rule 10AB does not describe any
methodology, but only provides an enabling provision to use any method that
has been used or may be used to arrive at the price of a transaction
undertaken between non-AEs. Hence, it provides flexibility to determine the
price in complex transactions where third party comparable prices or
transactions may not exist. The wide coverage of this Rule would provide
flexibility in establishing arm's length prices, particularly in cases where the
application of the five specific methods is not possible due to reasons such
as difficulties in obtaining comparable data. This could be because of the
uniqueness of transactions such as intangibles or business transfers,
transfer of unlisted shares, sale of fixed assets, revenue allocation/splitting,
guarantees provided and received, etc.
However, it would be necessary to analyse and document the reasons for
rejection of all other five methods while selecting the "Other Method" as the
most appropriate method. The OECD Guidelines also permit the use of any
other method and state that the assessee retain the freedom to apply
methods not described in OECD Guidelines to establish prices, provided
those prices satisfy the arm's length principle.
How to determine the Most Appropriate Method
Although it is difficult to prescribe general principles for choice of the most
appropriate method, the following broad categorization may be considered:
(i) CUP method may be used in case of loans, service fee, transfer of
tangibles, sale and purchase of goods, etc.
(ii) Resale price method is most useful in case of marketing operations,
especially in case of distributors not performing significant value
addition to the product.
(iii) Cost Plus method is normally used where raw materials or semi-
finished goods are sold between related parties, where related parties
have concluded joint facility agreements or long-term buy and supply
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arrangements, or where the controlled transaction is the provision of
services.
(iv) Profit split method is normally used in cases where the transactions
are complex and interrelated.
(v) Transactional net margin method could be used in case of
manufacturing operations, sale of raw materials or semi-finished
goods where cost plus method is not the most appropriate method,
and marketing operations of finished products where resale price
method is not the most appropriate method.
(vi) Other method may be used in case of royalties, commodities, transfer
of intangibles and shares, etc.For the purposes of determining the Most
Appropriate Method, the comparability of an international transaction with an
uncontrolled transaction shall be judged with reference to the following
namely:
(a) the specific characteristics of the property transferred or services
provided in either transactions;
(b) the functions performed, taking into account assets employed or to be
employed and the risks assumed, by the respective parties to the
transactions;
(c) the contractual terms (whether or not such terms are formal or in
writing) of the transactions which lay down explicitly or implicitly how
the responsibilities, risks and benefits are to be divided between the
respective parties to be transaction;
(d) conditions prevailing in the markets in which the respective parties to
the transaction operate, including the geographical location and size
of the markets, the laws and government orders in force, costs of
labour and capital in the markets, overall economic development and
level of competition and whether the markets are wholesale or retail.
Secondary Adjustment
The Finance Act 2017 has introduced the concept of secondary adjustment
on transfer pricing adjustments. An assessee is required to make a
secondary adjustment, where the primary adjustment to transfer price has
been made in the following situations:
(i) Suo moto by the assessee in the return of income
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Taxation of Non-Residents
(ii) By the AO during assessment proceedings, and has been accepted by
the assessee
(iii) Adjustment determined by an Advance Pricing Agreement (APA) entered
into by the assessee
(iv) Adjustment made as per the Safe Harbour Rules under Section 92CB or
(v) Adjustment arising as a result of resolution of an assessment by way of
the mutual agreement procedure (MAP) under an agreement entered
into under section 90 or section 90A for avoidance of double taxation.
Further, Section 92CE(3)(v) defines `Secondary adjustment' as an
adjustment in the books of account of the assessee and its associated
enterprise to reflect that the actual allocation of profits between the assessee
and its associated enterprise are consistent with the transfer price
determined as a result of primary adjustment, thereby removing the
imbalance between cash account and actual profit of the assessee.
The additional amount receivable from the associated enterprise as a result
of the primary adjustment should be repatriated by the assessee into India
within a prescribed time limit. If the same is not received by the assessee
within the time-limit, then the primary adjustment will be deemed as an
advance extended to the overseas associated enterprise and a secondary
adjustment in the form of notional interest on the outstanding amount should
also be offered to tax as an income of the assessee.
The above requirements for repatriating the adjustment amount into India
and imputing a notional interest are triggered if the TP or primary adjustment
exceeds rupees one crore.
Recently, the CBDT vide Notification No. 52/2017, F.No.370142/12/2017,
has prescribed the time limit for repatriation of excess money and imputed
per annum interest on excess money, in relation to the secondary adjustment
introduced by the Finance Act, 2017 as per Section 92CE of the Act.
According to the notification, time limit for repatriation of excess money shall
be on or before ninety days from the following:
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(a) Due date of filing of the tax return under Section 139(1), in the below
cases:
· Suo-moto adjustment
· APA agreement
· MAP resolution
· Safe harbour
(b) Date of order of the Assessing Officer or the Appellate Authority, in case
of acceptance of the adjustment.
For the imputed per annum interest income on excess money, the new rule
provides for two options:
(i) For rupee denominated international transaction
The interest rate would be one-year marginal cost of fund lending rate of
State Bank of India ( `SBI') prevalent as on 1st April of the relevant previous
year plus 325 basis points.
(ii) For foreign currency denominated international.
The interest rate would be six month London Interbank Offered Rate
( `LIBOR') as on 30th September ofrelevant previous year plus 300 basis
points.
An explanatory memorandum issued with the above rule mentions that the
provision shall be applicable to primary adjustments exceeding Rs. 1 crore
made in respect of the assessment year 2017-18 and onwards.
Documentation and verification
Section 92D provides that every person who has undertaken an international
transaction shall keep and maintain such information and documents as may
be specified by rules made by the Board. The Board may also specify by
rules the period for which the information and documents are required to be
retained. The documentation required to be made has been prescribed under
Rule 10D.
The proviso to section 92D(1) provides that the person, being a constituent
entity of an international group, shall also keep and maintain such
information and document in respect of an international group as may be
prescribed.
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Taxation of Non-Residents
Further, the person referred to in the proviso to sub-section (1) shall furnish
the information and document referred to in the said proviso to the authority
prescribed under sub-section (1) of section 286, in such manner, on or
before the date, as may be prescribed.
Every person who has entered into an international transaction shall keep
and maintain the following information and documents:
Enterprise wise documents
A description of the ownership structure of the assessee enterprise with
details of shares or other ownership interest held therein by other enterprises
[clause (a), Rule 10D(1)].
A profile of the multinational group of which the assessee enterprise is a part
alongwith the name, address, legal status and country of tax residence of
each of the enterprises comprised in the group with whom international
transactions, as the case may be, have been entered into by the assessee,
and ownership linkages among them [clause (b), Rule 10D(1)]
A broad description of the business of the assessee and the industry in which
the assessee operates, and of the business of the associated enterprises
with whom the assessee has transacted [clause (c), Rule 10D(1)].
Transaction specific documents
The nature and terms (including prices) of international transactions entered
into with each associated enterprise, details of property transferred or
services provided and the quantum and the value of each such transaction or
class of such transaction [clause (d), Rule 10D(1)].
A description of the functions performed, risks assumed and assets
employed or to be employed by the assessee and by the associated
enterprises involved in the international transaction [clause (e), Rule 10D(1)].
A record of the economic and market analyses, forecasts, budgets or any
other financial estimates prepared by the assessee for the business as a
whole and for each division or product separately, which may have a bearing
on the international transactions entered into by the assessee [clause (f),
Rule 10D(1)].
A record of uncontrolled transactions taken into account for analyzing their
comparability with the international transactions entered into, including a
record of the nature, terms and conditions relating to any uncontrolled
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transaction with third parties which may be of relevance to the pricing of the
international transactions [clause (g), Rule 10D(1)].
A record of the analysis performed to evaluate comparability of uncontrolled
transactions with the relevant international transaction [clause (h), Rule 10D(1)].
Computation related documents
A description of the methods considered for determining the arm's length
price in relation to each international transactions or class of transaction, the
method selected as the most appropriate method along with explanations as
to why such method was so selected, and how such method was applied in
each case [clause (i), Rule 10D(1)]
A record of the actual working carried out for determining the arm's length
price, including details of the comparable data and financial information used
in applying the most appropriate method, and adjustments, if any, which
were made to account for differences between the international transaction
and the comparable uncontrolled transactions, or between the enterprises
entering into such transactions [clause (j), Rule 10D(1)].
The assumptions, policies and price negotiations, if any, which have critically
affected the determination of the arm's length price [clause (k), Rule 10D(1)].
Details of the adjustments, if any, made to transfer prices to align them with
arm's length price determined under these rules and consequent adjustment
made to the total income for tax purposes [clause (l), Rule 10D(1)].
Any other information, data or document, including information or data
relating to the associated enterprise, which may be relevant for determination
of the arm's length price [clause (m), Rule 10D(1)]
Rule 10D(3) provides that the information compiled, kept and maintained by
the enterprise, under clauses (a) to (m) of sub rule (1), shall, to the extent
possible, be further supported by `authentic" documents that provide
additional information of the nature specified therein.
The additional information that Rule 10D(3) requires, is as under:
(a) Official publications, reports, studies and databases from the
Government of the country of residence of the associated enterprise,
or of any other country;
(b) Reports of market research studies carried out and technical
publications brought out by institutions of national or international
repute;
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(c) Price publications including stock exchange and commodity market
quotations;
(d) Published accounts and financial statements relating to the business
affairs of the associated enterprises;
(e) Agreements and contracts entered into with associated enterprises or
with unrelated enterprises in respect of transactions similar to the
international transactions;
(f) Letters and other correspondence documenting any terms negotiated
between the enterprise and the associated enterprise;
(g) Documents normally issued in connection with various transactions
under the accounting practices followed.
Rule 10D(4) provides that the data, information and documents on the basis
of which the arm's length price has been determined should, as far as
possible, be contemporaneous. At any rate, they should exist latest by the
specified date, referred to in clause (iv) of section 92F.
Rule 10D(2) provides that nothing contained in sub-rule (1) shall apply in a
case where the aggregate value, as recorded in the books of account of
international transactions entered into by the assessee does not exceed one
crore rupees:
However, the assessee shall be required to substantiate on the basis of
material available with him, that income arising from international
transactions entered into by him has been computed in accordance with
section 92 and submit report under section 92E.
The information and documents specified in sub rules (1) and (2) shall be
kept and maintained for a period of eight years from the end of the relevant
assessment year.
Country by Country ("CbC") Reporting and Master
file ("MF")
Under Action 13 of Base Erosion & Profit Shifting ( "BEPS") Action Plan,
Organisation for Economic Co-operation and Development ( "OECD ")
adopted a three-tiered approach regarding documentation; and suggested
significant changes to the compliance and reporting of global information for
risk assessment and for Transfer Pricing ( "TP") purposes. The said approach
includes:
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a) Preparation of a Country-by-Country report to provide a global financial
snapshot of a Multinational Enterprise ( "MNE ");
b) Maintenance of a master file to provide a high-level view of a group's
business operations and global TP policies, and
c) Maintenance of a local file that will provide an entity level and transaction
level TP analysis for each jurisdiction.
In keeping with commitment to implement the recommendations of the BEPS
Action 13, India introduced CbC reporting and Master File regime in the Act
through Finance Act 2016.
The core elements of the CbC reporting requirement and the concept of
Master File were introduced [Section 286 and proviso to section 92D(1)] in
the Act, while the detailed rules were awaited.
To take the initiative forward, the CBDT on 6 October 2017 released
(for public consultation) draft rules in respect of CbC reporting and
Master File related requirements in India. The draft rules provide
detailed instructions. Thereafter, on 31 October 2017, the CBDT
released the final rules on CbC reporting and Master File requirements
in India vide notification no. 92/2017.
CbC Reporting
The CbC Report requires aggregate tax jurisdiction-wide information relating
to the global allocation of the income, the taxes paid, and certain indicators
of the location of economic activity among tax jurisdictions in which the group
operates. The report also requires listing of all the Constituent Entities for
which financial information is reported (including the tax jurisdiction of
incorporation, where different from the tax jurisdiction of residence), as well
as the nature of the main business activities carried out by that Constituent
Entity.
Section 286(1) provides that every constituent entity resident in India
of an international group, the parent entity of which is not resident in
India, notify the prescribed income-tax authority in the form and
manner, on or before such date, as may be prescribed [Refer Rule
10DB below] --
a. whether it is the alternate reporting entity; or
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b. the details of the parent entity or the alternate reporting entity, if
any, of the international group, and the country or territory of which
the said entities are resident.
Section 286(2) provides that every parent entity or alternate reporting
entity (designated by parent) of an international group, that is resident
in India, shall for every reporting accounting year, furnish a report in
the form [Form No.3CEAD] and manner as may be prescribed, to the
prescribed authority, within a period of twelve months from the end of
the said reporting accounting year.
Further, section 286(4) provide that a constituent entity of an
international group, resident in India, other than the entity referred to in
sub-section (2), shall furnish the report referred to in the said sub-
section, in respect of the international group for a reporting accounting
year within the period as may be prescribed, if the parent entity is
resident of a country or territory,--
· where the parent entity is not obligated to file the report of the
nature referred to in sub-section (2);
· with which India does not have an agreement providing for
exchange of the report of the nature referred to in sub-section (2);
or
· there has been a systemic failure of the country or territory and the
said failure has been intimated by the prescribed authority to such
constituent entity:
As per Rule 10DB of the Rules CbC reporting will be applicable to an
international group having consolidated revenues exceeding INR 5,500
crores [Rule 10DB(6)].
Further, MNE's not headquartered in India, having group companies
resident in India will be required to notify [in Form no.3CEAC] Indian
authorities of the details of their parent entity/alternate reporting entity
and its jurisdiction [Rule 10DB(1)]. The said intimation shall be made at
least two months prior to the due date for furnishing of report as
specified under sub-section (2) of section 286 [Rule 10DB(2)].
The due date for submission of CbC report by an Indian constituent
entity of an international group required to file the CbC report in India
under Section 286(4) will be the due date as specified in Section
286(2) i.e. due date of filing of return of income in India. The due date
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Transfer Pricing
was later revised for FY 2016-17 to March 31, 2018 vide Circular No.
26/2017 issued by CBDT.
Subsequently, the Finance Act, 2018 retrospectively made amendment
to Section 286(2) that the due date for filing the CBC report in India
under section 286(2) be within a period of 12 months from the end of
the reporting accounting year (as against the return filing due date).
Additionally, with respect to Section 286(4), the Finance Bill 2018 also
proposed that the due date of filing of CbC report under Section 286(4)
would be the due date specified in Section 286(2) i.e. 12 months from
the end of the reporting accounting year.
Thereafter, CBDT issued a press release dated 23 March 2018
providing a clarification that the due date of 31 March 2018 applies for
furnishing of the CbC report under section 286(2) only (i.e. for parent
entities resident in India). Thus, CBDT has clarified that the said due
date would not be applicable to filing of CbC report in India under
section 286(4) (i.e. for multinational group's having non-resident parent
entities). The new due date is proposed to be prescribed.
The information requirements of the CbC report (as per existing Indian
regulations) are similar to those prescribed by the OECD BEPS Action
Plan 13. There are penalties prescribed for non-compliance. Refer to
the `Penalties ' section below.
Master file
The memorandum to the Finance Bill 2016 introduced the concept of
Master File, whereby entities being constituent of an international
group shall be required to maintain and furnish the Master File.
Thereafter, final rules on Master File requirements in India were
prescribed vide notification no. 92/2017 dated 31 October 2017.
Rule 10DA of the Rules is newly inserted prescribing Information and
documents to be kept and maintained under proviso to sub-section (1)
of section 92D and to be furnished in terms of sub-section (4) of
section 92D.
As per the rules, if the following mentioned conditions are fulfilled then
the constituent entity would have to file the complete master file in
Form 3CEAA (Part A and B):
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· Consolidated group revenue exceeded INR 500 crores in
accounting year as followed by foreign parent; and
· Indian entity's related party transactions (in same accounting year)
exceeded INR 50 crores or, intangible related transaction
exceeded INR 10 crores.
However, the rules require that every constituent entity (resident and
non-resident) of the MNE (which has entered into international
transactions) file Part A of the master file in India; irrespective of
meeting the aforementioned threshold.
As per the rules [Rule 10DA(1)] below is the list of information and
documents to be kept and maintain relating to the international group.
The contents of the Master File (as per existing Indian regulations) are
largely aligned to those prescribed by the OECD, with few additional
information.
(a) a list of all entities of the international group along with their
addresses;
(b) a chart depicting the legal status of the constituent entity and
ownership structure of the entire international group;
(c) a description of the business of international group during the
accounting year including,-
(I) the nature of the business or businesses;
(II) the important drivers of profits of such business or businesses;
(III) a description of the supply chain for the five largest products or
services of the international group in terms of revenue and any other
products including services amounting to more than five per cent. of
consolidated group revenue;
(IV) a list and brief description of important service arrangements made
among members of the international group, other than those for
research and development services;
(V) a description of the capabilities of the main service providers within
the international group;
(VI) details about the transfer pricing policies for allocating service
costs and determining prices to be paid for intra-group services;
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(VII) a list and description of the major geographical markets for the
products and services offered by the international group;
(VIII) a description of the functions performed, assets employed and
risks assumed by the constituent entities of the international group that
contribute at least ten per cent. of the revenues or assets or profits of
such group; and
(IX) a description of the important business restructuring transactions,
acquisitions and divestments;
(d) a description of the overall strategy of the international group for
the development, ownership and exploitation of intangible property,
including location of principal research and development facilities and
their management;
(e) a list of all entities of the international group engaged in
development and management of intangible property along with their
addresses;
(f) a list of all the important intangible property or groups of intangible
property owned by the international group along with the names and
addresses of the group entities that legally own such intangible
property;
(g) a list and brief description of important agreements among
members of the international group related to intangible property,
including cost contribution arrangements, principal research service
agreements and license agreements;
(h) a detailed description of the transfer pricing policies of the
international group related to research and development and intangible
property;
(i) a description of important transfers of interest in intangible property,
if any, among entities of the international group, including the name
and address of the selling and buying entities and the compensation
paid for such transfers;
(j) a detailed description of the financing arrangements of the
international group, including the names and addresses of the top ten
unrelated lenders;
(k) a list of group entities that provide central financing functions,
including their place of operation and of effective management;
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(l) a detailed description of the transfer pricing policies of the
international group related to financing arrangements among group
entities;
(m) a copy of the annual consolidated financial statement of the
international group; and
(n) a list and brief description of the existing unilateral advance pricing
agreements and other tax rulings in respect of the international group
for allocation of income among countries.
The above information (in Form No.3CEAA) shall be furnished on or
before the due date for furnishing the return of income as specified in
sub-section (1) of section 139. However, for the accounting year 2016-
17 was to be furnished at any time on or before the 31st day of March,
2018.
Further, as per Rule 10DA(4) of the Rules in case there are more than
one constituent entities in India which is required to file master file, the
group can designate one entity to file the master file on behalf of all the
Indian constituent entity(s).
The constituent entity shall intimate (regarding its designation on
behalf of the group) at least 30 days before the due date of filing of the
report in Form No.3CEAB.
There are penalties prescribed for non-compliance. Refer to the
`Penalties ' section below.
Local file
The Indian Transfer P1ricing regulations under section 92D of the Act read
with Rule 10D of the Rules require every person who has entered into an
international transaction to maintain prescribed information / documents for
substantiating the arm's length price of its transactions with the related
parties, these regulations persist.
Currently, no changes have been proposed to the existing documentation
requirements to align with the requirements of the Local File as per BEPS
Action Plan 13. Thus, the existing Indian regulations on local transfer pricing
documentation specified in Section 92D of the Act read with Rule 10D of the
Rules continue to persist.
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Transfer Pricing
Report from an Accountant
Rule 10E requires to report from an Accountant in Form No. 3CEB by every
person who has entered into an international transaction during a previous
year under section 92E on or before 30th November.
Online filing of Form 3CEB
From AY 2012-13, CBDT has made it mandatory for enterprises to file their
Form 3CEB online, with a view to make the process faster and less error
prone.
Power of Assessing Officer
The primary onus is on the tax payer to determine an arm's length price in
accordance with the rules and to substantiate the same with the prescribed
documentation. Where such onus is discharged by the assessee and the
data used for determining the arm's length price is reliable and correct, there
can be no intervention by the Assessing Officer. This is made clear by sub
section (3) of section 92C which provides that the Assessing Officer may
intervene only if he, on the basis of material or information or document in his
possession, is of the opinion that the price charged in the international
transaction has not been determined in accordance with sub-sections (1) &
(2) or information and documents relating to the international transaction
have not been kept and maintained by the assessee in accordance with the
provisions contained in section 92D(1) and the rules made thereunder; or the
information or data used in the computation of arm's length price is not
reliable or correct; or the assessee has failed to furnish within the specified
time in information or document which he was required to furnish by a notice
issued under sub-section (3) of section 92D. If any one of such
circumstances exists, the Assessing Officer may reject the price adopted by
the assessee and determined the arm's length price in accordance with the
same rules. However, an opportunity has to be given to the assessee before
determining such price. Thereafter, as provided in section 92C(4) the
Assessing Officer may compute the total income on the basis of the arm's
length price so determined by him.
The first proviso to section 92C(4) recognizes the commercial reality and
provides that even when a transfer pricing adjustment is made, the amount
represented by the adjustment would not actually have been received in
India or would have actually gone out of the country. Therefore, it has been
provided that no deductions under section 10A or 10B or under chapter VIA
shall be allowed in respect of the amount of adjustment.
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Taxation of Non-Residents
Section 92CA(2A) inserted by Finance Act 2011 with effect from 1 June 2011
provides that where an international transaction not referred to the Transfer
Pricing Officer by the Assessing Officer comes to the notice of the Transfer
Pricing Officer, then such international transaction can be examined by the
Transfer Pricing Officer as if it was referred to him. Further, section
92CA(2B) inserted by Finance Act 2012 with retrospective effect from 1 June
2002 provides that where an assessee has not furnished an accountant's
report under section 92E and an international transaction comes to the notice
of the Transfer Pricing Officer, then such international transaction can be
examined by the Transfer Pricing Officer as if it was referred to him.
The CBDT on 10 March 2016 issued the revised procedural guidelines for
scrutiny of TP cases i.e. Instruction No. 3/ 2016. It provides that TP cases
would be referred to the TPO only if it meets the criteria for compulsory
scrutiny. Further, cases which are selected for compulsory scrutiny on non
TP parameters, would be referred to the TPO only if the AO finds any
additional TP transaction during the course of assessment. Such cases
would be referred by the AO to the TPO only after giving an opportunity of
being heard to the taxpayer. The AO would also be required to record his
reasons and seek necessary approvals in all the cases before referring to the
TPO. The guidelines categorically restrict the AO to determine the ALP of
international transactions where cases are not referred to the TPO.
Additionally, the guidelines provide mandatory TP scrutiny of the cases
where TP adjustment in earlier years has been set aside by the Income Tax
Appellate Tribunal ( "ITAT") or by the HC or by the SC either fully or partly.
The second proviso to section 92C(4) refers to a case where the amount
involved in the international transaction has already been remitted abroad
after deducting tax at source and subsequently, in the assessment of the
resident payer, an adjustment is made to the transfer price involved and,
thereby, the expenditure represented by the amount so remitted is partly
disallowed. Under the Act, a non-resident in receipt of income from which tax
has been deducted at source has the option of filing a return of income in
respect of the relevant income in such case. A non-resident could claim a
refund or part of the tax deducted at source, on the ground that an arm's
length price has been adopted by the Assessing Officer in the case of the
resident and the same price should be considered in determining the taxable
income of the non-resident. However, the adoption of arm's length price in
such cases would not alter the commercial reality that the entire amount
claimed earlier would have actually been received by the entity located
abroad. It has therefore been made clear in the second proviso that income
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of one associated enterprise shall not be recomputed by reason of an
adjustment made in the case of other associated enterprise on determination
of arm's length price by the Assessing Officer.
