INTRODUCTION

Income tax is an annual tax on income, where income tax is a government levy (tax) imposed on individuals or entities (taxpayers) that varies with the income or profits (taxable income) of the taxpayer. The Indian Income Tax Act (Section 4) provides that in respect of the total income of the previous year of every person, income tax shall be charged for the corresponding assessment year at the rates laid down by the Finance Act for that assessment year. Details vary widely by jurisdiction. Many jurisdictions refer to income tax on business entities as companies tax or corporation tax. Partnerships generally are not taxed; rather, the partners are taxed on their share of partnership items. Tax may be imposed by both a country and subdivisions thereof. Most jurisdictions exempt locally organized charitable organizations from tax. Income tax generally is computed as the product of a tax rate times taxable income. The tax rate may increase as taxable income increases (referred to as graduated rates). Tax rates may vary by type or characteristics of the taxpayer. Capital gains may be taxed at different rates than other income. Credits of various sorts may be allowed that reduce tax. Some jurisdictions impose the higher of an income tax or a tax on an alternative base or measure of income. According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the finance act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year.

HISTORY & ORIGIN

In 1799, Britain enacted a general income tax to finance the Napoleonic Wars. In the U.S. an income tax was first tried during the Civil War; The origin of taxation in the United States can be traced to the time when the colonists were heavily taxed by Great Britain on everything from tea to legal and business documents that were required by the Stamp Tax. The colonists' disdain for this taxation without representation (so-called because the colonies had no voice in the establishment of the taxes) gave rise to revolts such as the Boston Tea Party. However, even after the Revolutionary War and the adoption of the U.S. Constitution, the main source of revenue for the newly created states was money received from customs and excise taxes on items such as carriages, sugar, whiskey, and snuff. Income tax first appeared in the United States in 1862, during the Civil War. At that time, only about one percent of the population was required to pay the tax. A flat-rate income tax was imposed in 1867. The income tax was repealed in its entirety in 1872.

OBJECTIVE OF STUDY
Every successful study should have specified and well-defined objectives. A careful statement of the objective helps in preparing a well-decorated report facilitating others to take decision on it. The specific objectives of the study are to have knowledge about. To determine Scope of Total Income with respect to/ based on Residential Status [Sec.6] To determine how should income of an Indian, earned abroad, be taxed? Are foreigners earning income in India liable to taxation? Is a non-resident liable for tax in India? Elaboration of sec.7 & 9 of Income Tax Act 1961.

SCOPE OF TOTAL INCOME - [ SECTION 5 ]

Section 5 - (1) Subject to the provisions of this Act,-

The total income of any previous year of a person who is a resident includes all income from whatever source derived which

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year. Provided that, In the case of a person, not ordinarily resident in India [as per section 6(6)], income which accrues or arises to him outside India shall not be included unless it is derived from a business controlled in or a profession set up in India. In the case of non-resident, the total income shall include all income from whatever source derived which (a) is received or deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Income accruing or arising outside India shall not be deemed to be received in India merely on the reason that it is taken into account in a balance sheet preferred in India. Explanation 1.Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2. For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

DETERMINE THE NATURE OF INCOME IN THE FOLLOWING CIRCUMSTANCES:

1) Mr. Michael Schumacher received a sum of USD 500,000 from Ferrari India for endorsing their brand in India. Payment for the endorsement was made in Germany.

Ans: Income deemed to accrue and arise in India but received outside India.

2) Mr. Sanjay Nayar is working for CITIBANK India. During the year, he was posted to Singapore on deputation for a period of 6 months. Salary for the period was remitted in India while he was receiving allowance for his stay abroad.

Ans: Income earned outside India but received in India.

3) Mr. Gary Kirsten, citizen of South Africa, works for the Indian cricket team. He receives salary for his work with the Indian cricket team and travels across the globe with the team.

Ans: Income deemed to accrue and arise in India and received in India.

4) Mr. Mallaya has a huge resort in Goa which has been let out to UniLever PLC UK on a monthly rent of Rs 10 lacs. The sum is being credited in equivalent pounds every month in his Swiss bank account.

