Period Quantum of deduction
For the first 5 AY’s relevant to the PY in which permission under banking regulation act or SEBI or under any other laws was obtained
100% of such income
Next 5 years 50% of such income
Non resident
1) Non resident individual: An individual is regarded as non –resident if he is not resident in India during that PY. An individual is regarded as resident in India if –
He is India for a period of 182 days*** or more during the PY; OR
He is in India for a period of 60 days or more during the PY and 365 days or more during the 4 years preceding the PY.
** Under the following circumstances, the period of 60 days are extended to 182 days –
a) An Indian citizen who leaves India during PY for the purpose of employment outside India.
b) An Indian citizen who leaves India during PY as a member of crew of an Indian ship.
c) An Indian citizen or a person of Indian origin (who is abroad) who comes to India on a visit during the PY.
Note: A person is deemed to be of Indian origin, if he or either of his parents or any of his grand parents was born in Undivided India.
2) Non resident HUF: If the control and management of the affairs of HUF is situated wholly outside India, then HUF is said to be non resident in India. 3) Non resident company: According to section 6(3) an Indian company is always resident in India. A foreign company will be non resident in India if the control and management of its affairs is wholly or partly situated outside India. 4) Non resident firm/AOP/other persons: If the control and management of the affairs of Firm or AOP or other person is situated wholly outside India then Firm or AOP or such other person is said to be Non resident in India.
Tax incidence on Non –Resident: In case of non residents, only the income received or deemed to be received in India or, income accrued or arisen or deemed to be have accrued or arisen in India is taxable in their hands. All other incomes aren’t taxable.
Business connection
Business connection involves relation between a business carried on by a non – resident, which yields profits and some activity in India, which contributes directly or indirectly to the earning of those profits. It predicates an element of continuity between business of the non- resident and the activity in India. It includes professional connection e.g. when foreign lawyer is called upon in India to plead the case in Indian courts.
Definition Business activity carried through following agents of non resident is covered –
Concluding agent who concludes contracts on behalf of the non resident. However, agents who only purchase goods/ merchandise for the non resident aren’t covered, or
Stocking agent who maintains stock of goods in India from which he regularly delivers goods on behalf of the non resident.
Indenting agent who secures orders in India mainly/wholly for non resident or, that non –resident and other non- residents who exercise control over one – another or are under common control.
Exceptions:
a) Business activity carried out through an agent having an independent status and acting in ordinary course of business isn’t regarded as business connection. However, an agent working mainly/ wholly for non resident or, that non resident and other non –residents who exercise control over one another or are under common control is not regarded as having an independent status.
b) In cases falling under the above three, only the income attributable to the operations carried out in India shall be deemed to accrue or arise in India.
Income not to be treated as arising from or through business connection A. In case all the operations of a business aren’t carried out in India, only the income reasonably attributable to the operations carried out in India will be deemed to accrue or arise in India.
B. In case of a non resident, income in respect of operations confined to purchase of goods in India for the purpose of export shall not be deemed to accrue or arise in India.
C. In case of non resident, engaged in business of running a news agency/ publishing newspapers, magazines, journals, income arising through and from activities confined to collection of news and views in India for transmission out of India shall not be deemed to accrue or arise in India.
D. In case of a non resident being –
a. An individual who isn’t a citizen of India ;
b. A firm not having a partner who is either a citizen of India or resident in India; and
c. A company not having any shareholder who is either citizen of India or resident in India,
Income arising through or from operations confined to shooting of any cinematograph film in India shall not be deemed to accrue or arise in India. levy of income tax on income pertaining to FIIs
Sec Assessee Specified
Income
Tax rate Remarks , if any
115A Any non resident Assessee a) Interest from govt. or Indian concern on debt given in foreign currency ** 20% 30% 20% 10% ->no deduction is allowed in computing such income under any provision of Act. -->such agreement must be approved by the central Government or must relate to a matter covered by the industrial policy of the Govt. of India.
b) Royalty and fees for technical services received under agreement entered – Between 1-4-1976 to 31-5-1997
Between 1-6-1997 to 31-5-2005 On or after 1-6-2005
115AB Overseas financial organization (offshore fund) LTCG from transfer of units or UTI or a mutual fund specified under section 10% Indexation benefit will not be available in computing LTCG
10(23D), which were
purchased in foreign
currency. 115AC Any non resident
Assessee** a)interest on notified foreign currency bonds of Indian/ public sector company b) LTCG from transfer of such bonds or global depository receipts (GDRs) 10% No deduction in computing such income under any provision and no indexation benefit in computing LTCG.
