Taxation of Non-Residents

Taxation of Non-residents
WIRC ICAI
WIRC-ICAI Presented by
Feb 13, 2010 Vishal Gada
PwC
Presentation agenda
• Relevant concepts
- Residence
- Scope
S off Total
T t l Income
I
- Business Connection
- Deemed to accrue or arise in India
- Royalty
R lt / FTS
- Representative Assessee
• Tax Treaty Overview
• Tax Incentives
• Specific Provisions for taxation on Non Resident
• Transfer Pricing
• Entry Strategies & Tax Planning
• Direct Tax Code
• Concluding Remarks
Relevant concepts
Relevant concepts
Overview Of Income Tax Act
• Income is taxable in India under the domestic tax laws based on:
- Residential status of the taxpayer
- Accrual/ Receipt of income
• Under Indian domestic tax laws
laws, a person could qualify as:
- Resident
• resident but not ordinarily resident (only for Individuals/ HUF) or
• ordinarily resident
- Non Resident
• Sec 2(30)- A Non-resident is a person who is not a Resident
Who is a Resident?
Taxation of Non-residents 11 May 2009

PricewaterhouseCoopers Slide 4
Relevant concepts
Residential Status - Individuals
Basic condition:
Basic condition: Additional Conditions:
Additional Conditions:
An individual
An individualwho
who stays
stays in in India
India for:for: • NR inNR in in
India India
9 outinof9 10
outpreceding
of 10 tax
days
• 182 182 or
days or or
more; more; or years preceding tax years
• 60 days
60 or
days orinmore
more a taxinyear
a tax year
& 365
• Stays Stays
in Indiainfor
India for an aggregate
an aggregate period of
& more
days or 365 days or preceding
during more during 4 tax period
729 days of 729
or less days
in the or less 7intax
preceding the
years preceding 4 tax years years preceding 7 tax years
Category Ordinarily Not Ordinarily Non Resident

Resident Resident
Basic Condition Yes Yes Yes
Additional To satisfy none To satisfy either Not Applicable

Conditions of the additional of the additional
conditions conditions

Relevant concepts
Residential Status- Companies
A company is resident in India in any previous year if:

• It is an Indian company; or
• During a year, control and management of its affairs is situated wholly in
India (Section 6(3))
Control and management

g of the affairs of the Company?
p y

Relevant concepts
Scope of Total Income – Section 5
Particulars ROR RNOR NR
1. Income received or deemed to be received

in India Y Y Y
2. Income accruing or arising or deemed to

accrue or arise in India Y Y Y
3. Income accruing or arising & received

outside India from-
a) Business controlled in India or

profession set up in India Y Y X
b) A
Any other
th source Y X X

Relevant concepts
Taxability Of Individuals
Section 5 seeks to lay down what income would constitute the total income of
assessee belonging to various categories
All individuals
Resident Non-resident (NR)

• Income received in India;
• Income accruing or
arising in India;
Ordinarily Resident Not Ordinarily Resident
• Income deemed to
• Worldwide income • Income received in India; accrue or arise in India.
• Income accruing or
arising in India;
• Income deemed to
accrue or arise in India;
• Income from business
controlled in India.

Relevant concepts
Taxability Of Companies
Company
Resident Non-resident
• Income received/ • Income is received or
deemed to be received in deemed to be received in
India I di b
India by or on b
behalf
h lf off a
company
• Accrues/arises/deemed
to accrue or arise in India • Accrues or arises or is
deemed to accrue or
• A
Accrues or arises
i outside
id
arise in India
India

Relevant concepts
Income deemed to accrue – Section 9…
Section 9(1)(i) – covers income arising, directly or indirectly, through:

• Business connection in India
• Property in India
• Asset / source of income in India
• Capital asset situated in India
Exclusions:
• Operations
O ti confined
fi d tto purchase
h off goods
d ffor exports
t
• Collection of news & views for transmission outside India
• Operations confined to shooting of films in India
- Not available to entities in which Indian citizens / residents hold
interest
Profits attributed to the extent of operations carried in India

