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Taxation of Non-residents

-Feb 13, 2010

Vishal Gada

PwC



Presentation agenda• Relevant concepts

- Residence

- cope o o a ncome

- Business Connection- Deemed to accrue or arise in India

- oya ty

- 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





Overview Of Income Tax Act

Relevant concepts

•

- Residential status of the taxpayer- Accrual/ Receipt of income

,

- Resident

• resident but not ordinarily resident (only for Individuals/ HUF) or

- Non Resident

• Sec 2(30)- A Non-resident is a person who is not a Resident

Who is a Resident?

PricewaterhouseCoopers

11 May 2009

Slide 4




Residential Status - Individuals

Relevant concepts

Basic condition: Additional Conditions:Basic condition: Additional Conditions:

An individual who stays in India for:

182 days or more; or 60 days or more in a tax year

& 365 da s or more durin

NR in India in 9 out of 10

preceding tax years Stays in India for an aggregate

eriod of 729 da s or less in the

An individual who stays in India for:

• 182 days or more; or

• 60 days or more in a tax year & 365

• NR in India in 9 out of 10 preceding tax

years

• Stays in India for an aggregate period of

preceding 4 tax years

preceding 7 tax years

years

years

Category Ordinarily Not Ordinarily Non ResidentResident Resident

Basic Condition Yes Yes Yes

AdditionalConditions

To satisfy noneof the additional

To satisfy eitherof the additional

Not Applicable


11 May 2009

Slide 5




Residential Status- Companies

Relevant concepts

• 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 mana ement of the affairs of the Com an ?


11 May 2009

Slide 6




Scope of Total Income – Section 5

Relevant concepts

Particulars ROR RNOR NR

1. Income received or deemed to be receivedin India Y Y Y

2. Income accruing or arising or deemed to

3. Income accruing or arising & receivedoutside India from-

a) Business controlled in India orprofession set up in India Y Y X


11 May 2009

Slide 7


ny o er source



Taxability Of Individuals

Relevant concepts

Section 5 seeks to lay down what income would constitute the total income ofassessee belonging to various categories

All individuals

• Income received in India;

• Income accruing or

Non-resident (NR)Resident

arising in India;

• Income deemed to

accrue or arise in India.

Ordinarily Resident

• Worldwide income

Not Ordinarily Resident

• Income received in India;

• Income accruing or

arising in India;• Income deemed to

accrue or arise in India;

• Income from business


11 May 2009

Slide 8


controlled in India.



Taxability Of Companies

Relevant concepts

ompany

• Income is received or

deemed to be received in

• Income received/

deemed to be received in

Resident Non-resident

n a y or on e a o a

company

• Accrues or arises or is

India

• Accrues/arises/deemed

to accrue or arise in India

arise in India• Accrues or arises outsideIndia


11 May 2009

Slide 9




Income deemed to accrue – Section 9…

Relevant concepts

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:• perat ons con ne to purc ase o goo s or exports

• 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 holdinterest


11 May 2009

Slide 10


Profits attributed to the extent of operations carried in India



…Income deemed to accrue – Section 9…

Relevant concepts

• ‘ ’

- Wider than the term ‘business’- CIT Vs. R.D. Aggarwal & Co. (56 ITR 20) (SC)

• e at on etween a non-res ent s us ness an an act v ty n n a

• Normally an element of continuity

• Determined on facts of each case

• Concept of ‘business connection’ academic, if no operations carried out inIndia

• Whether test under Section 9 needs to be a lied, when income normall

accrues in India?

• Performing Rights Society Vs. CIT (106 ITR 11) (SC)


11 May 2009

Slide 11





Relevant concepts

•

- Services rendered in India- Rest period / leave period preceded and succeeded by services

• Should form part of the employment contract

• What about employment contract executed in India, but services renderedy non-res en ou s e n a

- 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.)


11 May 2009

Slide 12





Relevant concepts

•

- Taxability of dividend paid by a foreign company to foreignshareholders, in a scenario where a major part of its income is earned

• Whether dividends arising from a source of income in India?

- Caltex (India) Ltd Vs. CIT (21 ITR 278) (Bom.)


11 May 2009

Slide 13






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

Relevant concepts

“ —. ,

purposes of this section, where income is deemed to accrue or arise in Indiaunder clauses (v), (vi) and (vii) of sub-section (1), such income shall be includedin the total income of the non-resident, whether or not the non-resident has aresidence or place of business or business connection in India.”

