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Taxation of Non Residents Certificate

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					                                              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…)
“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

                        TAXATION OF NON-RESIDENTS          4
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.



                           TAXATION OF NON-RESIDENTS             5
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 : - ―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.)
                        TAXATION OF NON-RESIDENTS               6
 Taxability of non-residents under the
 Income Tax Act,1961(contd…)
            .― Deemed to accrue or arise in India‖ – meaning of:
Section      Sources     Description
             Of Income


9(1)(i)      Business    Income from a business connection in India or through or from any property
             Income      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).

                                         TAXATION OF NON-RESIDENTS                                             7
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        non-resident  non-resident engaged          non-resident foreign company
section     engaged       in providing service/         engaged in   engaged in civil
                          facilities or supplying
applies to- operation ships.                            operation of construction or
                          plant/ machinery for          aircraft.    erection, testing or
                          extraction or                              commissioning of
                          production of mineral                      plant or machinery in
                          oils (including                            connection with an
                          petroleum and natural                      approved turnkey
                          gas)                                       power project
Deemed      7½ % of gross 10% of gross receipts         5 % of gross 10 % of gross
Income      receipts                                    receipts     receipts




                                TAXATION OF NON-RESIDENTS                                8
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

                                 TAXATION OF NON-RESIDENTS   9
    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 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


                            TAXATION OF NON-RESIDENTS              11
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 DTAA’s
    • Use of concept of PE & “effective connection to a
      PE”
    • Use of definitions of FTS & Royalty under the
      Treaties




                      TAXATION OF NON-RESIDENTS           12
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


                     TAXATION OF NON-RESIDENTS    13
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
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)




                        TAXATION OF NON-RESIDENTS         15
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 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?

                           TAXATION OF NON-RESIDENTS                             16
      tAXABILITY OF reIMBURSEMENT
      OF EXPENSES
        Reimbursement of Expenses
       Types
IV.   • 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.
                        TAXATION OF NON-RESIDENTS             17
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))

                    TAXATION OF NON-RESIDENTS        18
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)




                            TAXATION OF NON-RESIDENTS   19
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))

                                TAXATION OF NON-RESIDENTS                      20
Sushil Lakhani
4th Floor, Bharat House,
104, Mumbai Samachar Marg,
Fort,
Mumbai – 400023
Tel No.: 022-40693926/15
Email-id : lakhani.sushil@gmail.com

               TAXATION OF NON-RESIDENTS   21

				
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