Ans: Income deemed to accrue and arise in India but received outside India.
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RESIDENCE IN INDIA - [ SECTION 6 ]

Section 6 For the purposes of this Act,(1) An individual is said to be resident in India in any previous year, if he(a) is in India in that year for a period of periods amounting in all to one hundred and eighty-two days (182) or more; or (c) Having within the four years (4) preceding that year been in India for a period or periods amounting in all to three hundred and sixty five days (365) or more, is in India for a period or periods amounting in all to sixty days (60) or more in that year. Explanation In the case of a individual,(a) Being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purpose of employment outside in India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words sixty days, occurring therein, the words one hundred and eighty-two days has been substituted;. (b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words sixty days occurring therein, the words one hundred and eighty-two days, had been substituted.

(6) A person is said to be not ordinarily resident in India in any previous year if such person is (a) an individual who has not been resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and thirty days or more; or (b) A Hindu undivided family whose manager has not been resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and thirty days or more. The following clause (6) shall be substituted for the existing clause (6) of section 6 by the Finance Act, 2003, w.e.f. 1-4-2004: A person is said to be not ordinarily resident in India in any previous year if (6) such person is (a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or (b) a Hindu undivided family whose manager has been a non-resident in India a nine out of the ten previous year preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.

Illustration 1 :
Mr. Kamath, working with ICICI Bank Mumbai, is an Indian citizen who has never travelled out of India. He travelled to Singapore for an inspection on 05.08.2012 and returned on 15.09.2013. Determine his residential status for the AY 13-14. Solution: Step 1: Resident or Non-Resident An individual who fulfils either of the following conditions will be a resident in India. If he has stayed in India for 182 days or more during the relevant previous year Or If he has stayed in India for 60 days or more during the relevant previous year and 365 days or more during the 4 preceding previous years. However, in case of the following persons, only the first condition is applicable to determine the residential status: Indian citizen, leaving India for employment outside India Indian citizen being a crew member of an Indian ship leaving India Indian citizen or Person of Indian origin visiting India.

Stay in India: 01.04.12 to 05.08.12 , Number of days : 127 days In this case Mr. Kamath, has travelled abroad for the first time. His stay in India is less than 182 days during the previous year. However he has stayed for more than 60 days in the previous year and has spent more than 365 days in the immediately preceding 4 years since this is his first trip abroad. Hence he is a resident. Note: Foreign tour on behalf of an Indian employer will not be considered as employment outside India.
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Step 2: Ordinarily or Not Ordinarily Resident Additional Conditions: Individual should have been a resident u/s 6(1) for at least 2 out of 10 preceding previous years. Individual should have been in India for a period of 730 days or more in the 7 preceding previous years If an individual fulfills both the above conditions: Resident and Ordinary resident If an individual fulfills any one or none of the above conditions: Resident but not Ordinarily resident. Since Mr. Kamath is leaving India for the first time, he was a resident in all the 10 previous years and had stayed in India for more than 730 days. Therefore, Mr. Kamath will be treated as Resident and Ordinarily resident.

Illustration 2 :
Mr. Blair, a citizen of UK moved into India on 01.05.2007 for the first time. Blair is working with Orange Inc UK. His assignment in India stretched and he finally returned home on 05.09.2012. Determine his residential status for the year ending 31st March 13. Solution: Step 1: Resident or non- resident: During the previous year, Mr. Blair has been in India for 158 days (30+31+30+31+31+5). However, he has spent more than 60 days in the previous year and more than 365 days in the immediately preceding 4 previous years (he was in India since 01.05.2007). Therefore Mr. Blair is a Resident for the previous year 12-13.

Step 2: Ordinarily or not ordinarily resident: Mr. Blair came to India for the first time during 07-08 and is in India since then. Therefore, he would be a resident for 2 out of the 10 immediately preceding previous years and had been in India for more than 730 days. Hence he is a resident and ordinary resident for the previous year 12-13.