PricewaterhouseCoopers11 May 2009

Slide 15Taxation of Non-residents



CBDT Circular on the Finance Act 2007

Relevant concepts

“ . ,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

, .

7.4 In view of the above judicial opinion, a need was felt to reiterate the legislative intent . ,

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?



owever, avoura e ec s on o arna a a n n a erma ower



Case Study

Case Study 1

Relevant concepts

F Co. (USA) USA Branch

US Customers of I Co.

Payment to FCo. for

I Co.

technicalassistance in

software

development

Software development Companyengaged in onshore activity

(through US branch) and offshoreactivities



.between “source of income” & “income from source”



Meaning of ‘source’

Relevant concepts

• 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:

• - ,

• 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- ,

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’



Case Study 2

Relevant concepts

.

Foreign customers ofEn a es

Payment forIPRs

ex loited bo.agent to

solicit ordersfor exploiting

IPRs

customersoutside India)

Indian agent

Solicitsorders,

negotiatescontracts etc.

Whether income earned by F Co. deemed to accrue in India? Can therovisions of Section 9 1 i a l ? Refer Meteor Satellite 121 ITR



311) (Guj) & Copes Vulcan (167 ITR 884) (Chennai)



Rate of taxation for Non Residents– Royalty / FTS

Sec 44D

Royalty/FTS received by a F Co from Govt./’Indian Concern’. underagreements entered after March 31, 1976 but before April 1, 2003 -taxable on ross basis as er the rovisions u/s 115A .

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

Concern’ under agreements entered on/after April 1, 2003

Sec 44DA

through PE/ Fixed Place of profession would be computed as‘business income’ provided right / property / contract is

‘effectively connected’ with such PE/Fixed place.• .PE/Fixed Place, or (b) Payment to HO/other overseas

branches (except reimbursement of exp)

• FCo -Compulsory maintenance of A/c & Tax Audit.

Sec 115A

Royalty/FTS (excl. sec 44DA) received by nonresident. fromGovt./ ’Indian Concern’ under agreements approved by C.G./inaccordance with Industrial olic (exce t co ri ht in book/


Slide 20PricewaterhouseCoopers

computer software to Indian Concern/Resident) entered on/ after

June 1, 2005 - taxable on gross basis at 10% (plus sur&cess)



Issues…

- resident - Can the foreign branch be regarded as an Indian concern?

• Ownership, mgt & control must be substantially in India. It is not enough.

[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 residentassessee.

(Jt. Official Li uidator 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 approvedby RBI?

• an e paymen e regar e as approve y e overnmen

- 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

olicy, if the royalty ayments were under the ‘automatic route’?







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

e ui ment and a roved under olic on com uter software

export, Software Development and Training, 1986, is exempt

- Imparting of information concerning technical, industrial, commercial

,

- 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 ‘co ri ht’?





Fees for Technical Services - Definition under ITA

Explanation 2 to Section 9(1)(vii)

"fees for technical services " means any consideration (including anylump sum consideration) for the rendering of any managerial,

technical or consultancy services (including the provision of servicesof technical or other personnel)

Exclusion

, ,undertaken by the recipient; or

consideration which would be income of the reci ient char eable

under the head "Salaries"

Requirement of human interface necessary?



e g ourt ec s on n art e u ar



Royalty / FTS - Scope under ITA

Payment by Government

Payment by Resident to Non-resident

• Taxable unless services utilized in business outside India or forearning income from any source outside India

Payment by Non-resident to Non-resident

• Taxable only if services utilised in business in India or for earningincome from any source in India











Tax Treaty Overview – Important Articles

Articles covered* Category Taxability in the host country

6Income from

Immovable PropertyTaxable, if property is located in the host

country

7 Business Profits Taxable, if Permanent Establishment exists

Taxable (but at concessional rates), if10 Dividend dividends paid by a company resident of

the host country

Interest Ro alt & Taxable but at concessional rates if11 & 12 Fees for Technical

Servicespayments “arise” in the host country as per

the Treaty rules

13 Capital GainsTaxability depends on nature of underlying

capital asset and specific Treaty rules

15 Salary Income Taxable in host country, subject to ‘shortstay exemption’

*Article numbers are illustrative only and may vary from treaty to treaty









Tax Incentives…

• –

- Available only to non-resident individual• Tax Exemption on Interest from foreign currency deposits – Section

- RFC & FCNR deposits

• Tax Holidays u/s 10A / 10B / 10AA deduction relating to SEZ, STP, EOU,e c.