Relevant concepts
…Income deemed to accrue – Section 9…
• Meaning of ‘business
business connection’
connection
- Wider than the term ‘business’
- CIT Vs. R.D. Aggarwal & Co. (56 ITR 20) (SC)
• Relation
R l ti b between
t a non-resident’s
id t’ bbusiness
i and
d an activity
ti it iin IIndia
di
• Normally an element of continuity
• Determined on facts of each case
• Concept of ‘business connection’ academic, if no operations carried out in
India
• Whether test under Section 9 needs to be applied,
pp , when income normally y
accrues in India?
• Performing Rights Society Vs. CIT (106 ITR 11) (SC)

Relevant concepts
• Salaries paid for:

- Services rendered in India
- Rest period / leave period preceded and succeeded by services
rendered in India
• Should form part of the employment contract
• What about employment contract executed in India, but services rendered
b non-resident
by id t outside
t id IIndia?
di ?
- CIT Vs. Avtar Singh Wadhwan (247 ITR 260) (Bom.)
- CIT Vs. S.R. Patton (193 ITR 49) (Ker.)
- CIT Vs. Goslino Mario & Others (241 ITR 312) (SC)
- CIT Vs. S.G.Pgnatale (124 ITR 391) (Guj.)

Relevant concepts
• Dividend paid by an Indian company outside India

- Taxability of dividend paid by a foreign company to foreign
shareholders, in a scenario where a major part of its income is earned
in India??
• Whether dividends arising from a source of income in India?
- Caltex (India) Ltd Vs. CIT (21 ITR 278) (Bom.)

Relevant concepts
…Income deemed to accrue – Section 9
Payer Whether Interest / Royalty / FTS arises in India?

• Govt • Yes
• Resident • Yes
• Exception: where it is payable in respect of services utilized in
b i
business or profession
f i carried
i d on outside
t id IIndia
di or ffor purpose off
earning income from any source outside India
• Non- • Yes
Resident • Condition: payable in respect of service utilized in business or
profession carried in India or for p
p purpose
p of earningg income from any
y
source outside India
Impact of SC decision in Ishikawajima & Amendment in Section 9 by

Finance Act, 2007
Relevant concepts
Amendment under Section 9 w.r.e.f. June 1, 1976
“Explanation
Explanation.—ForFor the removal of doubts
doubts, it is hereby declared that for the
purposes of this section, where income is deemed to accrue or arise in India
under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included
in the total income of the non-resident, whether or not the non-resident has a
residence or place of business or business connection in India.”

Relevant concepts
CBDT Circular on the Finance Act 2007
“7
7.3
3 Recent judicial opinion has held that despite the deeming fiction in the said section
section, for
any such deemed income to be taxable in India, there must be sufficient territorial nexus
between such income and the territory of India. ……………. In regard to fees for technical
services, it has been specifically held that for the fees to be taxable in India, the services
have not only to be utilized in a business in India
India, but also have to be rendered in India
India.
7.4 In view of the above judicial opinion, a need was felt to reiterate the legislative intent
behind the introduction of the said clauses
clauses. Accordingly
Accordingly, an Explanation has been
inserted in section 9 to clarify that ………………. In such cases, therefore, there will be no
need to establish any territorial nexus between the income deemed to accrue or arise to
the non-resident under the said clauses and the territory of India.”
Hayden’s rule applicable?
H
However, ffavourable
bl ddecision
i i off K
Karnataka
t k HC iin Ji
Jindal
d l Th
Thermall P
Power

Relevant concepts
Case Study
Case Study 1
F Co. (USA) USA Branch

US Customers of I Co.
Payment to F
Co. for
technical
assistance in
software
development
I Co.
Software development Company

engaged in onshore activity
(through US branch) and offshore
activities
Whether payment to F Co.

Co arises in India? Whether there is distinction
between “source of income” & “income from source”
Relevant concepts
Meaning of ‘source’
• Asia Satellite Telecommunication Company (85 ITD 478) (Delhi Tribunal)

