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Advanced Tax- Law and Practice

International Taxation
Taxation of Non Residents
 Scope of Taxation
RESI. STATUS

Resident NOR NR

Global Income taxable

•Income accrued/ received in India
•Income deemed to accrue in India
•Income arising abroad from
business controlled in India

•Income accrued / received in India

•Income deemed to accrue in India
 Income deemed to accrue or arise in India
• According to section 9 of the Act, the following incomes are deemed to
accrue or arise in India:
• (a) Income by virtue of business connection : any income which arises,
directly or indirectly from any activity or a business connection in India is
deemed to accrue or arise in India.
• (b) Income arising from any asset or property in India : Income arising in a
foreign country from any property situated in India would be deemed to
accrue or arise in India.
• (c) Income from transfer of any capital asset situated in India : Capital
gains arising to an assessee regardless of his residential status from the
transfer of a capital asset situated in India would be deemed to accrue or
arise in India.
• (d) Income from services rendered in India including for the rest period or
leave period preceded and succeeded by services rendered in India is
deemed to accrue or arise in India.
 Income deemed to accrue or arise in India
• (e) Salary payable by the Government to an Indian
citizen/national for services rendered outside India.
• (f) Interest payable by the
– Government or
– A person who is resident in India except where interest is
payable in respect of money borrowed and used for the
purpose of business or profession carried on outside India
or earning any income from any source outside India or:
– A person who is a non-resident in India provided interest is
payable in respect of money borrowed and used for a
business or profession carried on in India shall be deemed
to accrue or arise in India.
 Income deemed to accrue or arise in India
• (g) Royalty payable by the
— Government or
– A Resident in India except where it is payable in respect of any
right/Information/property used for the purpose of a business or profession carried on
outside India or earning any income from any source outside India or
– A Non-Resident in India provided royalty is payable in respect of any right/
information/property used for the purpose of the business or profession carried on in
India or earning any income from any source in India shall be deemed to accrue or arise
in India.
• (h) Taxability of Fees for Technical Services payable by
– Government; or
– A Resident in India except where services are utilized for the purpose of a business or
profession carried on outside India or earning any income from any source outside India;
or
– A Non-Resident in India provided fee is payable in respect of services for the purpose of
a business or profession carried on in India or earning any income from any source in
India shall be deemed to accrue or arise in India.
 What is Business Connection
• “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 nonresident, unless his activities are limited to the purchase of goods
or merchandise for the nonresident; 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 nonresident:
• However, such business connection shall not include any business activity carried
out through a broker, general commission agent or any other agent having an
independent status, if such broker, general commission agent or any other agent
having an independent status is acting in the ordinary course of his business.
• Further, an agent working mainly 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.
Exceptions to business connection
– (1) In case all the operations of a business are not carried out in India then only
reasonable proportion of the income attributable to operations in India is deemed to
accrue or arise in India;
• the same may be computed by apportionment:
• at such percentage of Indian turnover as determined by the Assessing Officer;
• Taxable profits = Total profits × Receipts accruing/arising in India/Total receipts of
business; Or
• in any other manner as considered suitable by Assessing Officer
– (2) Income of a non-resident from operations consisting only of purchase of goods in
India for exports;
– (3) Income of a non-resident engaged in business of running a news agency or activities
confined to collection of news and views in India for transmission outside India;
– (4) Income of a non-resident from operations confined to shooting of cinematographic
film in India in following cases:
• (a) In case of an Individual: He / She should be Non Resident and Noncitizen of
India.
• (b) In case of Firm or Association: All the partners / members should be Non
resident and non citizen of India;
• (c) In case of company: All the members should be Non resident and noncitizen of
India.
Income deemed to be received in India
– Annual accretion (i.e., interest in excess of
specified percentage) to the credit balance of an
employee in the case of recognised provident
fund.
– Excess contribution of employer (i.e., in excess of
12 per cent of salary) in the case of recognised
provident fund.
– Transfer balance (from unrecognised PF to
recognised PF)
– Tax deducted at source
 Review Question
• For the assessment year 2016-17, Hari is a non-resident in India. From the
information given below, find out his income chargeable to tax for the assessment
year 2015-16 :
– (i) Royalty received by him outside India from the Government of India: Rs.
17,000.
– (ii) Technical fees received from an Indian company in Germany for advice
given by him in respect of a project situated in Iran : Rs. 1,17,000.
– (iii) Income from a business situated in Sri Lanka (goods are sold in Sri Lanka,
sale consideration is received in Sri Lanka but business is partly controlled in Sri
Lanka and partly in India) : Rs. 2,17,000.
– (iv) Income received in Nepal from a business connection in India : Rs.
3,17,000.
– (v) Gift in foreign currency from a friend received in India on 20th January,
2015 : Rs.80,000.
– (vi) Past untaxed profit of 2000-01 brought in India on 10th April, 2014 :
Rs.27,000.
Income of Hari a non-resident shall be chargeable to tax for the
Assessment Year 2016-17in the following manner:
 Special provisions for taxation of
Investment income
• Interest income received by a non-resident from Government or from any
other person in India is taxable in India.

