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Tax on income applicable to Non Resident Indians

Direct Taxes Code 2012 (New)
  • The New Direct Taxes Code (DTC) is said to replace the existing Income Tax Act of 1961 in India. Who is a non resident indian?
  • Residential status is re-defined
  • How long can a person stay in india without attracting tax on income earned outside India? Read the discussion on residence..
  • Residence in India
  • More NRIs shall be brought under tax net by virtue of new definition given to residential status.
  • Direct Taxes Code, 2010 defines
  • the duration of residence of a person in India during his visit in a year which shall have a tax impact on his/her income earned even outside India
  • Total Income is defined as:-

    SPECIAL PROVISIONS

    6.1 As mentioned in Chapter-II a person who is non-resident is liable to tax on that income only which is earned by him in India. Income is earned in India if -
  • i.It is directly or indirectly received in India; or
  • ii.It accrues in India or the law construes it as having accrued in India.
  • 6.1.1 The following are some of the instances when the law construes and income to have accrued in India:-
  • i.income from business arising through any business connection in India (refer Chapter X);
  • ii.income from property if such property is situated in India;
  • iii.income from any asset or source if such asset or source is in India;
  • iv.income from salaries if the services are rendered in India. In such cases salary for rest period or leave period will be regarded as earned in India if it forms part of service contract,.
  • v.income from salaries payable by the Government to a citizen of India even though the services are rendered outside India;
  • vi.income from dividend paid by an Indian company even if the same is paid outside India;
  • vii.income by way of interest payable by Government or by any other person in certain circumstances ;
  • viii.income by way of Royalty if payable by the Government or by any other person in certain circumstances;
  • ix.income by way of fees for technical services if such fees is payable by the Government or by any other person in certain circumstances.
  • 6.1.2The following income even though appearing to be arising in India are construed as not arising in India:-
  • i.If a non-resident running a news agency or publishing newspapers, magazines etc. earns income from activities confined to the collection of news and views in India for transmission outside India, such income is not considered to have arisen in India.
  • ii.In the case of a non-resident, no income shall be considered to have arisen in India if it arises from operations which are confined to the shooting of any cinematography film. This applies to the following types of non-residents:-
  • a.individual who is not a citizen of India; or
  • b.firm which does not have any partner who is a citizen of India or who is resident in India; or
  • c.company which does not have any shareholder who is resident in India.
  • 6.2 Exempted income of non-residents
  • Certain income of non-residents are totally exempt from income tax. Such income are mentioned in Chapters VII to X.
  • 6.3 To avoid difficulties in working out the net income of a non resident from his gross receipts in India, the law provides for taxation or most of the income of non-resident on 'Gross income basis', which means that the tax liability is determined on the basis of gross receipts without going into the question of expenses incurred in earning those receipts. Such 'Gross receipt basis' taxation operates in two ways.
  • a)By laying down the rate of tax to be applied on gross receipts. The rates are determined at a figure lower than the general rate of tax applicable to total income as it takes account of the possible expenses in earning the income. Such provisions are:-
  • i.Tax on dividend (other than dividend from domestic companies), interest, royalty, fee for technical services and income from Units (Sec. 115A).
  • ii.Tax on income and capital gain in respect thereto from units purchased in foreign currency by off shore funds (Sec. 11 SAB).
  • iii.Income and capital gain in respect thereto from Bonds and shares purchased in foreign currency or acquired in resulting or amalgamated company as a result of demerger or amalgamation (Sec 115 AC.).
  • iv.Tax on income other than dividend of Foreign Institutional Investors from Securities & Capital gains arising from their transfer (Sec. 115 AD).
  • v.Income of sportsman or Sports association (Sec. 115BBA).
  • b)By laying down a percentage to be applied on gross receipts to determine the net income. The tax is then calculated at the normal rate of tax on such presumptive income. Such provisions are:-
  • i.Profits of shipping business (Sec. 44B)
  • ii.Profits of business of providing services etc. to be used in the business of prospecting, exploration or production of mineral oils (Sec. 44BB)
  • iii.Profits from operation of aircraft (Sec. 44BBA)
  • iv.Profit from business of civil construction etc. in certain turnkey power projects (Sec. 44BBB)
  • 6.4 Non-Resident Indians
  • With a view to attract investment by Non-resident Indians and Indian Nationals living abroad, special provisions exist in Chapter XIIA providing incentives in the form of reliefs and concessional tax rate as also simplifying the tax assessment procedure for such persons. Non-resident Indian has been defined as an individual, being a citizen of India or a person of India origin, who is not a resident. A person is of Indian origin if he or either of his parents or any of his grand parents was born in undivided India. These special provisions are dealt with in Chapter XI.
