Week – 4-7

A. Residential Status

 There are separate residential rules for individual, HUF etc.

 Section 2(7): assessee means a person by whom any tax … is payable under this Act.

 Section 2(31):  "person" includes—

1) an individual,

2) a Hindu undivided family,

3) a company,

4) a firm, etc

B. How is Residential status determined?

1) Residential status is determined for a given previous year

2) A person can be a resident of more than one country in a given previous year

3) Citizenship and residential status are separate concepts

4) Residence does not need to be continuous, aggregate number of days matter

5) Individual can be staying in multiple places during his stay

6) Purpose of visit is irrelevant

7) The day he enters India and the day he leaves India should both be included to calculate 182 days

C. Residence rules for individual

 Section 6(1): An individual is said to be resident in India in any previous year, if he—

1) is in India in that year for a total period of 182 days; or

2) is in India in that year for a total period of 60 days and have also been in India for a total period
of 365 days within the four years preceding that year.

D. Ordinarily resident and not ordinarily resident in India

 Section 5(1): the total income of any previous year of a person who is a resident includes all income
which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or

(c) accrues or arises to him outside India during such year.

 Proviso: in the case of a person not ordinarily resident in India within the meaning of section 6(6),
the income which accrues or arises to him outside India shall not be so included unless it is derived
from a business controlled in or a profession set up in India.

 Section 6(6): A person is said to be "not ordinarily resident" in India in any previous year if such
person—

1) Has been a NR in India for 9 out of 10 PY preceding the relevant PY; or

2) Has been in India for 729 days or less in the 7 PY preceding the relevant PY; or

3) Is citizen of India or person of Indian origin having total income(other than income from foreign
sources) of more than 15Lakhs in the PY, and he has been in India in the PY for more than 120
but less than 182 days.

4) Deemed resident under clause 6(1A)

 Section 6(1A)  Notwithstanding anything contained in clause (1), an individual, being a citizen of
India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees
during the previous year shall be deemed to be resident in India in that previous year, if he is not
liable to tax in any other country or territory by reason of his domicile or residence or any other
criteria of similar nature.]

[Explanation.—For the removal of doubts, it is hereby declared that this clause shall not apply in
case of an individual who is said to be resident in India in the previous year under clause (1).]

E. Residential rules for a company

 Prior to 01.04.2016, Section 6 stated that a company is resident in India if:

1) It is an Indian company; or

2) or the control and management of its affairs is situated wholly in India.

 Companies could easily avoid being a resident of India by shifting only a small part of their activities
outside India. This enabled them to avoid paying taxes on their global income.

Radha Rani Holdings (P) Ltd. vs Additional Director Of Income Tax (2007)

 The board of directors actually control and manage the affairs of a company, the place where the
board actually meets for the purpose of determination of the key issues relating to the company
should determine the place of control and management of the company.

 In this case, the record showed that board meetings were held in Singapore and not in India,
therefore, the company was held to be non-resident in India.

 Discrepancies in this test:

  What will happen when Board meets online, and members are situated in different parts of the
world? Which BOD’s residence will be the appropriate place of control and management?

 Current provision on residential status of a company

 Section 6(3): A company is said to be a resident in India in any previous year, if—

(i) it is an Indian company; or

(ii) its place of effective management, in that year, is in India.

Explanation.—For the purposes of this clause "place of effective management" means a place where
key management and commercial decisions that are necessary for the conduct of business of an entity
as a whole are, in substance made.

 Guidelines:

 PoEM of a company engaged in ‘Active Business Outside India’ shall be presumed to be outside if
majority meetings of Board are held outside India.

 A Company is said to be engaged in Active Business Outside India if –

1) Passive income is not more than 50% of its total income.

2) If less than 50% of total assets are situated in India.

3) If less than 50% of total employees are situated or resident in India.

4) Payroll expenses on such employees is less than 50% of total payroll expenses.

 For the purpose of determining whether the company is engaged in active business outside India, the
average data of the previous year and two years prior to that shall be taken into account.

 In cases of companies other than those that are engaged in active business outside India, the
determination of POEM would be a two-stage process, namely

1) First stage would be identification or ascertaining the person(s) who actually make the key
management and commercial decision for conduct of the company’s business as a whole.

2) Second stage would be determination of place where these decisions are in fact being made

F. Residential status of HUF:

 Section 6(2): A Hindu undivided family, firm or other association of persons is said to be resident in
India in any previous year in every case except where during that year the control and management
of its affairs is situated wholly outside India.

G. Section 9 - Income deemed to accrue or arise in India

1. The following incomes shall be deemed to accrue or arise in India :—

 all income accruing or arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property in India, or through or from any asset or source
of income in India, or through the transfer of a capital asset situate in India.