Illustration 3 :
Mr. Shaun Pollock was born in South Africa during 1975. His father Mr. Peter Pollock is a US citizen by birth. His grandfather was born in Bangladesh (East Bengal) during 1922. Is Mr. Pollock a resident of India assuming he travelled to India for the India-South Africa series and stayed for 175 days during the previous year? Solution: Mr. Pollock has stayed in India for 175 days during the current previous year. Therefore he is not a resident by the first condition. Since Mr. Pollock is a person of Indian origin (his grandfather was born in undivided India), the 60 day condition will not apply to him. Therefore Mr. Pollock will be a Non-resident for the previous year.

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RESIDENTIAL STATUS OF A COMPANY [SEC. 6(3)] A Company is a Resident in India if: It is an Indian Company u/s Sec 2(26), or Control and management of affairs are wholly in India during the relevant previous year.

Note: Company u/s 2(26) refers to a company formed and registered in India and has its principal office in India. Where a company does not fulfill either of the above conditions, it shall be deemed to be a Non-resident.

Illustration 1:
Nike Inc. USA, has its wholly owned subsidiary in Nike India Ltd, an Indian company registered under the Companies Act. The companys top management has its base in Singapore and all strategic decisions are taken at Singapore. Determine the residential status of the company. Would your answer differ if the company is not registered in India? Solution: Where a company is registered in India, it will be a resident irrespective of whether control and management is within India or otherwise. Therefore, Nike India will be a resident for Income tax purposes. Where the entity is not an Indian company and has its management and control outside India, the company will be a non-resident as both the conditions u/s Sec 6(3) have not been complied with. Therefore, Nike India will be a non-resident.

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RELATED CASE 1) The mere fact that a company is also a resident in a foreign country would not necessarily displace its residence in India. Control is not necessarily situated in the country in which the company is registered Unit Construction Co Ltd vs Bullock (1961) 42 ITR 340 (HL). 2) Control and management is situated at the place where board meetings are held. Control for the purposes of sec 6 refers to central control and management and not the carrying on of day to day business operations by employees CIT vs Bank of China (inliquidation) (1985) 23 taxman 46 (Cal).

RESIDENTIAL STATUS OF A FIRM/ AOP/ BOI AND OTHER PERSONS [SEC. 6 (2) and 6 (4) ] 1) A firm, AoP, BoI or any other person shall be regarded as a resident in India if whole or part of the control and management is in India. 2) If the control and management of the affairs of the entity are wholly outside India during the relevant previous year then the assessee would be regarded as a non resident. 3) Residential status of the partners / members is irrelevant for the purpose of determining the status
of a firm/ AoP/ BoI etc.

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RESIDENTIAL STATUS OF AN HUF- [SEC. 6(2) ] Similar to an individual, a HUF also has three residential status namely: Resident and ordinarily resident Resident but not ordinarily resident Non-resident

Determination of Resident or Non-resident status of a HUF: If whole or part of the control and management is in India, HUF shall be regarded as a resident. If whole of the control and management is outside India, HUF shall be regarded as a Non resident. Determination of Ordinarily or Not Ordinarily status of Resident HUF - Additional Conditions: Once an HUF is considered as a resident based on the above mentioned criteria, the next step is to determine whether it is ordinarily or not ordinarily resident in India. The conditions are similar to that of an individual, however these conditions are to be applied on the Karta of the HUF. Karta should have been a resident u/s 6(1) for at least 2 out of 10 preceding previous years Karta should have been in India for a period of 730 days or more in the 7 preceding previous years. If the Karta fulfills only one or none of the above conditions, the HUF is Not Ordinarily resident and where he fulfills both the conditions, the HUF is an ordinarily resident. Note: For determining whether a HUF is a resident or not, status of the Karta is irrelevant.