- ‘source’ refers to the activity which gives rise to the income
• Luftansa cargo India Pvt Ltd (91 ITD 133) (Delhi Tribunal)
- Income from source outside India, if:
• Payer is non-resident,
non-resident or
• Contract made outside India, or
• Activity yielding income takes place outside India
• Aktiengesellschaft Kuhnle Kopp and Kausch (262 ITR 513) (Madras HC)
- Royalty paid by resident on export sales to a non-resident outside India
- Held that royalty was paid out of the export sales and hence, source for royalty is
the sales outside India
- Since the source for royalty is from the source situate outside India
India, the royalty
paid on export sales is not taxable
• Bombay High Court decision in Kusumben Mahadevia
• Bangalore Tribunal decision in Synopsis Private Limited distinguishing
between ‘source of income’ and ‘income from a source’
Relevant concepts
Case Study 2
F Co.
Co
Payment for
IPRs
Engages
g g ((exploited
p by
y Foreign customers of
agent to customers F Co.
C
solicit orders outside India)
for exploiting
IPRs
Solicits
orders,
negotiates
Indian agent contracts,, etc.
Whether income earned by F Co. deemed to accrue in India? Can the

provisions of Section 9(1)(i)
p ( )( ) apply?
pp y ((Refer Meteor Satellite ((121 ITR
311) (Guj) & Copes Vulcan (167 ITR 884) (Chennai)
Rate of taxation for Non Residents– Royalty / FTS
Royalty/FTS received by a F Co from Govt./’Indian Concern’. under

Sec 44D agreements entered after March 31, 1976 but before April 1, 2003 -
taxable on gross basis (as per the provisions u/s 115A).
• Royalty/FTS received by a non-resident from Govt./’Indian

Concern’ under agreements entered on/after April 1, 2003
through PE/ Fixed Place of profession would be computed as
‘business income’ provided right / property / contract is
Sec 44DA ‘effectively connected’ with such PE/Fixed place.
• No deduction for (a) exp.
exp NOT wholly & exclusively incurred for
PE/Fixed Place, or (b) Payment to HO/other overseas
branches (except reimbursement of exp)
• FCo -Compulsory maintenance of A/c & Tax Audit.
Royalty/FTS (excl. sec 44DA) received by nonresident. from

Govt./ ’Indian Concern’ under agreements approved by C.G./in
Sec 115A accordance with Industrial p policy
y ((except
p copyright
py g in book/
computer software to Indian Concern/Resident) entered on/ after
June 1, 2005 - taxable on gross basis at 10% (plus sur&cess)
PricewaterhouseCoopers 11 May 2009
Issues…
A foreign branch established in India makes payment of royalty to a non-

resident - Can the foreign branch be regarded as an Indian concern?
• Ownership, mgt & control must be substantially in India. It is not enough
if the concern is functioning/working in India
India.
[CIT vs. Craigmore Land & Produce Co. Ltd (1976) (110 ITR 730) (Mad)
& IBM World Trade Corp. (19 ITD 116) (Mum ITAT)].
• Business carried on in India by any assessee i.e. resident/non resident
assessee.
( Official Liquidator
(Jt. q of Bank of Credit & Commerce v JCIT 6 SOT 391
(Mum.ITAT)].
• CBDT Circular No. 740 dated: April 17, 1996

…Issues…
A royalty payment made by an Indian company to a non-resident is approved
by RBI?
• Can
C th the paymentt b be regarded
d d as approved
db by th
the G
Government?t?
- DLJMB (Mauritius) 228 ITR 268 (AAR)
- Yu Bo Investment Company Pvt. Ltd. (AAR)
• Is the payment covered under the Industrial policy?
• Would the payment be considered to be covered under the Industrial
policy,
p y if the royalty
y yp payments
y were under the ‘automatic route’?

…Issues
• Whether agreements made on/after April 1 2003 can be construed as an

extension of an old agreement and consequently, Royalty / FTS should be
offered on gross basis u/s 44D?
- Great Lakes Carbon Corporation vs. CIT (202 ITR 133)(Cal HC)
- The original agreement provided for an extension
- The new agreement stated that it was supplementary to the principal (old)
agreement.
- Leonhardt Andra Und Partner, Gmbh v. CIT (2001) 249 ITR 418 (Cal)
Definition of ‘PE’ for sec. 44DA
- 92(F) inclusive definition – ‘PE includes a fixed place of business through
p
which the business of enterprise is wholly
y or p
partly
y carried on’
- Whether the inclusive definition of PE as given in section 92F has to be given
an extended meaning as given under the treaties?
- What is the p
position under a non-treatyy scenario,, sayy Hong
g Kong?
g

Royalty - Definition under ITA
Royalty - consideration (incl. lumpsum consideration) for :