115 ACA Resident employee LTCG from transfer of foreign currency GDRs of an Indian company engaged in specified knowledge based industry or service, issued under 10% Assessee must be the employee of such Indian company. No indexation benefit in computation of LTCG.
employees
stock option scheme
(ESOPs) 115AD Notified foreign
institutional investor Income in respect of securities other than units referred to in section 115AB 20% No deduction allowable in computing such income under any provision of the act and no indexation
benefit in computing LTCG
Capital gains on transfer of the securities—STCG under section 111A Other STCG
LTCG
115BBA Non resident sportsman being foreign citizen** Income from – -participation in a game/sport in India ; - advertisement ; - Contribution of articles relating to any game or sport in India in newspapers, 10% No deduction allowable in computing such incomes under any provision of act
Winnings from lottery, crossword puzzles etc are taxable under section 115BB @ 30% and therefore, they do not fall under this section.
magazines or journals.
Non resident sports association ** Any amount guaranteed to be paid or payable to such association or institution for any game/ sport played in India Notes –
1) **in cases falling under sections 115A, 115Ac and 115BBA, the assessee needn’t file return of income if his income consists of specified incomes only and tax on such incomes has been deducted at source.
2) Additional provisions of section 115A: section 115A applies only to such royalty and fees for technical income from royalty/ fees for technical services, deduction under chapter VI-A shall be available from income from royalty/ fees for technical services taxable under this section.
Section 160
Representative assessee of non resident includes his agent. Section 163: Agent of a non resident
Agent in relation to a non resident includes following persons in India – a) Person employed by or on behalf of the non resident.
b) Person who has any business connection with the non resident
c) Person from or through whom the non resident is in receipt of nay income, whether directly or indirectly,
e) Any person who has acquired a capital asset in India by means of a transfer, whether such person is a resident or non resident.
Section 172: tax liability of shipping business
Non resident carrying on shipping business presumptive income @ 7.5% of amount payable.
Transfer pricing
Objective with the increase in participation of the multinational groups there has been increase in the cross border transactions. The existence of different tax rates in different countries offers a potential incentive to multinational enterprises to manipulate their transfer prices to recognize lower profit in countries with higher taxes and vice versa.
In order to monitor transfer prices for goods, facilities and services, transfer pricing regulations were introduces in the form of sections 92 and 92A to 92F. The basic intention underlying the transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country’s tax base.
Provisions relating to computation of income from international transactions – sec 92
1) Income to be computed as per arms length price
2) Section not to apply when arms length prices decreases income or increases loss.
Section 92A associated enterprises and deemed associated enterprises. Associated enterprise means an enterprise which participates, directly or indirectly, in management or control or capital of other enterprise. Further, if one or more persons participate, directly or indirectly in the management or control or capital of two enterprises those two enterprises are associated enterprises.
Deemed associated enterprises: two enterprises are deemed to be associated enterprises. If, at any time during the PY, -
a) One holds, directly or indirectly shares carrying 26% or more of voting power in other enterprise.
b) Any person holds, directly or indirectly shares carrying 26% or more voting power in both of them.
c) A loan advanced by one to the other constitutes 51% or more of BV of total assets of other.
d) One enterprise guarantees 10% or more of the total borrowings of the other enterprise.
e) One appoints more than half of board of directors or one or more executive directors of the other.
f) Any person appoints more than half board of directors or one or more executive directors of both.
g) Manufacture/ processing of goods or business carried on by one is fully dependent on use of know how, patents, copyright, etc. owned by the other, or in respect of which other has exclusive rights.
h) 90% or more of RM required by one are supplied by the other or by persons specified by other, and prices and other conditions relating to the supply are influenced by the other enterprise.
i) Goods manufactured/ processed by one are sold to the other enterprise or to persons specified by other, and the prices and other conditions relating thereto are influenced by such other enterprise.
j) Where one enterprise is controlled by an individual/HUF, the other enterprise is also controlled by such individual/ HUF or his relatives or jointly by such individual/HUF and such relative.
k) One enterprise is a firm/AOP/BOI and other enterprise holds 10% or more interest in such firm/AOP/BOI.
l) There exists between the two enterprises, any relationship of mutual interest, as may be prescribed.