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Illustration 1:
Jain HUF is a family owned entity having diverse business interests across the globe. The brain of the family primarily resides in Hongkong. However, certain key decision makers are also based out of Mumbai. Mr. Naresh Chandra Jain, the karta of the HUF, is always on tours. During the previous year 12-13 he stayed in India for 100 days. Mr. Naresh Jain was individually assessed as a resident for only 3 years out of the past 6 years and had spent 120 days on an average in India over the past 8 years. Determine the residential status of the HUF. Would your answer change if Mr. Naresh Jain had been in India for only 25 days during the previous year? Solution: The control and management of Jain HUF is partly in India and partly abroad. Hence the entity will be regarded as a resident u/s 6(2). To determine whether the HUF is an ordinarily or not ordinarily resident, the conditions specified for an individual should be applied on the karta. In this case, Mr. Naresh has been a resident for 3 out of the past 10 preceding previous years and has spent more than 720 days over the immediately preceding 7 years. Therefore, the entity will be resident and ordinarily resident for the previous year. Residential status of the Karta is irrelevant for determining whether the HUF is a resident or nonresident. In other words, period of stay of the Karta during the relevant previous year will not have any impact on the residential status of the HUF. Hence the HUF will continue to remain as a Resident and Ordinarily Resident.

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Illustration 2:
The business of a HUF is transacted from Australia and all the policy decisions are taken there. Mr. E, the karta of the HUF, who was born in Kolkata, visits India during the P.Y.201213 after 15 years. He comes to India on 1.4.2012 and leaves for Australia on 1.12.2012. Determine the residential status of Mr. E and the HUF for A.Y. 2013-14. Solution : (a) During the P.Y.2012-13, Mr. E has stayed in India for 245 days (i.e. 30+31+30+31+31+ 30+31+30+1 days). Therefore, he is a resident. However, since he has come to India after 15 years, he cannot satisfy any of the conditions for being ordinarily resident. Therefore, the residential status of Mr. E for the P.Y.2012-13 is resident but not ordinarily resident. (b) Since the business of the HUF is transacted from Australia and nothing is mentioned

regarding its control and management, it is assumed that the control and management is also wholly outside India. Therefore, the HUF is a non-resident for the P.Y. 2012-13.

RELATED CASE 1) A HUF shall not be regarded as a resident merely because the family has a house in India unless it is proved that it is a seat of control and management. Also the mere absence of karta from India does not make the family a Non-resident Annaalai Chettiar vs IT (1958) 34 ITR 88 (Mad).

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IMPORTANT POINTS TO BE BORNE IN MIND WHILE DETERMINING THE RESIDENTIAL STATUS OF AN INDIVIDUAL

1. Residential status is always determined for the Previous Year because the assessee has to determine the total income of the Previous Year only. In other words, as the tax is on the income of a particular Previous Year, the enquiry and determination of the residence qualification must confine to the facts obtaining in that Previous Year. 2. If a person is resident in India in a Previous 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. [Section 6(5)] 3. Relevant Previous Year means, the Previous Year for which residential status is to be determined 4. It is not necessary that the stay should be for a continuous period. 5. It is not necessary that the stay should be at one place in India. 6. Both the day of entry and the day of departure should be treated as the day of stay in India [Petition No.7 of 1995 225 ITR 462 (AAR)] 7. Presence in territorial waters in India would also be regarded as stay in India. 8. A person is said to be of Indian Origin if he or either of his parents or any of his grandparents was born in undivided India [Section 115C] 9. Official tours abroad in connection with employment in India shall not be regarded as employment outside India. 10. A person may be resident of more than one country for any Previous Year. Citizenship of a country and residential status of that country are two separate concepts. A person may be an Indian national/Citizen but may not be a resident in India and vice versa.
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RELATION BETWEEN RESIDENTIAL STATUS AND INCIDENCE OF TAX [SECTION 5] The residential status of a person is required to be determined for each assessment year in order to determine the scope of total income. The basis of determination of residential status in respect of each person is laid down under the provisions of section 6 which are analysed hereinafter. Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual of receipt of income: Indian Income and foreign income Indian Income: Any of the following three is an Indian income: i) if income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year; ii) If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year; iii) If income is received outside India during the previous year but it accrues (or arises

or is deemed to accrue or arise) in India during the previous year; Foreign income: If the following conditions are satisfied, then such income is foreign income: i) Income is not received (or not deemed to be received) in India; and ii) Income does not accrue or arise (or does not deem to accrue or arise) in India.