- Transfer of all or any rights (including license) in:
• Patent, invention, model, design, secret formula, process, etc.
• Copyright, literary, artistic or scientific work
• Computer software (supplied alongwith computer based
equipment)
q p ) and approved
pp under ppolicy
y on computer
p software
export, Software Development and Training, 1986, is exempt
- Imparting of information concerning technical, industrial, commercial
or scientific knowledge
knowledge, experience or skill
- Use or right to use any industrial, commercial or scientific equipment
- Rendering of services in connection with above
Capital Gains excluded
Whether the term ‘of’ needs to be read after the term ‘copyright’?
py g

Fees for Technical Services - Definition under ITA
Explanation 2 to Section 9(1)(vii)
"fees for technical services" means any consideration (including any

lump sum consideration) for the rendering of any managerial,
technical or consultancy services (including the provision of services
of technical or other personnel)
Exclusion
consideration for any construction,

construction assembly
assembly, mining or like project
undertaken by the recipient; or
consideration which would be income of the recipient chargeable

under the head "Salaries"
Requirement of human interface necessary?

D lhi High
Delhi Hi h Court
C t decision
d i i in
i Bharti
Bh ti Cellular
C ll l
Royalty / FTS - Scope under ITA
Payment by Government
Payment by Resident to Non-resident
• Taxable unless services utilized in business outside India or for

earning
i iincome ffrom any source outside
t id IIndia
di
Payment by Non-resident to Non-resident
• Taxable only if services utilised in business in India or for earning

income from any source in India

Relevant concepts
Representative Assessee…
• Representative assessee defined under Section 160(1) to include an agent

agent,
including a person treated as an agent under Section 163
• Agent of non-resident u/s 163 includes following persons in India:
- Employee
- Any person having business connection
- Any person from or through whom NR receives any income, directly or
i di tl
indirectly
• What does the term ‘indirectly’ connotes?
- Trustee of NR
• Agent of non-resident subject to same duties, responsibilities and liabilities
- Whether required to withhold tax under Section 195? [Premier Tyres 134
ITR 17 ((Bom.)]
)]

Relevant concepts
…Representative Assessee
• Direct assessment of non-resident

non resident is no bar to assess agent
- CIT V. Fertilizers & Chemicals (Travancore) Ltd. 166 ITR 823 (Ker)
- Clagett Brachi Co. Ltd. V. CIT 44 Taxman 186 (SC)

Tax Treaty Overview

Tax Treaty Overview – Important Articles
Articles covered* Category Taxability in the host country
Income from Taxable, if property is located in the host

6
Immovable Property country
7 Business Profits Taxable, if Permanent Establishment exists
Taxable ((but at concessional rates),

) if
10 Dividend dividends paid by a company resident of
the host country
Interest,, Royalty
y y& Taxable ((but at concessional rates),
), if
11 & 12 Fees for Technical payments “arise” in the host country as per
Services the Treaty rules
Taxability depends on nature of underlying
13 Capital Gains
capital asset and specific Treaty rules
Taxable in host country, subject to ‘short
15 Salary Income
stay exemption’
*Article numbers are illustrative only and may vary from treaty to treaty

Tax Incentives

Tax Incentives…
• Tax Exemption on Interest from NRE Account – Section 10(4)

- Available only to non-resident individual
• Tax Exemption on Interest from foreign currency deposits – Section
10(15)(iv(fa)
- RFC & FCNR deposits
• Tax Holidays u/s 10A / 10B / 10AA deduction relating to SEZ, STP, EOU,
etc.
t
• Deduction u/s 80C / 80D to non-resident individuals / HUFs

…Tax Incentives
• Deduction u/s 80-IA

80 IA applicable to enterprise carrying on the business of
developing, operating and maintaining specified infrastructure facility
- Condition that the enterprise should be owned by a “company registered
in India”
India
• Absent in the case of telecommunication services, operation of
industrial park, power generation
- Whether covers foreign companies having a place of business under
Section 592 of the Companies Act?
- Whether ‘Non-discrimination clause’ under a Treaty can be applied?
• Deduction
D d ti u/s / 80
80-IB
IB available
il bl
- References to ‘Indian company’ in certain sub-sections?