Following types of interest incomes are exempted:

1. Interest on NRE/FCNR account paid or credited

to individual non-residents Indians who are permitted by Reserve Bank to
maintain such accounts. Sec. 10(4)(ii) (including persons who may be
“resident” in India as per Income tax law, but are resident outside India
under section 2(q) of FEMA.)

2. Interest on notified saving certificates (like NSC VI & VII) subscribed in

foreign exchange before 1-6-2002, by a NR who is an Indian citizen or a
person of Indian origin. Sec. 10(4B)
 Special provisions for taxation of
Investment income
3. Interest, premium on redemption or any other payment on NRNR deposit
and other securities, bonds, savings certificates, notified under section
10(15)(i). NRNR deposit interest is exempt in the hands of non-resident
while he remains non-resident as per Income-tax Act.

4. Interest on “NRI Bonds 1988” and “NRI Bonds (Second series)” issued by
SBI purchased in foreign exchange, exemption continues even after
person becomes resident. (S. 10(15)(iid). However, no exemption will be
available in the year of premature encashment.
 Special provisions for taxation of
Investment income
5. Any income by way of dividends referred to in S. 115O received by a non-resident
is exempt u/s 10(34). Any income received in respect of units of a Mutual Fund
specified u/s 10(23D), or the specified company or an Administrator of the
specified undertaking as defined in Sec. 10(35) is exempt u/s 10(35).

6. Any income arising from the transfer of a long-term capital asset, being an eligible
equity share in a company purchased on or after 1st day of March, 2003 and
before 1st March, 2004 and held for a period of twelve months or more is exempt
u/s 10(36). Eligible equity share means: –
i. Any equity share in a company which is a constituent of BSE 500 Index of the Stock
Exchange, Mumbai as on the 1st day of March, 2003 and the transaction of purchase and
sale of such equity share are entered into on a recognised stock exchange in India;
ii. Any equity share in a company allotted through a public issue on or after the 1st day of
March, 2003 and listed in a recognised stock exchange in India before 1st March, 2004.
 Special provisions for taxation of
Investment income
7. Any interest received by a non resident or a person
who is NOR, in India on a deposit made after 1st
April, 2005 in an Offshore Banking Unit as is referred
to in section 2(u) of the Special Economic Zones Act,
2005.
 Taxation of Capital Gains from sale of listed
securities is treated differently (like residents).
LTCG – exempt u/s 10(38)
STCG – taxed @ 15%
 Tax Rates-Special rates under Act
115A – Interest from Govt. / Indian
concern for money borrowed in FX
– Tax Rate- @ 20% ++115A –
– @5% in case referred to in
section 194 LC and 194LD (w.e.f
A.Y 2014-15)
• Deductions under sections
28 to 44C and 57 are not
available
• Deductions under sections
80C to 80U not available
• It is not necessary to file the
return of income, if this is
the only source of income
and T.D.S has been deducted
on such income.
115AC – Interest on bonds of Indian
companies / PSU as per Govt
Notification, and LTCG on sale of
such bonds / ADRs/ GDRs
– Tax Rate - @ 10% ++
• Deductions under sections
28 to 44C and 57 are not
available
• Deductions under sections
80C to 80U not available
• It is not necessary to file the
return of income, if this is
the only source of income
and T.D.S has been deducted
on such income
 Tax Rates-Special rates under Act
115AB – Overseas financial
organisations on LTCG on sale /
redemption of MF / UTI
– Tax Rate@ 10% ++
• Deductions under
sections 28 to 44C and 57
are not available
• Deductions under
sections 80C to 80U not
available
• Return of Income has to
be filed.
115AD – Approved FII
• Interest on securities –
20%
• Interest referred to in
section 194LD- 5%
• STCG - @ 30% (15% if STT
is applicable) ; LTCG - @
10%
– Deductions under
sections 28 to 44C
and 57 are not
available
– Deductions under
sections 80C to 80U
not available
– Return of Income has
to be filed.
 Tax Rates-Special rates under Act
– 115BBA - NR Sportsmen / sports associations – on
specified income - @ 20% ++
• Deductions under sections 28 to 44C and 57
are not available
• Deductions under sections 80C to 80U not
available
• It is not
• Special rates under DTAA – if taxable under DTAA.
• Surcharge to be added (check for DTAA rates)
Presumptive Taxation in case of Non-
Residents
Business Rate at which income is
presumed