Business Connection

 Section 9, Explanation II: "business connection" shall include any business activity carried out
through a person who, acting on behalf of the non-resident,—

(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-
resident or habitually concludes contracts or habitually plays the principal role leading to
conclusion of contracts by that non-resident and the contracts are—

(i) in the name of the non-resident; or

(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by
that non-resident or that non-resident has the right to use; or

(iii) for the provision of services by the non-resident; or

(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from
which he regularly delivers goods or merchandise on behalf of the non-resident; or

(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident
and other non-residents controlling, controlled by, or subject to the same common control, as that
non-resident.

(Proviso: does not include any business activity carried out through a broker, general commission
agent or any other agent having an independent status)

 Section 9, Explanation 2A: the significant economic presence of a non-resident in India shall
constitute "business connection" in India and "significant economic presence" for this purpose, shall
mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident with any
person in India including provision of download of data or software in India, if the aggregate of
payments arising from such transaction or transactions during the previous year exceeds such amount
as may be prescribed40; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such
number of users in India, as may be prescribed40:

The Anglo-French Textile Co. Ltd. vs. CIT 1950

 To constitute a business connection some continuity of relationship between the person in India who
helps to make the profits and the person outside British India who receives or realizes the profits is
requisite.
 CIT Vs R. D. Aggarwal & Company 1964 

 Mere canvassing orders for a non-resident does not amount to business connection.

GVK Industries case (1997)

 Guiding principles for business connection:

1) the essence of "business connection" is the existence of close, real, intimate relationship and
commonness of interest between the NRC and the Indian person.

2) where there is control of management or finances or substantial holding of equity shares or

sharing of profits by the NRC of the Indian person, the requirement of principle (1) is
fulfilled.

3) to constitute "business connection" there must be continuity of activity or operation of the

NRC with the Indian party and a stray or isolated transaction is not enough to establish a
business connection.

H. Permanent Establishment

 Article 7 of India-UK DTAA: The profits of an enterprise of a Contracting State shall be taxable
only in that State unless the enterprise carries on business in the other Contracting State through a
permanent establishment situated therein.

 Permanent Establishment and Business Connection

 Resident of UK under the India-UK DTAA

 India seeks to tax the resident for income from ‘business connection’ in India

 Resident can only be taxed under Section 9 if it is more beneficial to it

 Otherwise, resident will be taxed as per provisions of UK-India DTAA

Commissioner of Income Tax, A.P.-I v. Visakhapatnam Port Trust (Test for PE)

 There are three types of Pes:

1) Associated PE: An establishment which is part of the same enterprise under common ownership
and control. For example, an office, branch, etc. The primary requirement is that there must be a
fixed place of business, i.e. a place which is at the disposal of the enterprise, through which the
business of an enterprise is wholly or partly carried on.

2) Unassociated PE: an agent, though legally separate from the enterprise, nevertheless who is
dependent on the enterprise to the point of forming a PE.

3) A construction or installation site may be regarded as PE under certain circumstances.

 Cal-dive Constructions, 315 ITR 334: Where a foreign company renders services through a fixed
place of business in India which is maintained only for few days (15 days) – whether PE exists?
Decided in the Negative.

Pintsch Bamag, 318 ITR 190: Whether the sub-contractor in India constituted permanent
establishment for the foreign company in India. Held that the sub-contractor was independent, and it
could not be concluded that the business of the applicant was being carried on through the sub-
contractor's workshop, therefore, it did not constitute a "permanent establishment”.

Formula One World Championship Ltd. Vs. CIT (2017)

 Twin conditions which need to be satisfied to conclude PE are:

(i) existence of a fixed place of business, i.e. a place which is at the disposal of the enterprise; and

(ii) through that place, business of an enterprise is wholly or partly carried out

 As long as the presence is in a physically defined geographical area, permanence in such fixed place
could be relative having regard to the nature of the business.

DIT (International Taxation), Mumbai v. Morgan Stanley and Co. Inc. 2007

 The Supreme Court held that the services performed by MSAS such as information technology
support, account reconciliation, research support, and so on, being in the nature of back-office
functions, could not be construed as the business of the multinational enterprise, thus it does not
constitute a PE under fixed place of business.

 Service PE Deputation

 Facts: MS & Co. proposed sending some personnel to India to undertake stewardship activities to
enforce quality control standards. Also, some personnel would be deputed to MSAS and would work
under the supervision and control of MSAS.

 The Supreme Court held that as the deputed employee remains an employee of MS & Co. and is
providing services to and for MSAS, a service PE is created.

 Employees sent for stewardship activities was not considered service PE because stewardship
activities cannot be said to be service to MSAS; quality control is more in the nature of a self-
preservation activity.