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The provisions of residential status are tabulated as below: Whether income is received (or deemed to be received) in India during the relevant years Yes Yes No No Not taxable Incidence of tax for different taxpayers is as follows: Incidence of tax in India for Individuals and Hindu Undivided Family (HUF): Resident and ordinarily resident Indian Income Foreign Income If it is business income Taxable in India Taxable in India and business is controlled wholly or partly in from India If it is income from Taxable in India profession which is set up in India If it is business income Taxable in India and business is controlled from outside India If it is income from Taxable in India profession which is set up outside India - Any other foreign income Taxable in India (like salary, rent, interest etc.) Taxable in India Not taxable in India Not taxable in India Not taxable in India Not taxable in India Not taxable in India Taxable in India Resident but not ordinarily resident Taxable in India Non-resident Whether income accrues (or arises is deemed to accrue or arise) in India during the relevant years. Yes No Yes No

Status of Income

Indian Income Indian Income Indian Income Foreign Income

Taxable in India

Not taxable in India Not taxable in India Not taxable in India

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Any other taxpayer (like company, firm, co-operative society, association of persons, body of individuals, etc): Resident Indian Income Foreign Income Taxable Taxable Non-resident Taxable Not taxable

CONCLUSION: Indian Income: Indian income is always taxable in India irrespective of the residential status of the taxpayer; Foreign Income: Foreign income is taxable in the hands of resident in case of a firm, cooperative society, association of persons, body of individuals or resident and ordinarily resident in case of individuals and HUFs in India. Foreign income is not taxable in the hands of non-resident in India. In the hands of resident but ordinarily resident taxpayer, foreign income is taxable only if it is business income and business is controlled wholly or partly in from India; and income from profession which is set up in India

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INCOME DEEMED TO BE RECEIVED IN INDIA - [ SECTION 7 ]

The following incomes shall be deemed to be received in the previous year:

(i) The annual accretion in the previous year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule ;

(ii) The transferred balance in a recognised provident fund, to the extent provided in sub-rule (4) of rule 11 of Part A of the Fourth Schedule ;

(iii) the contribution made, by the Central Government [or any other employer] in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD. MEANING OF INCOME ACCRUING AND ARISING

Accrue refers to the right to receive income, whereas due refers to the right to enforce payment of the same. For e.g. salary for work done in December will accrue throughout the month, day to day, but will become due on the salary bill being passed on 31st December or 1st January. Similarly, on Government securities, interest payable on specified dates arise during the period of holding, day to day, but will become due for payment on the specified dates. Example: Interest on Government securities is usually payable on specified dates, say on 1st January and 1st July. In all such cases, the interest would be said to accrue from 1st July to 31st December and on 1st January, it will fall due for payment.

It must be noted that income which has been taxed on accrual basis cannot be assessed again on receipt basis, as it will amount to double taxation. For example, when a loan to a

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director has already been treated as dividend under section 2(22)(e) and later dividend is declared, distributed and adjusted against the loan, the same cannot be treated as dividend income again.

With a view to removing difficulties and clarifying doubts in the taxation of income,

Explanation 1 to Section 5 specifically provides that an item of income accruing or arising outside India shall not be deemed to be received in India merely because it is taken into account in a balance sheet prepared in India.

Further, Explanation 2 to Section 5 makes it clear that once an item of income is included in the assessees total income and subjected to tax on the ground of its accrual/deemed accrual or receipt, it cannot again be included in the persons total income and subjected to tax either in the same or in a subsequent year on the ground of its receipt - whether actual or deemed.

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INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [ SECTION 9 ]

Certain types of income are deemed to accrue or arise in India even though they may actually accrue or arise outside India. The categories of income which are deemed to accrue or arise in India are: 1. Any income accruing or arising to an assessee in any place outside India whether directly or indirectly (i) through or from any business connection in India, (ii) through or from any property in India, (iii) through or from any asset or source of income in India or through the transfer of a capital asset situated in India. 2. Income, which falls under the head Salaries, if it is earned in India. Any income under the head Salaries payable for rest period or leave period which is preceded and succeeded by services rendered in India, and forms part of the service contract of employment, shall be regarded as income earned in India. 3. Income from Salaries which is payable by the Government to a citizen of India for services rendered outside India (However, allowances and perquisites paid outside India by the Government is exempt). (iv) Dividend paid by a Indian company outside India. (v) Interest (vi) Royalty (vii) Fees for technical services Exception : Where the payment is made for earning any income from any source outside India income shall not be deemed to accrue or arise in India. For example, where an Indian company borrows from a Singapore bank for a business project in Indonesia, the interest paid by such
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Indian company to the Singapore bank shall not be regarded as income accruing or arising in India. Similarly, if a Dubai company borrows money from a Singapore bank for investment in a business project in India, interest paid by the Dubai company to the Singapore bank shall be regarded as income accruing or arising in India.