Reference to Transfer Pricing Officer
Section 92CA provides that if any person has entered into an international
transaction and the Assessing Officer considers it necessary or expedient so
to do, may, with the previous approval of the Commissioner refer the
computation of the arm's length price in relation to the said international
transaction to the Transfer Pricing Officer.
On a reference by the Assessing Officer, the Transfer Pricing Officer shall
serve a notice to the assessee requiring him to produce or cause to be
produced, on a day to be specified, any evidence on which assessee would
like to rely in support of the computation made by him of the arm's length
price in relation to the international transaction.
The Finance Act 2011 has inserted sub-section (2A) in section 92CA which
provides that where any other international transaction other than an
international transaction referred under sub-section (1), comes to the notice
of the Transfer Pricing Officer during the course of the proceedings before
him, the provisions of this Chapter shall apply as if such other international
transaction is an international transaction referred to him under sub-section
(1).
The Finance Act 2012 has inserted sub-section (2B) in section 92CA so as to
capture international transactions going unnoticed due to non-furnishing of
the report under section 92E. Sub-section (2B) provides as below:
" Where in respect of an international transaction, the assessee has not
furnished the report under section 92E and such transaction comes to the
notice of the Transfer Pricing Officer during the course of the proceeding
before him, the provisions of this Chapter shall apply as if such transaction is
an international transaction referred to him under sub-section (1) "
However the above amendment does not empower the AO to assess or
reassess under section 147 or pass an order enhancing the assessment or
reducing the refund or otherwise increasing the liability under section 154 for
any assessment year proceedings for which have been completed before
1.07.2012.
On the date specified or as soon thereafter, after hearing such evidence as
the assessee may produce and after considering such evidence as the
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Transfer Pricing Officer may require on any specified points and after taking
all relevant materials he has gathered, the Transfer Pricing Officer shall by
order in writing determine the arm's length price in relation to international
transaction and send a copy of his order to the Assessing Officer and to the
assessee.
On receipt of the aforesaid order, the Assessing Officer shall proceed to
compute the total income of the assessee having regard to the arm's length
price determined by the Transfer Pricing Officer.
The Transfer Pricing Officer may amend any order passed by him, with a
view to rectify any mistake apparent from the record under section 154 of the
Act.
After rectification, the Transfer Pricing Officer shall send a copy of his order
to the Assessing Officer, who shall thereafter proceed to amend the order of
assessment in conformity with such order of the Transfer Pricing Officer.
Notifications issued by CBDT for referring the cases to TPO:
Erstwhile, selection process for the audit was based on the value of
international transactions. A threshold limit of INR 5 crore in international
transactions, in aggregate, was specified which was subsequently raised to
INR 15 crore from tax year ended 31 March 2006 by the CBDT.
The CBDT, vide instruction 6/2014 dated 2 September 2014, announced a
risk based approach for manual selection of TP cases for compulsory
scrutiny / audit.
CBDT, vide instruction no. 8/2015 dated 31 August 2015, announced criteria
for the manual selection of tax and transfer pricing cases for compulsory
scrutiny during FY 2015-16.
On 16 October 2015, the CBDT, vide instruction no. 15/2015, provided a
detailed scrutiny procedure to be followed by the AO before referring any
case to the TPO.
Presently, the CBDT on 10 March 2016 issued the revised procedural
guidelines for scrutiny of TP cases i.e. Instruction No. 3/ 2016. It provides
that TP cases would be referred to the TPO only if it meets the criteria for
compulsory scrutiny. Further, cases which are selected for compulsory
scrutiny on nonTP parameters, would be referred to the TPO only if the AO
finds any additional TP transaction during the course of assessment. Such
cases would be referred by the AO to the TPO only after giving an
opportunity of being heard to the taxpayer. The AO would also be required to
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record his reasons and seek necessary approvals in all the cases before
referring to the TPO. The guidelines categorically restrict the AO to
determine the ALP of international transactions where cases are not referred
to the TPO. Additionally, the guidelines provide mandatory TP scrutiny of the
cases where TP adjustment in earlier years has been set aside by the ITAT
or by the HC or by the SC either fully or partly.
Time limit for completion of assessment:
The Finance Act 2016 has extended the limitation period of TP audits beyond
the limitation period to allow the TPO at least 60 days for passing the TP
order after excluding the period for which:
- the assessment proceedings before the TPO are stayed by any court;
or
- the information is sought from any other country under the exchange
of information provisions.
Such amendment is applicable from 1 June 2016.
The time limit for AOs/TPOs to pass the order is 48 months from the end of
the tax year (section 153(1)). The Finance Act 2016 reduced such time limit
to 45 months from the end of the tax year.
The Finance Act 2017, has further reduced the said time limit to 42 months
from the end of the tax year for AY 2018-19 and 36 months from the end of
the tax year for AY 2019-20 onwards.
Penalties
For concealment
Section 271(1)(c)(iii) provides that if Assessing Officer or Commissioner
(Appeals) dissatisfied that any person has canceled the particulars of his
income or furnished inaccurate particulars of such income, he may direct that
such person shall pay by way of penalty, in addition to any tax payable by
him, a sum which shall not be less than, but which shall not exceed three
times the amount of tax sought to be evaded by reason of the concealment of
particulars of his income or the furnishing of inaccurate particulars of such
income. The said section has been omitted by Finance Act 2016. Section
271(1)(c) shall not apply to and in relation to any assessment for the
assessment year commencing on or after the 1st day of April, 2017 and
subsequent assessment years and penalty be levied under the newly
inserted section 270A with effect from 1st April, 2017.
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Under reporting and misreporting of income
Section 271(1)(c) has been deleted by the Finance Act 2016 and in its place
section 270A has been inserted which is applicable from 1 April 2017. It
seeks to levy penalty on under reporting of income.
Section 270A inserted vide Finance Act 2016 prescribes penalty for under-
reporting of income and misreporting of income. Section 270A (7) of the Act
prescribes a penalty of 50% of the amount of tax payable on the under-
reported income. Further, Section 270A(6)(d) provides that the underreported
income for the purpose of Section 270A shall not include the amount of
under-reported income represented by any addition made in conformity with
the arm's length price determined by the Transfer Pricing Officer, where the
assessee had a) maintained information and documents as prescribed under
section 92D, b) declared the international transaction under Chapter X, and,
c) disclosed all the material facts relating to the transaction.
Section 270A(8) of the Act provides that where under-reported income is in
consequence of any misreporting thereof by any person, the penalty shall be
equal to two hundred per cent of the amount of tax payable on under-
reported income. Section 270A(9)(f) of the Act provides that the case of
misreporting of income shall be failure to report any international transaction
or any transaction deemed to be an international transaction, to which the
provisions of Chapter X apply.
Failure to keep and maintain information & document
Section 271AA has been substituted by a new section with effect from 1 July
2012. It provides that without prejudice to the provisions of section 270A or
section 271 or Section 271BA, if any person in respect of an international
transaction:
(a) fails to maintain prescribed documents and information as required by
sub section (1) or sub section (2) of section 92D;
(b) fails to report any such transaction which is required to be reported; or
(c) maintains or furnishes any incorrect information or documents
the Assessing Officer or Commissioner (Appeals) may direct that such
person shall pay by way of penalty, a sum equal to 2% of the value of each
international transaction entered into by such person. Further, Section
271AA(2) inserted vide Finance Act 2016 prescribes penalty for failure to
furnish master file by prescribed date as INR 5,00,000.
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Failure to furnish report
Section 271BA provides that if any person fails to furnish a report from an
Accountant as required by section 92E, the Assessing Officer may direct that
such person shall take by way of penalty of INR 100,000.
Failure to furnish information and document
Section 271G provides that if any person who has entered into an
international transaction fails to furnish any such information or document as
required by sub section (3) of section 92D, the Assessing Officer or the
Commissioner (Appeals) may direct that such person shall pay, by way of
penalty, a sum equal to two percent, of the value of the international
transaction for each such failure.
The power to levy this penalty has also been extended now to the Transfer
Pricing Officer.
Furnishing incorrect information in reports or
certificates
Finance Act 2017 introduced section 271J, provides for levy of penalty of INR
10,000 on accountants, merchant bankers and registered valuers in case of
incorrect information being furnished by them in the reports
Failure to furnish information or documents under
Section 286
Finance Act 2016 introduced Section 286 which requires parent entity or the
alternative reporting entity, resident in India, to furnish a prescribed report on
or before the prescribed due date.
Section 271GB of the Act provides for penalty for failure to furnish the
documents prescribed under Section 286. The penalty prescribed under
Section 271GB are as follows:
Nature of penalty Penalty (INR)
Failure to furnish the prescribed
documents required to be
maintained by the India parent
entity of the international group:
a. Where period of failure is equal 5,000 per day
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Nature of penalty Penalty (INR)
to or less than 1 month
b. Where period of failure is
15,000 per day
greater than 1 month
c. Continuing default after service 50,000 per day
of penalty order
Furnishing of inaccurate 5,00,000
particulars
(subject to certain conditions)
Failure to produce the information INR 5,000 per day upto service of
and documents within 30 days penalty order
(extendable by maximum 30 days) INR 50,000 per day for default
beyond date of service of penalty
order
Filing of appeal against the order of TPO
The income tax act 1961 permits the assessee to file an appeal with the
Commissioner of Income tax (appeals) under the regular appellate
procedure. However by the Finance Act 2009, the assessee has been given
an option to approach the dispute resolution panel (DRP) in cases where an
addition has been proposed by the TPO.
The Finance Act 2009 inserted a new section 144C in the income tax act
providing an alternate mechanism to resolve tax disputes of the foreign
companies expeditiously.
The new scheme provides that whenever an AO proposes to make variations
in the income or loss returned by a foreign company, he shall forward a draft
of the proposed order to any person in whose case the variation arises as a
consequence of the order of the TPO. Any person, in whose case the
variation arises as a consequence of the order of the TPO, on receipt of the
draft order shall either accept the variation made by the assessing officer or
file objections to variations with the DRP within 30 days of the receipt of the
draft order.
The DRP shall issue directions within 9 months from the end of the month in
which the draft order is forwarded to the assessee.
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Thereafter the AO is obliged to pass the final assessment order within 30
days from the end of the month in which such directions are received.
Against the order of the AO, the assessee can file appeal before Income Tax
Appellate Tribunal.
The scheme of DRP is available to a foreign company and to any person who
has entered into an international transaction and whose assessment has
been referred to TPO.
In pursuance of the above provisions the CBDT has issued Income Tax
(Dispute Resolution Panel) Rules 2009 vide notification no. 84/2009 dated
20.11.2009. The rules inter alia contain the procedure for filing objections,
hearing of objections, power to call for or permit additional evidence, issue of
directions, passing of assessment order, rectification of mistake and appeal
against the assessment order.
The scheme did not provide for filing appeal by the tax department against
the order passed in pursuance of the directions issued by the DRP. However
the Finance Act 2012 had amended section 253 of the Act to provide that the
CIT may direct the AO to file an appeal against final order passed by AO
incorporating the directions of DRP, if the commissioner objects to any of the
directions issued by the DRP. The appeal can be filed within 60 days of the
date on which the final order is passed by the AO. However, the same stands
omitted as of now vide Finance Act, 2016 w.e.f. 1-6-2016 i.e., the tax
department cannot file an appeal before ITAT against the order passed in
pursuance of the directions issued by the DRP.
Alternatively, if the taxpayer does not file an objection, it may file an appeal
against the final assessment order passed by the AO, which also
incorporates the order of the TPO, within 30 days of the receipt of the
assessment order.
If the taxpayer is aggrieved by the order passed by the AO pursuant to the
directions issued by the DRP or by the order passed by the CIT (A), the
taxpayer may directly approach the ITAT. DRP is only an alternative
mechanism, and the taxpayer has an option to either file its objections with
DRP or file a regular appeal with the CIT(A).
Provisions in the Act relating to reference to
dispute resolution panel
Under section 144C (1), the AO shall forward a draft of the proposed order of
assessment to the eligible assessee if he proposes to make, on or after the
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1st day of October, 2009, any variation in the income or loss returned which
is prejudicial to the interest of such assessee.
Sub section (2) provides the option to the eligible assessee to either accept
the draft order or file his objections against the draft order before the DRP.
The exercise of option or filing of objections must be completed within 30
days from the date of the receipt of the draft order by him.
In the event of the assessee intimating to the AO the acceptance of the
variation; or if no objections are received from the assessee within the period
mentioned above, the AO shall pass the final assessment order
notwithstanding the provisions relating to time period of passing the order
contained in section 153 or section 153B of the Act. [Section 144C(3)&(4)]
Where the assessee has filed objections with the DRP, the Dispute
Resolution Panel shall, issue such directions, as it thinks fit, for the guidance
of the AO to enable him to complete the assessment. [Section 144C(5)]
Section 144C(6) provides that while issuing the directions, the DRP shall
consider the following, namely:--
(a) draft order;
(b) objections filed by the assessee;
(c) evidence furnished by the assessee;
(d) report, if any, of the Assessing Officer, Valuation Officer or Transfer
Pricing Officer or any other authority;
(e) records relating to the draft order;
(f) evidence collected by, or caused to be collected by, it; and
(g) result of any enquiry made by, or caused to be made by, it.
The DRP may, before issuing any directions make or cause to be made such
further enquiry, as it thinks fit. [Section 144C(7)]
The DRP may confirm, reduce or enhance the variations proposed in the
draft order so, however, that it shall not set aside any proposed variation or
issue any direction under sub-section (5) for further enquiry and passing of
the assessment order. [Section 144C(8)]
The Finance Act 2012 has added a clarificatory explanation to sub-section
(8) providing that the power of the DRP to enhance the variation shall include
and shall be deemed always to have included the power to consider any
matter arising out of the assessment proceedings relating to the draft order,
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notwithstanding that such matter was raised or not by the eligible assessee.
The explanation is effective retrospectively from 1.04.2009
If the members of the DRP differ in opinion on any point, the point shall be
decided according to the opinion of the majority of the members. [Section
144C(9)]
Every direction issued by the DRP shall be binding on the AO. [Section
144C(10)]
In a case where the proposed directions by the DRP are prejudicial to the
interest of the assessee or the interest of the revenue, the directions cannot
be issued without giving an opportunity of being heard to the assessee or to
the revenue as the case may be. [Section 144C(11)]
Sub section (12) has set the time limit for the issue of directions to nine
months from the end of the month in which the draft order is forwarded to the
eligible assessee.
Upon receipt of the directions, the AO shall, in conformity with the directions,
complete, the assessment without providing any further opportunity of being
heard to the assessee, within one month from the end of the month in which
such direction is received. This is notwithstanding anything to the contrary
contained in section 153 or section 153B. [Section 144C(13)]
Under sub- section (14) of section 144C, the Board may make rules for the
purposes of the efficient functioning of the DRP and expeditious disposal of
the objections filed under sub-section (2) by the eligible assessee.
The Finance Act 2012 has introduced sub-section (14A) to section 144C
which is effective from 1-4-2013. This amendment is collateral to the GAAR
provisions introduced by the Finance Act 2012:
(14A) The provisions of this section shall not apply to any assessment or
reassessment order passed by the AO with the prior approval of the
Commissioner under sub-section (12) of section 144BA.
The following meanings are assigned to the various expressions used in this
section-
(a) "Dispute Resolution Panel" means a collegium comprising of three
Commissioners of Income-tax constituted by the Board for this
purpose;
(b) "eligible assessee" means
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(i) any person in whose case the variation referred to in sub-
section (1) arises as a consequence of the order of the
Transfer Pricing Officer passed under sub-section (3) of
section 92CA; and
(ii) any foreign company.
Advance Pricing Agreement (APA)
The Finance Act 2012 has inserted sections 92CC and 92CD relating to
advance pricing agreement. This provision is aimed to reduce the number of
transfer pricing disputes and provides certainty to the tax payer. Advance
pricing agreement is entered between CBDT with the approval of central
government and the assessee w.r.t an international transaction wherein the
arm's length price of the international transaction is agreed upon by the
parties in advance by applying the prescribed method(s).
APAs presents a proactive measure for resolving transfer pricing disputes in
a cooperative manner. An APA can be entered into for a maximum period of
five future years.
To add further impetus to the APA program, Finance Act, 2014 allowed
provision for the rollback of APAs from 1 October 2014 and detailed rules for
the same were notified later by the CBDT on 14 March 2015. Roll back
provisions allowed applicability of the APA to prior 4 years also. Accordingly,
APA scheme provides certainty on the transfer price of the covered
international transactions for a maximum period of 9 years.
APA Scheme
A gist of India APA scheme is as follows:
i. Eligibility: Any person who has or proposes to enter into an
international transaction is eligible to apply for an APA
ii. Type of APA: Indian APA scheme allows for all the types of APA i.e.,
unilateral APA, bilateral APA and multilateral APA. A unilateral APA is an
arrangement between the tax payer and the Indian tax administration
(CBDT); whilst a bilateral/multilateral APA involves not only the taxpayer
and the Indian tax administration but also the taxpayer 's affiliates (with
whom it transacts) and their tax administration.
iii. Filing fee - Filing fee for the APA is based on the aggregate value of
international transactions; and it ranges from Rupees 10 lakhs to Rupees
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20 lakhs for main application. An additional fee of Rupees 5 lakhs is
payable for rollback application.
iv. Time for filing APA application - APA can be applied for existing as
well as proposed international transactions. For existing transactions,
APA application needs to be filed before the commencement of the fiscal
year for which it seeks to apply. For new transactions, APA application
can be filed any time before the commencement of such transaction.
v. Pre-filing application- Taxpayer may opt for a pre-filing consultation
with the APA authorities before making a formal application for APA.
This can be done by filing application in the prescribed Form no.3CEC to
the Principal Chief Commissioner of Income Tax (International Taxation)
[PCCIT]. If in a pre-filing consultation, the suitability of entering into the
APA is determined then the applicant chooses to file the formal APA
application.
vi. APA Application - APA application is to be filed in Form No.3CED.
vii. Rollback scheme - Some important points w.r.t rollback scheme are as
follows:
(a) The rollback provisions would apply in respect of the `same'
international transaction covered under the main APA application.
[clause (i), Rule 10MA(2)]
(b) In order to be eligible for applying the rollback provisions, the
assessee should have filed Return of Income and Form No.3CEB
(Accountants Report) on or before the statutory due date for each of
the relevant rollback year. [clause (ii) & (iii), Rule 10MA(2)]
(c) Rollback is available for a block of 4 years. Rollback years cannot
be selected by the applicant [clause (iv), Rule 10MA(2)]
(d) In case, the arm's length price of the covered international
transaction is determined in an appeal by the Tax Tribunal for any
year, before the signing of the APA, then such year would not be
covered under the APA rollback [clause (i), Rule 10MA(3)]
(e) The application for rollback is to be filed in Form No 3CEDA.
viii. Others
(a) The advance pricing agreement entered into shall be binding--
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Taxation of Non-Residents
i. on the person in whose case, and in respect of the transaction
in relation to which, the agreement has been entered into; and
ii. on the [Principal Commissioner or] Commissioner, and the
income-tax authorities subordinate to him, in respect of the said
person and the said transaction.
The agreement shall not be binding if there is a change in law or facts
having bearing on the agreement so entered.
(b) The Board may, with the approval of the Central Government, by an
order, declare an agreement to be void ab initio, if it finds that the
agreement has been obtained by the person by fraud or
misrepresentation of facts.
Upon declaring the agreement void ab initio,--
i. all the provisions of the Act shall apply to the person as if such
agreement had never been entered into; and
ii. notwithstanding anything contained in the Act, for the purpose of
computing any period of limitation under this Act, the period
beginning with the date of such agreement and ending on the date of
order under sub-section (7) shall be excluded:
Provided that where immediately after the exclusion of the aforesaid period,
the period of limitation, referred to in any provision of this Act, is less than
sixty days, such remaining period shall be extended to sixty days and the
aforesaid period of limitation shall be deemed to be extended accordingly.
(c) The assessee has right to appeal lies against the order of assessment or
reassessment passed by AO u/s 92CD.
(d) There are procedures in place for renewal, amendments, withdrawals and
revisions of APA.
Effect to advance pricing agreement
92CD. (1) Notwithstanding anything to the contrary contained in section 139,
where any person has entered into an agreement and prior to the date of
entering into the agreement, any return of income has been furnished under
the provisions of section 139 for any assessment year relevant to a previous
year to which such agreement applies, such person shall furnish, within a
period of three months from the end of the month in which the said
agreement was entered into, a modified return in accordance with and limited
to the agreement
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Transfer Pricing
(2) All other provisions of this Act shall apply accordingly as if the
modified return is a return furnished under section 139.
(3) If the assessment or reassessment proceedings for an assessment
year relevant to a previous year to which the agreement applies have been
completed before the expiry of period allowed for furnishing of modified
return under sub-section (1), the Assessing Officer shall, in a case where
modified return is filed in accordance with the provisions of sub-section (1),
proceed to assess or reassess or recompute the total income of the relevant
assessment year having regard to and in accordance with the agreement.
(4) Where the assessment or reassessment proceedings for an
assessment year relevant to the previous year to which the agreement
applies are pending on the date of filing of modified return in accordance with
the provisions of sub-section (1), the Assessing Officer shall proceed to
complete the assessment or reassessment proceedings in accordance with
the agreement taking into consideration the modified return so furnished.
(5) Notwithstanding anything contained in section 153 or section
153B or section 144C,--
(a) the order of assessment, reassessment or recomputation of total
income under sub-section (3) shall be passed within a period of one
year from the end of the financial year in which the modified return
under sub-section (1) is furnished;
(b) the period of limitation as provided in section 153 or section
153B or section 144C for completion of pending assessment or
reassessment proceedings referred to in sub-section (4) shall be
extended by a period of twelve months.
(6) For the purposes of this section,--
(i) "agreement" means an agreement referred to in sub-section
(1) of section 92CC;
(ii) the assessment or reassessment proceedings for an assessment
year shall be deemed to have been completed where --
a. an assessment or reassessment order has been passed; or
b. no notice has been issued under sub-section (2) of section
143 till the expiry of the limitation period provided under the
said section.
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Taxation of Non-Residents
Also, the assesse is required to file annual compliance report in
quadruplicate in Form 3CEF to PCCIT for all the APA covered years -
rollback years and future years. It is required to be filed within 30 days of the
due date of filing the income-tax return for that year, or within 90 days of
signing the APA, whichever is later.
The PCCIT will forward the Annual Compliance Report to the Competent
Authority and to the jurisdictional commissioner/ TPO for compliance audit.
TPO will have to submit its compliance audit report within 6 months of the
receipt of Annual Compliance Report and send its report to the PCCIT.
Based on the compliance audit report received from the TPO, the AO will
pass the assessment order for the relevant assessment year.
Progress of APA and MAP in India
CBDT issued its first annual report on the APA programme, in India in April
2017. This report covers 5 APA cycles from FY 2012-13 to 2016-17.
The salient features of the report are as follows:
· 815 APA applications have been filed so far and out of that 152
applications have been concluded, including 88 APAs signed in FY
2016-17.
· 72 percent APA conclusions have been in the services sector, followed
by 24 percent in the manufacturing sector, and the balance 4 percent
for trading and other segments.
· In the services sector itself, IT industry rules with a higher share of 29
percent, banking industry 21 percent and the balance half comprising
other industries.
