Taxation Of Non-Residents – Advanced Tax Laws and Practice Important Questions
Answer the following questions in the context of provisions contained under the Income-tax Act, 1961 by taking each an independent case of Advance Ruling:
- Applicability of advance ruling and to whom the same is binding.
- When can the advance ruling be void?
- Fees to be paid and form to be filed for obtaining the advance ruling.
(1) The advance ruling pronounced by the Authority for Advance Ruling (AAR) under section 245R shall be binding only:
- On the applicant who had sought it;
- In respect of the transactions in relation to which the ruling had been sought; and
- On the Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction.
(2) Advance Ruling pronounced under section 245R will be void ab initio if:
- the AAR finds on a representation made to it by the Principal Commissioner or otherwise that an advance ruling has been obtained by the applicant by fraud or misrepresentation of facts; and
- the AAR by order declares such advance ruling to be void ab initio.
Fees of ₹ 10,000 or such fee as may be provided under rule 44E whichever is higher is to be paid along with the application as per section 245Q(2).
Advance Rulings is not directly part of New syllabus of CS professionals. But it is one of the important aspects of the taxation of Non-Resident, hence included in this book.
Ms. Alicia is a German national working in Sensing Ltd., in Turkey. Sensing Ltd. neither has any office in India nor has done any business in India. The company deputed Ms. Alicia to India on 31st January 2021 for conducting a market survey.
She went back to Turkey on 30th March 2021. A salary of US $50,000 for the period of her stay in India was credited to an account maintained by her in India. Examine the taxability of the salary income received by her in India. Would your answer be different, if Sensing Ltd. is maintaining its office in Delhi?
Section 1 0(6)( vi) of Income-tax Act, 1961 states that remuneration received by a foreign national as an employee of a foreign enterprise for services rendered during his/her stay in India is exempt from tax provided:
- Foreign enterprise is not engaged in any business or trade-in India;
- Stay of employee does not exceed 90 days in such Previous Year; and
- Such remuneration is not liable to be deducted from the income of the employer chargeable under the Income-tax Act.
In the given case, Ms. Alicia stayed in India for a period of (1+ 28+30) 59 days inclusive of the days of coming to and going from India. Since Ms. Alicia satisfies all the above conditions, she is not required to pay tax on the US $ 50,000 received by her in India from January to March 2021. Yes, if Singsang Ltd. had its office in Delhi, it would have meant that a foreign enterprise was engaged in business in India, and accordingly, exemption under section 1 0(6)(vi) would not have been available to Ms. Alicia.
A Non-Resident foreign company has a Permanent Establishment (PE) in India in respect of which royalty of ₹ 101 lakhs was earned from the Indian company in pursuance of an agreement dated 10th June 2015 (expenditure incurred on PE in India: ₹ 12,37,600). Compute the gross tax liability of foreign company ignoring TDS, Advance tax for the assessment year 2021-22, assuming that there is no other income of the company for the year.
Since the foreign company has a permanent establishment in India and the right, property, or contract in respect of which the royalties are paid to is effectively connected with such permanent establishment, the provisions of section 44DA will be applicable. Thus, the gross tax liability of foreign company for assessment year 2021 -22 shall be (₹ 1,01,00,000 -12,37,600)X41.6% = ₹ 36,86,758.
Compute the Income-tax in the following cases:
- The royalty of ₹ 10 lakhs was received by a foreign company from an Indian concern in pursuance of an agreement approved by the Central Government.
- ₹ 10,00,000 long-term capital gains received by an overseas financial organization on the transfer of units purchased in foreign currency.
- As per section 115A, the rate of tax shall be 10%. Hence, Tax = ₹ 10,00,000 X 10.4% (Tax rate: 10% + Health and Educa-tion Cess @ 4%) = ₹ 1,04,000. No surcharge will be applicable as total income does not exceed ₹ 1 crore.
- Tax rate is 10% under section 115AB. Hence, tax = ₹ 10,00,000 X 10.4% = ₹ 1,04,000.
Would non-resident match referees and umpires in the games played in India fall within the meaning of sportsmen to attract taxability under the provisions of section 115BBA? Discuss briefly with help of decided case law, if any.
The Calcutta High Court has, in Indcom v. CIT (TDS)  335 ITR 485, held that match referee in the games played in India do not fall within the meaning of “sportsmen” to attract the provisions of section 115BBA. Therefore, although the payments made to non-resident match referees are “income” which has accrued and arisen in India, the same are not tax¬able under provisions of section 115BBA. They are subject to the normal rates of tax.
Nadal, a professional tennis player, and a non-Indian citizen during the financial year 2020-21 participated in India in a Tennis Tournament and won the prize money of ₹ 25,00,000. He contributed articles on the tournament in the local newspaper for which he was paid ₹ 3,00,000. He was also paid ₹ 7,50,000 by a soft drink company for his appearance in a TV advertisement. All his expenses in India were though met by the sponsors, but he had incurred ₹ 5,00,000 towards his travel cost to India. He was a non-resident for tax purposes in India during the financial year 2020-21. What would be his tax liability in India for the assessment year 2021-22? Is he required to file his return of income?
