By Sushil Lakhani

( For Ahmadabad Sub Chapter Of International Fiscal Association

On 16th February, 2008)

1

Scope Of The Presentation

Definition of Non-Residents Taxability of Non-Residents under the Income

Tax Act,1961 DTAAs and how to use them for reducing taxes An Overview of TDS u/s 195 & Certification by

CA Some Controversial Issues Taxability of Reimbursement of Expenses

TAXATION OF NON-RESIDENTS 2

Definition of Non-Residents

1. “Resident ” as per I.T. Act:• Individual:(i) Physical presence ≥ 182 days in a F.Y. or

(ii) Physical presence ≥ 365 days in four preceding F.Y. and ≥ 60 days in the F.Y. or

(iii) If a crew of Indian ship, or a NRI who comes on leave, or Indian citizen leaves India for the purpose of employment outside India physical presence ≥ 182 days irrespective of presence in preceding four years.

TAXATION OF NON-RESIDENTS 3

Definition of Non-Residents (contd…)

• Company:(i) control & management wholly in India (Radha Rani

Holding-110 TTJ 920(Delhi))

or

(ii) if Indian company

• Other Entities ( HUFs, Firms etc.)

Resident unless control & management wholly outside India

TAXATION OF NON-RESIDENTS 4

“Resident” as per I.T. Act: ( contd … )

Definition of Non-Residents (contd…)

• Planning with respect to Residential status (Precautions):

• Day of arrival & day of departure from India are counted as one day each in India (i.e. 2 days stay) (223 ITR 462-AAR).

• In the 1st year of leaving India ensure that you leave before September 28th otherwise world income will be taxable.

• On final return (not on leave) to India ensure to come back on or after Feb. 1st if present for 365 days in previous 4 years. If not, one can return on September 28th.

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Taxability of non-residents under the Income Tax Act,1961

. Section 5:-Section 5:- Scope of “income” of a NR & NOR

`̀ ((i) Received or deemed to be received in India and/or

(ii) Accrues or arises or is deemed to accrue or arise in India.

( Notes : - “NOR”’s income accruing or arising outside India excluded only if it is not derived from a business controlled in India or a profession set up in India.)

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Taxability of non-residents under the Income Tax Act,1961(contd…)

..“ Deemed to accrue or arise in India” – meaning of:

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Section Sources Of Income

Description

9(1)(i)9(1)(i) Business Income

Income from a Income from a business connection business connection in India or through or in India or through or from from any property any property or or capital assetcapital asset or or source of income source of income or or transfer of capital assetransfer of capital asset situated in India.t situated in India.

9(1)(ii)9(1)(ii) Salaries Salaries Salaries for services for services rendered in Indiarendered in India..

9(1)(iii)9(1)(iii) Salaries SalariesSalaries by Govt. for services outside India. by Govt. for services outside India.

9(1)(iv)9(1)(iv) Dividend DividendDividend paid by an Indian Company outside India. (now paid by an Indian Company outside India. (now Exempt)Exempt)

9(1)(v)9(1)(v) Interest InterestInterest by Govt. or by a resident (unless for a business or by Govt. or by a resident (unless for a business or source outside India)source outside India)

9(1)(vi)9(1)(vi) Royalty ‘‘Royalty’ Royalty’ by Govt. or a resident by Govt. or a resident ((unless for a business or a unless for a business or a source outside India).source outside India).

9(1)(vii)9(1)(vii) FTS ‘‘Fees for Technical Services Fees for Technical Services (FTS)’ by Govt. or a resident (FTS)’ by Govt. or a resident (unless for a business or a source outside India).(unless for a business or a source outside India).

Taxability of non-residents under the Income Tax Act,1961(contd…)

Special Provisions For Computing Profits And Gains In Case Of Non-Residents Engaged In Certain Business

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Sec 44B Sec 44BB Sec 44BBA Sec 44BBBThis section applies to-

non-resident engaged operation ships.

non-resident engaged in providing service/ facilities or supplying plant/ machinery for extraction or production of mineral oils (including petroleum and natural gas)

non-resident engaged in operation of aircraft.

foreign company engaged in civil construction or erection, testing or commissioning of plant or machinery in connection with an approved turnkey power project

Deemed Income

7½ % of gross receipts

10% of gross receipts 5 % of gross receipts

10 % of gross receipts

Taxability of non-residents under the Income Tax Act,1961 (contd…)

TAXATION OF NON-RESIDENTS 9

• Rule 10• percentage of turnover or• proportion to total receipts or• any other reasonable

• Rule 26 :- Exchange Rate Applicable for TDS

• Rule 115:- Exchange Rate Applicable for Returns

Relevant Income tax Rules

Chapter XII A – For NRIs

Transfer Pricing – Sec. 92 to Sec 92F

Taxability of non-residents under the Income Tax Act,1961 (contd…)

Taxability of a Business Income of Non-Resident Sec. 9(1)(i)* Taxability if “Business Connection“ exists or if asset or source in India.(Vodafone ?)