· APA conclusions in `other industries', e.g., Industrial goods, consumer
goods and Pharmaceutical industry; was 11 percent, 4 percent and 7
percent, respectively.
· TNMM, at 73 percent of the cases, is the most used appropriate method
for conclusion of the APAs.
· India has used other methods also, such as profit-split method and
resale price method.
· 127 applications for bilateral APAs have been filed in India, 42 are with
the USA, 39 with the UK, 17 with Japan and rest with other countries.
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Transfer Pricing
· 11 BAPAs have been signed so far - 5 relate to trading sector, 2 to
manufacturing and 4 to services sector.
· The average duration for unilateral APA conclusion is 29 months and
that for bilateral APAs is 39 months.
As per the recent update, India has completed its 6th year of the APA
programme on March 31, 2018. During the last 5-year time, a total of 219
APAs - 199 unilateral and 20 bilateral, were concluded. 67 APAs - 58
unilateral and 9 bilateral were concluded during the last FY, 2017-18.
Important to note that India had so far signed bilateral APAs only with the UK
and Japan. But during the last FY, 3 and 2 bilateral APAs were concluded
with the US and the Netherlands, respectively.
Concluded APAs cover different industries and varied transactions. One
unilateral APA, being the first on that transaction, was for AMP issues. The
Indian APA authorities had so far adopted a cautious approach on APA for
AMP transactions as the matter is sub judice with the apex court. But it is
learnt that during the recent meeting of the competent authorities of India
and the US IRS, it was decided to commence discussions on AMP even for a
bilateral APAs.
Further, relevant update in respect of MAP in India are as follows:
· Indian Government has been actively resolving MAP cases for two
years.
· Resolution has been reached with the US, UK, China and Japan.
· In last three years, since the effective opening of the bilateral
negotiations between the two countries in January 2015, India has
resolved maximum number of MAP cases with the US resulting in
complete end of litigation in more than tax 400 disputes.
Recently, the Indian Tribunal has upheld the persuasive value of the arm's
length price determined under MAP to similar transactions with other AEs or
in other years. Therefore, MAP may be useful to get the benefit of persuasive
value for the other international transactions.
Safe Harbour
The safe harbour concept was introduced in the Indian TP Regulations in
2009 with an objective to provide a certain degree of certainty to taxpayers in
the context of TP. CBDT was empowered by the Central Government to
make safe harbor rules vide Finance Act, 2009 w.e.f. 1-4-2009.
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Taxation of Non-Residents
In July 2012, the Prime Minister 's Office constituted the Rangachary
Committee to, inter alia, suggest clarifications needed to remove ambiguity
and improve clarity on taxation of the IT sector and to finalize safe harbour
rules sector by sector.
On 14 August 2013, the CBDT released draft safe harbour rules for public
comments. After considering comments of various industry stakeholders, the
CBDT issued the final safe harbour rules vide notification dated 18
September 2013 by insertion of rules 10TA to 10TG to the Rules. These
newly inserted rules have been framed largely based on the
recommendations of the Rangachary Committee. The rules cover
international transactions in six categories/sectors, i.e. IT, IT-enabled
services, contract R&D in the IT and pharmaceutical sectors, financial
transactions (outbound loans and corporate guarantees) and auto ancillary
manufacturing.
Further, the CBDT announced safe harbour rules in respect of specified
domestic transactions undertaken by government companies engaged in the
business of generating, transmitting or distributing electricity. As per the
rules, the transfer price shall be considered at ALP if the tariff is determined
in accordance with the provisions of the Electricity Act, 2003.
The Safe Harbour Rules are applicable for 5 years from AY 2013-14.
Recently, CBDT made amendments in the safe harbor rules. In this respect,
CBDT issued a notification on June 7, 2017. The amended safe harbour
rules will be applicable for three years, from AY 2017-18 to AY 2019-20.
To exercise this option, the taxpayer is required to file specified form (Form
No 3CEFA) with the AO on or before due date of furnishing the return of
income with required details for:
· the relevant assessment year, in case the option is exercised only for
that assessment year; or
· the first of the assessment years, in case the option is exercised for
more than one assessment years.
The taxpayer can opt out of the safe harbour regime from the second year
onwards, by filing a declaration to that effect with the AO.
The rules incorporate a time limit up to which the tax authorities can
challenge the validity of the safe harbour option exercised by taxpayers.
Further, the CBDT vide notification of 20 December 2013 has provided the
following clarifications with respect to safe harbour rules:
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Transfer Pricing
- If the taxpayer has opted for safe harbour but has reported rates or
markup less than the rates or markups specified under safe harbour rules,
then income has to be computed by the tax authorities on the basis of the
safe harbour rates or markups.
- The rates or margins as specified in safe harbour rules are not to be
considered as a benchmark by the TPO in cases where the taxpayer has not
opted for the safe harbour rules. Hence, in cases where taxpayer has not
opted for safe harbour and the case is under regular transfer pricing audit,
such audit will be carried out without regard to the rates or markups specified
in safe harbour rules.
Safe harbour rules shall not apply in respect of eligible international
transactions entered into with an AE located in any country or territory
notified under section 94A or in a no-tax or low-tax country or territory (i.e.
maximum rate of income tax is less than 15%).
Recently, CBDT made amendments in the safe harbour rules. In this respect,
CBDT issued a notification on June 7, 2017. The amendments in the
notification are primarily in the applicable safe harbour rates. It also brought
within the ambit of safe harbour rules, the receipt of low value-adding intra
group services.
Revised safe harbour rates for specific nature of international transactions
are tabulated below:
Sr. Nature of Conditions Revised Safe
No. international Harbour rates
transaction
1. Software Annual transaction value <= 17%
development INR 100 crore
services Annual transaction value 18%
>100 crore = < INR 200
crore
2. IT enabled Annual transaction value <= 17%
services INR 100 crore
Annual transaction value 18%
>100 crore = < INR 200
crore
3. Knowledge Annual transaction value <=
process
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Taxation of Non-Residents
Sr. Nature of Conditions Revised Safe
No. international Harbour rates
transaction
Outsourcing INR 200 crore and
services Employee Cost to Operating 24%
Expenses >= 60%
Employee Cost to Operating 21%
Expenses < 60% and >=
40%
Employee Cost to Operating 18%
Expenses < 40%
4. Advancing CRISIL credit rating of 1 year marginal
intra group Associated enterprise is cost of funds
loan in Indian lending rate of SBI
Rupees as on 1st April of
the relevant
previous year plus
between AAA to A or its 175 basis points
equivalent
BBB-, BBB or BBB+ or its 325 basis points
equivalent
between BB to B or its
equivalent 475 basis points
between C to D or its
equivalent 625 basis points
not available and the amount 425 basis points
of loan advanced <= 100
crore as on 31st March of the
relevant previous year
5. Advancing CRISIL credit rating of 6 month LIBOR of
intra group Associated enterprise is: the relevant foreign
loan in foreign currency as on 30th
currency September of the
relevant previous
year plus
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Transfer Pricing
Sr. Nature of Conditions Revised Safe
No. international Harbour rates
transaction
between AAA to A or its 150 basis points
equivalent
BBB-, BBB or BBB+ or its 300 basis points
equivalent
between BB to B or its
equivalent 450 basis points
between C to D or its
equivalent 600 basis points
not available and the amount
of loan advanced <= 100
400 basis points
crore as on 31st March of the
relevant previous year
6. Providing 1% of the
corporate guaranteed amount
guarantee
7. Contract R&D Annual transaction value <= 24%
services INR 200 crore
· Software
development
· Generic
pharmaceuti
cal drugs
8. Manufacture
and export of
· core auto 12%
components
· non-core
auto 8.5%
component
9. Receipt of low Annual transaction value <= 5%*
value-adding INR 10 crore
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Taxation of Non-Residents
Sr. Nature of Conditions Revised Safe
No. international Harbour rates
transaction
intra-group
services
* Provided that the method of cost pooling, the exclusion of shareholder
costs and duplicate costs from the cost pool and the reasonableness of the
allocation keys used for allocation of costs to the assessee by the overseas
associated enterprise, is certified by an accountant.
The safe harbour rates before amendment are tabulated below:
S Nature of Conditions Safe Harbour Rates
No. international
transaction
1. Software Annual transaction 22%
development value > INR 500 crore
services* Annual transaction 20%
value =< INR 500
crore
2. IT enabled Annual transaction 22%
services* value > INR 500 crore
Annual transaction 20%
value =< INR 500
crore
3. Knowledge process No threshold for 25%
Outsourcing annual transaction
services* value
4. Contract R&D
services*
· Software 30%
development
· Generic
pharmaceutical 29%
drugs
5. Manufacture and 90 % or more of total
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Transfer Pricing
S Nature of Conditions Safe Harbour Rates
No. international
transaction
export of turnover are in nature
· core auto of Original Equipment 12%
components Manufacture sales
· non-core auto 8.5%
component
6. Advancing intra · To wholly owned Interest rate = / >
group loan nonresident subsidiary base rate of SBI as
· Loan sourced in INR on 30th June of the
relevant year plus
· Excludes loans by
enterprises engaged in · 150 basis points
lending or borrowing in [Loan =/< INR 50
normal course of crores]
business · 300 basis points
· Excludes credit line [Loan > INR 50
or any other loan crores]
facility with no fixed
term for repayment
7. Providing explicit · Amount of guarantee 2% of the
corporate is upto INR 100 crores guaranteed amount
guarantee · Amount of guarantee 1.75% of the
exceeds INR100 guaranteed amount
crores
*Applicable to service providers with insignificant risks
Multilateral exchange of information
Most treaties provide that the competent authorities are to exchange such
information as is necessary for carrying out the provisions of the treaty and
for preventing fraud or evasion of taxes. The treaties usually contain
restrictions regarding the treatment and type of information that may be
exchanged.
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Taxation of Non-Residents
India has been an active participant in the G20 and OECD's BEPS project,
and has implemented key BEPS actions requiring amendment to its tax laws
like country-by-country reporting, limit on interest deduction, equalisation
levy and a patent regime. It has also introduced the general anti-avoidance
rule [GAAR]. The BEPS actions requiring amendment to tax treaties is now
being implemented by way of a multilateral instrument.
Furthermore, India has entered into a number of tax information exchange
agreements (TIEAs) for receiving and providing information for tax purpose
available with other countries/jurisdictions. Indian TIEAs are based on the
2002 Model Agreement on Exchange of Information on Tax Matters
developed by the OECD Global Forum Working Group on Effective Exchange
of Information, with certain variations.
Pursuant to the approval of the Cabinet, India's Finance Minister on 7 June
2017 participated in the signing of the Multilateral Convention to Implement
Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting
[multilateral instrument / MLI] at Paris. The MLI was signed by 68 countries
including Australia, Canada, China, Cyprus, France, Germany, Hong Kong,
Japan, Luxembourg, Netherlands, Singapore and the United Kingdom.
Interestingly, the United States, has not signed the MLI and Mauritius has
committed to sign by 30 June 2017.
As on 21 December 2017, out of the 68 countries, India has activated the
exchange relationship with 50 countries.
The MLI covers inter alia, two minimum standards agreed on BEPS, relating
to prevention of treaty abuse (addressed to some extent by the Indian GAAR)
and improvement of dispute resolution under the mutual agreement
procedure [MAP]. The other key area covered by the MLI relates to
avoidance of the permanent establishment [PE] status, which is a big area of
dispute between taxpayers and Revenue authorities in India.
It is interesting to note that the MLI provides significant flexibility to
signatories. For example, a country can decide which tax treaties will be
covered by the MLI and which will be outside its purview. Moreover, each
country can also opt out of a provision of the MLI (entirely or partly), provided
it is not a minimum standard. At the signing of the MLI, India has given a
provisional list of expected reservations and notifications. The provisional list
indicates that India proposes to cover all existing comprehensive tax treaties
under the MLI.
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Transfer Pricing
Other Recent Developments Budget update, Board
Circulars and important judicial precedents
Interest Deduction Rule [Section 94B]
The Finance Act, 2017 has introduced a new provision called `Limitation on
interest deduction in certain cases'. This provision sets the norm according to
which an Indian Company or a Permanent Establishment (PE) of a foreign
company would be eligible to claim a deduction of interest expenses against its
taxable income. The key features are as below:
· Applies only if the interest charge claimed exceeds one crore rupees;
· Restricts claim on interest costs;
· Applies to interest clause or similar consideration in respect of debts issued
by a non-resident;
· The non-resident should be an associated enterprise of the borrower;
· Interest will be tax deductible only to the extent of 30% of earnings before
interest, taxes, depreciation and amortization (EBITDA) of the borrower;
· Any interest in excess of the above (referred to as `excess interest') will be
allowed to be carried forward for eight assessment years immediately
succeeding the assessment year for which the excess interest expenditure
was first computed.
It is pertinent to note that even guarantee and back-to-back deposit loan (by
extending the line of credit against an overseas deposit) arrangements are
also covered. If an overseas parent extends a guarantee on behalf of the
Indian subsidiary to a third party lender (say, a bank), then such interest
costs also will be covered by the new provisions. Another case is where the
overseas parent deposits funds with an overseas lender who in turn requests
the latter 's Indian arm under a line of credit to extend the loan to the Indian
subsidiary.
R&D circular [Circular No.6/2013 dated 29 June, 2013] -
Guidelines on characterization of Indian development
centres (IDC)
India has emerged as an important location for R&D centres (for MNEs).
Traditionally, these captive contract R&D service providers have been
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Taxation of Non-Residents
characterised for TP purposes - as routine contract R&D service providers
exposed to low/ limited risk, warranting a routine cost plus return.
Indian Revenue have had divergent views on the matter i.e. contending that
the R&D centres (of MNEs) in India have played a crucial role in developing
the intangibles and accordingly these development centres should be
characterised as full-fledged entrepreneurs/ significant risk bearing entities.
Accordingly, the CBDT issued Circular No.6/2013 on 29 June, 2013 which
provides guidelines on characterisation of Indian development centres (IDC).
Following parameters are outlined for characterizing a contract R&D service
provider as low risk entity entitled to a cost plus return:
· Foreign principal (FP) performs most of the economically significant
functions (such as the conceptualisation and design of the product and
providing strategic direction and framework, etc.) involved in the research
or product development cycle either through its own employees or
through its associated enterprises, while the IDC carries out the work
assigned to it by the FP.
· FP or its associated enterprises provides funds/ capital and other
economically significant assets including intangibles for research or
product development. FP or its AEs also provides remuneration to the
IDC for the work carried out by the latter.
· IDC works under the direct supervision of the FP or its associated
enterprises, which actually controls or supervises the research or product
development through its strategic decisions to perform core functions as
well as monitor activities on a regular basis.
· IDC does not assume or has no economically significant realized risks.
· IDC has no ownership right (legal or economic) on the outcome of the
research which vests with the FP.
CBDT has focused on the functional analysis and the related aspects of
decision making, control, capital, supervision and monitoring, etc. in order to
ascertain whether or not the IDC is a contract R&D centre with an
insignificant risk. Further, by emphasizing on the `substance' and `conduct
over contract', the CBDT has made an attempt to align it with the
international guidance provided by the OECD and United Nations.
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Transfer Pricing
Advertising, Marketing and Promotion (AMP)
Expenses
Indian Revenue Authorities, over the years, have made some high-pitch TP
adjustments on issue relating to AMP expense. The number of cases and TP
adjustment amount has increased multifold. Currently, there are no specific
guidelines in the Indian transfer pricing regulations to address the AMP
expense related aspects; however, the Indian courts have provided useful
insights, thereto. The OECD has acknowledged the fact that AMP
expenditure by a distributor or licensee is an integral part of the distribution
function. In this context, the focus has been clearly on the functional profile
and rights of the distributor. Based on the facts and having regard to the
arm's length principle, it is therefore imperative to evaluate the need for
separate remuneration (if any) for such marketing activities. OECD TP
Guidelines1 provide that such remuneration could take different forms, such
as decrease in the purchase price of the product or a reduction in the royalty
rate.
The United Nations Practical Manual on Transfer Pricing for Developing
Countries (UN TP Manual)2 provides for the allocation of market penetration,
marketing expansion and market maintenance strategy-related costs
between entities within a MNE. It is essential to know which entity or entities
have the legal ownership of the intangibles. The UN TP Manual supports the
concept of "economic ownership", i.e. where a marketer incurs significant
marketing expenditure, which adds value to an affiliate's intangible, or
creates its own local marketing intangible, the marketer is entitled to a share
of the returns from its exploitation.
In the Indian context, the key principles outlined by the Indian judiciary, has
been discussed in detail in the next section under Important Judicial
Precedents. Broadly, the consensus is that that increased AMP expenditure
does not pre-suppose contribution to brand building by the Indian entity for
its overseas AE.
1OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, OECD,
July 2010.
2United Nations, United Nations Practical Manual on Transfer Pricing for Developing Countries,
United Nations
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Taxation of Non-Residents
Applicability of TP regulations in case of
international transaction relating to Issue of
Shares:
The Mumbai High Court has provided the much-needed guidance in relation
to the applicability of TP provisions to issuance of shares.
The facts and salient aspects of the ruling are outlined below:
- The taxpayer, a wholly owned subsidiary of a Mauritius entity
namely Vodafone Tele-Services (India) Holdings Ltd (holding
company), issued equity shares of face value of INR 10 at a
premium of INR 8,591 per share to its holding company.
- During TP assessment proceedings, the TPO disputed the valuation
of shares and re-computed the value per share (based on the Net
Asset Value (NAV) after inter-alia considering preceding years TP
adjustments) to INR 53,775. The TPO treated the shortfall in the
value of shares (INR 53,775 less INR 8,591 per share) as deemed
loan by the taxpayer to its foreign parent and charged a notional
interest at 13.5%. Accordingly, the TPO made a TP adjustment for
the alleged shortfall in the value of shares as well as the notional
interest thereon to the taxable income of the taxpayer.
- Aggrieved by the order of the TPO, the taxpayer filed a writ petition
challenging the jurisdiction applicability of TP regulations to the
issue of equity shares before the Mumbai HC.
- The Hon'ble HC disposed the writ petition directing the Dispute
Resolution Panel (DRP) to decide the issue of jurisdiction. The DRP
held that the Revenue has jurisdiction to apply TP provisions in the
instant case, as share premium is an income arising from issue of
shares and there is income potentially arising or affected by short
receipt of share premium. Aggrieved, the taxpayer filed the current
writ before the Honourable Mumbai HC.
- The taxpayer had challenged the following TP adjustments made by
the revenue:
· Alleged undervaluation of shares issued by the taxpayer in
favour of its AE;
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Transfer Pricing
· Imputing of notional interest on such alleged undervaluation of
shares, by treating the shortfall as loan advanced by the
taxpayer to the AE.
- On 10 October 2014, the Mumbai High Court held that the TP
regulations are applicable only to international transactions that give
rise to taxable income. Neither the capital receipt on issue of equity
shares nor the shortfall (if any) in share premium can be considered
as taxable income within the ambit of the Act. Further, there is no
specific provision in the Act for treating inflow of funds from shares
issued to non-residents as taxable income. Hence, TP provisions do
not apply to issue of equity shares to a non-resident.
The above ruling is a welcome relief for taxpayers that have been facing
huge transfer pricing adjustments on account of alleged undervaluation of
shares and subsequent recharacterization of the same as a loan.
Further, the Bombay High Court in the case of Shell India Markets Pvt Ltd v.
ACIT and others [Writ petition 1205 of 2013] followed its earlier decision in
Vodafone (supra) and held that the TP provisions should not be applied to
issue of equity shares in the absence of any income arising from a particular
transaction.
Further, on 28 January 2015, the Union Cabinet decided to accept the order
of the High Court of Bombay in the case of Vodafone (supra). The decision
will also have a bearing on similar cases as the government has decided not
to appeal on such cases in higher courts. This decision has attained finality
on the long standing issue of whether TP provisions are applicable to the
issue of shares.
Important Judicial Precedents:
1. Bangalore Tribunal in the case of Tally Solutions decided that there is
nothing in section 92CA that requires the AO to first form a
"considered opinion" before making a reference to the TPO. It is
sufficient if he forms a prima facie opinion that it is necessary and
expedient to make such a reference. The making of the reference is a
step in the collection of material for making the assessment and does
not visit the assessee with civil consequences. There is a safeguard
of seeking prior approval of the CIT. Moreover, by virtue of CBDT's
Instruction No.3 of 2003 dated 20.5.2003 it is mandatory for the AO to
refer cases with aggregate value of international transactions more
than INR 5 crores to the TPO The argument that the "Excess Earning
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Taxation of Non-Residents
Method" adopted by the TPO is not a prescribed method is not
acceptable. A sale of IPR is not a routine transaction involving regular
purchase and sale. There are no comparables available. The "Excess
Earning Method" is an established method of valuation which is
upheld by the U.S Courts in the context of software products. The
"Excess Earning Method" method supplements the CUP method and
is used to arrive at the CUP price i.e. the price at which the assessee
would have sold in an uncontrolled condition.
2. In the case of Diageo India Pvt. Ltd v ACIT 47 SOT 252 it was
decided that If one enterprise controls the decision making of the
other or if the decision making of two or more enterprises are
controlled by same person, these enterprises are required to be
treated as `associated enterprises'. Though the expression used in
the statute is `participation in control or management or capital',
essentially all these three ingredients refer to de facto control on
decision making.
The argument, based on Quark Systems 38 SOT 307 (SB), that
exceptionally high and low-profit making comparables are required to
be excluded from the list of TNMM comparables is not acceptable.
Merely because an assessee has made high profit or high loss is not
sufficient ground for exclusion if there is no lack of functional
comparability. While there is some merit in excluding comparables at
the top end of the range and at the bottom end of the range as done
in the US Transfer Pricing Regulations, this cannot be adopted as a
practice in the absence of any provisions to this effect in the Indian
TP regulations. (Benefit of +/ 5% adjustment as directed in UE Trade
Corporation 44 SOT 457 to be given); The adjustment made by the
TPO with regard to the advertisement expenditure incurred by the
assessee was without jurisdiction because the AO had not made any
reference on this issue to the TPO. As the reference to the TPO is
transaction specific and not enterprise specific, the TPO Officer has
no power to go into a matter which has not been referred to him by
the AO. Even the CBDT Instructions are clear on this (3i Infotech Ltd
136 TTJ 641 followed)( A.Y.200607).
3. In the case of Siva Industries & Holdings Ltd Chennai tribunal held
that in case of grant of loan by assessee to its foreign subsidiary in
foreign currency out of its own funds. For determining ALP, it is the
220
Transfer Pricing
international LIBOR rate that would apply and not the domestic prime
lending rate.
4. Pune Tribunal held the following in the case of Bringtons Carpets
Asia (P) Ltd v Dy CIT 57 DTR 121 assessee having cited six
comparables, TPO /AO was not justified in rejecting the same and
applying domestic transactions of the assessee when the AO/TPO
has accepted said six external comparables in the subsequent
assessment year and there is similarity of facts in both the years,
further the assessee is entitled to economic adjustments in the
circumstances of under capacity utilization of the company, matter
was set aside for examining the issue de novo. (AY 200607)
5. While determining arm's length price, it is profit as per books of
account that has to be considered for computing net margin of
assessee and not adjusted book profits. (AY 2006 07). Refer, Geodis
Overseas (P) Ltd v Dy CIT 45 SOT 375 (Delhi Tribunal).