  • 6.5 Provisions for tax avoidance
  • When in a business carried on between a resident and non-resident, the course of business is arranged in a manner that the business produced to the resident either no profits or less than the ordinary profits, the Assessing Officer would determine the profits which may reasonably be deemed to have been derived there from. This problem arises where the dealings between the two are not at arms length and arrangement through transfer pricing is resorted to reduce the profit taxable in India. In such situations, the assessing officer can take recourse to estimation of income on any rational basis. Rules 10 and 11 of Income Tax Rules govern the estimation of such income.
  • 6.6 Assessment of non-residents through 'Agents' (Sec. 163)
  • A non-resident may be assessed to tax in India either directly or through agents. Persons in India who may be treated as 'agent1 of a non-resident are:-
  • i.employee or trustee of the non-resident;
  • ii.any person who has any business connection with the non-resident;
  • iii.any person from or through whom the non-resident is in receipt of any income;
  • iv.any person who has acquired a capital asset in India from the non-resident.
  • A broker in Indian who has independent dealings with a non-resident broker acting on behalf of a non-resident principal is, however, not treated as an 'agent' of the non-resident, if the transactions between the two brokers are carried on in the ordinary course of their business.Before any person is treated as an 'agent' of non-resident, he is given an opportunity of being heard and any representation from him in the matter is considered.
  • 6.7 Tax clearance certificate before departure from India
  • The following categories of persons are required to produce a tax clearance certificate from the concerned assessing officer prior to their departure:-
  • a)persons who are not domiciled in India, and in whose case the stay in India has exceeded 120 days;
  • b)persons of Indian or non-Indian domicile whose names have been communicated to the airlines/shipping Companies by the Income Tax authorities;
  • c)persons who are domiciled in India at the time of their departure; but
  • i.intend to leave India as emigrants; or
  • ii.intend to proceed to another country on a work permit with the object of taking any employment or other occupation in that country; or
  • iii.in respect of whom circumstances exist, which in the opinion of the income tax authorities render it necessary for him to obtain the Tax Clearance Certificate.
  • 6.7.1 Such certificate is granted where there are no outstanding taxes under the Income Tax Act, the Excess Profits Tax Act, the Business Profits Tax Act, the Wealth Tax Act, the Expenditure Tax Act or the Gift Tax Act against him or where satisfactory arrangements have been made for the payment of any such taxes. Obtaining guarantee from the employer of the person leaving the country is one of the methods of ensuring satisfactory arrangement for payment of taxes. For those who have to go abroad frequently for employer's work, facility of one-time Clearance Certificate has been provided to the foreign employee who has a fixed tenure of service in India or up to 5 years on furnishing an employer's guarantee in the prescribed form for payment of any tax that may be found due against him during the entire period of contract plus two years.
  • 6.8 Advance Rulings
  • With a view to avoiding dispute in respect of assessment of income tax liability in relation to the transaction undertaken by or with a non-resident, a scheme of Advance Ruling has been introduced by incorporating Chapter XIX-B in the Income Tax Act, 1961. The Scheme now enables the parties to obtain, in advance, a binding ruling from the Authority for Advance Rulings on issues which could arise in determining their tax liabilities.
  • Such Advance ruling:-
  • i.Helps non-residents in planning their income tax affairs well in advance.
  • ii.Brings certainty in determining tax liability.
  • iii.Helps avoiding long drawn and expensive litigation.
  • 6.8.1 The advance ruling can be sought on any question of law or fact specified in the applications in relation to the concerned transaction. Advance ruling cannot, however, be sought where the question:-
  • i.is already pending in the case of the applicant before any income tax authority, the Appellate Tribunal or any court; or
  • ii.involves determination of fair market value of any property; or
  • iii.relates to a transaction which is designed prima facie for avoidance of income tax.