Specific
p Provisions for taxation of
Non-Residents

Specific Provisions for taxation on Non-Residents
NRI Taxation – Chapter XII-A…
• Applicable to income earned by NRIs from “foreign

foreign exchange assets
assets”
purchased in convertible foreign exchange
• Foreign exchange assets include:
- Shares in Indian company (private or public)
- Debentures issued by an Indian public company
- Deposits of an Indian public company
- C t l governmentt security
Central it as d
defined
fi d iin P
Public
bli ddebt
bt A
Actt
• LTCG charged @ 10%
- Indexation not available
- Applicability of Rule 115A?
• STCG, dividends, interest, etc. charged @ 20%

…NRI Taxation – Chapter XII-A
• LTCG exempt, if:

- Consideration invested in foreign exchange assets within six months
- Lock-in period of 3 years
• Filing of ROI not necessary,
necessary if:
- Income consists only of income covered under Chapter XII-A
- TDS deducted from such income
• Option to an NRI becoming a resident to be governed by the provisions of
Chapter XII-A on income from foreign exchange assets (other than shares
in Indian company)
Chapter XII-A automatically applies to an NRI, unless he opts to be

go erned by
governed b normal provisions
pro isions of the IT Act
NRI Taxation – Special Computation Provisions
Section Provisions
Special provision for deductions in the case of business for
42
prospecting, etc., for mineral oil.
Special provision for computing profits and gains of shipping business
44B & 172 in the case of non-residents
Special provision for computing profits and gains in connection with
44BB
the business of exploration, etc., of mineral oils.
Special provision for computing profits and gains of the business of
44BBA operation of aircraft in the case of non-residents.
Special provision for foreign companies engaged in the business of
44BBB civil construction, etc., in certain turnkey power projects.
44C Deduction of head office expenditure

p in the case of non-residents

Transfer Pricing
g

Transfer Pricing
Introduction…What is Transfer Pricing
• No precise definition of the term

Transfer Pricing
• Refers to the p
prices of the
transactions between associated
enterprises which may take place
under conditions differing from
those taking place between
independent enterprises

Transfer Pricing
Introduction…Whyy Transfer Pricing

g
T preventt shifting
To hifti off profits
fit ffrom India
I di
Company A Company B
India Overseas

Transfer Pricing
Introduction…Historical Perspective
Section 92 – [Section 42(2) of IT Act 1922]
Business so arranged so as to diminish the resident’s profit

• Business may be carried on between a resident and a person not ordinary
resident in India, and owing to close connection between them, the
course of business is so arranged that the resident earns no profit or
earns a lesser profit.
• Such an arrangement would deprive the Indian tax authorities of the tax
which would otherwise be payable by resident.
• In such a case, the provisions of this section would be enacted and the
resident may be charged in respect of profits which he has not made but
which he might reasonably be expected to have made had he carried on
the business on the ordinary commercial terms.
Transfer Pricing
Introduction…Need for Change

g
As erstwhile provisions-
provisions
• Did not allow the adjustment of income in the case of non-residents;
• Referred to a ‘close
close connection’
connection which was undefined and vague;
• Did not apply to the individual transactions viz. royalty;
• No defined rules for documentation

Transfer Pricing
Provisions of the Act
• Introduced in 2001
2001, TP regulations (contained in sections 92 to 92F of
the Income Tax Act, 1961) largely based on the OECD (Organisation
for Economic Co-operation and Development) Transfer Pricing
Guidelines
• Contains transfer pricing documentation requirements and penalties
supplemented by Income Tax Rules, 1962
New provisions laid down that the income arising from an international
transaction between ‘associated enterprises’ shall be computed having
regard to the Arm’s
Arm s Length Price

Transfer Pricing
Arms Length Price of a Transaction
Associated Independent ALP has been defined

enterprise Entity
under the Act as a
price which is applied
International
transactions or proposed to be
Goods - applied in a transaction
Services -
Intangibles - b t
between persons other
th
than associated
Resident Resident enterprises in
uncontrolled conditions
Transfer Arm’s length
price price

Transfer Pricing

Associated Enterprises (Section 92A)
A A D
Both A and B D and E are also
are AE of C associated
B B E enterprises of C
since they have a
common ultimate
parent (A)
p ( )
C C
Where one Enterprise ….
• controls appointment of > half of the directors or one or more executive directors….
• advances loans constituting >= 51% of book value of total assets….
• guarantees >= 10% of borrowings….….of
borrowings of the other Enterprise

Transfer Pricing
International Transaction (Section 92B)