6. Bangalore Tribunal has held that transaction of supply of raw material
by non-resident AE to a domestic "Third Party" entity for manufacture,
is an international transaction between assessee (an Indian
company) and AE, requiring determination of ALP under Section
92(1);
Tribunal observed the terms of agreements and held that it was a
`concerted action' or `arrangement' which is brought out in a form
which apparently is intended and framed in such a manner as not to
attract the provisions of Section 92B of the Act. Refer, Novo Nordisk
India Pvt Ltd Vs DCIT, IT(TP)A No.122/Bang/2014
7. The Delhi High Court, while confirming the order of the Tribunal, held
that rendering of services by assessee to Indian third-party
customers, in the given facts and circumstances, is not regarded as a
deemed international transaction under Section 92B(2) of the ITA,
given that none of the conditions provided under section 92B(2) were
fulfilled. Refer, CIT Vs. Stratex Net Works (India) Pvt. Ltd., [2013] 33
taxmann.com 168 (Delhi)
8. The Hon'ble Delhi High Court has pronounced its ruling on TP
adjustment on account of AMP expenditure incurred by Indian
distributors as part of their distribution business in India. The High
Court, while upholding that AMP expenditure could be considered as
an international transaction, held that increased AMP expenditure
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Taxation of Non-Residents
does not pre-suppose contribution to brand building by the Indian
entity for its overseas AE. As per the court, universal application of
bright line test to segregate AMP into routine and non-routine AMP is
unwarranted. Further, the Court also held that such application of
bright line test and to apply cost plus method to determine ALP would
amount to adding provisions to the statute and rules, which are non-
existent. Refer, Sony Ericsson Mobile Communications India (P.) Ltd.
v CIT, [2015] 55 taxmann.com 240 (Delhi)
9. The Delhi Tribunal pronounced an important ruling on marketing
intangibles. The Tribunal upheld the adjustment made by the TPO
wherein the TPO has attempted to make an economic adjustment on
the margins of the comparables to account for differences in intensity
of marketing function.
This ruling is distinct from other rulings on the issue of AMP, as in the
present case the TPO has attempted to shift from its previous
approach of treating excess AMP expense as a separate international
transaction. Instead, the TPO has classified marketing activity as a
function undertaken by a distributor. Refer case of Luxottica India
Eyewear Pvt. Ltd. vs ACIT Cir-15(2), New Delhi (ITA No. 1492/ 2015,
ITA 1205/2016 and ITA 344/2017) and ACIT Cir 15(2) vs Luxottica
India Eyewear Pvt. Ltd. (ITA No. 1117/2015).
10. The High Court held that since the Revenue was unable to
demonstrate with tangible material that there was an international
transaction involving AMP expenses between the assessee and AE,
the question of determining ALP did not arise. It held that merely
because the AE had financial interest in the assessee it could not be
presumed that the AMP expenses incurred by the assessee was on
behalf of the AE. It held that even though Section 92B read with
Section 92F included arrangement, understanding or actions in
concert within the ambit of international transaction there has to be
tangible evidence to show that the parties acted in concert. It further
held that the clauses of trade name license agreement do not indicate
that the assessee was under obligation to incur AMP expenses for
building the brand of its AE and accordingly dismissed the appeal of
the Revenue. Refer, DCIT v Whirlpool of India Ltd., [2015] 64
taxmann.com 324 (Delhi)
11. The Tribunal has held that "the accretion of brand value, as a result
of use of the brand name of foreign AE under the technology use
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Transfer Pricing
agreement- which has been accepted to be an arrangement at an
arm's length price, does not result in a separate international
transaction to be benchmarked". Refer Hyundai Motor India Limited
Vs DCIT, (I.T.A. No. 739 and 853 /Chny/2014, 563 and 614
/Chny/2015, 842 and 761/Chny/16 and CO 73/Chny/16 AYs: 2009-10,
2010-11 and 2011-12)
12. The Tribunal in a recent ruling deletes the TP adjustment in the
context of AMP not being an international transaction (under
section 92B of the Act. Focus of the ruling is primarily on bright line
test (BLT) not to be applied for making TP adjustment. The Tribunal
has relied upon the case of Thomas Cook (India) Ltd. (supra) and
after considering the available High Court judgements. [Refer: I.T.A.
No./7744/Mum/2012 (A.Y 2008-09); 1792/Mum/2014 (A.Y. 09-10);
105/Mum/2015, (A.Y.10-11); 903/Mum/2016, (A.Y. 11-
12);674/Mum/2017,(A.Y- 12-13) Nivea India Pvt. Ltd.].
13. Delhi High Court ruled in favour of the taxpayer wherein it was upheld
that, Tax authorities cannot question the commercial rationale of
legitimate business expenses incurred by the taxpayer as long as it is
demonstrated that the transaction is at arm's length by application of
the prescribed methods. Financial health of the taxpayer can never
be a criterion to judge allowability of an expense. Thus, the taxpayer
need not show that any expenditure incurred by him for the purpose
of business has actually resulted in profit or income. OECD
guidelines can be relied upon for guidance wherever applicable.
Refer, CIT vs. EKL Appliances Ltd, [2012] 24 taxmann.com 199
(Delhi HC).
14. Delhi High Court rejected assessee's contention that no
benchmarking is required where the AEs have only recovered costs
without charging any mark up. High Court ruled that even though the
transaction involves only a recovery of cost, as the transaction is
between two AEs, it is necessary to test whether an uncontrolled
entity for the same or comparable services charges an amount less
than or equal to or more than what was charged to the Taxpayer by
the AEs. Application of Section 92(3), which does not permit
application of ALP if it has the effect of reducing tax incidence, cannot
be inferred merely because the AEs recover costs without a mark-up.
A comprehensive transfer pricing analysis is required to test the
appropriateness of the costs that are allocated as well as for
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Taxation of Non-Residents
determining applicability of Section 92(3). The HC also observed that
while examining whether an independent entity would have paid for
such services, the Tax Authorities cannot question the commercial
judgment of the assessee. Refer CIT vs. Cushman and Wakefield
India Pvt Ltd., [2014] 46 taxmann.com 317
15. Mumbai Tribunal held that margin determined for 96% of assessee's
ITeS transactions with US AE-entities under MAP proceedings should
be applied for remaining 4% transactions with non-US AE-entities
absent distinction in facts or nature of transactions.. Refer J.P.
Morgan Services P. Ltd. vs. DCIT, [2016] 70 taxmann.com 228
16. Delhi Tribunal has allowed the selection of foreign AEs (engaged in
sales and distribution activities or secondary manufacturing) as
tested party, being the least complex entity, while benchmarking
assessee's international transactions; draws support from assessee's
APA, wherein CBDT approved selection of foreign AEs as tested
party with TNMM as the most appropriate method and also approved
concept of benchmarking considering regional comparables. Tribunal
observed that assessee's Functional, Assets & Risk ( `FAR') analysis
as well as international transactions for APA years and the year
under appeal were identical and adequate financial data for
comparison on region basis / country basis were available. Refer
Ranbaxy Laboratories Ltd Vs ACIT, [2016] 68 taxmann.com 322
17. Delhi High Court has upheld Tribunal's order considering foreign
exchange gain/loss arising out of revenue transactions as an item of
operating revenue/cost. Further, the High Court observed that
assessee, for subsequent AYs, had entered into an APA with the
CBDT, by which the 'cost plus pricing methodology' had been
impliedly accepted. Accordingly, dismisses Revenue's appeal stating
that no substantial question of law arises for consideration. Refer, Pr.
Commissioner Vs. Ameriprise India Pvt Ltd., ITA 206/2016.
18. Bangalore Tribunal rejected TPO's determination of Nil ALP for
management fees paid to AE, noted that assessee had filed the
agreement and relevant record under which the management fees
were paid to the AE and Department had accepted the management
fees under the APA.
Thus, the tribunal held that even though APA was not applicable for
the subject year, making a separate adjustment by TPO by
determining ALP of management fees at Nil was contrary to the stand
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Transfer Pricing
of the department itself while agreeing to APA. Refer AXA
Technologies Shared Services Pvt. Ltd Vs DCIT, [2017] 80
taxmann.com 197.
19. Mumbai Tribunal in the case of Watson Pharma Pvt Ltd (ITA No.
1423/Mum/2014) analysed the concept of location savings in a TP
context placing its reliance on the OECD Guidance on Transfer
Pricing Aspects of Intangibles as per BEPS Action Plan 8 which
indicates that if reliable local market comparables are available and
can be used to determine arm's length prices, specific comparability
adjustments for location savings should not be required.
20. Instrumentarium Corporation Limited, Finland (ITA No. 1548 and
1549/Kol/2009): In this case, the Special Bench analysed the
provisions of section 92(3) of the Act and acceded to the view of the
Revenue that the exemption from the TP provisions apply only in
cases where the TP adjustment results in reducing the taxable profit
or enhancing the losses of the taxpayer. The Special Bench held that
there is no provision for corresponding deduction of the TP
adjustment in the hands of the Indian AE. The tax base erosion would
have taken place only in situation where the Indian AE would have
actually allowed interest income to the taxpayer, which is not the fact
of the case. Based on the above, the bench held that there was no
case of tax base erosion.
The Special Bench also held that the provision of section 92(3) of the
Act provides for determining the impact on profit or losses only for the
year under consideration and not for taking into consideration the
impact of any TP adjustment in the subsequent years.
Tax administration cannot be expected to have a clairvoyance of
whether or not the Indian AE will actually make sufficient profits in
future in the set off period so as to subsume the losses of the Indian
AE from the transaction with the taxpayer. The possibility of set off of
future profits, against the losses incurred by the AE cannot be taken
into account for determining the overall tax impact.
21. In the case of Pr. CIT vs Kusum Healthcare Pvt. Ltd. (I.T.A. No. 765/
2016), the Delhi High Court held that every outstanding invoice
beyond the credit free period cannot be classified as a separate
international transaction under the explanation to Section 92B of the
Act. Further, once the taxpayer has factored in the impact of working
capital requirement due to outstanding receivables in its
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Taxation of Non-Residents
pricing/profitability, no further adjustment on account of outstanding
receivable is required.
22. In a recent ruling, Vodafone India Services Private Limited vs DCIT
[ITA No. 565/Ahd/17, AY 2012-13], the Tribunal held that the entire
arrangement involves several parties acting in concert including non-
resident associated enterprises. Section 92F (v) of the Act provides
that irrespective of whether an arrangement, understanding, or action
in concert is legally enforceable or not, it falls within the ambit of
"transaction" for the purpose of TP provisions. Further, as the non-
resident associated enterprises were parties to such action in
concert, it becomes an "international transaction".
The Tribunal rejected the assessee's reliance on the Supreme Court
decision in Vodafone International Holdings BV wherein the Supreme
Court held that the arrangement was not an international transaction,
on the ground that the Supreme Court only dealt with the legal
ownership of the entities and not the factual rights.
Besides the above, the Tribunal further held that that just because an
income/ expense is not taken into account in computation of taxable
income, an international transaction cannot be said to be regarded as
outside the ambit of "international transaction". What is material is
whether the transaction in question is capable of producing an
income chargeable to tax or not.
Lastly, The Tribunal also analysed the applicability of deemed
international transaction provision under section 92B(2) of the Act.
The Tribunal observed that the foreign AE and parent entity of the
assessee but also decided the terms & conditions of the agreement.
Hence, the transaction falls under section 92B(2).
The said judgement is significant and lays down guiding principles for
structuring deals. It emphatically makes it clear that Indian TP
regulations are very wide and covers all actions with the involvement
of non-resident associated enterprise. Factual rights preside over
legal rights for the application of TP provisions.
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Chapter 9
General Anti-Avoidance Rules
(Chapter X-A, General Anti-Avoidance Rule, shall apply in respect of any
assessment year beginning on or after April 1, 2018.)
Introduction
The chapter is applicable to all assesses, and aim to curb the transactions
entered with the intention to avoid tax. Simultaneously section 144BA is
inserted in the Act which provides the administrative procedure to be
followed by the department in respect of cases involving impermissible
transactions as per this chapter.
AO on the basis of evidence or material before him may declare an
arrangement as impermissible avoidance arrangement; having done so may
make a reference to the principal commissioner or commissioner in order to
determine the consequence of such arrangement in accordance with GAAR.
The principal commissioner or commissioner is duty bound to hear the
assessee before issuing any order.
An approving panel is also set up for issue of directions where assessee
objects to the proposed action by the principal commissioner or
commissioner and the principal commissioner or commissioner is not
satisfied with the explanation of the assessee. Appeal can be made to ITAT
against the order passed under section 144BA.
Further, assessee can also obtain an advance ruling from the AAR for the
determination whether the arrangement proposed to be undertaken is
impermissible arrangement as referred to in Chapter X-A or not
Applicability of General Anti-Avoidance Rule
[Section 95]
The section overrides the Act and provides that--
an arrangement entered into by an assessee may be declared to be
an impermissible avoidance arrangement; and
the consequence in relation to tax arising therefrom may be
determined subject to the provisions of this Chapter.
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Taxation of Non-Residents
Explanation clarifies that provisions of this chapter can be applied to any step
in, or a part of, the arrangement also.
Meaning and scope of impermissible avoidance
agreement [Section 96]
Section 96(1) defines impermissible avoidance arrangement to mean an
arrangement, the main purpose or one of the main purposes of which is to
obtain a tax benefit and it--
(a) creates rights, or obligations, which are not ordinarily created bet-
ween persons dealing at arm's length;
(b) results, directly or indirectly, in the misuse, or abuse, of the
provisions of this Act;
(c) lacks commercial substance or is deemed to lack commercial
substance under section 97, in whole or in part; or
(d) is entered into, or carried out, by means, or in a manner, which are
not ordinarily employed for bona fide purposes.
Under section 96(2) even if the main purpose of the step in or part of the
arrangement is to obtain a tax benefit, unless it is proved to the contrary by
the assessee, the whole arrangement shall be presumed to have been
entered into, or carried out, for the main purpose of obtaining a tax benefit.
Meaning of arrangement lacking commercial
substance
As per section 97(1) an arrangement shall be deemed to lack commercial
substance if--
(a) the substance or effect of the arrangement as a whole, is inconsistent
with, or differs significantly from, the form of its individual steps or a
part; or
(b) it involves or includes--
(i) round trip financing;
(ii) an accommodating party;
(iii) elements that have effect of offsetting or cancelling each
other; or
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General Anti-Avoidance Rules
(iv) a transaction which is conducted through one or more
persons and disguises the value, location, source, ownership
or control of funds which is the subject matter of such
transaction; or
(c) it involves the location of an asset or of a transaction or of the place
of residence of any party which is without any substantial commercial
purpose other than obtaining a tax benefit (but for the provisions of
this Chapter) for a party; or
(d) it does not have a significant effect upon the business risks or net
cash flows of any party to the arrangement apart from any effect
attributable to the tax benefit that would be obtained (but for the
provisions of this Chapter).
Irrelevant considerations for determining whether
transaction lacks commercial substance or not
The following shall not be taken into account while determining whether an
arrangement lacks commercial substance or not, namely:--
(i) the period or time for which the arrangement (including operations
therein) exists;
(ii) the fact of payment of taxes, directly or indirectly, under the
arrangement;
(iii) the fact that an exit route (including transfer of any activity or
business or operations) is provided by the arrangement.
Meaning of round trip financing
Round trip financing includes any arrangement in which, through a series of
transactions--
(a) funds are transferred among the parties to the arrangement; and
(b) such transactions do not have any substantial commercial purpose
other than obtaining the tax benefit (but for the provisions of this
Chapter),
without having any regard to--
(A) whether or not the funds involved in the round trip financing can be
traced to any funds transferred to, or received by, any party in
connection with the arrangement;
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Taxation of Non-Residents
(B) the time, or sequence, in which the funds involved in the round trip
financing are transferred or received; or
(C) the means by, or manner in, or mode through, which funds involved in
the round trip financing are transferred or received.
Meaning of accommodating party
A party to an arrangement shall be an accommodating party, if the main
purpose of the direct or indirect participation of that party in the arrangement,
in whole or in part, is to obtain, directly or indirectly, a tax benefit (but for the
provisions of this Chapter) for the assessee whether or not the party is a
connected person in relation to any party to the arrangement.
Consequence of impermissible avoidance
arrangement [Section 98]
If an arrangement is declared to be an impermissible avoidance
arrangement, then the consequences, in relation to tax, of the arrangement,
including denial of tax benefit or a benefit under a tax treaty, shall be
determined depending upon each circumstance of the case, including by way
of but not limited to the following, namely:--
(a) disregarding, combining or recharacterising any step in, or a part or
whole of, the impermissible avoidance arrangement;
(b) treating the impermissible avoidance arrangement as if it had not
been entered into or carried out;
(c) disregarding any accommodating party or treating any
accommodating party and any other party as one and the same
person;
(d) deeming persons who are connected persons in relation to each
other to be one and the same person for the purposes of determining
tax treatment of any amount;
(e) reallocating amongst the parties to the arrangement--
(i) any accrual, or receipt, of a capital or revenue nature; or
(ii) any expenditure, deduction, relief or rebate;
(f) treating--
(i) the place of residence of any party to the arrangement; or
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General Anti-Avoidance Rules
(ii) the situs of an asset or of a transaction,
at a place other than the place of residence, location of the asset or
location of the transaction as provided under the arrangement; or
(g) considering or looking through any arrangement by disregarding any
corporate structure.
For the above purposes--
(i) any equity may be treated as debt or vice versa;
(ii) any accrual, or receipt, of a capital nature may be treated as of
revenue nature or vice versa; or
(iii) any expenditure, deduction, relief or rebate may be recharacterised.
Treatment of connected person and
accommodating party [Section 99]
In determining whether a tax benefit exists--
(i) the parties who are connected persons in relation to each other may
be treated as one and the same person;
(ii) any accommodating party may be disregarded;
(iii) such accommodating party and any other party may be treated as
one and the same person;
(iv) the arrangement may be considered or looked through by
disregarding any corporate structure.
Application of chapter X-A [Section 100]
The provisions of this Chapter shall apply in addition to, or in lieu of, any
other basis for determination of tax liability.
Chapter to be applied in accordance with
prescribed guidelines [Section 101]
The provisions of this Chapter shall be applied in accordance with such
guidelines and subject to such conditions and the manner as may be
prescribed.
As per Rule 10U of the Income-tax Rules, 1962, Chapter XA shall not apply
in respect of the following:
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Taxation of Non-Residents
· An arrangement where the total tax benefit in aggregate to all the
concerned parties in a particular financial year does not exceed Rs. 3
Crores (Rs. 30 million)
· A Foreign Institutional Investor, who is an assessee under the Act, who
has not taken benefit of an agreement referred to in section 90 or
section 90A as the case may be and who has invested in listed
securities, or unlisted securities, with the prior permission of the
competent authority, in accordance with the Securities and Exchange
Board of India (Foreign Institutional Investor) Regulations, 1995 and
such other regulations as may be applicable, in relation to such
investments
· A non-resident in relation to investments made in a Foreign Institutional
Investor by way of offshore derivative instrument (eg. total return swaps
or participatory notes) or otherwise i.e. Participatory note holder, directly
or indirectly
· any income accruing or arising to, or deemed to accrue or arise to, or
received or deemed to be received by, any person from transfer of
investments made before April 1, 2017 by such person.
In order to provide certainty to investors, all investments made before April 1,
2017 would not be subject to GAAR.
As per Rule 10UA of the Income-tax Rules, 1962, for the purposes of sub-
section (1) of section 98, where a part of an arrangement is declared to be
an impermissible avoidance arrangement, the consequences in relation to
tax shall be determined with reference to such part only.
Rule 10UB provides that for the purpose of section 144BA(1), the Assessing
Officer before making a reference to the Commissioner in Form 3CEG issue
a notice in writing to the assessee seeking objections if any to the
applicability of chapter XA. The notice issued shall contain the following:--
i. Details of the arrangement to which the provisions of Chapter X-A
are proposed to be applied;
ii. the tax benefit arising under the arrangement;
iii. the basis and reason for considering that the main purpose of the
identified arrangement is to obtain tax benefit;
iv. the basis and the reasons why the arrangement satisfies the
condition provided in clause (a), (b), (c) or (d) of sub-section (1) of
section 96; and
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General Anti-Avoidance Rules
v. the list of documents and evidence relied upon in respect of (iii) and
(iv).
This rule further provides that where the Commissioner is satisfied that the
provisions of Chapter X-A are not required to be invoked with reference to an
arrangement after considering the reference received from the Assessing
Officer under section 144BA(1) or after the reply of the assessee in response
to the notice issued under section 144BA(2), he shall issue directions to the
Assessing Officer in Form No. 3CEH.
Similarly, the Commissioner before making a reference to the Approving
Panel under section 144BA(4), shall record his satisfaction regarding the
applicability of the provisions of Chapter X-A in Form No. 3CEI and enclose
the same with the reference.
Rule 10UC lays down the time-limits for completing the proceedings as
under:
i. No directions under section 144BA(3) shall be issued by the
Commissioner after the expiry of one month from the end of the
month in which the date of compliance of the notice issued under
section 144BA(2) falls;
ii. No reference shall be made by the Commissioner to the Approving
Panel under sub-section (4) of section 144BA after the expiry of two
months from the end of the month in which the final submission of
the assessee in response to the notice issued under section
144BA(2) is received;
iii. The Commissioner shall issue directions to the Assessing Officer in
Form No.3CEH within a period of one month from the end of month
in which the reference is received by him. While, the said time-limit
is increased to two months in cases where the final submissions of
the assessee in response to the notice issued under section
144BA(2) is received by the Commissioner.
Considering the subjectivity around GAAR, stakeholders and industry
associations requested the government to issue directions or clarifications on
various issues. CBDT constituted a working group in June 2016 to provide
their comments on the issue. CBDT on January 27, 2017 issued clarifications
on implementation of GAAR which are briefly covered as under:
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Taxation of Non-Residents
1) Tax treaty v. GAAR
If there is limitation of benefit clause in tax treaty that sufficiently
addresses tax avoidance, GAAR will not be invoked. However, if
some tax avoidance strategies are not addressed by LOB clause,
those can be tackled by GAAR.
GAAR will not be invoked merely on the argument on that the
taxpayer is located in a tax efficient jurisdiction. If the jurisdiction of a
FPI is finalised based on non-taxed commercial considerations and
the main purpose of the engagement is not to obtain tax benefits,
GAAR would not apply.
2) Application of specific provisions v. GAAR
If the law allows taxpayer to select between two alternatives of
implementing a transaction, GAAR cannot be invoked by tax
authorities to challenge the alternative selected by the taxpayer.
Even if an arrangement satisfies specific anti-avoidance rule (SAAR)
provided in law, it can still be subject to GAAR as SAAR may not
address all situations of abuse of the law by taxpayers. GAAR
provisions are generic and therefore can co-exist with SAAR.
If a treaty benefit claim is made in one year by taxpayer and the tax
payer opts to be governed by the domestic law in another year,
GAAR will not deny such a claim.
3) Judicial Interpretation
GAAR will be invoked only in deserving cases which are highly
aggressive and artificial and not there is a difference in interpretation.
There is a two-step approval process in place GAAR provisions can
be invoked.
If the approving authorities (Commissioner / Approver Panel) has
rejected the tax officer 's request to invoke GAAR provisions in
respect of an arrangement in any year, GAAR cannot be invoked in
respect of such arrangement in subsequent years provided the facts
and circumstances remain the same.
GAAR would not apply to an arrangement in respect of which an
advance ruling has been obtained from the Authority for Advance
Rulings.
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General Anti-Avoidance Rules
GAAR will not be applied to an arrangement sanctioned by the Court
where the Court has explicitly and adequately considered the tax
implications of the arrangement.