  • 6.8.2 The applicant may seek advance ruling by making an application to the Authority in quadruplicate in the prescribed Form No. 34C either in the person or by an authorised representative or by registered post. The applicant is entitled to represent his case before the Authority either personally or through an authorised representative. If the applicant desires to be represented by an authorised representative, a duly authenticated document authorizing him to appear for the applicant should be enclosed. The applicant may withdraw his application within 30 days from the date of filing the application.
  • 6.8.3 The application should be accompanied by a fee of Rs. 2,500/- (two thousand five hundred Indian rupees) through a bank draft drawn in favour of the Authority for Advance Ruling payable at New Delhi.
  • 6.8.4 The advance ruling is required to be pronounced by the Authority within six months of the receipt of the application.
  • 6.8.5 Advance ruling pronounced by the Authority would be binding in respect of the transaction(s) in relation to which ruling has been sought:-
  • i.on the Commissioner and the income tax authorities subordinate to him in respect of the applicant; and
  • ii.on the applicant who had sought it.
  • 6.9 Deduction of Tax at Source from payments to Non-residents Any person responsible for making any payment (except dividend declared after 1.6.97) to a non-resident individual or a foreign company is required to deduct tax at source at the prescribed rate at the time of credit of such income to the account of the payee or at the time of payment thereof. If, however, person responsible for making the payment is the government, public sector bank or public financial institutions, deduction is to be made at the time of payment only.
  • 6.9.1 Where the person responsible for making such payments considers that the whole of such sum would not be income chargeable in the case of recipient, he may make an application to the assessing officer to determine the appropriate proportion of such sum which will be chargeable to tax and upon such determination tax is required to be deducted only on the chargeable proportion.
  • 6.9.2 The rate at which tax is to be deducted at source will be the rates as specified in the Finance Act of the relevant year or the rate specified in any agreement for avoidance of double tax whichever is beneficial to the assessee. In respect of income of the nature referred to in para 7.2(iii) arising to Offshore Funds and of the nature referred to in para 7.2(iv), tax is deductible at the rates at which such income is taxable.
  • 6.9.3 For certain remittances, the Reserve Bank of India Exchange Control Manual requires production of a no objection certificate from the Income-tax authorities. The Central Board of Direct Taxes, vide circular No. 759 and 767, has simplified the procedure by dispensing with such requirement. The person making the remittance has only to furnish an undertaking (in duplicate) addressed to the Assessing Officer which should be accompanied by a certificate from a Chartered Accountant in the prescribed form. The undertaking should be submitted to the Reserve Bank of India or the authorised dealer in foreign exchange who will forward a copy to the assessing officer.
  • 6.9.4 Any tax deducted in excess of the required amount is normally refundable to the non-resident on making a proper claim for it. Sometimes the non-resident returns the amount in respect of which tax was deducted or, circumstances occur in which tax is found to be non-deductible or, in which tax is found to have been deducted in excess and the non-resident is either not able to claim refund or does not show initiative in claiming such refund. In such cases, the CBDT has by circular No. 790 dated 20.4.2000 permitted refund of excess tax to the person making the deduction.

    INVESTMENT INCOME

    In this chapter a discussion is made about the tax treatment of income from interest, dividend, income from leasing and capital gains arising to non-residents.
  • Tax Treatment of Interest
  • 7.1 Interest income received by or accruing to a non-resident in India is taxable.Interest wherever received or accruing is considered as accrued in India if the same is payable by the Government or, if payable by any other person, it is in respect of the money used for business or profession in India or for any Source of income in India.
  • 7.1.1 The following interest income is exempted from tax:-
    a. Interest on the notified securities and interest as well as premium on redemption on any notified bonds issued by the Central Government is exempt. For this purpose 4%% National Defense Loan, 1968 and 4 3/4% National Defense Loan, 1972 have been notified as exempt [Section 10(4)].
    b. Interest on deposits in the Non-Resident (Non repatriable) Rupees Deposits Scheme.
    c. Interest on deposits in N.R. (external) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973. This exemption is available to a person who is a person resident outside India within the meaning of Sec. 2(q) of the Foreign Exchange Regulation Act, 1973. This exemption is also available to one who has been permitted by the Reserve Bank of India to maintain such account [Sec.1094)(ii)]
    d. Interest income of a bank incorporated outside India authorised to perform central banking function on any deposit made by it with any scheduled bank if such deposit is approved by the Reserve Bank of India [Sec. 10(15)(iii)(a).]