• Scope of transactions covered
- Purchase, sale, lease of tangibles or intangibles
- P i i off services
Provision i
- Financing
- Cost apportionments, allocations, contributions
- Any other transactions having a bearing on profits,
f income, losses or
assets of an enterprise

Transfer Pricing

Deemed International Transactions (Section 92 B(2))
A’s Parent 3rd party

Prior Agreement
Services
A
Determination of terms of
A’s Parent 3rd party agreement
Services
A

Transfer Pricing
Computation Provision
OECD Transfer Pricing Methods
Traditional Transaction Methods Transactional Profits Methods
Comparable Resale Price Cost Plus Profit

f Split
S Transactional
Uncontrolled Method Method Method Net Margin
Price Method

Transfer Pricing
Computation…
• OECD: Traditional methods preferred over Transactional methods

• Any other method that may be prescribed by the CBDT – No method till
date
• IIn most cases, it
i is
i not possible
ibl to id
identify
if a single
i l price
i that
h can b
be
considered to be an uncontrolled price
• Possibility that different transactions are equally comparable. More than
one Arm’s Length Price
• Variation of +/- 5% allowed
• No deduction u/s 10A
10A, 10AA or 10B or under Chapter VI
VI-A
A be allowed

Transfer Pricing
Documentation provisions
Entity related Price related Transaction related
• Profile of industry • Transaction terms • Agreements

• Profile of group • Functional analysis (functions, • Invoices
• Profile of Indian entity assets and risks) • Pricing related
• Profile of associated • Economic analysis (method correspondence
enterprises selection, comparable (letters, emails etc)
benchmarking)
• Forecasts, budgets, estimates
• Contemporaneous documentation requirement

• Documentation to be retained for 8 years from assessment year
• Documentation is not required to be maintained if the aggregate value of all international
t
transactions
ti does
d nott exceed
d one crore rupees

Entryy Strategies
g & Tax Planning
g

Entryy Strategies
g & Tax Planning
g – Some thoughts
g
Subsidiary Vs
Vs. Branch
• Business activity
Selection of Holding Company Jurisdiction
• Sources of Income – Dividend, royalty, FTS, Capital Gains, etc.
• Further plans – divestment, spin-off, etc.
Emerging tax issues
• Need for ‘substance’
• Aggressive tax positions of Tax Office

Direct Tax Code

Key changes in a nutshell
Positive Negative Circumstantial
Lower tax rates but, 2% Introduction of sweeping Changes in capital gains

MAT General Anti Avoidance Rules legislation
Introduction of APA and

Treaty override provisions
safe harbour rules
Indefinite carry forward Increase in withholding tax
of business and capital rates
losses
Residence status of foreign
co pa es
companies
MAT
Si il iissues ffor IIndian

Similar di subsidiaries
b idi i off fforeign
i
companies
Treatyy override
• For “determining
determining the relationship between … a treaty and this
code … the provision which is later in point of time shall
prevail”
• Principle of beneficial interpretation between the domestic law
and tax treaty no longer applicable?
• Furnishing of tax residency certificate mandatory for claiming
benefits under the applicable tax treaty
• GAAR to override applicable tax treaties?
80 existing tax treaties overridden?

– Long-standing principle of beneficial choice
overturned?
Slide 55
Overview of tax rates
Existing (%) Proposed (%)*

Corporate tax 40 25
Branch Profits Tax - 15

Capital gains tax Various 30
Royalty/Fees for Technical Services 10.56 20

(“FTS”)
* Surcharge and cess as per the relevant Finance Act
Slide 56
Overview of branch p
profits tax
• Branch profits tax (15%) introduced on branches of foreign

companies
• Illustration -
INR
Branch profits in India 100
L
Less :CCorporate
t ttax att 25% 25
Net profits after corporate tax 75
Less : Branch p profits tax at 15%
% 11.25
Net profits after branch profit tax 63.75
Eff ti tax
Effective t rate
t – 36.25%
36 25%
Slide 57
Branch profits tax - Key issues
• Branch not defined

- Applicability to Project Office
- Permanent Establishment without ground presence
• Scope of tax base for branch profits tax unclear
- Whether applies to Royalty / FTS / Capital Gains
• Not linked to repatriation
Slide 58
Change in residency test for foreign companies
Provision Implication
Current Foreign companies resident in Non-India

Non India income not liable
India only if controlled and to tax in India
managed wholly in India during
the year
Proposed Threshold lowered to wholly or Non-India income exposed

partly managed and controlled to Indian tax
from India at any time during the
year
Intent to hit subsidiaries of Indian MNCs?