Business Connection Explanation 2 to Sec 9(1)(i)

Business Connection includes any business activity carried out through a person who, acting on behalf of the non-resident: Habitually concludes contracts for the non-resident which are not limited to mere purchase of goods for the non-resident Does not conclude deals but regularly maintains in India, stock of goods, from which he delivers on behalf of the non-resident Regularly secures orders in India, mainly for that non-resident and its holding, subsidiary and group entities. Business connection shall not include any business activity carried out through a broker, agent etc having an independent status and who is acting in the ordinary course of his business. RELATED CASE For purpose of Sec 9, a mere relation between business of non-resident and activity in India which facilitates or assists carrying on of business of non-resident, would result in a business connection - WSA Shipping (Bombay) Pvt. Ltd vs ADIT [2011] 11 taxmann. com 122 (MUM. - ITAT).

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Illustration
The following illustrations are given based on CBDT circulars 23/ 1969, 163/1975 and 786/2000. Answer : Business connection in India: The following situations are considered business connection in India based on relevant CBDT clarifications: Branch office in India for transacting business Factory in India for processing raw materials for export Forming a local subsidiary for selling products of the foreign parent Financial association with a Resident Shares in Indian company for materials supplied Local subsidiary for marketing products of Non-resident parent company.

No Business connection based on relevant CBDT circulars: Situation Non-resident exporter selling goods from abroad to an Indian importer Non-resident company selling goods from abroad to its Indian subsidiary Condition / Remarks Transaction is on a principal to principal basis The contract to sell are made outside India Sales are made on a principal to principal basis and at arms length Subsidiary does not act as an agent of the parent company Agency is independent The agent operates in his own country The commission is directly remitted to him outside India a) Sale directly by a Non-resident and the Nonresident extends credit to the Indian customers - Contract to sell was made outside India - The sales are on a principal to principal basis b) Non-resident having an agent in India and makes a sale directly to Indian customers - The agent neither performs nor undertakes to perform any service directly or indirectly in respect of these direct sales
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Foreign agent of an Indian exporter

Sale by a Non-resident to Indian customers either directly or through agents

Shooting of films

- Contract to sell was made outside India - The sales are on a principal to principal basis. Provided such Non-resident is: An Individual who is not a citizen of India or A Firm not having a partner who is a citizen or resident of India or A Company not having a share holder, who is a citizen or resident of India. Such news is for transmitting outside India. Such pension is for services rendered in foreign countries. Such pension income will not be chargeable to tax for non-residents and individuals who are Resident but not ordinarily resident.

Non-resident news agency collecting news in India Pensions received in India from abroad

TAXATION OF INDIRECT TRANSFER OF ASSETS [SECTION 9(1)(I)]

According to Sec 9(1)(i), all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India Consequent to the landmark decision by the Honble Supreme Court in the case of Vodafone International Holdings BV vs UoI (2012) 341 ITR 1 and few other judicial rulings in favour of the assessee, the following explanations have been added to Sec 9(1) with retrospective effect from 01-04-1962, to expand the scope of the section to include, capital gains on transfer of assets outside India as income accruing or arising in India if these assets derive their value from an underlying Indian asset: Explanation 4.For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of".
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Explanation 5.For the removal of doubts, it is hereby clarified 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 Consequent to the insertion of the above explanation, any transfer by way of shares outside India of companies which have investments in shares of Indian companies shall now be subject to tax in India if the shares transferred derives substantial value from the assets in India.