4) Grandfathering benefit
Grandfathering benefit would be available to an investor on shares
acquired after March 31, 2017, if the shares acquired by such
investor through conversion of compulsorily convertible instruments
(eg. compulsorily convertible preference shares or debentures)
issued before April 1, 2017 provided the terms of conversion were
finalised at the time of original acquisition of such instruments. Also
grandfathering provisions would be available for shares acquired in a
share split or consolidation or through bonus issue, provided the
original shares were acquired before April 1, 2017.
Grandfathering benefit is not available to lease contracts and loan
arrangements as the same are not `investments'.
5) GAAR as deterrent
An impermissible avoidance arrangement will be disregarded by
application of GAAR provisions and necessary consequences will
follow (including penalty).
Period of time for which an arrangement exists is only a relevant
factor and not a sufficient factor to determine whether an
arrangement lacks substance and accordingly, a definite timeline of
existence of arrangement is not required.
GAAR is an anti-avoidance provision with deterrent consequences.
Therefore, in event of a particular consequence being applied in the
hands of one of the participants as a result of GAAR provisions,
corresponding adjustment in the hands of another participant will not
be made.
GAAR provision apply to tax benefit enjoyed in Indian jurisdiction due to an
impermissible arrangement or part of arrangement and does not extend to
tax consequences, on a net basis or otherwise, across territories. Further,
the exemption limit for tax benefit upto Rs. 3 crores cannot be restricted to a
single taxpayer alone and impact on all parties to the arrangement to be
considered.
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Taxation of Non-Residents
Meaning of key terms used in the chapter X-A
[Section 102]
In this Chapter, unless the context otherwise requires,--
(1) "arrangement" means any step in, or a part or whole of, any
transaction, operation, scheme, agreement or understanding, whether
enforceable or not, and includes the alienation of any property in
such transaction, operation, scheme, agreement or understanding;
(2) "asset" includes property, or right, of any kind;
(3) "benefit " includes a payment of any kind whether in tangible or
intangible form;
(4) "connected person", means any person who is connected directly or
indirectly to another person and includes --
(a) any relative of the person, if the person is an individual;
(b) any director of the company or any relative of such director, if the
person is a company;
(c) any partner or member of a firm or association of persons or body of
individuals or any relative of such partner or member if the person is
a firm or association of persons or body of individuals;
(d) any member of the Hindu undivided family or any relative of such
member, if the person is a Hindu undivided family;
(e) any individual who has a substantial interest in the business of the
person or any relative of such individual;
(f) a company, firm or an association of persons or a body of individuals,
whether incorporated or not, or a Hindu undivided family having a
substantial interest in the business of the person or any director,
partner, or member of the company, firm or association of persons or
body of individuals or family, or any relative of such director, partner
or member;
(g) a company, firm or association of persons or body of individuals,
whether incorporated or not, or a Hindu undivided family, whose
director, partner, or member has a substantial interest in the business
of the person, or family or any relative of such director, partner or
member;
(h) any other person who carries on a business, if--
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General Anti-Avoidance Rules
(i) the person being an individual, or any relative of such person,
has a substantial interest in the business of that other person;
or
(ii) the person being a company, firm, association of persons,
body of individuals, whether incorporated or not, or a Hindu
undivided family, or any director, partner or member of such
company, firm or association of persons or body of individuals
or family, or any relative of such director, partner or member,
has a substantial interest in the business of that other person;
(5) "fund" includes--
(a) any cash;
(b) cash equivalents; and
(c) any right, or obligation, to receive, or pay, the cash or cash
equivalent;
(6) "party" includes a person or a permanent establishment which
participates or takes part in an arrangement;
(7) "relative" shall have the meaning assigned to it in the Explanation to
clause (vi) of sub-section (2) of section 56;
(8) a person shall be deemed to have a substantial interest in the
business, if--
(a) in a case where the business is carried on by a company, such
person is, at any time during the financial year, the beneficial owner
of equity shares carrying twenty per cent or more, of the voting
power; or
(b) in any other case, such person is, at any time during the financial
year, beneficially entitled to twenty per cent or more, of the profits of
such business;
(9) "step" includes a measure or an action, particularly one of a series
taken in order to deal with or achieve a particular thing or object in
the arrangement;
(10) "tax benefit" means--
a) a reduction or avoidance or deferral of tax or other amount
payable under this Act; or
b) an increase in a refund of tax or other amount under this Act; or
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Taxation of Non-Residents
c) a reduction or avoidance or deferral of tax or other amount that
would be payable under this Act, as a result of a tax treaty; or
d) an increase in a refund of tax or other amount under this Act as
a result of a tax treaty; or
e) a reduction in total income or an increase in loss,
in the relevant previous year or any other previous year.
(11) "tax treaty" means an agreement referred to in sub-section (1) of
section 90 or sub-section (1) of section 90A.
238
Chapter 10
Concessional Tax Rates for NRIs
Chapter XII-A has been introduced in the Income tax Act 1961 with effect
from June 01, 1983. This chapter contains seven sections viz. 115C to 115I.
The provisions of this chapter are applicable to a non-resident Indian who
invests in certain foreign exchange assets and who derives investment
income and/or long-term capital gains in respect thereof.
A non resident Indian is defined to mean an individual who is not resident in
India as defined in section 6 of the Act. It is irrelevant whether he is a citizen
of India or not so long as he is a person of Indian origin. A person is deemed
to be a person of Indian origin if he or either of his parents or any of his
grand parents were born in undivided India.
According to clause (b) of section 115C a "foreign exchange assets" means
any specified assets, which the assessee has acquired or purchased with, or
subscribed to in convertible foreign exchange.
As per clause (f) of section 115C the following are specified assets.
(i) Share in an Indian company;
(ii) Debentures issued by an Indian company which is not a private
company as defined in the Companies Act, 2013;
(iii) Deposits with an Indian company which is not a private company as
defined in the Companies Act, 2013;
(iv) Any securities of the Central Government as defined in clause (2) of
section 2 of the Public Debt Act, 1944;
(v) Such other assets as notified by the Central Government.
Section 115D makes special provisions for computation of "investment
income" of a non-resident Indian. Clause (c) of section 115C defines an
"Investment Income" to mean any income other than dividends referred to in
section 115-O derived from a foreign exchange asset.
According to section 115D(1), while computing the "Investment income" of a
non-resident Indian, no deduction is allowed under any provision of the Act in
respect of any expenditure or allowance. Thus making the gross investment
income taxable at the rate specified in section 115E, unless the assessee
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Taxation of Non-Residents
exercises the option under section 115I of being not governed by chapter
XIIA.
Section 115D(2) further provides that no deduction be allowed to a non-
resident Indian assessee under chapter VIA (i.e. sections 80A to 80U) from
his "investment income" or income by way of long term capital gains or both.
However, it does not prohibit for allowance of rebate under section 88 [CIT v.
K. C. John [2003] 264 ITR 715 (Kerala HC)].
Clause (d) of section 115C defines "long term capital gains" to mean income
chargeable under the head "capital gains" relating to a capital asset being a
foreign exchange asset which is not a short term capital assets.
Further, section 115D(2) also provides that no deduction be allowed under
sub section (2) of section 48 while computing investment income or income
by way of long-term capital gains.
Section 115E provides for tax rate on investment income and long term
capital gains. Under this section, the investment income and long-term
capital gains of non-resident Indians are to be treated as a separate block
and charged to tax at flat rates. Investment income (other than dividend
referred to in section 115-O) to be taxed at 20% plus surcharge and long
term capital gains from transfer of specified assets to be taxed at 10% plus
surcharge.
Non-Resident Ordinary (NRO) deposit acquired with convertible foreign
exchange in a banking company, which is not a private company as per
Companies Act, 1956, shall be treated as a `foreign exchange asset' under
section 115C(b). The interest on such NRO deposit shall be treated as
investment income under section 115C(c) which is liable to be taxed as
section 115E. [V. Ravi Narayanan, In re [2008] 300 ITR 62 (AAR Delhi)]
The point for consideration is whether the benefit of the confessional tax rate
is applicable to short term capital gains by treating the same as investment
income?
Similar question arose before the Mumbai Tribunal in Sunderdas Haridas v.
ACIT [1998] 67 ITD 89. In that case, the facts were, the assessee, being a
non resident Indian to whom the provisions of Chapter XIIA of the Act
applied, claimed that the short term capital gain was of the nature of
investment income as defined under section 115C and so should be taxed at
concessional rate of 20% stipulated in section 115E. The Assessing Officer
rejected the claim on the ground that the concessional rate applied only to
long-term capital gains and investment income, which did not include the
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Concessional Tax Rates for NRIs
short-term capital gain. The Commissioner (Appeals) concurred with the
Assessing Officer.
In appeal by the assessee, the Tribunal hold that the word "investment
income" used in section 115E does not include within its scope short-term
capital gains. If this word is so construed as to include short term capital
gains within its scope the expression "income by way of long term capital
gains or both" figuring in section 115D and 115E would be rendered otiose.
Further, the Tribunal observed that income derived from an asset can be only
of two types i.e. income as normally construed or capital gains. The Act has
consistently made a distinction between short term capital gains and long
term capital gains, both for applying the tax rates and set off of losses. If the
benefit of concessional tax rate is extended even to short term capital gains
by including the short term capital gains within the scope of the expression
"investment income" used in section 115E, such an approach would overlook
the distinction consistently made in the Act between the short term capital
gains and long term capital gains and also render the expression "long term
capital gains or both" redundant. The same is reiterated by the Bombay HC
in the case of CIT v. Sham L. Chellaram [2015] 373 ITR 292.
Long-term capital gains earned by a non-resident on transfer of bonus
shares which resulted from original investment of shares made out of
convertible foreign exchange is eligible to be taxed at concessional rate of 10
per cent under section 115E. [Smt. Deivanayagam Maruthini v. DDIT [2012]
51 SOT 163 (Chennai Tribunal)]
In Hari Gopal Chopra v. CIT, [1999] 237 ITR 135, the authority for advance
ruling held that every nationalized bank is deemed to be an Indian Company
for purpose of the Income tax Act and assets deposited in such a bank would
be specified assets within meaning of section 115C.
Section 115F sets out the circumstances on fulfillment whereof "long term
capital gains" arising from transfer of a foreign exchange asset are not to be
charged, if the assessee invests net proceeds realized on such transfer
within six months from the date of transfer in any of the `specified assets' as
defined in section 115C(f) or in saving certificate referred to in section
10(4B).
If the entire net proceeds so realized are so invested within the stipulated
period, then, the whole of the "long term capital gains" is exempt from tax.
However, if only a portion of the net proceeds so realized is so invested
241
Taxation of Non-Residents
within the stipulated period, the exemption from tax in respect of long term
capital gains is allowed on proportion basis.
In order to earn the exemption as stated above, the new asset must be
continue to be held by the assessee for at least three years from the date of
its acquisition. In case where the new assets is transferred or converted,
otherwise than by a transfer, into money by the assessee within a period of
three years from the date of acquisition, the amount of capital gains arising
from the transfer of the original assets exempted from tax on the basis of the
acquisition of the new assets is deemed to be long term capital gains
chargeable to tax in the year in which the transfer or conversion (otherwise
than by transfer) into money, of the new asset takes place.
The bonus shares acquired by the assessee, where the original shares were
acquired by investing in convertible foreign exchange, were covered by
section 115C(b), and the same were eligible for benefit under section 115F.
[Sanjay Gala v. ITO [2011] 46 SOT 482 (Mumbai Tribunal)]. The same is
reiterated by the Hyderabad Tribunal in the case of Shashi Parvatha Reddy
v. DCIT(IT) [2017] 167 ITD 587.
Section 115G prescribes that, in the following circumstances a non resident
Indian, although having taxable income, need not file a return of income
under section 139(1), if
(a) the non resident Indian's income consists only of "investment income"
or income by way of "long term capital gains" or both
and
(b) the tax deductible at source from such income has been deducted.
Section 115H enables a non resident Indian assessee to avail the benefit of
Chapter XII-A in relation to investment income derived from debentures (not
shares) and deposit with an Indian public limited company and also from
Central Government securities or other specified asset even for a
subsequent year wherein he become resident in India. In order to avail such
benefit, the assessee has to furnish a declaration in writing alongwith his
return of income for such subsequent years to that effect. On such
declaration having been filed, the provisions of chapter XII-A shall continue
to apply in relation to such income for such subsequent year and every year
thereafter until the transfer or conversion (other than by transfer) into money
of such assets.
In Dr. M. Manohar v. ACIT [2011] 339 ITR 49, the Madras High Court held
that where assessee received interest on investment made out of foreign
242
Concessional Tax Rates for NRIs
funds which was chargeable to tax at concessional rate under section 115H,
said special treatment could not be extended to interest on interest
redeposited with original sum.
In the case of CIT v. M.C. George [2011] 243 CTR 404, a question arose
before the Kerala High Court whether transfer of specified asset without
affecting its character would affect its identity as a foreign exchange asset for
purpose of section 115H. In the instant case, assessee, as a non-resident
Indian, made deposits in Indian bank in convertible foreign exchange under
Non-Resident Non-Repatriable Scheme (NRNR). Later on, assessee became
a resident of India and he transferred NRNR accounts from banks in which
original deposits were made to other scheduled banks.
Assessing Officer held that assessee was not entitled to concessional rate of
tax under section 115H, read with section 115E, for reason that transferred
NRNR deposits had ceased to be foreign exchange assets.
The High Court held that so long as original source of deposit was
convertible foreign exchange, transfer of such foreign exchange asset,
namely, deposit, from one bank to another bank would not affect its identity
as a foreign exchange asset and, therefore, assessee was entitled to
concessional rate of tax on interest earned from NRNR deposits under
section 115H, read with section 115E.
Section 115I gives an option to a non resident Indian to elect that he should
not be governed by the special provisions of chapter XII A for any particular
assessment year. Such option can be exercised by making a declaration in
the relevant column of return of income for that assessment year. In case
where such an option is exercised by a non-resident Indian, the whole of his
total income including "investment income" and "long term capital gains" is to
be charged to tax under the general provisions of the Act.
Special provisions for computing income by way
of royalties etc. in the case of foreign companies
Section 44D of the Income tax Act lays down special provision for computing
income by way of royalties and fees for technical services received by foreign
companies from Government or an Indian concern. Where such income is
received in pursuance of an agreement made after March 31, 1976, section
44D(b) provides that the gross amount of income by way of royalties for fees
for technical services received by such foreign companies without any
243
Taxation of Non-Residents
deduction, expenditure or allowance is chargeable to tax at the rates
specified in section 115A.
Section 115A provides that royalties or fees for technical services received
by foreign companies will be taxed at concessional rate of 20% only if the
agreement with an Indian concern under which these royalties or fees for
technical services are received is approved by the Central Government or
relates to a matter that is covered under the Industrial policies.
The Act has amended clause (b) of section 44D by inserting a sun-set clause
and has made this section inoperative in respect of agreements entered after
March 31, 2003.
With a view to harmonies the provisions relating to the income from royalty or
fees for technical services attributable to a fix place of profession or
permanent establishment in India with similar provisions in various DTAA, the
Act has inserted a new section 44DA in the Act. This section provides that
income by way of royalty or fees for technical services received from
Government or an Indian concern in pursuance of an agreement made by a
non-resident or a foreign company with Government or the Indian concern
after March 31, 2003 shall be computed under the head `Profits and gains of
business or profession' in accordance with the provisions of the Act.
However, the provisions of the said section shall apply only if the non-
resident or a foreign company carries on business in India through
permanent establishment situated in India or performs professional services
from a fix place of profession situated in India, and the right, property or
contract in respect of which the royalty or fees for technical services are paid
is effectively connected with such permanent establishment or fix place of
profession, as the case may be. It has also been provided that no deduction
shall be allowed
(i) in respect of any expenditure or allowance which is not wholly and
exclusively incurred for the business of such permanent
establishment or fixed place of profession in India; and
(ii) in respect of amounts, if any, paid (otherwise than towards
reimbursement of actual expenses) by the permanent establishment
to its head office or to any of its other offices.
The section also requires that every non-resident or a foreign company shall
keep and maintain books of account and other documents in accordance with
the provisions of section 44AA and get the accounts audited by an
accountant as defined in the explanation to section 288 to and furnish
244
Concessional Tax Rates for NRIs
alongwith the return of income, the report of such audit in the prescribed form
duly signed and verified by such accountant.
Tax on dividend, royalty and technical service fee
in the case of foreign companies [Section 115A]
Section 115A of the Act, provides that the income of a non resident or a
foreign company, by way of
(i) dividends (other than dividends referred to in section115-O); or
(ii) interest received from Govt. or an Indian concern on monies borrowed or
debt incurred by Govt. or the Indian concern in foreign currency not
being interest received from infrastructure debt fund set up in
accordance with the guidelines as may be prescribed, which is notified
by the Central Government in the Official Gazette for the purpose of this
clause or interest of the nature and extent referred to in section 194LC;
or
(iii) income received in respect of units, purchased in foreign currency, of
mutual fund under section 10(23D) or Unit Trust of India; shall be taxed
@ 20%.
(iv) interest received from infrastructure debt fund set up in accordance with
the guidelines as may be prescribed, which is notified by the Central
Government in the Official Gazette for the purpose of this clause; or
(v) interest of the nature and extent referred to in section 194LC; or
(vi) interest of the nature and extent referred to in section 194LD; or
(vii) distributed income being interest referred to in sub-section (2) of section
194LBA; shall be taxed @ 5%.
If a non-resident or a foreign company includes any income by way of royalty
or fees for technical services received from Government or Indian concern in
pursuance of an agreement made by the foreign company with Government
or the Indian concern after March 31,1997 and where such agreement is with
an Indian concern and the agreement is approved by the Central
Government or where it relates to a matter included in the industrial policy of
the Government of India and the agreement is an accordance with that
policy, the income tax shall be payable @ 10%.
If the royalty is in consideration for the transfer of all or any rights (including
granting of a license) in respect of copyright in any book to an Indian concern
245
Taxation of Non-Residents
or in respect of any computer software to a person resident in India shall be
taxed @ 10% provided that-
(a) such book is on a subject, the books on which are permitted
according to the Import Trade Control Policy of the Government of
India for the period commencing on April 1,1977 and ending with
March 31,1978 be imported into India under an open General
License;
(b) Such computer software is permitted according to the Import Trade
Control Policy of the Government of India under an open General
License.
It has also been provided that no deduction in respect of any expenditure or
allowance shall be allowed under section 28 to 44C and section 57 in
computing the aforesaid income of non-resident and foreign companies.
Further, no deduction shall be allowed under chapter VIA of the Act.
However, if, the gross total income includes the aforesaid incomes, the
deduction under chapter VIA shall be allowed from the gross total income as
reduced by the said incomes.
It has further been provided that it shall not necessary for the assessee to
furnish a return of their income under section 139(1); if
(a) the total incomes in respect of which they are assessable under the
Act consists only incomes referred above.
and
(b) the tax deductible at source under the provisions of Chapter XVIIB of
the Act has been deducted from such incomes.
Tax on income from units purchased in foreign
currency or capital gains arising from their
transfer in case of Offshore Fund [Section 115AB]
Section 115AB(1) provides that where the total income of the assessee,
being overseas financial organization (hereinafter referred to as Offshore
Fund) includes:
(a) Income received in respect of units purchased in foreign currency or
(b) Income by way of long term capital gains arising from the transfer of
units purchased in foreign currency;
the income tax payable shall be aggregate of:
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Concessional Tax Rates for NRIs
(i) the amount of income tax calculated on the income in respect of units
referred above, @ 10% plus surcharge;
(ii) the amount of income tax calculated on the income by way of long
term capital gains referred above, @ 10% plus surcharge and
(iii) the amount of income-tax with which the offshore fund would have
been chargeable had its total income been reduced by
aforementioned income.
According to section 115AB(2), when the gross total income of Offshore
Fund consists only of income from units or income by way of long term
capital gains arising from the transfer of units, or both, no deduction shall be
allowed to the assessee under sections 28 to 44C or section 57(i) or 57(iii) or
under chapter VIA and nothing contained in the provisions of the second
proviso to section 48 shall apply to income referred to in clause (b) of sub-
section (1);.
Further where the gross total income of the Offshore Fund includes any
income from units or income by way of long term capital gains arising from
the transfer of units, or both, the gross total income shall be reduced by the
of amount of such income and the deduction under chapter VIA shall be
allowed as if the gross total income as so reduced were the gross total
income of the assessee
"Overseas financial organization" is defined so as to mean any fund,
institution, association or body, whether incorporation or not, established
under the laws of a country outside India, which has entered into an
arrangement for investment in India with any public sector bank or public
financial institution or a mutual fund specified under section 10(23D) and
such arrangement is approved by the SEBI established under the Securities
and Exchange Board of India Act, 1992 for this purpose.
Effective from April 1, 2003 income of units of specified mutual funds is
exempt under section 10(35) of the Income-tax Act.
Similarly, effective from April 1, 2005 long-term capital gains in respect of
units of equity oriented funds or unit of a business trust is exempt under
section 10(38) of the Income-tax Act. However, vide Finance Act 2018, long-
term capital gains on sale of equity oriented mutual funds or units of a
business trust are brought back under the tax net (section 112A) subject to
satisfaction of the specified conditions.
247
Taxation of Non-Residents
Tax on income from bonds or shares purchased
in foreign currency or capital gains arising from
the transfer in case of non-resident [Section
115AC]
According to section 115AC(1), where the total income of an assessee, being
a non-resident includes:
(a) income by way of interest, on bonds of an Indian company, issued in
accordance with such scheme as notified by the Central Government
in this behalf or bonds of a public sector company, sold by the
Government and purchased by him in foreign currency; or
(b) income by way of dividends (other than dividend referred to in section
115-O) on Global Depository Receipts subject to conditions specified;
or
(c) income by way of long term capital gains arising from the transfer of
such bonds or shares the income tax payable shall be @10%
Accordingly to section 115AC(2) provides that where the gross total income
of the non-resident consists only of the aforesaid income no deduction shall
be allowed to him under section 28 to 44C or section 57(i) or 57(iii) or under
chapter VIA.
Section 115AC(3) provides nothing contained in the first and second proviso
s to section 48 shall apply for the computation of long-term capital gains
arising out of the transfer of long term capital asset, being bonds or Global
Depository Receipts referred to in section 115AC(1)(c).
By virtue of section 115AC(4), it shall not be necessary for a non-resident to
furnish under section 139(1), a return of income if his total income in respect
of which he is assessable under the Act during the previous year consisted
only of income referred to in section 115AC(1)(a) / 115AC(1)(b), and the tax
deductible at source under the provisions of chapter XVIIB has been
deducted from such income.
Section 115AC(5) provides that where the assessee acquired Global
Depository Receipts or bonds in an amalgamated or resulting company by
virtue of his holding Global Depository Receipts or bonds in the
amalgamating or demerged company, in accordance with the provisions of
sub section (1), the concessional tax treatment accorded to the original
248
Concessional Tax Rates for NRIs
Global Depository Receipts or bonds, would continue to apply such Global
Depository Receipts or bonds.
Tax on income of foreign Institutional Investors
from Securities or Capital gains arising from their
transfer [Section 115AD]
Section 115AD(1) provides that when the total income of Foreign Institutional
investors includes:
(a) income (other than income by way of dividends referred to in section
115-O) received in respect of securities (other than units referred to
in section 115AB); or
(b) income by way of short term or long-term capital gains arising from
the transfer of such securities,
the income tax payable shall be the aggregate of:
(i) the amount of income tax calculated on the income in
respect of securities referred to in section 115AD(1)(a), if
any, included in the total income @ 20%. However, the
amount of income-tax calculated on the income by way of
interest referred to in section 194LD shall be @ 5%;
(ii) the amount of income tax calculated on the income by way
of short term capital gains referred to in section
115AD(1)(b), if any, included in the total income @ 30%.