Result: (unintended?) adverse consequences for certain
foreign companies
Slide 59
Change in residency test for individuals - Implications to
expatriates in India
• Concept of “not
not ordinarily resident”
resident eliminated
- relevance – non-India income was shielded from Indian tax
• Residence triggers in Year 2 of coming to India

- foreign income exposed to Indian tax after Year 2
Slide 60
Other important provisions
• Income deemed to accrue in India includes income from direct as well as
“indirect” transfer of capital assets situate in India
• “Royalty” definition expanded
- Use or right to use transmission by satellite, cable, optic fibre or similar
technology
- Use of equipment specifically expanded to ships or aircrafts (bareboat
charter/dry lease specifically hit)
- Consideration for “live feed” now included
• Fees for Technical Services (“FTS”) definition expanded to include
development and transfer of a design
design, drawing
drawing, plan or software
• Withholding tax rate for royalties and FTS increased from current 10% to
20%
• Interest paid by one non-resident to another in respect of borrowing made to
earn income from any source in India liable to tax in India
Slide 61
Concluding
g Remarks

Concluding Remarks
• Non
Non-resident
resident transactions increasing due to opening up of sectors and
better opportunities in India
• Taxation of non-resident gaining prominence
• Tax Treaty knowledge becoming very necessary
• Consequent tax issues for non-residents increasing in India
Need to balance tax theory with pragmatic approach

Thank You

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Taxation of Non-Residents - PDF New

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Overview Of Income Tax Act

Taxation of Non-residents 11 May 2009

Residential Status - Individuals

Category Ordinarily Not Ordinarily Non Resident

Additional To satisfy none To satisfy either Not Applicable

Taxation of Non-residents 11 May 2009

Residential Status- Companies

A company is resident in India in any previous year if:

Control and management

Taxation of Non-residents 11 May 2009

Scope of Total Income – Section 5

Particulars ROR RNOR NR

1. Income received or deemed to be received

2. Income accruing or arising or deemed to

3. Income accruing or arising & received

a) Business controlled in India or

Taxation of Non-residents 11 May 2009

Resident Non-resident (NR)

Taxation of Non-residents 11 May 2009

Taxation of Non-residents 11 May 2009

Income deemed to accrue – Section 9…

Section 9(1)(i) – covers income arising, directly or indirectly, through:

Profits attributed to the extent of operations carried in India

…Income deemed to accrue – Section 9…

Taxation of Non-residents 11 May 2009

…Income deemed to accrue – Section 9…

• Salaries paid for:

Taxation of Non-residents 11 May 2009

…Income deemed to accrue – Section 9…

• Dividend paid by an Indian company outside India

Taxation of Non-residents 11 May 2009

…Income deemed to accrue – Section 9

Payer Whether Interest / Royalty / FTS arises in India?

Impact of SC decision in Ishikawajima & Amendment in Section 9 by

Amendment under Section 9 w.r.e.f. June 1, 1976

Taxation of Non-residents 11 May 2009

CBDT Circular on the Finance Act 2007

Hayden’s rule applicable?

Taxation of Non-residents 11 May 2009

F Co. (USA) USA Branch

Software development Company

Whether payment to F Co.

• Asia Satellite Telecommunication Company (85 ITD 478) (Delhi Tribunal)

Whether income earned by F Co. deemed to accrue in India? Can the

Royalty/FTS received by a F Co from Govt./’Indian Concern’. under

• Royalty/FTS received by a non-resident from Govt./’Indian

Royalty/FTS (excl. sec 44DA) received by nonresident. from

A foreign branch established in India makes payment of royalty to a non-

Taxation of Non-residents 11 May 2009

Taxation of Non-residents 11 May 2009

• Whether agreements made on/after April 1 2003 can be construed as an

PricewaterhouseCoopers 11 May 2009

Royalty - consideration (incl. lumpsum consideration) for :

Capital Gains excluded

Taxation of Non-residents 11 May 2009

Explanation 2 to Section 9(1)(vii)

"fees for technical services" means any consideration (including any

consideration for any construction,

consideration which would be income of the recipient chargeable

Requirement of human interface necessary?

Payment by Resident to Non-resident