 Agency PE

 There is no agency PE, as MSAS in India had no authority to enter into or conclude contracts on
behalf of MS & Co.

I. Section 9(i)(vii) technical or consulting service

 Section 9 (1): The following incomes shall be deemed to accrue or arise in India :—

(vii) income by way of fees for technical services payable by—

(a) the Government ; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised
outside India; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised in India.

Explanation 2.— includes managerial, technical or consultancy services. Does not include
consideration for any construction, assembly, mining or like project undertaken by the recipient or
consideration which would be income of the recipient chargeable under the head "Salaries."

 Feature of FTS (Fee for Technical Services): Human Element: The phrase managerial or
consultancy is a definitive indication of involvement of human element; It is equally true of technical
services - the phrase ‘rendering of’ signifies through human skill or experience.

GVK Industries case (1997)

 The petitioner company (GVK Industries) hired the NRC to render professional service from
Zurich by correspondence as to how to execute the documents for sanction of loan. For its
services, the NRC was to be paid a success fee.

 Issue: Is the success fee chargeable to tax in India under Section 9(1)(vii) as technical service.

 Advice given to procure loan to strengthen finances would be as much a technical or consultancy
service as it would be with regard to management, generation of power or plant and machinery.
"Success fees" falls within the ambit of section 9(1)(vii) (b).

Ishikawajma case (2007)

 Services should be rendered in India and utilized in India for it to be taxed u/s 9(1)(vii).

 Aftermath of Ishikawajma Case

 Explanation to Section 9 was amended to say: for the purposes of this section, income of a
nonresident shall be deemed to accrue or arise in India under clause ( vii ) of subsection (1),
whether or not the non-resident has rendered services in India.

E-bay case (ITAT 2012) [not complete]

 Facts: E-bay was operating India specific websites which provided an online platform to facilitate
sale and purchase of goods.

 Issue: Whether the income of the assessee is ‘Fee for Technical Services’?
  Held: ITAT said the fee is certainly not ‘Fee for Technical Services’ within the meaning of
definition as contained under the IT Act, 1961 since assessee was not providing ‘managerial,
technical or consultancy services’ to the sellers.

J. Extra-territoriality of Section 9

Vodafone (2012)

 Facts: Vodafone (Netherland) acquired the entire share capital of CGP which had over 67 per cent of
the controlling interest in HEL (Indian Company) through which VIH came about getting command
over HEL. Revenue argued this was an indirect transfer of assets under Section 9(1)(i) therefore
taxable in India. Revenue argued that the word ‘through’ in Section 9 means in consequence of;
Thus, if transfer of any capital asset situated in India happens ‘in consequence of’ an overseas
transfer then all income from transfer of such capital asset becomes taxable in India under Section 9.

 Held: Section 9 is not a ‘look through’ provision because it contemplates 3 elements:

1) Existence of a capital asset

2) Transfer of the capital asset

3) The capital asset should be situated in India

 Direct Taxes Code Bill, 2010 proposes taxation of indirect transfer of a capital asset which indicates
that indirect transfers are not covered under the existing provision.

 SC also clarified that tax planning is allowed provided it is within the corners of the law and no
colorable devices are used by the taxpayer.

 The principle of lifting the corporate veil arises only in those cases wherein the controlling non-
resident company makes an indirect transfer through abuse of legal form and without business
purpose which may result in tax avoidance.

 Finance Act 2012

 Explanation to Sec 2(14) was amended w.e.f 1-4-1962 : it is hereby clarified that “property” includes
and shall be deemed to have always included any rights in or in relation to an Indian company,
including rights of management or control or any other rights whatsoever.

 Sec 9, Explanation 4 was amended w.e.f 1-4-1962: it is hereby clarified that the expression
“through” shall mean and include and shall be deemed to have always meant and included “by means
of”, “in consequence of” or “by reason of”

 Sec 9, Explanation 5 was amended w.e.f 1-6-1976: it is hereby clarified that an asset or a capital
asset being any share or interest in a company or entity registered or incorporated outside India shall
be deemed to be and shall always be deemed to have been situated in India, if the share or interest
derives, directly or indirectly, its value substantially value from the assets located in India.
 Retrospective Amendments

 It is settled law that the only retrospective amendments that can be made to a taxation statute are
those that are clarificatory in nature and any amendment that seeks to create a new substantive levy
can only be prospective.

 Further, it is well-settled that the clarificatory nature of an amendment is to be judged not on the
basis of whether it is inserted by way of explanation or proclaims itself to be for the removal of
doubts, but on the nature of liability it creates. On this basis, the amendments mentioned above
clearly disturb the settled position of law and create a fresh liability and are by no means merely a
clarification of the existing law and consequently, can have only prospective effect.