Shipping [Section 44B] (a) 7.5% of gross receipts

Exploration of mineral oil . [Sec. 44BB] (a)(b) 10% of gross receipts
Operations of Aircraft . [Sec. 44BBA] (a) 5% of gross receipts
Turnkey power projects . [Sec. 44BBB] (a)(b) 10% of gross receipts
(a) All deductions/expenses (including depreciation) shall be deemed to have
been allowed
(b) The taxpayer can claim lower profits, if he keeps and maintains specified
books of accounts and obtains a tax audit report
 TAXATION OF ROYALTIES & FEES FOR TECHNICAL
SERVICES RECEIVED BY NON-RESIDENTS
A. Royalties and Fees for technical services received by non-residents from
an Indian concern or the Government are taxed as under:
*(i)Agreements entered into after 31st March, 1976 and before 1st April,
2003 – [Section 115A(1)(b)]
(a)Gross amount of income by way of royalties or FTS – 25%++
(b) No deduction under section 28 to 44C
(c) Deduction under section 80C to 80U is available.
(B) Covered by section 44DA ( having “Permanent Establishment” in India
and agreement is made after 31st March, 2003)
(a) Income by way of royalties taxable at the applicable rates
(b) Deduction under section 28 to 44C is available
(c) Deduction under section 80C to 80U is available.
(C) Agreements is made after 31st March, 2003 but no PE
(a)Gross amount of income by way of royalties or FTS – 25%++
(b) No deduction under section 28 to 44C
(c) Deduction under section 80C to 80U is available.
 TAXATION OF ROYALTIES & FEES FOR TECHNICAL
SERVICES RECEIVED BY NON-RESIDENTS
*(iii) Agreements entered into after 31st March, 2003 –
[Sections 44DA & 115A(1)(b)]
For all non-residents; i.e., Foreign companies and other persons:
(A) If the non-resident does not have a Permanent Establishment
in India –
(a) If the agreement is approved by the Central Government
or is under Industrial Policy, Tax = 25% on Gross income.
(b) If the agreement is not approved as mentioned in clause
(a), Tax is at applicable rate on Net income.
(B) If the non-resident has a PE, Tax is at applicable rates on Net
income.
 Review Question
• State, with reasons in brief, whether the following
statements are correct or incorrect:
• A non-resident is not liable to pay income-tax on
the income earned and received outside India.
• As per section 115A of the Income-tax Act, 1961
where the total income of a foreign company
includes any dividend, income-tax payable on
such dividend will be at the rate of 30%.
 C. Sec. 115 F: Exemptions of long-term
capital gains
Capital gains arising on transfer of a specified assets, is exempt
from levy of any tax on fulfilment of the following conditions:
(i). The asset transferred must be a long-term capital asset.
(ii) Net consideration must be invested in certain specified assets.
(Refer– Section 115C)
(iii) Investment to be made within 6 months of transfer.
(iv) If only a portion of the net consideration is reinvested,
then proportionate exemption is allowed.
(v) New asset must be held for at least three years.
D. Sec. 115 G: Option not to file income-
tax return
• NRI need not file an income-tax return , if –
(i) His total income consists only of investment
income or income by way of long-term capital
gains or both and
(ii) TDS has been deducted from such income.
E. Sec. 115 H : Continuation of benefits after
NRI becomes resident

Chapter XIIA shall continue to apply to

investment income even after NRI becomes a
resident, if he furnishes a declaration along
with Return of Income to that effect. This
benefit does not apply to dividend income
from shares. However, as dividends are now
exempt from tax in shareholders’ hands, it
does not make any difference.