    e. Interest income in respect of moneys borrowed outside India if the interest is payable by-
    i. Government or a local authority [Sec.10(15)(iv)(a)].
    ii. Industrial undertakings in India on moneys borrowed by them under a loan agreement entered into with any financial institution in a foreign country which is approved by the Central Government. [Sec. 10(15)(iv)(b)].
    iii. Industrial undertakings in India on any moneys borrowed or debt incurred by them in a foreign country in respect of purchases outside India of raw materials or components or capital plant and machinery to the extent to which the interest is calculated at the rate approved by the Central Government. For this purpose, the purchase of capital plant and machinery would include its purchase under a hire purchase agreement or a lease agreement with an option to purchase such plant and machinery [Sec. 10(1 5)(iv)(c)].
    iv. Industrial undertakings in India on any moneys borrowed in foreign currency under a loan agreement approved by the Central Government to the extent to which the interest does not exceed the amount of interest calculated at the rate approved by the Central Government [Sec.10(15)(iv)(f)
    v. Industrial Finance Corporation of India or the Industrial Development Bank of India or the Export-Import Bank of India or the National Housing Bank or the Small Industries Develop ment bank of India or the Industrial Credit and Investment Corporation of India to the extent to which the interest does not exceed the amount of interest calculated at the rate approved by the Central Government [Sec. 10(15)(iv)(d)].
    vi. Any other financial institution established in India or a banking company on any moneys borrowed by them under a loan agreement approved by the Central Government where the moneys are borrowed either for the purpose of advancing loans to industrial undertakings in India for purchase outside India of raw materials or capital plant and machinery or for the purpose of importing any goods which the Central Govern ment may consider necessary to import in the pubic interest. The exemption is, however, allow able to the extent to which the interest does not exceed the amount of interest calculated at the rate approved by the Central Government (Sec. 10 (15) (iv) (e)
    vii. Industrial undertaking on money borrowed in foreign currency under a loan agreement approved by Central Government having regard to the need for industrial development in India. The exemption is to the extent of interest calculated at the approved rate [Sec. 10(15)(iv)(f)].
    viii. A Scheduled bank on deposits in foreign currency if such deposits are approved by the Reserve bank [Sec. 10(15)(iv)(fa)].
    ix. An Indian public company carrying on the business of providing long-term finance for construction or purchase of house in India for residential purposes on any moneys borrowed by it in foreign currency under a loan agreement ap proved by the Central Government. The exemption is limited to the extent to which the interest does not exceed the amount of the interest calculated at the rate approved by the Central Government. It is necessary that such a company is eligible for deduction under Section 36(1)(viii) of the Act [Sec. 10(15)(iv)(g)].
  • 7.1.2 Rates of tax on interest Income
    Interest income of certain non-residents is charged to tax at a fixed rate on the gross receipts without deduction of any expenses incidental to earning such income or the deduction referred to in Chapter V. Such non-resident persons and the rate of tax are:-
    (i) Foreign companies in respect 20% of interest received from the Government or Indian concern on borrowing in foreign currency [Sec. 115A]. 20%
    (ii) Non-corporate non-residents in 20% respect of interest received from the Government or Indian concern on borrowing in foreign currency [Sec. 115A]. 20%
    (iii) Non-residents in respect of 10% interest on Bonds of an Indian company if the Bonds are issued in accordance with scheme notified by the Central Government and the same are purchased by them in foreign currency or acquired as a result of demerger or amalgamation. Foreign currency convertible Bonds and ordinary shares (Through Depository Receipt Mechanism) Scheme, 1993 is the one notified for this purpose [Sec. 115AC]. 10%
    (iv) Notified Foreign institutional 20% investors in respect of income from securities listed in a Recognised Stock Exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 [Sec. 115 AD] 20%
  • 7.1.3 Income from interest other than those specified above is charged to tax on net income basis at the normal rate applicable to the tax payer depending upon whether he is individual, company or any other person.
  • 7.1.4 Rates of tax as per 'Double Tax Avoidance Agreement' In terms of the double tax avoidance agreements in force with different countries income from interest derived by a person resident of the country with which such agreement exists is chargeable to tax in India at the agreed rates which are generally lower than the rates of tax mentioned in para 7.1.2 and 7.1.3 above. If, however, in any case the rates in the agreement are higher, the tax payer is entitled to be assessed at the rates prescribed in the Income Tax Act. Rate of tax on interest as agreed with different countries are given in the annexure.