It means a transaction entered into between two or more associated enterprise (at least one is a non resident) for purchase/sale/ lease of tangible/ intangible property or provision of services or lending/ borrowing money or any other transaction (including sharing agreements for common costs) having bearing on income and assets.
Deemed associated transaction: If an associated enterprise and a third person determine the terms of a transaction between third person and another associated enterprise, such transaction shall be regarded as having being entered into between two associated enterprise.
Section 92C methods under which arm’s length price is determined
1) Arms length price (ALP) means a price applicable in a uncontrolled transaction i.e. a transaction between non associated enterprises, in uncontrolled conditions.
2) Methods for computation of arms length price: arms length price is determined by the most appropriate of the following methods, selected as per the mode prescribed by the board –
a) Comparable uncontrolled price method b) Resale price method
c) Cost plus method
d) Transaction net margin method e) Profit split method
f) Other prescribed method.
3) When more than one price determined : by the most appropriate method, the arms length price shall be taken to be the lower of the following –
a) The arithmetical mean of such prices, or,
b) A price varying up to 5% of such arithmetical mean. Double taxation avoidance agreement - DTAA
Double taxation means taxation of same income of a person in more than one country i.e. both under Indian income tax act, 1961 and income tax law of other country.
DTAA are agreements entered into by the government of India with the government of other countries.
Effect of DTAA
a) If no liability is imposed under the Income tax Act on a particular income, then no liability will arise on that income.
b) If the tax liability is imposed by the act on a particular and there’s a difference between the provision of the act and the agreement then the provision or the conditions of agreement which is more beneficial to the assessee can be enforced.
c) Any term used but not defined in the Act or in the DTAA shall, unless the context otherwise requires, and isn’t inconsistent with the provisions of the Act or the agreement, have the same meaning assigned to it in the notification issued by the central government in the official gazette in this behalf.
Two methods of granting relief under DTAA [bilateral relief] Exemption method
Tax credit method
Conditions for claiming relief:
1. The income should have been taxed in both the contracting countries. 2. Proof of income having suffered double taxation has to be provided.
3. If there is no tax treaty with the country levying double tax; then relief can be granted unilaterally u/s 91.
DTAA- Sec 90A
Between two specified associations, adopted for levy of tax. - Section 90A Meaning
Specified association: notified institutions, associations are bodies functioning under any law for the time being in force either in India or the specified territory outside India.
Specified territory: Any area outside India notified for the purposes of this section.
Adoption of agreement specified association in India may enter into an agreement with any specified association in the specified territory outside India. Through notification in the official gazette, the central Government may make such provisions necessary for adopting and implementing such agreement. Purpose of adoption
a) Granting of relief in respect of –
Income which have suffered tax under both Indian tax laws and those of specified territory outside India, or;
Income tax chargeable under this act and under the corresponding law in force in that specified territory outside India to promote mutual economic relations, trade and investment, or
b) Avoidance of double taxation of income under Indian law and those governing the specified territory; or
c) Exchange of information for the prevention of evasion or avoidance of income tax chargeable in both in India and specified territory , or investigation of cases of such evasion or avoidance, or
d) Recovery of income –tax – tax under laws of both the countries/ territories. Section 91 unilateral relief
Conditions
a) The assessee must have been resident in India in the relevant PY. b) The income must have accrued or arisen outside India during that PY.
c) The assessee must have paid the tax either by deduction or otherwise in respect of such income as per the law of the foreign country.
d) There should be no reciprocal agreement of relief or avoidance from double taxation with the country where income has accrued or arisen.