However, if the transaction of sale of equity share in a
company or a unit of equity oriented fund is entered into on
or after October 1, 2004, then such transaction is
chargeable under Security Transaction Tax and therefore in
such case short term capital gains shall be payable @ 15%;
(iii) the amount of income tax calculated on the income by way
of long term capital gains referred to in section 115AD(1)(b),
if any included in the total income @ 10%, and
(iv) Further, with effect from AY 2019-2020, long-term capital
gains arising from the transfer of specified securities like
equity shares or a unit of an equity oriented fund or a unit of
a business trust (on an amount exceeding Rs.1 lakh) is
taxable at the rate of 10%.
249
Taxation of Non-Residents
(v) the amount of income tax with which the foreign Institutional
Investor would have been charged had its total income
reduced by the amount of income referred in section
115AD(1)(a) and 115AD(1)(b).
By virtue of section 115AD(2), where the gross total income of Foreign
Institutional Investors consists only of income in respect of securities referred
to in section 115AD(1)(a), no deduction shall be allowed to it under section
28 to 44C or section 57(i) or 57(iii) or under chapter VIA. Further, where the
gross total income of the Foreign Institutional Investor includes any income
referred to in section 115AD(1)(a) or section 115AD(1)(b), the gross total
income shall be reduced by the amount of such income and the deduction
under chapter VIA shall be allowed as if the gross total income as so
reduced, were the gross total income of the Foreign Institutional Investor.
Further, as per section 115AD(3), nothing contained in the first and second
provisos of section 48 shall apply for the computation of capital gains arising
out of the transfer of securities referred to in section 115AD(1)(b).
Clause (a) of Explanation to section 115AD defines the expression "Foreign
Institutional Investors" means such investor as the Central Government, by
notification in the official Gazette, specify in this behalf.
Clause (b) of Explanation to section 115AD defines the expression
"securities means the meaning assigned to section 2(h) of the Securities
Contracts (Regulation) Act, 1956
In case of Foreign Institutional Investor 's loss incurred from transactions in
derivatives was to be treated as capital loss and not as business loss
[Platinum Investment Management Ltd. v. DDIT [2013] 33 taxmann.com 298
(Mumbai Tribunal)]
Tax on non-resident sportsman or sports
association [Section 115BBA]
Section 115BBA provides that the income of an assessee who is a
sportsman (including an athlete) or an entertainer, who is not citizen of India
and is a non-resident will be chargeable to tax at the flat rate of 20% plus
surcharge of the gross payment due to them. This rate will also be applicable
in respect of income derived by non-resident sportsmen from their other
activities like participating in advertisement and writing in newspapers etc.
250
Concessional Tax Rates for NRIs
Further, income of a non-resident sport association or institution includes any
amount guaranteed to be paid or payable in relation to any game or sports
played in India shall be chargeable to tax @ 20% plus surcharge.
It has also been prescribed that in such cases, there will be no necessity for
filing the return of income by such non-resident, once tax has been deducted
at source. It has been prescribed that the person responsible for paying any
sum to these non-resident sport bodies/players will be required to deduct the
tax at source @ 20% plus surcharge of the gross payments.
Calcutta High court in the case of Indocom v. CIT (335 ITR 485) held that
payments made to the umpires or match referees do not come within the
purview of section 115BBA because the umpires and match referees are
neither sportsman nor are they non-resident sports associations or
institutions so as to attract the provisions of section 115BBA.
Special provisions relating to conversion of
Indian branch of a foreign bank into a subsidiary
Indian company [Section 115JG]
Where a foreign company is engaged in the business of banking in India
through its branch situate in India and such branch is converted into a
subsidiary Indian company thereof, in accordance with the scheme framed by
the Reserve Bank of India, then, subject to conditions notified by central
government,--
(i) the capital gains arising from such conversion shall not be chargeable
to tax;
(ii) the provisions relating to treatment of unabsorbed depreciation, set
off or carry forward and set off of losses, tax credit and the
computation of income in the case of the foreign company and the
Indian subsidiary company shall apply with such exceptions,
modifications and adaptations as may be specified in that notification.
In case of failure to comply with any of the conditions notified, all the
provisions of this Act shall apply to the foreign company and the said Indian
subsidiary company without any benefit, exemption or relief under section
115JG(1).
In case in a previous year, any benefit, has been claimed and granted to the
foreign company or the Indian subsidiary company and, subsequently, there
is failure to comply with any of the conditions notified then,--
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Taxation of Non-Residents
(i) such benefit, exemption or relief shall be deemed to have been
wrongly allowed;
(ii) the Assessing Officer may, re-compute the total income of the
assessee for the said previous year and make the necessary
amendments; and
(iii) the provisions of section 154 shall apply and the period of four years
shall be reckoned from the end of the previous year in which the
failure to comply with the condition takes place.
Every notification issued under this section shall be laid before each House
of Parliament.
Special provisions relating to foreign company
said to be resident in India [Section 115JH]
Section 115JH provides that where a foreign company is said to be resident
in India in any previous year and such foreign company has not been
resident in India in any of the previous years preceding the said previous
year, then, notwithstanding anything contained in this Act and subject to the
conditions as may be notified by the Central Government in this behalf, the
provisions of this Act relating to the computation of total income, treatment of
unabsorbed depreciation, set off or carry forward and set off of losses,
collection and recovery and special provisions relating to avoidance of tax
shall apply with such exceptions, modifications and adaptations as may be
specified in that notification for the said previous year:
However, where the determination regarding foreign company to be resident
in India has been made in the assessment proceedings relevant to any
previous year, then, the provisions of section 115JH(1) shall also apply in
respect of any other previous year, succeeding such previous year, if the
foreign company is resident in India in that previous year and the previous
year ends on or before the date on which such assessment proceeding is
completed.
In case in a previous year, any benefit, has been claimed and granted to the
foreign company or the Indian subsidiary company and, subsequently, there
is failure to comply with any of the conditions notified then,--
(i) such benefit, exemption or relief shall be deemed to have been wrongly
allowed;
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Concessional Tax Rates for NRIs
(ii) the Assessing Officer may re-compute the total income of the assessee
and make the necessary amendment as if the exceptions, modifications
and adaptations referred to in sub-section (1) did not apply; and
(iii) the provisions of section 154 shall apply and the period of four years
shall be reckoned from the end of the previous year in which the failure
to comply with the condition takes place.
Every notification issued under this section shall be laid before each House
of Parliament. Notification No. 29/2018 dated 22nd June 2018 has been
issued by Central Board of Direct Taxes in this regard.
253
Chapter 11
Tax Deduction at Source in respect of
Payments to Non Residents
The tax deduction at source ( `TDS') is one of the methods of collecting
Income tax. The other methods are:
(a) Advance tax
(b) Self assessment tax
(c) Regular collection after assessment
(d) Tax collection at source.
Under the TDS method, the person who makes the payment or credit the
amount to non-resident, he requires to deduct the prescribed amount of tax
from such payment/credit and deposit the same with the Central
Government.
1. Payment to non-resident sportsmen or
sports association [Section 194E]
Section 194E enjoins upon a person responsible for making any payment of
any income, referred to in section 115BBA or to a non-resident sportsman
(including an athlete) or to an entertainer who is not a citizen of India and
who is a non-resident or to a non resident sports association or institution to
deduct at the time of credit of such income to the account of the payee or at
the time of payment thereof in cash or by issue of cheque or draft or by any
other mode, whichever is earlier, income tax thereon at the rate of 20 per
cent plus surcharge and cess.
The following payments to non-resident sportsman (including an athlete are
covered by section 115BBA:
(a) income by way of participation in India in any game or sport;
(b) income by way of advertisements; and
(c) income by way of contribution to articles relating to any game or sport
in India in newspapers, magazines or journals.
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Tax Deduction at Source in respect of Payments to Non Residents
Any income by way of winnings from lotteries, cross word puzzles, races
including horse races and gambling or betting are not covered by this
section.
The amount guaranteed to be paid or payable to any non-resident sports
association or institution in relation to any game (other than winnings from
lotteries, cross word puzzles, races including horse races and gambling or
betting) or sports played in India are subject to tax deduction under section
194E.
2. Income by way of interest from infrastructure
debt fund [Section 194LB]
An infrastructure debt fund, which is responsible for paying to a non-resident
shall deduct tax @ 5%, at the time of credit or payment whichever is earlier.
3. Income by way of interest from Indian
company [Section 194LC]
Indian company is required to deduct tax @5% on interest payable in the
following cases to non- resident, at the time of credit or payment whichever is
earlier.
(i) in respect of monies borrowed in foreign currency, from a source
outside India, in any of the following forms-
(a). under a loan agreement on or after July 1, 2012 but before
July 1, 2020 or
(b). by way of issue of any long-term bond (including long-term
infrastructure bond) at any time on or after October 1, 2014
but before July 1, 2020
as approved by the Central Government in this behalf; and
(ia) in respect of monies borrowed by issue of rupee denominated bond
from a source outside India before July 1, 2020 and
(ii) to the extent to which such interest does not exceed the amount of
interest calculated at the rate approved by the Central Government in
this behalf, having regard to the terms of the loan or the bond and its
repayment.
255
Taxation of Non-Residents
3. Other sums [Section 195]
Section 195(1) enjoins upon any person responsible for paying to a non-
resident, or to a foreign company, any interest (other than interest on
securities under section 194LB or 194LC or 194LD) or any other sum
chargeable under the provisions of the Act (not being income chargeable
under the head "salaries") to deduct tax at rate in force at the time of credit of
such income to the account of the payee or at the time of payment thereof in
cash or by the issue of a cheque or draft or by any other mode, whichever is
earlier.
The first proviso to section 195(1) provides that in the case of interest
payable by the Government or a public sector bank within the meaning of
section 10(23D) or a public financial institution within the meaning of section
10(23D), deduction of tax is to be made only at the time of payment thereof
in cash or by the issue of cheque or draft or by any other mode and not at
the time of credit.
The second proviso to the section provides that no deduction shall be made
in respect of any dividends referred to in section 115-O. This is because
domestic companies are required to pay tax on distributed profits and
therefore dividend is exempt in the hands of recipient under section 10(34).
The Explanation to section 195(1) enacts deeming provisions for the purpose
of this section and provides that any interest or other sum as aforesaid
credited to any account, whether called "Interest payable account" or
"Suspense account" or by any other name, in the books of account of the
person liable to pay such income, the provisions of section 195 would apply
accordingly.
i. For this purpose, the payer himself is treated as "person responsible
for paying" such amount. If however, the payer is a company, the
company itself including the principal officer thereof, is the person
responsible for paying such amount.
ii. Where the sum payable to a non resident Indian represents
consideration for the transfer of any foreign exchange asset (other
than a short term capital asset), the "authorized dealer " responsible
for remitting such sum or crediting such sum to Non-resident
(external) Account of the payee shall be the "person responsible for
the paying".
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Tax Deduction at Source in respect of Payments to Non Residents
Explanation 2 to section 195(1) which clarifies that obligation to deduct tax
under section 195(1) has always meant to extend to all persons resident or
non-residents, whether or not the non-resident has
(i) A residence or place of business or business connection in India; or
(ii) Any other presence in any manner whatsoever in India
Section 195(2) provides that, where the person responsible for paying any
such sum chargeable under the Act, other than interest on securities and
salary, to a non-resident considers that the whole of such sum would not be
income chargeable in the case of the recipient, then, he may make an
application to the Assessing Officer to determine by general or special order,
appropriate proportion of such sum so chargeable and upon such
determination, tax is to be deducted under section 195(1) only on that
proportion of sum which is so chargeable.
Section 195(3) enables, subject to the rules made under section 195(5), any
person who is entitled to receive any interest or other sum on which income
tax has not to be deducted under section 195(1) to make an application in
Form No. 15C or Form No. 15D as per the provisions of rule 29B to the
Assessing Officer for the grant of a certificate in Form no. 15E authorizing
him to receive such interest or other sum without deducting tax thereon
under section 195(1).
A certificate granted under section 195(3) shall remain in force till the expiry
of the period specified therein or if is cancelled by the Assessing Officer
before the expiry of such period, till such cancellation [Section 195(4)].
Section 195(5) empowers the Board to make rules having regard to the
convenience of assessee or the interest of revenue, by notification in the
Official Gazette specifying:
· in the cases in which, and the circumstances under which, an
application may be made for the grant of a certificate under section
195(3) and
· the condition subject to which such certificate may be granted and
· providing for all other matters connected therewith.
Under Section 195(6), deductor of tax at source is required to file the
information relating to payment in the forms 15CA and 15CB and in the
manner prescribed in rule 37BB.
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Taxation of Non-Residents
As per section 195(7), by which CBDT is authorized to issue the notification
specifying the class of persons or cases where the person responsible for
paying to non-resident, any sum, whether or not chargeable under the
provisions of this Act, shall make an application to AO to determine the
appropriate proportion of sum chargeable, and tax shall be deducted on
sums so chargeable.
Important judicial precedents & board circulars:
1. In DCIT v. Tata Yodogawa Ltd. [1999] 68 ITD 47 (Patna Tribunal) , the
assessee entered into technical collaboration agreement, duly
approved by the GOI and the RBI, with Austrian company. In terms of
the agreement, the assessee was required to remit by way of lump
sum technical knowhow fees to the foreign company in three
installments. The Assessing Officer asked the assessee to deduct
taxes on the installments of payments being made to the said
company as they were fees for technical services. On appeal, the
Commissioner (Appeals) held that the deduction of tax at source was
not called for in view of the provisions of Double Taxation Agreement
between India and Austria.
The Patna Tribunal on appeal by the Department held that in the
instant case the technical services for which the payment were made,
were rendered in Austria and not in India and in view of the article 7
of Double Taxation Agreement between India and Austria are taxed in
Austria and not in India. In view of this there was no question of
deduction of tax at source from the payment in question. The same
has been reiterated by Madras Tribunal in the case of TVS Suzuki
Ltd. v. ITO [2000] 73 ITD 91.
2. In Kanchanaganga Sea Foods Ltd. v. CIT [2010] 325 ITR 540 (SC),
assessee-company was engaged in sale and export of sea food and
for that purpose it obtained permit to fish in exclusive economic zone
of India. To exploit fishing rights, it entered into an agreement,
chartering two fishing vessels with a non-resident company. Charter
fee was payable from earnings from sale of fish and for that purpose
85 per cent of gross earnings from sale of fish was to be paid to non-
resident company. Actual fishing operations were done outside
territorial waters of India but within exclusive economic zone.
Thereafter, chartered vessels with entire catch were brought to Indian
Port, catch were certified for human consumption, valued, and after
customs and port clearances, non-resident company received 85 per
258
Tax Deduction at Source in respect of Payments to Non Residents
cent of catch. The apex court has held that the non-resident company
effectively received charter fee in India and same would be
chargeable to tax under section 5(2). Therefore, assessee was liable
to deduct tax under section 195 on payment made to non-resident
company.
3. In BIOCON Biopharmaceuticals (P.) Ltd. v. ITO [2013] 144 ITD 615,
the Bangalore Tribunal held that:
a. Where non-resident company provides technology/know-how in
form of capital contribution, tax is required to be deducted at
source on issue of shares;
b. Where there was no transfer of capital asset, and joint venture
agreement allowed assessee only right to use know-how, issue
of shares for same constitutes royalty.
4. The Mumbai Tribunal in Raymond Ltd v. ITO, [2003] 86 ITD 791, has
opined that an adjustment of the amount payable to the non-resident
or deduction thereof by the non-resident from the amounts due to the
resident payer of the income would fall to be considered under `any
other mode' indicated in section 195(1). Such adjustment or
deduction also is equivalent to actual payment. Commercial
transactions very often takes place in the aforesaid manner and the
provisions of section 195 could not be defeated by contending that an
adjustment or deduction of the amount payable to the non-resident
could not be considered as actual payment.
5. The assessee cannot deduct tax at lower rate without getting an
authorization or certificate from the assessing officer under section
195(2). [CIT v. Chennai Metropolitan Water Supply & Sewerage
Board [2012] 348 ITR 530 (Madras High Court)]
6. The apex court in the case of G.E. India Technology Centre (P) Ltd v
CIT [2010] 327 ITR 456 distinguishing the SC decision in the case of
In Transmission Corporation of A.P. Ltd. And Another Vs. CIT [239
ITR 587 (SC)] has held that obligation to withhold tax is limited to the
appropriate portion of income which is chargeable to tax under the
provisions of Act and forms part of gross amount payable. It was held
that:
In Transmission Corpn. of A.P. Ltd.'s case (supra) it was held that
TAS was liable to be deducted by the payer on the gross amount if
such payment included in it an amount which was exigible to tax in
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Taxation of Non-Residents
India. It was held that if the payer wanted to deduct TAS not on the
gross amount but on the lesser amount, on the footing that only a
portion of the payment made represented "income chargeable to tax
in India", then it was necessary for him to make an application under
section 195(2) of the Act to the ITO(TDS) and obtain his permission
for deducting TAS at lesser amount. Thus, it was held by this Court
that if the payer had a doubt as to the amount to be deducted as TAS
he could approach the ITO(TDS) to compute the amount which was
liable to be deducted at source. In our view, section 195(2) is based
on the "principle of proportionality". The said sub-section gets
attracted only in cases where the payment made is a composite
payment in which a certain proportion of payment has an element of
"income" chargeable to tax in India. It is in this context that the
Supreme Court stated, "If no such application is filed, income-tax on
such sum is to be deducted and it is the statutory obligation of the
person responsible for paying such `sum' to deduct tax thereon
before making payment. He has to discharge the obligation to TDS".
If one reads the observation of the Supreme Court, the words "such
sum" clearly indicate that the observation refers to a case of
composite payment where the payer has a doubt regarding the
inclusion of an amount in such payment which is exigible to tax in
India. In our view, the above observations of this Court
in Transmission Corpn. of A.P. Ltd.'s case (supra) which is put in
italics has been completely, with respect, misunderstood by the
Karnataka High Court in Samsung Electronics Co. Ltd. [2009] 185
Taxman 313 to mean that it is not open for the payer to contend that
if the amount paid by him to the non-resident is not at all "chargeable
to tax in India", then no TAS is required to be deducted from such
payment. This interpretation of the High Court completely loses sight
of the plain words of section 195(1) which in clear terms lays down
that tax at source is deductible only from "sums chargeable" under
the provisions of the Income-tax Act, i.e., chargeable under sections
4, 5 and 9 of the Income-tax Act.
7. In Vodafone International Holdings B.V. v. Union of India [2012] 341
ITR 1, the Supreme Court held that section 195 casts an obligation
on payer to deduct tax at source from payments made to non-
residents which payments are chargeable to tax and, therefore,
where sum paid or credited by payer is not chargeable to tax then no
obligation to deduct tax would arise. Section 195 would apply only if
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Tax Deduction at Source in respect of Payments to Non Residents
payments are made from a resident to non-resident and not between
two non-residents situated outside India. Where there was a
transaction of 'outright sale' between two non-residents of a capital
asset (share) outside India and moreover, said transaction was
entered into on principal to principal basis, no liability to deduct tax at
source arose under section 195.
8. The Chennai Tribunal in the case of Hyundai Motor India Ltd. v.
DCIT, [2017] 81 taxmann.com 5, held that where assessee took loans
from foreign banks, mere fact that loan agreements were signed in
local offices of said banks in India, those local affiliates did not
constitute their PE in India and, thus, interest paid to foreign banks
was not taxable in India. Accordingly, the assessee did not have any
tax withholding obligations, under section 195, in respect of these
payments.
9. The Madras High Court ( `HC') in the case of CIT v. Farida Leather
Company [2016] 287 CTR 565 has held that no tax withholding
( `TDS') liability arises on payment of commission to non-residents
abroad if the services are rendered outside India. The HC also held
that such services rendered by the non-resident agent could at best
be called as a service for completion of the export commitment and
would not fall within the definition of "fees for technical services"
under section 9(1)(vii) of the Income-tax Act; thus, provisions of
section 195 of the Act would not apply in the instant case.
10. The Mumbai High Court in the case of Marks & Spencer Reliance
India Pvt. Ltd. (ITA No.893 of 2014) held that the cost reimbursement
made by the taxpayer to the overseas entity under a secondment
agreement is not chargeable to tax in India and that the taxpayer has
not defaulted in withholding any tax in India on such payments.
11. The Central Board of Direct Taxes vide its circular no. 740 dated April
17, 1996 has clarified that the branch of a foreign company/concern
in India is a separate entity for purpose of taxation. Interest
paid/payable by such branch to its head office or any branch located
abroad would be liable to tax in India and would be governed by the
provisions of section 115A of the Act. If DTAA with the country of the
parent company is assessed to tax provides for lower rate of taxation,
the same would be applicable. Consequently, tax would have to be
deducted accordingly on the interest remitted as per the provisions of
section 195 of the Income tax Act, 1961.
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Taxation of Non-Residents
12. The CBDT vide Instruction No 2/2014 instructed that in cases where
the assessee does not withhold taxes under section 195 of the Act,
the AO is required to determine the income component involved in
the sum on which the withholding tax liability is to be computed and
the payer would be considered as being in default for non-withholding
of taxes only in relation to such income component.
Income from Units [Section 196B]
Section 115AB of the Income tax Act provides that in a case of an Offshore
Fund, the income in respect of units purchased in foreign currency and
income by way of long term capital gains arising from the transfer of such
units shall be taxed at the rates of ten percent thereof.
Section 196B therefore, enjoins on the person responsible for making such
payment to deduct tax @ 10% plus surcharge at the time of credit of such
income to the account of the payee or at the time of payment thereof in cash
or by the issue of a cheque or draft or by any other mode, whichever earlier.
Income from foreign currency bonds or Global
Depository Receipts (`GDRs') [Section 196C]
Section 115AC provides that, where the total income of an assessee, being a
non-resident includes income by of interest on bonds or dividends (other than
dividends referred to in section 115-O) on GDRs issued in accordance with
such scheme as the Central Government may, by notification in the Gazette
specify in this behalf or on bonds or shares of public sector company, sold by
the Government and purchased by a non-resident in foreign currency or
income by way of long term capital gains arising from the transfer of such
bonds as referred therein is to be taxed @ 10%.
By virtue of section 196C the person responsible for making the payment has
to deduct tax @ 10% plus surcharge at the time of making payment thereof
in cash or by issue of cheque or draft or any other mode, whichever is
earlier.
The proviso clarifies that no such deduction is to be made in respect of any
dividends referred to in section 115-O
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Tax Deduction at Source in respect of Payments to Non Residents
Income of Foreign Institutional Investors from
securities [Section 196D]
Section 115AD provides that where the total income of a Foreign Institutional
Investor includes any of the following kinds of income, then, tax shall be
payable at the rate specified against the income.
(a) Income (other than income by way of dividends referred to in section
115-O) received in respect of securities (other than units referred to
in section 115AB) @ 20%. It also excludes interest under section
194LD, which shall be taxable @5%.
(b) Income by way of short term capital gains arising from the transfer of
such securities @ 30%. In case of the short term capital gains
covered by section 111A i.e. short term capital gain arising on equity
share in a company or unit of an equity oriented fund and the
transaction is chargeable to securities transaction tax, the rate
applicable will be @15%.
(c) Income by way of long term capital gains arising from the transfer of
such securities @ 10%.
In consequence, section 196D provides that the person responsible for
making the payment shall, at the time of credit of such income (no deduction
for dividend) to the account of payee or at the time of payment in cash or by
the issue of a cheque, or draft or by any other mode, whichever is earlier,
deduct income tax thereon @ 20% plus surcharge.
However, as per section 196D(2), no deduction shall be made from any
income, by way of capital gains arising from the transfer of securities referred
to in section 115AD, payable to a Foreign Institutional Investor.