  • Tax Treatment of Dividend/Income from units
  • 7.2 Dividend declared, distributed or paid by a domestic company on or after 1.6.1997 is exempt from tax. Similarly income from Units of Unit Trust of India and other mutual funds and from Venture Capital Company/fund is exempt. As for dividend etc. declared, distributed or paid prior to the date from which exemption is effective, the law provides for taxation of such income in case of certain non-residents at a flat rate on gross receipts i.e. without deduction of any expenses incidental to earning such income.
    i) Foreign companies in respect of dividend or income from units of a notified Mutual Fund or the Unit Trust of India purchased in Foreign currency [Sec. 115A]
    25% up to assessment year 1994-95 20% w.e.f. the assessment year 1995-96
    ii) Non-Corporate non-residents in respect of dividend or income from Units of a notified mutual fund or the Unit Trust of India purchased in Foreign currency [Sec. 115A]
    20% w.e.f. the assessment year 1995-96
    iii) Overseas Financial Organisation (known as Off-shore Fund) in respect of units purchased in foreign currency. "Overseas Financial Organisation" means any fund institution, association or body 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 notified mutual fund and such arrangement is approved by the Central government (Sec. 115 AB)
    10%
    iv) Any non-resident in respect of dividend from shares of an Indian Company which are issued in accordance with a scheme framed and notified by the Central government and which are purchased by him in foreign currency or acquired in an amalgamated or resulting company as a result of amalgamation or demerger. Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 is the one notified for this purpose [Sec. 115 AC]
    10%
    v) Notified Foreign Institutional 10% investors in respect of income from securities listed in a recognised Stock Exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 [Sec. 11 SAD]
    10%
  • 7.2.2 Income from dividend etc. relating to period prior to exemption which is not specified above is taxable on net income basis at the normal rate of tax.
  • 7.2.3 Rate of tax as per 'Double Tax Avoidance Agreements' The rates of tax applicable to income from dividend etc. as agreed to in the 'Double Tax Avoidance Agreements1 entered into by India are given in the Annexure I. The Non-resident is entitled to be assessed at the normal rate applicable to him or the rate specified in the agreement with his country whichever is favourable to him.
    Tax Treatment of capital gains
  • 7.3 A discussion about the tax treatment of Capital Gains in general is made in Paras 4.5 to 4.5.9 of Chapter IV. There are certain special provisions applicable to non-residents in the matter of computation of such gains as well as rates of taxation which are discussed here.
  • 7.3.1 Special Provisions for computing capital gains from transfer of shares/debentures Capital gains arising to a non-resident from the transfer of shares in or debentures of Indian companies is, at his option, computed by first converting the cost and the transfer consideration into the same foreign currency which was initially utilized in the purchase of such shares/debentures and then the difference being the capital gains expressed in that foreign currency is reconverted into Indian currency for the purpose of taxation. This is done to ensure that the amount of capital gain chargeable to tax is not influenced by the exchange rate fluctuation and represents only the accretion in value. The rates of conversion and re-conversion to be applied are as prescribed in rule 115A, which is the average of the telegraphic transfer buying rate for cost of acquisition and telegraphic transfer selling rate for transfer consideration on the respective dates. For conversion of capital gain, the conversion rate will be the telegraphic transfer buying rate as on the date of transfer of the capital asset. The aforesaid manner of computation of capital gains is also applicable in respect of capital gains accruing or arising from every reinvestment thereafter in share or debentures of an Indian Company. Where this option is availed of, the non-resident is not entitled to the benefit of indexation adjustment mentioned in para 4.5.4
  • 7.3.2 In order to facilitate the restructuring of business it is provided that transfer of shares in Indian companies from one foreign company to another, in a scheme of amalgamation or demerger would not be regarded as a transfer provided two conditions are satisfied - firstly, that a specified percentage of the shareholders of the amalgamating company or the demerged company continue to be the shareholders of the amalgamated company or the resulting company and secondly that such transfer is not subject to capital gains tax in the country where the amalgamating company or the demerged company is incorporated.
