TAXATION OF NON-RESIDENTS

1. By Sushil Lakhani ( For Ahmadabad Sub Chapter Of International Fiscal Association On 16th February, 2008) TAXATION OF NON-RESIDENTS

2. 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 16th February, 2008

3. 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 employmentoutside India physical presence ≥ 182 days irrespective of presence in preceding four years. TAXATION OF NON-RESIDENTS 16th February, 2008

4. Definition of Non-Residents (contd…) “Resident” as per I.T. Act: ( 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 16th February, 2008

5. 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 16th February, 2008

6. Taxability of non-residents under the Income Tax Act,1961 .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-RESIDENTS 16th February, 2008

7. Taxability of non-residents under the Income Tax Act,1961(contd…) .“ Deemed to accrue or arise in India” – meaning of: TAXATION OF NON-RESIDENTS 16th February, 2008

8. 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-RESIDENTS 16th February, 2008

9. Taxability of non-residents under the Income Tax Act,1961 (contd…) • Relevant Income tax Rules • 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 • Chapter XII A – For NRIs • Transfer Pricing – Sec. 92 to Sec 92F TAXATION OF NON-RESIDENTS 16th February, 2008

10. 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 sourcein 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 inAct (Set Satellite-106 ITD 175);Galileo(ITAT -Delhi); Rolls Royce (ITAT -Delhi) ) * Agent need not bein India but must act in India. (Also refer Specialty Magazine (274 ITR 310(AAR))—Difference between “mailnly & “almost wholly””) TAXATION OF NON-RESIDENTS 16th February, 2008

11. 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-RESIDENTS 16th February, 2008

12. DTAA s & How to use them for reducing taxes • Treaty Override • 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 TAXATION OF NON-RESIDENTS 16th February, 2008

13. DTAA s & How to use them for reducing taxes (contd…) • 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 16th February, 2008

14. 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 16th February, 2008

15. An Overview of TDS u/s 195 & Certification by CA (contd…) • Difference between Section 195(2) & Section 197 • Appeal against order u/s. 195(2) (Section 248) • within 30 days of payment of tax. { Revision possible u/s263 against order u/s 195(2) (BCCI vs. DIT (96 ITD 263)) } • Refund to deductor of tax deducted ? (Circular 790) TAXATION OF NON-RESIDENTS 16th February, 2008

16. An Overview of TDS u/s 195 & Certification by CA (contd…) • Certification by CA for remittances • “Beneficiary” – Meaning • Tax Residency Certificate (AzadiBachao (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? TAXATION OF NON-RESIDENTS 16th February, 2008

17. tAXABILITY OF reIMBURSEMENT OF EXPENSES Reimbursement of Expenses • Types • 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 16th February, 2008

18. tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD…) Reimbursement of Expenses: (contd…) • 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)) TAXATION OF NON-RESIDENTS 16th February, 2008

19. tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD…) Reimbursement of Expenses: • 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) TAXATION OF NON-RESIDENTS 16th February, 2008

20. tAXABILITY OF reIMBURSEMENT OF EXPENSES (CONTD…) Reimbursement of Expenses: Reimbursement salaries & living allowances to deputies: Held salaries of technicians: • HCL Infosystems (274 ITR 261 – Delhi) • CIT Vs. BHEL (252 ITR 218 – Delhi);(222 ITR 551 Tekniskil (Sendirian) Berhard)(AAR) 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)) TAXATION OF NON-RESIDENTS 16th February, 2008

21. TAXATION OF NON-RESIDENTS 16th February, 2008