By Sushil Lakhani ( For Ahmadabad Sub Chapter Of International Fiscal Association On 16 th 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…) 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 “Resident” as per I.T. Act: ( contd … )

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:-. 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-RESIDENTS6

Taxability of non-residents under the Income Tax Act,1961 (contd…)..“ Deemed to accrue or arise in India” – meaning of: TAXATION OF NON-RESIDENTS7 SectionSources Of Income Description9(1)(i) Business Income Income from a business connection in India or through or from any property 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).

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 TAXATION OF NON-RESIDENTS8 Sec 44BSec 44BBSec 44BBASec 44BBB This section applies to- non-resident engaged operation ships. non-resident engaged in providing service/ facilities or supplying plant/ machinery for extraction or production of mineral oils (including petroleum and natural gas) non-resident engaged in operation of aircraft. foreign company engaged in civil construction or erection, testing or commissioning of plant or machinery in connection with an approved turnkey power project Deemed Income 7½ % of gross receipts 10% of gross receipts5 % of gross receipts 10 % of gross receipts

Taxability of non-residents under the Income Tax Act,1961 (contd…) TAXATION OF NON-RESIDENTS9 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  Relevant Income tax Rules  Chapter XII A – For NRIs  Transfer Pricing – Sec. 92 to Sec 92F

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-RESIDENTS10

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-RESIDENTS11

DTAA s & How to use them for reducing taxes Treaty Override TAXATION OF NON-RESIDENTS12 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

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 DTAA s & How to use them for reducing taxes (contd…)

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

TAXATION OF NON-RESIDENTS 15 Difference between Section 195(2) & Section 197 Appeal against order u/s. 195(2) (Section 248) within 30 days of payment of tax. Refund to deductor of tax deducted ? (Circular 790) { Revision possible u/s263 against order u/s 195(2) (BCCI vs. DIT (96 ITD 263)) } An Overview of TDS u/s 195 & Certification by CA (contd…)

TAXATION OF NON-RESIDENTS 16 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? An Overview of TDS u/s 195 & Certification by CA (contd…)

tAXABILITY OF reIMBURSEMENT OF EXPENSES Reimbursement of Expenses  Types TAXATION OF NON-RESIDENTS 17 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 18 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)) Reimbursement of Expenses: (contd…) tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD…)

TAXATION OF NON-RESIDENTS 19 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) Reimbursement of Expenses: tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD…)

TAXATION OF NON-RESIDENTS 20 Reimbursement salaries & living allowances to deputies: HCL Infosystems (274 ITR 261 – Delhi) CIT Vs. BHEL (252 ITR 218 – Delhi);(222 ITR 551 Tekniskil (Sendirian) Berhard)(AAR) Held salaries of technicians: 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)) Reimbursement of Expenses: tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD…)

TAXATION OF NON-RESIDENTS 21