  • 7.3.3 Capital gains arising from the transfer of short term capital asset are included in the total income and taxed at the normal rate applicable to the income of the person earning it. Capital gains arising out of the transfer of long term capital assets in the hands of non-residents are, however, assessed at the flat rates as follows:-
    (i) Foreign Companies
    40% upto A.Y. 1994-95
    20% w.e.f. A.Y. 1995-96
    (ii) Non-Corporate non­residents assessees:
    (a) Individual
    25% upto A.Y. 1994-95
    20% w.e.f. A.Y. 1995-96
    (b) Others e.g. firm etc.
    30% upto A.Y. 1994-95
    20% w.e.f. A.Y. 1995-96
  • 7.3.4 Non-residents of certain categories are, however, assessed at special concessional rates of tax in respect of capital gains arising from the transfer of certain specified assets. In computing the capital gain in such cases special provision applicable in the case of non-residents for avoiding the influence qf exchange rate fluctuation mentioned in para 7.3.1 are not to be applied. Such categories of non-resident earners are:- Overseas Financial Organisation (known as Off-shore Funds) in respect of long term capital gains arising from the transfer of units purchased in foreign currency. "Overseas Financial Organisation" means any fund institution, association or body 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 notified mutual fund and such arrangement is approved by the Central Government (Sec. 11 5AB)
    10%
    ii) Any non-resident in respect of long 10% term capital gains arising from the transfer of bonds or shares of Indian Companies which are issued in accordance with a notified scheme and purchased by him in foreign currency. Foreign Currency Convertible Bonds and Ordinary shares (through Depository Receipt Mechanism) Scheme 1993 is the one notified for this purpose (Sec. 115AC)
    10%
    iii) Notified Foreign Institutional investors on capital gains arising is from the transfer of securities listed in a recognised Stock Exchange in India in accordance with the provisions of Securities Contracts is long (Regulation) Act, 1956.
    a) If the gain short term-30%
    b) If the gain long term-30%
  • 7.4 Double Tax Avoidance Agreements The Jurisdiction to tax capital gains between the source country and the country of residence of the person holding the assets is governed by the double tax avoidance agreement, if any, existing with the country to which the non-resident belongs. Such agreements should, therefore, be referred to.
  • 7.5 Income from Leasing Activities Where the government of a foreign State or a foreign enterprise derives income from an Indian company engaged in operation of aircraft by leasing aircraft or aircrafts engine to it under an agreement entered after 31.3.97 and approved by the Central government and tax on such income is payable by that Indian Company, the tax so paid is not to be considered as Income of the lessor and consequently the payment is not to be grossed up [Sec. 10(6BB)]. Total exemption in respect of such payment was withdrawn in respect of agreements entered after 31.3.1997, but the same has been revived by the Finance Act 1999 and will be available in respect of income earned in pursuance of agreements entered into prior to 1.4.97 or after 31.3.99.
  • 7.6 Exemption in respect of any net of tax income In case the recipient receives net of tax payment from Government or Indian concern under an agreement between Central Government and a Foreign Government or between Central Government and an international organisation, the tax paid by the payer of the income will not be considered as the income of the recipient and the requirement of grossing up will not apply [Sec. 10(6B)].
  • 7.7 Exemption from the obligation to file the return of income If the income of the non-residents governed by Section 115A and 11 SAC consists only of the income from interest, dividend or income from units covered by these sections and tax has been deducted at source, such persons need not file the return of income which he is otherwise required to file.

    BUSINESS INCOME

    As for other income, the business income in the hands of a non-resident is chargeable to tax only when the same is either received in India or it accrues in India. The question as to where the income from business accrues or arises is a question of fact to be determined in individual cases. However, certain guiding principles are laid down in Section 9 of the Income Tax Act for determining the question of accrual of business income in India.
  • 10.1.1 Income from business operations is construed as accrued in India if the same accrues or arises, whether directly or indirectly, through or from any business connection in India. The expression 'business connection' admits of no precise definition. A business connection involves the concept of a control, supervision or an activity of continuous nature. It necessitates a nexus between the activity and the business. A stray transaction or business activity does not, therefore, generally establish such nexus. 'Business' is a word of wide import and means activities carried on continuously and systematically by a person by the application of his labour and skill with a view to earning an Income. Unless there is something to establish a relationship between the activity and such continuous and systematic carrying on of activities, the requisite nexus will be lacking. An idea of the import of this expression can be had from the following illustrative instances of a non-resident having business connection in India. These instances are contained in Board's Circular No. 23 of 1969:-
    a. Maintaining a branch office in India for the purchase or sale of goods or transacting other business.
    b. Appointing an agent in India for the systematic and regular purchase of raw material or other commodities or for sale of the goods or for other business purposes.
    c. Erecting a factory in India where the raw material purchased locally is worked into a form suitable for export outside.
    d. Forming a local subsidiary company to sell the products of the non-resident parent company.
    e. Having financial association between resident and a non-resident company.