(R.D. Agarwal (56 ITR 20(SC));Cir. 23 of 1969 & Cir. 786)

* Taxable only to the extent “reasonably attributable” to operations in India. Morgan Stanly-292 ITR 416 (SC); Galileo(ITAT - Delhi); Rolls Royce (ITAT - Delhi)

* Specific exclusions – Explanation 1(b);1(c) & 1(d) of Section 9(1)(i)

* Specific Inclusions - Explanation 2 to section 9 (1)(i) * Treaty Concept of dependent agent introduced in Act (Set Satellite-106 ITD

175);Galileo(ITAT -Delhi); Rolls Royce (ITAT -Delhi) )

* Agent need not be in India but must act in India.

(Also refer Specialty Magazine (274 ITR 310(AAR))—Difference between “mailnly & “almost wholly””)

TAXATION OF NON-RESIDENTS 10

Taxability of non-residents under the Income Tax Act,1961 (contd…)

Taxabilty of a Business Income (of Non-Resident)(Cont…)

○ Some important observations of SC in 288 ITR 408 :Mere existence of a business connection may not result in

income accruing or arising in India;Existence of a Permanent Establishment does not

necessarily mean existence of a business connectionWhere severable part of a composite contract are

performed in different jurisdictions , the principal of apportionment should be applied to determine profits taxable in each jurisdiction

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DTAA s & How to use them for reducing taxes• Treaty Override

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• Can a treaty impose higher tax burden than under the Domestic Laws?

• Brief Introduction of DTAA’s• Use of concept of PE & “effective connection to

a PE”• Use of definitions of FTS & Royalty under the

Treaties

•Use Some Other Treaty concepts like :

•Force of Attraction (110 TTJ 13(Delhi))•Residency MFN Clause,•Tax sparing Credit, Underlying Tax Credit •Non Discrimination

•No surcharge to be added to treaty rates

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DTAA s & How to use them for reducing taxes (contd…)

An Overview of TDS u/s 195 & Certification by CA

• Sec. 195(1) - Scope & conditions for applicability

• Sec. 195(2) - Application by payer to A.O. for lower deduction of tax

• Sec. 195(3 & 4) - Application by payee to A.O. for lower deduction of Tax

• Sec. 195(5) - Powers to CBDT to make Rules

TAXATION OF NON-RESIDENTS 14

TAXATION OF NON-RESIDENTS 15

• Difference between Section 195(2) & Section 197• Appeal against order u/s. 195(2) (Section 248)

• within 30 days of payment of tax.

• Refund to deductor of tax deducted ? (Circular 790)

{ Revision possible u/s263 against order u/s 195(2) (BCCI vs. DIT (96 ITD 263)) }

An Overview of TDS u/s 195 & Certification by CA (contd…)

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• Certification by CA for remittances

• “Beneficiary” – Meaning

• Tax Residency Certificate (Azadi Bachao (263 ITR 706(SC));Radha Rani Holding (110TTJ 920 (Delhi)))

• Whether CA duty–bound to determine existence of PE ?

• Determination of Profits attributable to PE. (Morgan Stanly (292 ITR 416(SC)),Galileo(ITAT - Delhi) & Rolls Royce (ITAT-Delhi)

• Whether CA Certificate an alternative to u/s 195(2) (Mahindra & Mahindra Ltd.(106 ITD 521 (Mum)))

• Validity period of undertaking/ declarations from payee – for a year or for a single payment?

An Overview of TDS u/s 195 & Certification by CA (contd…)

tAXABILITY OF reIMBURSEMENT OF EXPENSES

Reimbursement of Expenses Types

III.

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• Reimbursement of incidental expenses in addition to fees.

• Reimbursement of allocated / shared costs.

• Payment for services at cost or cost plus basis

• Reimbursement of cost of third party.

• Reimbursement of salaries & living allowance of deputies.

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• CIT Vs. TELCO (245 ITR 823 (Bombay))

• CIT Vs. Industrial Projects (202 ITR 1014-Delhi)

• Clifford Chance 82 ITD 106-Mumbai)

• Mahindra & Mahindra Ltd. (10 SOT 896 (Mum))

Against:

• Cochin Refineries (222 ITR 354 (Ker))

• Hindalco (278 ITR 125 (AT))

Reimbursement of Expenses: (contd…)

tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD…)

TAXATION OF NON-RESIDENTS 19

• CIT Vs. Dunlop (142 ITR 493 (Cal))

• Danfoss Ind. (268 ITR 1 (AAR))Reimbursement of services at cost or cost plus basis

Timkin (273 ITR 67 – AAR)

Reimbursement of cost of third party: Wallace Pharma (278 ITR 97 – AAR)

Reimbursement of Expenses:

tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD…)

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Reimbursement salaries & living allowances to deputies:

HCL Infosystems (274 ITR 261 – Delhi) CIT Vs. BHEL (252 ITR 218 – Delhi);(222 ITR 551 Tekniskil (Sendirian)

Berhard)(AAR)

Held salaries of technicians:

Held as FTS & salaries:

230 ITR 206 (AAR)– Steffen , Robertson & Kirsten Consulting Engineers & Scientists, IN RE-

AT & S India (P) Ltd. (287 ITR 421 (AAR))

Reimbursement of Expenses:

tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD…)

TAXATION OF NON-RESIDENTS 21