ROYALTY - [SEC TION 9(1)(VI)]

Royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains) for (i). the transfer of all or any rights (including the granting of a licence) 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 similar 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 (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB (sec 44BB contains special provisions pertaining to the business of exploration of minerals, oils etc dealt with in the chapter Profits and gains of business or profession)

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(v).

the transfer of all or any rights (including the granting of a licence) 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 not including consideration for the sale, distribution or exhibition of cinematographic films ; or

(vi).

the rendering of any services in connection with the activities referred to in the above clauses.

The term, computer software means 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.

RELATED CASE 1. Where assessee having purchased software and hardware from two different non-resident companies, integrated them for manufacture and supply of telecommunication equipments, it was held that the assessees transaction for purchase of software was an independent transaction, payment made for it amounted to royalty under section 9(1)(vi) in CIT vs Sunray Computers (P.) Ltd. [2011] 16 taxmann.com 268 (KAR.) 2. Payment made for right to use a high capacity submarine telecommunication fibre-optic cable system is royalty taxable in India - Dishnet Wireless Ltd., In re [2012] 24 taxmann.com 298 (AAR - New Delhi)

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FEES FOR TECHNICAL SERVICES [SEC TION 9(1)(VII) ]

Fees for technical services: Any fees for technical services will be deemed to accrue or arise in India if they are payable by (i). (ii). the Government. a person who is resident in India, except in cases where the fees are payable in respect of technical services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India. (iii). a person who is a non-resident, only where the fees are payable in respect of services utilised in a business or profession carried on by the non-resident in India or where such services are utilised for the purpose of making or earning any income from any source in India. Fees for technical services means any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including providing the services of technical or other personnel). However, it 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.

RELATED CASE Consideration paid to a UK company for rendering data processing services to applicant is not taxable as fees for technical services AAR in R.R. Donnelley India Outsource (P.) Ltd. In re [2011] 11 taxmann.com 94

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Illustration 1
JJ Limited, a company incorporated in Australia has entered into an agreement with KK Limited, an Indian company for rendering technical services to the latter for setting up a

fertilizer plant in Orissa. As per the agreement, JJ Limited rendered both off-shore services and on-shore services to KK Limited at fee of ` 1 crore and ` 1.5 crore, respectively. JJ Limited is of the view that it is not liable to tax in India in respect of fee of ` 1 crore as it is for rendering services outside India. Discuss the correctness of the view of JJ Limited. Answer The Explanation below section 9(2) has been substituted with retrospective effect from 1st June, 1976 to clarify that income by way of, inter alia, fees for technical services from services utilized in India would be deemed to accrue or arise in India under section 9(1)(vii) in case of a non-resident and be included in his total income, whether or not such services were rendered in India. In this case, the technical services rendered by the foreign company, JJ Ltd., were for setting up a fertilizer plant in Orissa. Therefore, the services were utilized in India. Consequently, as per section 9(2), the fee of ` 2.5 crore for technical services rendered by JJ Ltd. (both offshore and on-shore services) to KK Ltd. is deemed to accrue or arise in India and includible in the total income of JJ Ltd.

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Illustration 2

J, a citizen of India, employed in the Indian Embassy at Tokyo, Japan. He received salary and allowances at Tokyo from the Government of India for the year ended 31.3.2013 for services rendered by him in Tokyo. Besides, he was allowed perquisites by the Government. He is a non-resident for the assessment year 2013-14. Examine the taxability of salary, allowances and perquisites in the hands of J for the assessment year 2013-14.

Answer As per section 9(1)(iii) of the Income-tax Act, 1961, salaries payable by the Government to a citizen of India for services rendered outside India shall be deemed to accrue or arise in India. As such, salary received by J is chargeable to tax, even though he was a non-resident for A.Y.2013-14. As per section 10(7), all allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India for rendering services outside India is exempt from tax. Therefore, the allowances and perquisites received by J are exempt as per section 10(7).