  • 10.1.2 A non-resident will not be liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident has an office or an agency in India for this purpose.
  • 10.1.3 Where a non-resident has an agent in India but makes sales directly to Indian customers, there will be no 'business connection' even if he pays to his agent an over-riding commission on such sales to India provided
    i. the making of these sales can in no way be attributed to the existence of the agency or to any trading advantage or benefit accruing to the principal from the agency
    ii. the contracts to sell are made outside India and
    iii. the sales are made on a principal to principal basis.
  • 10.2 The bilateral double tax avoidance agreements require the presence of somewhat permanent nature of the non-resident in India to be able to exercise the jurisdiction of taxing the business income. Such presence is established through the existence of fixed place of business or relationship technically known as 'permanent establishments'. Following are some of the instances of permanent establishments:-
    a. a place of management,
    b. a branch,
    c. an office
    d. a factory,
    e. a workshop,
    f. a mine, oil well or other place of extraction of natural resources,
    g. a building site or construction or assembly project which exist for an agreed period, and
    h. provision of supervisory activities for a minimum agreed period on a building site or construction or assembly project.
  • The term 'permanent establishment' in generality of such agreements does not include-
    a. The use of facility solely for the purpose of storage or display of goods or merchandise belonging to the enterprise.
    b. The maintenance of stock of goods or merchandise solely for the purpose of storage or display.
    c. The maintenance of stock of goods or merchandise solely for the purpose of processing by another enterprise,
    d. The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the enterprise, and
    e. The maintenance of stock of a fixed place of business solely for the purpose of advertising of similar activities which have a preparatory or auxiliary character for the enterprise.
  • 10.3 Computation of business income The law does not seek to bring into the tax net the profits which cannot reasonably be attributed to operations carried out in India. Even if there is a 'business connection1 in India or a 'permanent establishment' exists only that part of the profits which can be attributed to activities through such 'business connection' or 'permanent establishment1 can be the subject matter of tax in India.
  • 10.3.1 The net income from such business activities is worked out on the basis of general principles governing the computation of business income (refer para 4.4 to 4.4.9 of Chapter IV). A non resident is also entitled to deduct out of gross business income that part of the head office expenses which can be attributed to the Indian operations through 'business connection' or 'permanent establishment'. The law lays down the ceiling on the Head Office expenses that can be allowed as deduction in computing the business income. It is laid down that the deduction of actual amount of head office expenses attributable to the business or profession in India shall not exceed 5% of the adjusted total income which means the total income before taking account of depreciation, carried forward losses etc. or deductions under Chapter VI-A of the Income Tax Act mentioned in Chapter V of this guide.
  • 10.4 Exemption from business income The income of the following persons is not subjected to tax as it is not considered as accruing or arising in India :-
    a. Income of a non-resident engaged in the business of running a news agency or of publishing newspapers, magazine or journals arising from activities which are confined to the collection of news and views in India for transmission out of India.
    b. Income of a non-resident who is also not a citizen of India, or, of a firm in which no partner is resident or Indian citizen, or, of a company in which no shareholder is a resident or Indian citizen if such income arises from operations which are confined to the shooting of any cinematography film in India.
  • 10.5 Profits of Non-residents from occasional Shipping business (Sec. 172) Before the departure from any port in India of any such ship, the master of the ship is required under the law 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 his behalf on account of such carriage since the last arrival of the ship at that port. The assessing officer may in his discretion allow tie ship to depart without furnishing the said return if satisfactory arrangement for filing of return and payment of taxes are made. In such a case, the return should be field within 30 days of the departure of the ship. On receipt of the return, the assessing officer will assess the income at 72% of the amount stated above, and determine the tax at the rate applicable to a foreign company and such sum shall be payable by the master of the ship. A port clearance is not granted to the ship until the tax has been paid or satisfactory arrangements have been made for the payment thereof. It is open to the non-resident to seek a regular tax assessment! of such income by furnishing a return of his total income in India before the expiry of the assessment year immediately following the financial year in which the ship departed from an Indian port. In such a case the tax already paid during the said financial year, if any, is treated as an advance payment of income tax for the relevant assessment year and is credited to the tax payer against his final tax liability determined on assessment. Income computed by application of a flat rate on gross receipts In order to facilitate assessment and avoid difficulties involved in adducing evidence to the satisfaction of assessing officer, taxable business profits of the following persons are computed not on actual basis but by applying a prescribed rate on gross receipts.