Non furnishing of PAN [Section 206AA]
In case of non-availability of the PAN, tax is to be deducted at higher of the
following-
· Rates specified in the Act;
· Rates in force;
· 20%.
The provisions of section 206AA shall not apply to a non-resident for any
payment of interest on long-term bonds under section 194LC.
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Taxation of Non-Residents
Further, the Finance Act 2016 provides relaxation effective 1 June 2016
whereby, tax shall not be deducted at a higher rate in case of non-residents
not having PAN, subject to prescribed conditions as covered below:
· The deductee to furnish following details for non-deduction of tax at
higher rates:
i. name, e-mail id, contact number;
ii. address in the country or specified territory outside India of which
deductee is a resident;
iii. a certificate of his being resident in any country or specified territory
outside India from the Government of that country or specified territory
if the law of that country or specified territory provides for issuance of
such certificate
iv. Tax Identification Number of the deductee in the country or specified
territory of his residence and in case no such number is available, then
a unique number on the basis of which the deductee is identified by
the Government of that country or the specified territory of which he
claims to be a resident.
In case of DDIT v. Serum Institute of India Ltd. [2015] 68 SOT 254, the Pune
Tribunal held that where tax has been deducted on the strength of the
beneficial provisions of DTAAs, the provisions of section 206AA of the Act
cannot be invoked to insist on tax deduction at 20%, having regard to the
overriding nature of the provisions of section 90(2) of the Act.
In case of DCIT v. Infosys BPO Ltd. [2015] 154 ITD 816, Bangalore Tribunal
held that there is no scope of deduction of tax at the rate of 20% as per
section 206AA (when assesse does not have tax identification number PAN)
of the Income-tax Act, 1961 when the benefit DTAA is available to the
assessee.
Above propositions were also upheld in the decision of Hyderabad Special
bench tribunal in the case of Nagarjuna Fertizers & Chemicals Ltd. [2017] 55
ITR(T) 1 and the Delhi High Court in the case of Danisco India (P.) Ltd. v.
Union of India [2018] 301 CTR 360.
In the case of Bosch Ltd. v. ITO [2013] 141 ITD 38, the Bangalore Tribunal
held that grossing up of the amount under section 195A is to be done at the
rates in force for the financial year in which such income is payable and not
at 20 per cent as specified under section 206AA.
264
Chapter 12
Advance Rulings
Backdrop
The provisions of relating to advance ruling were inserted in 1993 under the
Income tax Act, 1961. Initially they were applicable to non-resident. The
finance (No.2) Act, 1998 has extended these provisions to resident.
Meaning of Advance ruling [Section 245N]
As per section 245N(a), advance ruling means:
(a) a determination by the Authority in relation to a transaction which has
been undertaken or is proposed to be undertaken by a non-resident
applicant and such determination shall include the determination of
any question of law or fact specified in the application;
(b) a determination by the authority in relation to the tax liability of a non
resident arising out of a transaction which has been undertaken or is
proposed to be undertaken by a resident applicant with such non-
resident, and such determination shall include the determination of
any question of law or fact specified in the application;
(c) a determination by the Authority in relation to the tax liability of a
resident applicant, arising out of a transaction which has been
undertaken or is proposed to be undertaken by such applicant and
such determination shall include the determination of any question of
law or fact specified in the application;
(d) a determination or decision by the authority in respect of an issue
relating to computation of total income which is pending before any
income tax authority or the Appellate Tribunal and such determination
or decision of any question of law or fact relating to such computation
of total income specified in the application.
(e) a determination or decision by the authority whether an arrange-
ment, which is proposed to be undertaken by any person being a
resident or a non-resident, is an impermissible avoidance
arrangement as referred to in Chapter X-A or not.
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Taxation of Non-Residents
Meaning of applicant
The applicant has been defined in section 245N(b) which means any person
who is:
(i) a non-resident who proposes to enter into a transaction or has
already entered into a transaction in India; or
(ii) a resident who proposes to enter into such transaction with the non-
resident party; or
(iii) a resident falling within any such class or category or persons as the
Central Government may by notification in the official Gazette specify
in this behalf (Public Sector Undertakings have been notified vide
Notification No. 725(E) dated August 3, 2000); or
(iv) a resident who has undertaken or proposed to undertake a
transaction if the tax liability exceeds the defined threshold.
(Notification No. 73/2014 dated November 28, 2014 has notified the
threshold limit for one or more transactions valuing Rs. 100 crores or
more in total); or
(v) a resident or non-resident in respect of impermissible transaction
avoidance arrangement referred to in Chapter - X,
and
who makes application under section 245Q(1).
(vi) an applicant as defined in clause (c) of section 28E of the Customs
Act, 1962 (52 of 1962)
(vii) an applicant as defined in clause (c) of section 23A of the Central
Excise Act, 1944 (1 of 1944)
(viii) an applicant as defined in clause (b) of section 96A of the Finance
Act, 1994 (32 of 1994)
· The Authority for Advance Ruling in Lloyd Helicopters International
Pty. Ltd. v. CIT [(2001) 249 ITR 162 (AAR)] has held that, it is
permissible for an applicant under section 245Q to approach the
Advance Ruling Authority for question which pertain to taxability of its
non-resident employees serving in India.
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Advance Rulings
Non-resident in which year
Section 245N stipulates that a non-resident can make an application under
chapter XIXB. However, it does not say in specific terms that he should be a
non-resident as on the date of application. Therefore, status `resident' or
`non-resident' for the purpose has to be determined with reference to a
previous year (which is a financial year) and not with reference to a particular
date as held by the Authority for Advance Ruling in Monte Harris v. CIT,
[1996] 218 ITR 413 (AAR Delhi) .
In Monte Harri's case, the AAR observed that it is difficult to say which
`previous year ' should be taken into account for purpose of section 245N. It
cannot be `previous year ' in which the application is made for an application
may be made very early in a financial year and may even have to be
disposed of long before the end of the financial year. In such cases, the full
picture of the applicants' stay in India during the previous year may not be
always available by the date of the application or even by the date of its
disposal by the authority. The only `previous year ' with reference to which the
status of the applicant is determinable for purpose of section 245N must be
the `previous year ' preceding the financial year in which the application is
made.
In Dr. Rajnikant R. Bhatt v. CIT, [1996] 222 ITR 562 (AAR Delhi), on the date
of the original application, the applicant was not a non-resident, hence his
application was rejected by AAR. However, on the date of the second revised
application he was non-resident the AAR held that his application is
maintainable.
Authority for advance ruling [Sections 245-O,
Section 245-OA & 245P]
Under section 245-O of the Act, the Authority for Advance Ruling consists of:
· a chairman, who is retired judge of the Supreme Court or the Chief
Justice of a High Court or for at least seven years a Judge of a High
Court,
· a Vice-chairman, who has been Judge of a High Court,
· a revenue Member,
· from the Indian Revenue Services, who is, or is qualified to
be, a Member of the Board; or
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Taxation of Non-Residents
· from the Indian Customs and Central Excise Service, who
is, or is qualified to be, a Member of the Central Boar of
Excise and Customs,
on the date of occurrence of vacancy and
· a law Member from the Indian Legal Service, who is, or is qualified
to be, an Additional Secretary to the Government of India on the
date of occurrence of vacancy.
In the event of the occurrence of any vacancy in the office of the Chairman
by reason of his death, resignation or otherwise, the senior-most Vice-
chairman shall act as the Chairman until the date on which a new Chairman,
appointed in accordance with the Provisions of this Act to fill such vacancy,
enters upon his office.
In case the Chairman is unable to discharge his functions owing to absence,
illness or any other cause, the senior-most Vice-Chairman shall discharge
the functions of the Chairman until the date on which the Chairman resumes
his duties.
The head quarter of the Authority is in Delhi. The Central Government vide
Notification No. (No.1/2015)/SO 812(E) dated March 20, 2015 notified the
creation of two additional benches of the AAR including one at National
Capital Region (NCR) and one new bench at Mumbai, with effect from the
date of publication of this notification in the Gazette of India (Extraordinary).
Amendments to Section 245O vide Finance Act 2018 now provides that the
Authority for advance ruling constituted under the Income-tax Act shall cease
to act as an Authority for Advance Rulings for the purposes of the Customs
Act, 1962 on and from the date of appointment of the Customs Authority for
Advance Rulings.The Finance Act, 2017 has introduced the qualifications,
terms and conditions of service of Chairman, Vice-Chairman and other
Members with effect from a date yet to be notified.
No proceeding of the Authority will be invalid merely on grounds of the
existence of any vacancy or defect in the constitution of the Authority.
Application for advance ruling [Section 245Q]
An application for obtaining advance ruling shall be made in quadruplicate
and accompanied by a fee of Rs.10,000/- or such fee as may be prescribed
in this behalf whichever is higher, in the following forms:
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Advance Rulings
Applicant Form No
a) A Non-resident 34C
b) A Resident:
(i) Seeking advance ruling in relation to a transaction 34D
with a non resident
(ii) Seeking advance ruling in relation to the tax 34DA
liability of a resident applicant arising out of a transaction
which has been undertaken or proposed to be undertaken
by such applicant
(iii) Falling such class or category of persons as 34E
notified by the Central Govt. i.e. public sector companies
c) A resident or non-resident in respect of impermissible 34EA
transaction avoidance arrangement referred to in Chapter
X
An applicant may withdraw an application within thirty days from the date of
the application.
Procedure on receipt of application [Section
245R]
The authority on receipt of an application will send a copy to the Principal
Commissioner or Commissioner and if necessary, call upon him to furnish
the relevant records. Such records shall be returned to the Principal
Commissioner or Commissioner as soon as possible. After examining the
application and the records the authority may either allow or reject the
application.
No application be proceeded
(I) The authority shall not allow the application, where the question
raised in the application is
(a) is already pending before any income tax authority or
Appellate Tribunal or Court except a resident falling within any
such class or category or persons as the Central Government
may by notification in the official Gazette specify in this behalf
i.e. a public sector company; or
(b) involves determination of fair market value any property; or
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Taxation of Non-Residents
(c) relates to a transaction or issue which is designed prima-facie
for the avoidance of income tax except:
· a resident falling within any such class or category or
persons as the Central Government may by notification in
the official Gazette specify in this behalf i.e. a public sector
company; or
· a resident or non-resident in respect of impermissible
transaction avoidance arrangement referred to in Chapter -
X.
· Already pending
The words `already pending' should be interpreted to mean `already
pending as on the date of the application' and not with reference to
any future date.[Monte Harris v. CIT [1996] 218 ITR 413 (AAR Delhi)]
The words `already pending' do not include an application by the
resident payer under section 195 to determine the amount of tax
deduction from payments to a non-resident.[Ericsson Telephone
Corporation India v. CIT [1997] 224 ITR 203 (AAR Delhi)]
Where the applicant non-resident company had been a warded to
contract by the Orissa State Government and the latter had
approached the Assessing Officer in terms of section 195(2) to
determine the appropriate proportion of the payments to tax, the
matter cannot be considered as a `pending proceeding'. [Hyder
Consulting Ltd. v. CIT [1999] 236 ITR 640 (AAR Delhi)]
The Delhi High Court in the case of Hyosung Corporation [2016] 382
ITR 371 dealt with the issue of rel-evant date in the context of the
words `already pending' as mentioned in proviso to Section 245R(2)
of the Act. The Delhi High Court held as under:
· The words 'already pending' in section 245R should be
interpreted to mean 'already pending as on date of application
and not with reference to any future date'.
· The mere fact that a standard pre-printed notice to assess the
return of income was issued by the Tax Authority before the
event of filing of the AAR application would not result in
pendency of the question raised in the application before the Tax
Authority.
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Advance Rulings
· A notice under section 142(1) of the Act issued prior to the filing
of application, wherein the very same question was raised that
was the subject matter of the AAR's applications would constitute
a bar, in terms of clause (i) to proviso to section 245R(2).
· The SLP filed by the Department in this case, has also been
dismissed by the Supreme Court, 244 Taxman 286.
Mere issuance of a notice under Section 143(2) of the Act which
merely stated that the Assessing Officer would like some further
information on certain points in connection with the return of income,
which does not form part of subject matter of application filed before
the AAR, this cannot be regarded as an issue being already pending
before the AAR. [LS Cable & System Ltd v. CIT [2016] 385 ITR 99
(Delhi HC)].
The AAR cannot reject the applicant's application by invoking proviso
to Section 245R(2) of the Act in case where the scrutiny notice under
Section 143(2) of the Act is issued by the Assessing Officer even
prior to filing of application before AAR. This is since the said notice
does not ad-dress any specific question and it does not even disclose
application of mind to the income-tax return filed by the applicant.
The SLP filed by the Department in this case, has also been dis-
missed by the Supreme Court, 246 Taxman 57. [Sage Publications
Ltd. U.K. v. DCIT [2016] 387 ITR 437 (Delhi HC)]
· Avoidance of tax
The applicant companies were fully owned subsidiaries of a British
company had invested in the shares of an Indian Bank. If the British
company had directly invested in India, capital gains arising on their
sale would have been taxable both in India and England. Whereas
investment through applicant companies of Mauritius, no capital gain
tax was payable in India in view of DTAA between India and
Mauritius. The authority found this arrangement as far avoidance of
tax and rejected the application of the applicant company. [X Ltd., In
re [1996] 220 ITR 377 (AAR Delhi)]
An application for advance ruling concerning liability to interest under
sections 234B & 234C in respect of tax on capital gains arising from
transaction of purchases and sale of shares is maintainable [Y Ltd.,
In re [1996] 221 ITR 172 (AAR Delhi)]
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Taxation of Non-Residents
Performance of natural justice
No application shall be rejected unless an opportunity has been given to the
applicant being heard. Where the application is rejected reasons for such
rejection shall be given in the order. A copy of every such order shall be sent
to the applicant and to the Principal Commissioner or the Commissioner.
Pronouncement of advance ruling
If an application is allowed, the authority shall after examining such further
material as may be placed before it by the applicant or obtained by the
authority pronounce its advance ruling on the question specified in the
application.
The applicant can, on request appear either in person or through a duly
authorized representative. The authority shall pronounce its advance ruling in
writing within six months of the receipt of application.
A copy of the advance ruling pronounced by the Authority duly signed by the
members and certified in the prescribed manner, shall be sent to the
applicant and to the Principal Commissioner or Commissioner, as soon as
may be, after such pronouncement.
Appellate authority not to proceed [Section
245RR]
No income tax authority or the Appellate Tribunal shall proceed to decide
any issue in respect to which an application has been made by an applicant,
being a resident, under section 245Q.
Applicability of advance ruling [Section 245S]
The advance ruling shall be binding only:
(a) on the applicant who had sought it;
(b) in respect of the transaction in relation to which the ruling had been
sought, and
(c) on the Principal Commissioner or Commissioner, and the income tax
authorities subordinate to him, in respect of the application and the
said transaction..
The advance ruling shall be binding unless there is change in law or facts on
the basis of which the advance ruling has been pronounced.
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Advance Rulings
Advance ruling to be void [Section 245T]
Where the authority finds, on a representation made to its by the Principal
Commissioner or Commissioner or otherwise, that the advance ruling
pronounced by it has been obtained by the applicant by fraud or
misrepresentation of facts, it may, by order declare such ruling to be void ab-
initio and thereupon all the provisions of the Act shall apply (after excluding
the period beginning with the date of such advance ruling and ending with
the date of order declaring such order as void) to the applicant as if such
advance ruling had never been made.
Powers of the Authority [Section 245U]
The authority shall have all the powers of a civil court in respect of:
(a) discovery and inspections;
(b) enforcing the attendance of any person including any officer of
banking company and examining him on oath;
(c) Issuing commissioner and compelling the production of books of
account and other records.
The Authority would be deemed to be a Civil Court for the purpose of section
195 of the Code of Criminal Procedure, 1973 and every proceeding before
the authority shall be deemed to be a judicial proceeding under sections 193
and 228 and for the purpose of section 196 of the Indian Penal Code.
Procedure of Authority [Section 245V]
The Authority shall have powers to regulate its own procedure in all matters
arising out of the exercise of its powers under the Act.
Important Judicial Precedents & Board Circulars:
1. A resident, who is liable to withhold tax on the payment to be made to
non-residents can apply for an advance ruling [McLeod Russel
Kolkata Ltd In re. (2008) 215 CTR 230(AAR)]
2. It would be very difficult to enforce the condition that an Applicant is a
non-resident at the time of making an application as the residential
status would be determined on the basis of his stay in India through-
out the previous year. Accordingly if a person were a non-resident in
the previous year immediately preceding the previous year in which
the application is made, the application would be maintainable.
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Taxation of Non-Residents
[Robert W Smith (1995) 212 ITR 275, Monte Harris (1996) 218 JB
413, P.NO. 20 of 1995 (1999) 237 ITR 382]
3. A ruling can be sought even if alternate remedy to make an
application under section 195(2) in respect of determination of
applicability of TDS provisions or rate of TDS is available. [Airport
Authority of India, IN RE (2008) 299 ITR102 (AAR)]
4. As per the provisions of Rule 19 of the Authority for Advance Rulings
(Procedure) Rules, 1996, the ruling given by the AAR may be
rectified by the AAR at the time before the said ruling is given effect
to by the Assessing Officer. Such rectification, however, is possible in
respect of any mistake apparent from the record. In case of General
Electric Pension Trust, IN RE, (2007) 289 ITR 335 (AAR), it has been
held that where there was some material available with applicant at
time of hearing but it was not filed then such material cannot be
furnished by invoking Rule 19.
5. As the AAR is an independent authority; circulars issued by the Board
may not be binding on it. However, benevolent circulars being for the
benefit of the assessee would be required to be followed in view of
the decisions of the Hon'ble Supreme Court in various
pronouncements including that of UCO Bank vs. CIT reported in
[1999] 237 ITR 889 (SC)
The SC held that we do not think that we can hold that an advance
ruling of the Authority can only be challenged under Article 136 of the
Constitution before this Court and not under Articles 226 and/or 227
of the Constitution before the High Court. In L. Chandra Kumar v.
Union of India and Others (supra), a Constitution Bench of this Court
has held that the power vested in the High Courts to exercise judicial
superintendence over the decisions of all courts and tribunals within
their respective jurisdictions is part of the basic structure of the
Constitution. Therefore, to hold that an advance ruling of the authority
should not be permitted to be challenged before the High Court under
Articles 226 and/or 227 of the Constitution would be to negate a part
of the basic structure of the Constitution. Columbia Sportswear
Company Vs Director of Income Tax, Bangalore (SLP (C) No. 3318 &
31543 of 2011)
6. The AAR ruling should be first challenged before the High Court
unless it appears to the Supreme Court that the SLP raises
substantial questions of general importance or a similar question is
274
Advance Rulings
already pending before the Supreme Court for decision. [Columbia
Sportswear Co. vs. DIT, 346 ITR 161 (SC)
275
Chapter 13
Equalisation Levy
Introduction
The Finance Act, 2016 has introduced a new Chapter VIII titled "Equalisation
Levy" in the Income-tax Act as a levy for additional resource mobilisation
purportedly to address the challenges of taxation of e-commerce
transactions. The Chapter constitutes a code in itself providing for the charge
of levy, its exceptions, consequences of default, appellate remedy, penalties
etc. The purpose behind the introduction of this Chapter appears to be to
bring within the tax net transactions whose source is in India and the benefit
therefrom is received by the service recipient in India, though the service
provider is situated outside India.
This Chapter extends to the whole of India except the State of Jammu &
Kashmir.
The CBDT issued notification no. 37 of 2016 dated May 27, 2016 stating that
the provisions of Chapter VIII relating to the equalisation levy would come
into effect from June 1, 2016. In other words, any payments being made for
the specified services provided on or after June 1, 2016 shall attract the
equalisation levy.
Section 164(d) defines equalisation Levy as the tax leviable on consideration
received or receivable for any specified service under the provisions of
Chapter VIII.
Specified service means online advertisement, any provision for digital
advertising space or any other facility or service for the purpose of online
advertisement and includes any other service as may be notified by the
Central Government in this behalf.
Thus, currently, the levy is restricted to online/ digital advertisement and
related services. However, in the future, additional services may be notified
by the Government for the levy.
Charge of levy
As per section 165, there shall be charged an equalisation levy at the rate of
6% of the amount of consideration for any specified service received or
receivable by a person, being a non-resident from--
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Equalisation Levy
a. a person resident in India and carrying on business or profession; or
b. a non-resident having a PE in India;
collectively known as "Liable persons".
The equalisation levy shall not be charged, where--
a. the non-resident providing the specified service has a PE in India
and the specified service is effectively connected with such PE;
b. the aggregate amount of consideration for specified service received
or receivable in a previous year by the non-resident from a person
resident in India and carrying on business or profession, or from a
non-resident having a permanent establishment in India, does not
exceed Rs. 100,000; or
c. where the payment for the specified service by the person resident
in India, or the PE in India is not for the purposes of carrying out
business or profession.
Furthermore, this Chapter VIII is not applicable to the State of Jammu and
Kashmir as per section 163(1). In other words, when the service recipient is
situated in the State of Jammu and Kashmir, the provisions of this Chapter
should not apply.
Collection and recovery
Section 165, which deals with collection and recovery of the levy, places the
onus on the Liable Persons to deduct the amount of levy from the amount
paid or payable to a non-resident in respect of the specified service and pay
the levy so collected during a calendar month to the Government by the 7th
day of the immediately following month. It has also been provided that the
liability to pay the equalisation levy shall trigger whether or not the Liable
Person deducts the same from the payment of the non-resident. As per
section 170, simple interest @ 1% per month or part thereof shall be paid by
the Liable Person for delay in making the payment of equalisation levy. There
are penal consequences in case of failure to deduct or pay equalization levy
and failure to furnish annual return.
Equalisation Levy Rules, 2016
The CBDT has notified the Equalisation Levy Rules, 2016, which lay down
the procedural framework for implementation, including prescribing forms for
filing of annual return and appeals.
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Chapter 14
Securitisation Trusts
Tax on income from securitisation trusts [Section
115TCA]
Section 115TCA(1) provides that any income accruing or arising to, or
received by, a person, being an investor of a securitisation trust, out of
investments made in the securitisation trust, shall be chargeable to income-
tax in the same manner as if it were the income accruing or arising to, or
received by, such person, had the investments by the securitisation trust
been made directly by him.
Section 115TCA(2) provides that the income paid or credited by the
securitisation trust shall be deemed to be of the same nature and in the same
proportion in the hands of the person referred to in sub-section (1), as if it
had been received by, or had accrued or arisen to, the securitisation trust
during the previous year.
Section 115TCA(3) provides that the income accruing or arising to, or
received by, the securitisation trust, during a previous year, if not paid or
credited to the person referred to in sub-section (1), shall be deemed to have
been credited to the account of the said person on the last day of the
previous year in the same proportion in which such person would have been
entitled to receive the income had it been paid in the previous year.
Further, section 115TCA(4) provides that the person responsible for crediting
or making payment of the income on behalf of securitisation trust and the
securitisation trust shall furnish, within such period, as may be prescribed, to
the person who is liable to tax in respect of such income and to the
prescribed income-tax authority, a statement in such form and verified in
such manner, giving details of the nature of the income paid or credited
during the previous year and such other relevant details, as may be
prescribed. Rule 12CC of the Income-tax Rule prescribes Form no. 64E and
64F, as applicable, to be furnished by 30th June of the financial year following
the previous year during which the income is distributed.
Section 115TCA(5) provides that any income which has been included in the
total income of the person referred to in sub-section (1), in a previous year,
on account of it having accrued or arisen in the said previous year, shall not
278
Securitisation Trusts
be included in the total income of such person in the previous year in which
such income is actually paid to him by the securitisation trust.
