TAXATION OF NON-RESIDENTS

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TAXATION OF NON-RESIDENTS

• By Sushil Lakhani
• ( For Ahmadabad Sub Chapter Of International
  Fiscal Association
• On 16th February, 2008)

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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

16th February, 2008
IFA-Ahmedabad
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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.

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IFA-Ahmedabad
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Definition of Non-Residents (contd)
Resident as per I.T. Act ( 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

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

• . 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 - NORs 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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IFA-Ahmedabad
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Taxability of non-residents under the Income Tax
Act,1961(contd)

• . Deemed to accrue or arise in India meaning
  of

Section Sources Of Income Description
9(1)(i) Business Income Income from a business connection in India or through or from any property or capital asset or source of income or transfer of capital asset situated in India.
9(1)(ii) Salaries Salaries for services rendered in India.
9(1)(iii) Salaries Salaries by Govt. for services outside India.
9(1)(iv) Dividend Dividend paid by an Indian Company outside India. (now Exempt)
9(1)(v) Interest Interest by Govt. or by a resident (unless for a business or source outside India)
9(1)(vi) Royalty Royalty by Govt. or a resident (unless for a business or a source outside India).
9(1)(vii) FTS Fees for Technical Services (FTS) by Govt. or a resident (unless for a business or a source outside India).
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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

Sec 44B Sec 44BB Sec 44BBA Sec 44BBB
This 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
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IFA-Ahmedabad
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Taxability of non-residents under the Income Tax
Act,1961 (contd)

• Relevant Income tax Rules

• 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

• Chapter XII A For NRIs

• Transfer Pricing Sec. 92 to Sec 92F

16th February, 2008
IFA-Ahmedabad
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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)

16th February, 2008
IFA-Ahmedabad
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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
  connection
• Where 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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IFA-Ahmedabad
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DTAA s How to use them for reducing taxes

• Treaty Override

• Can a treaty impose higher tax burden than under
  the Domestic Laws?
• Brief Introduction of DTAAs
• Use of concept of PE effective connection to a
  PE
• Use of definitions of FTS Royalty under the
  Treaties

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IFA-Ahmedabad
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DTAA s How to use them for reducing taxes
(contd)

• 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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IFA-Ahmedabad
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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

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IFA-Ahmedabad
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An Overview of TDS u/s 195 Certification by CA
(contd)

• Difference between Section 195(2) Section 197

• Appeal against order u/s. 195(2) (Section 248)

• within 30 days of payment of tax.

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

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

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IFA-Ahmedabad
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An Overview of TDS u/s 195 Certification by CA
(contd)

• Certification by CA for remittances
• Beneficiary Meaning
• Tax Residency Certificate (Azadi Bachao (263 ITR
  706(SC))Radha Rani Holding (110TTJ 920 (Delhi)))
• Whether CA dutybound 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?

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IFA-Ahmedabad
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tAXABILITY OF reIMBURSEMENT OF EXPENSES

• Reimbursement of Expenses
• Types

• 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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IFA-Ahmedabad
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tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD)

Reimbursement of Expenses (contd)

• 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))

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IFA-Ahmedabad
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tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD)
Reimbursement of Expenses

• 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)

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IFA-Ahmedabad
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tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD)
Reimbursement of Expenses
Reimbursement salaries living allowances to
deputies
Held salaries of technicians

• HCL Infosystems (274 ITR 261 Delhi)
• CIT Vs. BHEL (252 ITR 218 Delhi)(222 ITR 551
  Tekniskil (Sendirian) Berhard)(AAR)

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))

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IFA-Ahmedabad
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Thanking You Sushil Lakhani 4th Floor, Bharat
House, 104, Mumbai Samachar Marg, Fort, Mumbai
400023 Tel No. 022-40693926/15 Email-id
lakhani.sushil_at_gmail.com
16th February, 2008
IFA-Ahmedabad