• Deduction u/s 80C / 80D to non-resident individuals / HUFs





…Tax Incentives

• - developing, operating and maintaining specified infrastructure facility

- Condition that the enterprise should be owned by a “company registered”

• Absent in the case of telecommunication services, operation ofindustrial park, power generation

-Section 592 of the Companies Act?

- Whether ‘Non-discrimination clause’ under a Treaty can be applied?

• e uct on u s - ava a e- References to ‘Indian company’ in certain sub-sections?





S ifi P i i f i N R id



NRI Taxation – Chapter XII-A…

Specific Provisions for taxation on Non-Residents

• “ ”

purchased in convertible foreign exchange

• Foreign exchange assets include:

-

- Debentures issued by an Indian public company

- Deposits of an Indian public company- en ra governmen secur y as e ne n u c e c

• LTCG charged @ 10%

- Indexation not available

- Applicability of Rule 115A?• STCG, dividends, interest, etc. charged @ 20%



S ifi P i i f t ti N R id t



…NRI Taxation – Chapter XII-A

Specific Provisions for taxation on Non-Residents

• ,

- Consideration invested in foreign exchange assets within six months

- Lock-in period of 3 years

• ,

- 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



governe y norma prov s ons o e c

















Transfer Pricing



Provisions of the Act

Associated Enterprises (Section 92A)

Both A and Bare AE of C

A A DD and E are alsoassociated

B B E enterprises of Csince they have acommon ultimate

parent (A)

….

• controls appointment of > half of the directors or one or more executive directors….

• advances loans constituting >= 51% of book value of total assets….

PricewaterhouseCoopers 11 May 2009Slide 45Taxation of Non-residents

= ….….

Transfer Pricing



Provisions of the Act

• Scope of transactions covered- Purchase, sale, lease of tangibles or intangibles

- rov s on o serv ces

- Financing

-

Cost apportionments, allocations, contributions- Any other transactions having a bearing on profits, income, losses or

assets of an enterprise




Transfer Pricing



Computation Provision

OECD Transfer Pricing Methods

Traditional Transaction Methods Transactional Profits Methods

ComparableUncontrolled

Price

Resale PriceMethod

Cost PlusMethod

Profit SplitMethod

TransactionalNet Margin

Method


Transfer Pricing



Computation…

•

• Any other method that may be prescribed by the CBDT – No method tilldate

• In most cases, it is not possible to identify a single price that can be

considered to be an uncontrolled price

• Possibility that different transactions are equally comparable. More thanone Arm’s Length Price

• Variation of +/- 5% allowed

, -












Key changes in a nutshell

Positive Negative Circumstantial

Lower tax rates but, 2%

MAT

Introduction of sweeping

General Anti Avoidance Rules

Changes in capital gains

legislation

safe harbour rules

Treaty override provisions

Indefinite carry forward Increase in withholding tax

rates losses

Residence status of foreign

com anies

MAT

m ar ssues or n an su s ar es o ore gncompanies







Overview of branch rofits tax

•

companies• Illustration -

INR

Branch profits in India 100

ess : orpora e ax a

Net profits after corporate tax 75

Less : Branch rofits tax at 15% 11.25

Net profits after branch profit tax 63.75

Slide 57

ect ve tax rate – 36.25%





Ch i id f i di id l I li i



Change in residency test for individuals - Implications to

• “ ”

expatriates in India

- 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

O h i i i



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

- Use of equipment specifically expanded to ships or aircrafts (bareboatcharter/dry lease specifically hit)

- Consideration for “live feed” now included

• Fees for Technical Services (“FTS”) definition expanded to include, ,

• Withholding tax rate for royalties and FTS increased from current 10% to20%

• Interest paid by one non-resident to another in respect of borrowing made toearn income from any source in India liable to tax in India

Slide 61



Concluding Remarks



Concluding Remarks

• -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 theor with ra matic a roach


11 May 2009

Slide 63


Thank You



Documents

Taxation of Non-residents.pdf New