Since the income has accrued or arisen or received in India, the same is liable to income tax in India and includible in total income. Said receipts are taxable as per section 115BBA.
No expenditure is allowable against such receipt.
Hence, total income = Prize money of ? 25,00,000 + amount received from newspaper of ₹ 3,00,000 + amount received towards TV advertisements of ₹ 7,50,000 = ₹ 35,50,000.
Rate of tax chargeable under section 115BBA = 20% plus Health and Education Cess at 4% = 20.8%.
Tax liability of Nadal = 20.8% of ₹ 35,50,000 = ₹ 7,38,400.
He is not required to file his return of income if – (a) his total income during the previous year consists only of income arising u/s 115BBA, and (b) the tax deductible at source under the provisions of chapter XVII-B has been deducted from such income by the payers.
In the context of provisions contained in the Income-tax Act, 1961 examine the correctness of the following statements: “Liaison office main¬tained in India to explore the opportunity of business in India does not constitute business connection”.
The statement is correct. If a liaison office is maintained solely for the purpose of carrying out activities that are preparatory or auxiliary in character, and such activities are approved by the Reserve Bank of India, then no business connection is established. In this case, the liaison office is maintained for the purpose of exploring the business opportunity which is in the nature of the preparatory or auxiliary activity. It is assumed that such activities are approved by the Reserve Bank of India. Since it does not un¬dertake any commercial, trading on industrial activity, directly or indirectly, the liaison office does not constitute a business connection in this case.
X Ltd., a company incorporated in the USA has entered into an agreement with Y Ltd. an Indian company for rendering technical services to the latter for setting up a fertilizer plant in Orissa. As per the agreement, X Ltd. rendered both off-shore and on-shore services to Y Ltd. at a fee of ₹ 50 lakhs and 1 crore respectively. X Ltd. is of the view that it is not liable to tax in India in respect of a fee of ₹ 50 lakhs as it is for rendering services outside India. Discuss the correctness of the view of X Ltd.
The Explanation below section 9(2) clarifies that income by way of, inter alia, fees for technical services from services utilized in India would be deemed to accrue or arise in India under section 9(1)(vii) in case of non-resident and be included in his total income, whether or not such services were rendered in India.
In this case, the technical services rendered by the foreign company, X Ltd., were for setting up a fertilizer plant in Orissa. Therefore, the services were utilized in India. Consequently, as per section 9(2), the fees of ₹ 1.5 crores for technical services rendered by X Ltd. (both off-shore and on-shore) to Y Ltd. is deemed to accrue or arise in India and includible in the total income of X Ltd. Therefore, the view of X Ltd. that it is not liable to tax in India in respect of fee of ₹ 50 lakhs (as it is for rendering service outside India) is not correct.
Determine the tax liability of income of Japan-based company Fujitsu Ltd., in India on entering following transactions during the financial year 2020-21:
- ₹ 5 lakhs received from an Indian domestic company for providing technical know-how in India.
- ₹ 6 lakhs from an Indian firm for conducting the feasibility study for the new project in Finland.
- ₹ 4 lakhs from a non-resident for use of the patent for a business in India.
- ₹ 8 lakhs from a non-resident Indian for use of know-how for a business in Singapore.
- ₹ 10 lakhs for the supply of manuals and designs for the business to be established in Singapore.
Assume there is no Double Tax Avoidance Agreement and all foreign Income is taxable in India only.
Computation of tax liability of Fujitsu Ltd. for Assessment Year 2021-22
|The amount received from an Indian domestic company for providing technical know-how in India (It is Income from a business connection in India & hence taxable in India)||5,00,000|
|Amount received from Indian firm for conducting the feasibility study for the new project in Finland (Not taxable in India as it is for business outside India)||–|
|Amount received from a Non-resident for use of the patent for a business in India (Amount received for business set up in India and hence is taxable in India)||4,00,000|
|Amount received from a non-resident Indian for use of know-how for a business in Singapore (The business is outside India, therefore not taxable in India.)||–|
|Amount received for supply of manuals and designs for the business to be established in Singapore (Business is to be established outside India, thus not taxable in India.)||–|
|Total Income in India||9,00,000|
|Tax at 40%||3,60,000|
|Health and Education Cess @ 4%||14,400|
|Total Tax liability||3,74,400|
Taxation Of Non-Residents Notes
- Determination of Residential status for Individual, HUF, Firm, and Company. (Also covered in basics of International topic)
- Tax incidence on non-residents:
- Total income of non-resident includes all income from whatever source derived which,
a. is received in India
b. is deemed to be received in India
c. is accrued or arisen in India
d. is deemed to accrue or arise in India.
- Meaning of business connection
- Salary for services rendered in India is deemed to be a salary earned in India.
- Further, salaries payable by Government of India to Indian citizen abroad is also salaried income in India.
- Interest income payable by Government of India; or a resident ex¬cept where it is payable in respect of any debt incurred, or money borrowed and used for purpose of business/profession carried on by such person outside India or for purpose of earning any income from any source outside India shall be income arising in India.
Further, interest income payable by a non-resident, where it is payable in respect of any debt incurred and used for purpose of business/profession carried on by such person in India.