  • 10.5.1 Profit and gains of shipping business (Sec. 44B) Profit of non-resident from shipping business is deter mined by applying a flat rate of 7 1/2% on the following amounts:-
    i. the amount payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; including amount by way of demurrage or handling charges or amount of similar nature;
    ii. the amount received or considered as 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, including amount by way of demurrage or handling charges or any other amount of similar nature.
  • 10.5.2 Profits and Gains of Business of Exploration etc. of Mineral Oils [Sec. 44BB] The income of a non-resident assessee from the business of providing services or facilities in connection with, or supplying plant and machinery or hire for use in, the business of prospecting for, or extraction or production of mineral oils in India is computed at a sum, equal to 10% of the following receipts :-
    i. Amount paid or payable (in or out of India) on account of services and facilities provided to or on account of supply of plant and machinery on hire to be used in such business; and
    ii. Amount of the nature described in (i) above received or receivable in India.
  • 10.5.3 Profits and Gains of the Business of operation of Aircraft [Sec. 44BBA] The income of a non-resident from business of operation of aircraft is computed at a sum equal to 5% of the aggregate of the amounts paid or payable to him whether in India or outside India on account of the carriage or passengers, livestock, mail or goods from any place in India.
  • 10.5.4 Profits and Gains of foreign Companies engaged in the Business of Civil Construction etc. in certain Turnkey Power Projects [Sec. 44BBB] The income of a foreign company from the business of civil construction or of erection of plant and machinery or testing or commissioning thereof in connection with turnkey power project is computed at 10% of the amount paid or payable to it on account of such civil construction, erection, testing or commissioning. This is subject to the following conditions:-
    i. the project is approved by the Central Government in this behalf;
    ii. it is financed under any international aid program.
  • 10.5.5 Profit of foreign telecasting companies [Circular No. 742] The income of foreign telecasting companies which are not having any branch office or permanent establishment in India or are not maintaining country-wise accounts is to be computed, in respect of their operations in India, by adopting presumptive profit rate of 10% of the gross receipts meant for remittance abroad or the income returned by them, whichever is higher.
  • 10.6 Income of Non-Resident Sportsman or Sports Association [Sec. 115BBA] Instead of determining the income of such persons at a flat rate and computing tax thereon at normal rate, the law lays down a flat rate of tax of 10% to be applied on the gross receipts of a non-resident sportsman who is not a citizen of India in respect of his participation in India in any game or sports (other than horse races) or from advertisement or from contribution of articles relating to game or sport in any newspapers, magazines or journals. Similarly, a non-resident sports association or institution is liable to tax at the rate of 10% on the guaranteed amount paid or payable to it in relation to any game (other than horse races) or sport played in India.
  • 10.7 Special provisions in respect of business of prospecting for or extraction of mineral oils [Sec. 293A] Central Government has been authorised to grant by notification special exemption, reduction in rate or other modifications in respect of income tax in favour of the following class of persons :-
    a. persons with whom Central Government has entered into agreements for participation in any business consisting of the prospecting for or extraction or production of mineral oils;
    b. persons providing any service or facilities or supplying any ship, aircraft, machinery or plant (by way of sale or hire) in connection with any business consisting of the prospecting for or extraction or production of mineral oils carried on by the government or any person specified by the Government;
    c. employees of persons referred to in (a) and (b) above. In exercise of such power the Central Government reduced the rate of tax in respect of income of a foreign company or other non-corporate on-resident of the nature mentioned at (a) above to 50% (as against the general rate of 65% applicable to foreign companies up to the assessment year 1994-95). This rate was raised to 55% as increased by a Union surcharge @ 2.5 % by notification dated 31.03.93. With reduction in normal tax rates applicable to foreign companies these notifications do not result in reduction in rate. The Central Government is also empowered to make a notification in regard to the status in which the aforesaid class of person is to be assessed.

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