Explanation to section 115TCA defines "securitisation trust" to mean a trust,
being a -
i. "special purpose distinct entity" as defined in clause (u) of sub-
regulation (1) of regulation 2 of the Securities and Exchange Board
of India (Public Offer and Listing of Securitised Debt Instruments)
Regulations, 2008 made under the Securities and Exchange Board
of India Act, 1992 (15 of 1992) and the Securities Contracts
(Regulation) Act, 1956 (42 of 1956), and regulated under the said
regulations; or
ii. "Special Purpose Vehicle" as defined in, and regulated by, the
guidelines on securitisation of standard assets issued by the
Reserve Bank of India; or
iii. trust set-up by a securitisation company or a reconstruction
company formed, for the purposes of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (54 of 2002), or in pursuance of any guidelines or
directions issued for the said purposes by the Reserve Bank of
India,
which fulfils such conditions, as may be prescribed.
Income in respect of investment in securitization
trust [Section 194LBC]
Section 194LBC(2) provides that where any income is payable to an investor,
being a non-resident (not being a company) or a foreign company, in respect
of an investment in a securitisation trust specified in clause (d) of the
Explanation occurring after section 115TCA, the person responsible for
making the payment shall, at the time of credit of such income to the account
of the payee or at the time of payment thereof in cash or by issue of a
cheque or draft or by any other mode, whichever is earlier, deduct income-
tax thereon, at the rates in force.
Further, explanation (b) to section 194LBC provides that where any income
as aforesaid is credited to any account, whether called "suspense account"
or by any other name, in the books of account of the person liable to pay
such income, such crediting shall be deemed to be the credit of such income
279
Taxation of Non-Residents
to the account of the payee, and the provisions of this section shall apply
accordingly.
Tax on income of unit holder and business trust
[Section 115UA]
Section 115UA(1) provides that any income distributed by a business trust to
its unit holders shall be deemed to be of the same nature and in the same
proportion in the hands of the unit holder as it had been received by, or
accrued to, the business trust.
Section 115UA(2) provides that the total income of a business trust shall be
charged to tax at the maximum marginal rate, subject to the provisions of
section 111A and section 112.
Section 115UA(3) provides that if in any previous year, the distributed
income or any part thereof, received by a unit holder from the business trust
is of the nature as referred to in section 10(23FC)(a) or section 10(23FCA),
then, such distributed income or part thereof shall be deemed to be income
of such unit holder and shall be charged to tax as income of the previous
year.
Further, section 115UA(4) provides that any person responsible for making
payment of the income distributed on behalf of a business trust to a unit
holder shall furnish a statement to the unit holder and the prescribed
authority, within such time and in such form and manner as may be
prescribed, giving the details of the nature of the income paid during the
previous year and such other details as may be prescribed. Rule 12CA of the
Income-tax Rule has prescribed Form no. 64A and 64B, as applicable, to be
furnished by 30th June of the financial year following the previous year
during which the income is distributed.
Certain income from units of a business trust
[Section 194LBA]
Section 194LBA(2) provides that where any distributed income referred to in
section 115UA, being of the nature referred to in section 10(23FC)(a), is
payable by a business trust to its unit holder, being a non-resident (not being
a company) or a foreign company, the person responsible for making the
payment shall at the time of credit of such payment to the account of the
payee or at the time of payment thereof in cash or by the issue of a cheque
280
Securitisation Trusts
or draft or by any other mode, whichever is earlier, deduct income-tax
thereon at the rate of 5%.
Section 194LBA(3) provides that where any distributed income referred to in
section 115UA, being of the nature referred to in section 10(23FCA), is
payable by a business trust to its unit holder, being a non-resident (not being
a company), or a foreign company, the person responsible for making the
payment shall at the time of credit of such payment to the account of the
payee or at the time of payment thereof in cash or by the issue of a cheque
or draft or by any other mode, whichever is earlier, deduct income-tax
thereon at the rates in force.
281
Chapter 15
Base Erosion and Profit Shifting
`Base Erosion and Profit shifting' properly known as BEPS project could be
regarded as one of important tools developed majorly by the G20 countries
with the help of OECD to combat the issues arising due to shifting of profits
to no or low tax jurisdictions. This results in ultimately low or no taxes being
paid by the assessees involved. BEPS project has laid down almost 15 such
action plans which provides the minimum standards, recommendations and
best practices to protect economies. These action plans are as briefly
discussed below-
Action Plan 1 Addressing the Challenges of
Digital Economy:
The said Action Plan suggests the following three strategies for taxing
transactions in the digital economy
· New nexus based on significant economic presence
· Withholding tax on digital transactions
· Equalisation levy
Action Plan 1 does not recommend any of these action plans. Thus,
Countries may select and introduce any of these options in their tax laws.
Out of the above, India has introduced Equalisation levy in the domestic tax
law vide Finance Act 2016. Provisions related to business connection arising
due to significant economic presence (including digital transactions) are now
part of section 9(1)(i) of the Act as laid down by Finance Act 2018. The
threshold amount and number of users to be covered by the said provisions
of significant economic presence are yet to be prescribed. India has also
updated its position on PE in the OECD Model Convention 2017.
Action Plan 2 - Neutralizing the effect of hybrid
mismatch arrangements:
The recommendations are designed to neutralize mismatches by targeting
the following types of arrangements: those with deduction/no inclusion (D/NI)
outcomes, double deduction (D/D) outcomes and indirect deduction/no
inclusion (indirect D/NI) outcomes. The objective of said action plan is to put
an end to multiple deductions for a single expense, deductions without
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Base Erosion and Profit Shifting
corresponding taxation or the generation of multiple foreign tax credits for
one amount of foreign tax paid. The recommendations under this Action plan
intends to address mismatches in tax outcomes where they arise in respect
of payments made under a hybrid financial instruments or payments made to
or by a hybrid entity.
Part I of Action Plan 2 provides that the primary rule recommended under
this action plan is that countries deny the taxpayer 's deduction for a payment
to the extent that it is not included in the taxable income of the recipient in
the other treaty country involved or it is also deductible in that country viz.
deduction / no inclusion outcomes to be avoided. If the primary rule is not
applied, then the counterparty jurisdiction can generally apply a defensive
rule, requiring the deductible payment to be included in income or denying
the duplicate deduction depending on the nature of the mismatch viz. double
deduction outcome should not be intended.
Part II of the said Action Plan intends to ensure that hybrid instruments and
entities, as well as dual resident entities, are not used to obtain unduly the
benefits of tax treaties. Further, tax treaties do not prevent the application of
the changes to domestic law recommended in Part I.
Action Plan 3 - Designing Effective Controlled
Foreign Company (`CFC') Rules
As the name suggests, the said action plan intends to curb practices arising
due to shifting of income to subsidiaries located in foreign jurisdictions. It
recommends 6 building blocks for designing of effective CFC rules-
· Definition of a CFC (including the definition of control) - CFC rules
generally apply to foreign companies that are controlled by
shareholders in the parent jurisdiction.
· CFC exemptions and threshold requirements - The report
recommends that CFC rules only apply to controlled foreign
companies that are subject to effective tax rates that are
meaningfully lower than those applied in the parent jurisdiction.
· Definition of CFC income - CFC rules include a definition of CFC
income, and it sets out a non-exhaustive list of approaches or
combination of approaches that CFC rules could use for such a
definition.
· Computation of income - The report recommends that CFC rules use
the rules of the parent jurisdiction to compute the CFC income to be
283
Taxation of Non-Residents
attributed to shareholders. It also recommends that CFC losses
should only be offset against the profits of the same CFC or other
CFCs in the same jurisdiction.
· Attribution of income - The attribution threshold should be tied to the
control threshold and that the amount of income to be attributed
should be calculated by reference to the proportionate ownership or
influence.
· Prevention and elimination of double taxation
Action Plan 4 Limiting Base Erosion Involving
Interest Deductions and other financial payments
The said action plan recommends the concept of fixed ratio rule, group ration
rule and or targeted rules to address specific risks of entities like in public-
benefit projects, banking and insurance. There are instances where multi-
national companies may attempt to achieve favourable tax outcomes by
adjusting the amount of debt within their group entities. To combat such
practices, fixed ratio rule provides for an entity to deduct the net interest
expense up to a benchmark of net interest/ EBITDA ratio. The said ratio
could be in the range of 10% to 30%. While, under group ratio rule, a country
may supplement the fixed ratio by a group ratio rule. This ratio rule allows an
entity to deduct the net interest expense up to its group's net
interest/EBITDA ratio, where this is higher than the benchmark fixed ratio.
The group ratio rule is carve-out for entities which are highly leveraged for
non-tax reasons. Under this action plan, there are also provisions related to
carry forward of disallowed interest expense and which could then be
claimed as deduction in future years.
Many countries have adopted either of these above mentioned rules under
their domestic tax rules. In India, section 94B limitation on interest
deduction related provision which deals with fixed ratio rule could be
regarded as an outcome of this action plan.
Action Plan 5 Countering harmful tax practices
more effectively, taking into account transparency
and substance
Action Plan 5 (Action 5) deals inter alia with income arising from intellectual
property and in particular countering harmful tax practices taking into account
the transparency and substance factors.
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Base Erosion and Profit Shifting
Action 5 recommends the following:
· Nexus approach' to apply
· It provides that income from intellectual property should be attributed
· to and taxed in the country in which substantial research and
development activity is undertaken and should not be limited to the
county of legal ownership
It appears that in line with Action 5, India introduced section 115BBF under
the Income-tax Act ( `Act') which deals with India's patent box regime. The
said section provides for 10% tax on royalty income from patents developed
and registered in India by a patentee who is an Indian resident with no
deduction of expenses. Under this section, at least 75% of the expenditure
should be incurred in India for any invention, in respect of which patent is
granted for the company being eligible for patent box regime.
Action Plan 6 Preventing the granting of treaty
benefits in inappropriate circumstances
Action Plan 6 (Action 6) focuses on the prevention of treaty abuse, noting
that treaty shopping is one of the most important sources of BEPS concerns.
Action Plan 6 recommends the following:
· Commitment to ensure a minimum level of protection against treaty
shopping
· Countries to include in their tax treaties an express statement that
their common intention is to eliminate double taxation without
creating opportunities for non-taxation or reduced taxation through
tax evasion or avoidance, including through treaty shopping
arrangements.
· Minimum level of protection by including in the tax treaties one of
the following:
o A combined approach consisting of an Limitation of Benefit
rule and a Principal Purpose Test (PPT) rule
o A PPT rule alone
o A Limitation of Benefit rule, supplemented by specific rules
targeting conduit-financing arrangements.
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As noted above, the minimum standard to protect against treaty shopping
that was agreed to by countries may be met by including in treaties a PPT
rule alone or a PPT rule in conjunction with an LOB rule. In general, under
this provision, treaty benefits would be denied when it is reasonable to
conclude, having regard to all relevant facts and circumstances, that
obtaining treaty benefits was one of the principal purposes of any
arrangement or transaction that resulted directly or indirectly in that benefit
unless it is established that granting that benefit in these circumstances
would be in accordance with the object and purpose of the relevant
provisions of the tax treaty.
Countries may implement the minimum standard to protect against treaty
shopping by including the LOB rule supplemented by a mechanism that
would address treaty-shopping strategies commonly referred to as "conduit
arrangements" that would not be caught by the LOB rule. These rules would
deal with such conduit arrangements by denying treaty benefits in respect of
income obtained under, or as part of, a conduit arrangement.
Further, they could take the form of domestic anti-abuse rules or judicial
doctrines that would achieve a similar result.
Action Plan 7 Additional guidance on Attribution
of Profits to Permanent Establishments
The main objective of Action Plan 7 is to prevent the artificial avoidance of
Permanent Establishment's (PEs), where actually there is a significant
activity in the country.
Action Plan 7 focuses on updating the definition of PE in Article 5 of the
OECD model tax treaty to include the following:
· Changes to the rules on deemed PEs created by dependent agents,
addressing commissionaire and other undisclosed agent
arrangements;
· Changes to the exceptions from creating a fixed place of business
PE for specific activities (such as maintenance of stocks of goods for
storage, display, delivery or processing, purchasing or the collection
of information) so that these will apply only where the activity in
question is preparatory or auxiliary in relation to the business as a
whole; and
· An anti-fragmentation rule that removes exceptions (including those
for preparatory or auxiliary activities) in circumstances where
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activities in a country are carried out by different group companies,
where the activities are part of a "cohesive business operation" and
not, in the aggregate, preparatory or auxiliary.
Earlier, foreign enterprises used the Commissionaire arrangement for non-
creation of a PE by stating that the contracts concluded by the person acting
as a Commissionaire are not binding on them. It was therefore possible for
the foreign enterprise to avoid the PE exposure by changing the terms of
contracts without material changes in the functions performed in a State etc.
Similar strategies were also prevalent in case of agents acting on behalf of
the foreign enterprise, wherein contracts were substantially negotiated in a
country were not formally concluded in the same country because they were
finalized or authorized abroad or these agents used to contend that they
were independent agent even though they were closely related to the foreign
enterprise on behalf of which they were acting.
BEPS action plan 7 intends to tackle such arrangements.
Amendments to section 9 under the India domestic law could also be
regarded as influenced by the above provisions of Action plan 7.
With significant changes in the way the businesses are conducted, the
activities which were previously considered to be merely preparatory or
auxiliary activities now form part of core business activities of the foreign
enterprise. To effectively tackle such situations and tax the income arising
therefrom, modifications were suggested to ensure that each of the
exceptions included under Article 5(4) should be restricted to activities of a
`preparatory or auxiliary' character, as per Action plan 7.
Multi-national enterprises used to avoid PE status by artificially fragmenting
the activities and thereby later to argue that each part is merely engaged in
preparatory and auxiliary activities which form part of the exception provided
under Article 5(4). The Anti-fragmentation provisions suggested under Action
plan 7 is the outcome of this BEPS concern.
Other Action Plans are as briefly discussed
below-
Action Plan 8 Transfer pricing and intangibles Covered under the
transfer pricing related provisions
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Taxation of Non-Residents
Action Plan 9 of the OECD BEPS Action Plan is designed to develop rules
to prevent base erosion and profit shifting through the transfer of risks among
or the allocation of excessive capital to group members.
Action Plan 10 Transfer pricing and other high-risk transactions is
intended to develop rules to prevent abusive transactions which would not or
would rarely occur between the unrelated parties.
Action Plan 11 Measuring and monitoring BEPS The said action plan
recommends that OECD to work with Governments to report and analyse
more corporate tax statistics and to present them in an internationally
consistent way. One such initiative could be considered as `Country-by-
Country' reporting of data which will help government and researchers to
effectively measure and monitor BEPS and also the actions taken to address
BEPS.
Action Plan 12 Mandatory disclosure rules Transparency is one of the
three pillars of the BEPS project. Various measures developed under the
BEPS project will result in substantial availability of data which will lead to
enhanced co-operation and collaboration between tax administrations and
which will further aid in effective tackling of BEPS concerns.
Action Plan 13 CbC reporting provisions are covered under the Transfer
pricing provisions discussed in the previous section.
Action Plan 14 More effective dispute resolution mechanisms The said
action plan highlights the commitment of countries to implement a minimum
standard to ensure that they resolve treaty-related disputes in a timely,
effective and efficient manner. The compilation under the said action plan
contains four documents, namely (i) the Terms of Reference; (ii) the
Assessment Methodology; (iii) the Mutual Agreement Procedure (MAP)
Statistics Reporting Framework; and (iv) the Guidance on Specific
Information and Documentation required to be submitted with a Request for
MAP Assistance.
Action Plan 15 A mandate for the development of a Multi-Lateral
Instrument on tax treaty measures to tackle BEPS Covered as a separate
Chapter.
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Chapter 16
Multi-lateral Instrument
The Base Erosion and Profit Shifting project (BEPS) is an ambitious project
undertaken by the Organization for Economic Co-operation and Development
(OECD) to combat issues such as double non-taxation of income, treaty
shopping. To deal with these issues, OECD in October 2015 released reports
on 15 action plans.
BEPS Action Plan 15 is for developing a multilateral instrument (MLI) to
modify bilateral tax treaties. MLI does not need the individual renegotiating of
each bilateral treaty. The convention provides minimum standards in respect
of prevention of treaty abuse and dispute resolution. MLI also includes
recommendatory measures in respect of hybrid mismatch agreements and
artificial avoidance of permanent establishment (PE) status.
Multilateral instrument ( `MLI') will likely change the face of more than 2,000
tax treaties. On 7 June 2017, over 70 jurisdictions (including India)
participated in the signing of the MLI. The speed of implementation of MLI
propelled BEPS into action.
The MLI modifies tax treaties that are "Covered Tax Agreements". A Covered
Tax Agreement is an agreement for the avoidance of double taxation that is
in force between Parties to the MLI and for which both Parties have made a
notification that they wish to modify the agreement using the MLI.
MLI, unlike protocol, does not directly modify a tax treaty but runs parallel to
the tax treaties. MLI and tax treaties are to be read together. Where both the
treaty partners ratify, accept or approve the given MLI provision, it results in
adoption of that provision in the tax treaty. In the absence of such matching
terms, the pre-MLI provisions in treaties may continue.
MLI will be operative between the jurisdictions only when the MLI is signed
and the Instrument of ratification, acceptance or approval is deposited with
the OECD. Thereafter, the effective date may be notified.
As on 22 March 2018, more than 70 jurisdictions have signed MLI. India is
amongst the signatories to MLI and has provided a provisional list of 93
jurisdictions to which it intends to apply the MLI provisions and also its
reservations/ options on the applicability of MLI to its treaties. India is yet to
ratify its MLI provisional list.
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Taxation of Non-Residents
Some of India's major trading and investment partners such as Germany,
China and Mauritius have signed MLI but have not notified. India in their
provisional list for applicability of MLI. Thus, despite India including them in
its provisional list, MLI may not apply to these treaties.
As on 22 March 2018, Austria, Isle of Man, Poland, Jersey and Slovenia
have deposited their instruments of ratification with OECD wherein MLI
provisions will be effective from 1 July 2018.
Some of the important MLI provisions and India's positions on the same are
as provided below-
· Article 3 Transparent entities
Income derived by an entity that is treated as wholly or partly fiscally
transparent under the tax law of either treaty partners shall be
considered to be income of the Resident country but only to the
extent that the Resident country treats this as income for taxation
purposes.
India has reserved its right for non-applicability of Article 3. Thus,
Article 3 may not apply to India's tax treaties.
Mostly, India's tax treaties does not have specific provisions dealing
with fiscally transparent entities. India-US and India-UK tax treaties
which contain a specific provision are broadly aligned to MLI.
· Article 4 - Dual resident entities
The said provisions provide that where a person (other than
individual) is resident of both the treaty countries, competent
authorities shall tie-break and determine the residential status
through mutual agreement having regard to the place of effective
management (POEM), the place of incorporation and/or any other
relevant factors.
India has not made any reservations on applicability of Article 4.
Thus, many of India's tax treaties tie-break the dual residency issues
applying only the POEM test.
Some of the countries viz. Canada, Cyprus, France, Luxembourg and
Singapore etc. have not notified Article 4. These treaties may not be
modified by Article 4.
India-Japan tax treaty is already aligned to Article 4 of MLI.
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· Article 5: Application of Methods for Elimination of Double
Taxation
The said Article provides three options for non-taxation or for less
than single taxation. First option under this provision deals with
taxation of income in the resident country which is otherwise exempt
in both the countries. The second option also provides similar tax
treatment in respect of hybrid instruments. While the third option
deals with credit method.
India has reserved its rights for non-applicability of Article 5. India's
tax treaties usually adopt the credit method which is one of the
permitted options under its tax treaties.
· Article 7: Prevention of treaty abuse
This article provides for three approaches to prevent treaty abuse:
1. Only the Principal Purpose Test (PPT)
2. PPT plus either Detailed or Simplified Limitation of Benefit
test (LOB)
3. Detailed LOB plus anti-conduit arrangements
India has opted for PPT plus simplified LOB provision. India's tax
treaties may be modified by Article 6 of MLI subject to matching.
Many countries such as Cyprus, Luxembourg, France, Japan,
Netherlands, Singapore, UK etc. have adopted only PPT.
· Article 12 - Artificial avoidance of PE status through
commissionaire arrangements and similar strategies
Article 12 of MLI intends to amend agency PE-related provisions in tax
treaties through the following:
o Countering effect of commissionaire arrangements
o Creation of agency PE where an agent habitually plays a
principal role in concluding contracts with routine approval of
the principal
o No independent agent status if the agent acts exclusively on
behalf of a closely-related enterprise
India has not made any reservation on Article 12. Article 12 may
modify India's tax treaties subject to matching.
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Taxation of Non-Residents
Canada, Cyprus, Luxembourg, Singapore, UK etc. have not notified
Article 12. These tax treaties may not be modified by Article 12.
· Article 13 Artificial avoidance of PE status through specific
treaty exemption
Article 13 provides that PE exemption under treaty Article 5(4) will be
available only if (option A) - the overall activities of the fixed place of
business are preparatory or auxiliary in nature; or (option B) - if
specific exemption for the activity is provided.
This Article also deals with anti-fragmentation rules, which provides
that exemption from PE will not be available if:
o A closely-related enterprise already has a PE in the source
jurisdiction
o Overall activities conducted by the closely-related enterprises
are not of preparatory or auxiliary nature
India has chosen option A to deal with the avoidance of PE through
specific activity exemption. India has chosen to adopt the anti-
fragmentation rule.
Article 13 may modify India's tax treaties subject to matching.
Canada, Cyprus, Finland, etc. have not notified Article 13. These tax
treaties with India may not be modified by Article 13.
· Article 14- Splitting-up of contract
Article 14 provides for aggregation of time spent on connected
projects carried out by closely-related enterprises in the
determination of PE. The aggregation provision should not apply for
projects with less than 30 days.
India has not made any reservation on Article 14. Article 14 may
modify India's tax treaties subject to matching.
Canada, Cyprus, Japan, Luxembourg, Singapore, UK etc. have
reserved the right not to apply Article 14. These tax treaties with
India may not be modified by Article 14.
· Article 17- Corresponding Adjustments
Article 17 addresses unintended double taxation arising on account of
transfer pricing (TP) adjustments. It allows the tax resident of one
country to claim corresponding relief of taxes paid by its associated
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enterprises in another country due to TP adjustments. It also provides
for settlement of TP disputes through mutual agreement procedure or
bilateral advance pricing arrangement (APA) negotiations.
India reserves the right of non-applicability of Article 17 where its
treaties already contain a provision described in Article 17. Article 17
may modify India's tax treaties subject to matching.
India's tax treaties with Singapore and Japan contain similar
provisions.
Belgium, France, Sweden etc. have opted for Article 17.
MLI could be regarded one of the important action plans under the BEPS
project to create a healthy tax environment. This might go a long way in
bringing tax parity amongst developing and developed economies subject to
the adoption of matching provisions. Measures like PPT and various anti-
abuse provisions covered under the MLI may give impetus to countries to
curb tax avoidance and treaty shopping.
Recovery of tax in respect of non-resident from
his assets [Section 173]
Without prejudice to the provisions of section 161(1) or of section 167, where
the person entitled to the income referred to in section 9(1)(i) is a non-
resident, the tax chargeable thereon, whether in his name or in the name of
his agent who is liable as a representative assessee, may be recovered by
deduction under any of the provisions of Chapter XVII-B and any arrears of
tax may be recovered also in accordance with the provisions of this Act from
any assets of the non-resident which are, or may at any time come, within
India.
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