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Illustration 3
Mr. A, a citizen of India, left for USA for the purposes of employment on 1.5.2012. He has not visited India thereafter. Mr. A borrows money from his friend Mr. B, who left India one week before Mr. A's departure, to the extent of ` 10 lakhs and buys shares in X Ltd., an Indian company. Discuss the taxability of the interest charged @10% in B's hands where the same has been received in New York. An individual is said to be resident in India in any previous year, if he (i). (ii). has been in India during that year for a total period of 182 days or more, or has been in India during the four years immediately preceding that year for a total period of 365 days or more and has been in India for at least 60 days in that year. In this case, A has been in India only from 1.4.2012 to 30.04.2012 i.e. for 30 days. Therefore, he does not satisfy either of the conditions in (i) or (ii) and is, hence, a non- resident. B, who left India one week before As departure, is also a non-resident for the same reasons. Section 9(1)(v) provides that income by way of interest payable by a non-resident in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India shall be deemed to accrue or arise in India. Therefore, interest payable by a non-resident in respect of any debt incurred, or moneys borrowed and used, for the purpose of making or earning any income from any source other than a business or profession carried on by him in India, shall not be deemed to accrue or arise in India. Therefore, interest payable by A on money borrowed from B to invest in shares of an Indian company shall not be deemed to accrue or arise in India and hence, is not taxable in India in the hands of B.

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Illustration 4
Determine the taxability of the following incomes in the hands of a resident and ordinarily resident, resident but not ordinarily resident, and non-resident for the A.Y. 2013-14 PARTICULARS Interest on UK Development Bonds, 50% of interest received in India Income from a business in Chennai (50% is received in India) Profits on sale of shares of an Indian company received in London Dividend from British company received in London Profits on sale of plant at Germany 50% of profits are received in India Income earned from business in Germany which is controlled from Delhi (` 40,000 is received in India) Profits from a business in Delhi but managed entirely from London Rent from property in London deposited in a Indian Bank at London, brought to India Interest for debentures in an Indian company received in London. Fees for technical services rendered in India but received in London Profits from a business in Bombay managed from London Pension for services rendered in India but received in Burma Income from property situated in Pakistan received there Past foreign untaxed income brought to India during the previous year Income from agricultural land in Nepal received there and then brought to 12,000 8,000 26,000 4,000 16,000 5,000 18,000
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AMOUNT (` ) 10,000 20,000 20,000 5,000 40,000 70,000

15,000 50,000

India Income from profession in Kenya which was set up in India, received there but spent in India Gift received on the occasion of his wedding Interest on savings bank deposit in State Bank of India Income from a business in Russia, controlled from Russia Dividend from Reliance Petroleum Limited, an Indian Company Agricultural income from a land in Rajasthan

5,000

20,000 10,000 20,000 5,000 15,000

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Solution: Computation of total income for the A.Y.2013-14

Resident Resident Nonand but not resident ordinarily ordinarily ` resident resident 10,000 5,000 5,000

Particulars

Interest on UK Development Bonds, 50% of interest received in India Income from a business in Chennai(50% is received in India) Profits on sale of shares of an Indian company received in London Dividend from British company received in London Profits on sale of plant at Germany 50% of profits are received in India Income earned from business in Germany which is controlled from Delhi, out of which 40,000 is received in India Profits from a business in Delhi but managed entirely from London Rent from property in London deposited in a Bank at London, later on remitted to India Interest for debentures in an Indian company received in London. Fees for technical services rendered in India but received in London Profits from a business in Bombay managed from London Pension for services rendered in India but received

20,000

20,000

20,000

20,000

20,000

20,000

5,000 40,000

20,000

20,000

70,000

70,000

40,000

15,000

15,000

15,000

50,000

12,000

12,000

12,000

8,000

8,000

8,000

26,000

26,000

26,000

4,000

4,000

4,000
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in Burma Income from property situated in Pakistan received there Past foreign untaxed income brought to India during the previous year Income from agricultural land in Nepal received there and then brought to India Income from profession in Kenya which was set up in India, received there but spent in India Gift received on the occasion of his wedding [not an income] Interest on savings bank deposit in State Bank of India[Allowable as deduction upto 10,000 under section 80TTA] Income from a business in Russia, controlled from Russia Dividend from Reliance Petroleum Limited, an Indian Company [it is exempt u/s 10(34)] Agricultural income from a land in Rajasthan [it is exempt u/s 10(1)] Total Income 3,39,000 2,05,000 1,70,000 20,000 5,000 5,000 18,000 16,000 -

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