Unit-4

Special Provisions Relating To Non-Residents

4.1 Special provisions relating to non-residents

The chapter XII A of the income tax act deals with the provisions related to non-residents. Section 115 C of this chapter provides the following definitions required in this context-

(a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of [the Foreign Exchange Management Act, 1999 (42 of 1999)], and any rules made thereunder;

(b) "foreign exchange asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;

(c) "investment income" means any income derived [other than dividends referred to in section 115-O] from a foreign exchange asset;

(d) "long-term capital gains" means income chargeable under the head "Capital gains" relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset;

(e) "non-resident Indian" means an individual, being a citizen of India or a person of Indian origin who is not a "resident" .

Explanation.—A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India;

(f) "specified asset" means any of the following assets, namely :—

(i) shares in an Indian company;

(ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iii) deposits with an Indian company which is not a private com-pany as defined in the Companies Act, 1956 (1 of 1956);

(iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944);

(v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.

Special provision for computation of total income of non-residents (Section 115D)

(1) No deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the investment income of a non-resident Indian.

(2) Where in the case of an assessee, being a non-resident Indian,—

(a) the gross total income consists only of investment income or income by way of long-term capital gains or both, no deduction shall be allowed to the assessee [under Chapter VI-A and nothing contained in the provisions of the second proviso to section 48 shall apply to income chargeable under the head "Capital gains" ];

(b) the gross total income includes any income referred to in clause (a), the gross total income shall be reduced by the amount of such income and the deductions under Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.

Provisions regarding Tax on investment income and long-term capital gains (Section 115E)

Where the total income of an assessee, being a non-resident Indian, includes—

(a) any income from investment or income from long-term capital gains of an asset other than a specified asset;

(b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of—

(i) the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent;

(ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; and

(iii) the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b).

Capital gains on transfer of foreign exchange assets not to be charged in certain cases (Section 115 F)

(1) Where, in the case of an assessee being a non-resident Indian, any long-term capital gains arise from the transfer of a foreign exchange asset (the asset so transferred being hereafter in this section referred to as the original asset), and the assessee has, within a period of six months after the date of such transfer, invested the whole or any part of the net consideration in any specified asset, or in any savings certificates referred to in clause (4B) of section 10 (such specified asset, or such savings certificates being hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;

(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the new asset bears to the net consideration shall not be charged under section 45.

Explanation.—For the purposes of this sub-section,—

(i) "cost", in relation to any new asset, being a deposit referred to in sub-clause (iii), or specified under sub-clause (v), of clause (f) of section 115C, means the amount of such deposit;

(ii) "net consideration", in relation to the transfer of the original asset, means the full value of the consideration received or accruing as a result of the transfer of such asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

(2) Where the new asset is transferred or converted (otherwise than by transfer) into money, within a period of three years from the date of its acquisition, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head "Capital gains" relating to capital assets other than short-term capital assets of the previous year in which the new asset is transferred or converted (otherwise than by transfer) into money.

Return of income not to be filed in certain cases (Section 115 G)

It shall not be necessary for a non-resident Indian to furnish under sub-section (1) of section 139 a return of his income if—

(a) his total income in respect of which he is assessable under this Act during the previous year consisted only of investment income or income by way of long-term capital gains or both; and

(b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.

Benefit under Chapter to be available in certain cases even after the assessee becomes resident (Section 115H)

Where a person, who is a non-resident Indian in any previous year, becomes assessable as resident in India in respect of the total income of any subsequent year, he may furnish to the [Assessing] Officer a declaration in writing along with his return of income under section 139 for the assessment year for which he is so assessable, to the effect that the provisions of this Chapter shall continue to apply to him in relation to the investment income derived from any foreign exchange asset being an asset of the nature referred to in sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (v) of clause (f) of section 115C; and if he does so, the provisions of this Chapter shall continue to apply to him in relation to such income for that assessment year and for every subsequent assessment year until the transfer or conversion (otherwise than by transfer) into money of such assets.

Chapter not to apply if the assessee so chooses (Section 115-I)

A non-resident Indian may elect not to be governed by the provisions of this Chapter for any assessment year by furnishing [his return of income for that assessment year under section 139 declaring therein] that the provisions of this Chapter shall not apply to him for that assessment year and if he does so, the provisions of this Chapter shall not apply to him for that assessment year and his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act.

KEY TAKEAWAYS

• THE CHAPTER XII A OF THE INCOME TAX ACT DEALS WITH THE PROVISIONS RELATED TO NON-RESIDENTS.

4.2 Double taxation relief

Double taxation refers to the phenomenon of taxing the same income twice. Double taxation of the same income occurs when the same income related to an individual is treated as being accrued, arising or received in more than one country. The article studies double taxation relief according to Section 90 of the Income Tax Act. To mitigate the double taxation of income the provisions of double taxation relief have been created. The Government of India has signed Double Tax Avoidance Agreement, a bilateral treaty with over 150 countries to provide double taxation relief to Indian citizens and residents.

Section 90 of the Income Tax Act is associated with relief measures for assesses involved in paying taxes twice i.e. paying taxes in India as well as in Foreign Countries or territory outside India. Section 90 is intended for granting relief with reference to any of the following relevant situations that may occur:

• Income on which tax has been paid both under Income Tax Act, 1961 and Income Tax prevailing in that country or definite territory.
• Income tax chargeable under Income Tax Act, 1961 and according to the corresponding law in force in that country or specified territory to boost mutual economic relations, trade and investment.
• For the prevention of double taxation of income under Income Tax Act, 1961 and under the equivalent law in force in that country or specified territory.
• For exchange of information regarding the avoidance of evasion or avoidance of income-tax chargeable as per Income Tax Act, 1962 or under the equivalent law in force in that country or specified territory, or investigation of cases of evasion or avoidance.
• For recovery of income tax under the Income Tax legislation which is in force in India and under the equivalent law in force in that country of the specified territory.

The double tax relief as per Section 90 can be claimed only by the residents of the countries who have entered into the agreement. If a resident of other countries wants to claim relief related to the phenomenon of double taxation, then they have to obtain a Tax Residence Certificate (TRC) from the government of a particular country.

Types of double taxation relief

The double taxation relief is accessible in two ways-

• Unilateral relief and
• Bilateral relief

Figure1: Types of tax relief for double taxation

1. Unilateral relief: Section 91 of the Income Tax Act, 1961 provides for unilateral relief against double taxation. According to the provisions of this section, an individual can be relieved of being taxed twice by the government, irrespective of whether there is a DTAA between India and the foreign country in question or not. However, there are certain conditions that have to be satisfied in order for an individual to be eligible for unilateral relief. These conditions are:
   • The individual or corporation should have been a resident of India in the previous year.
   • The income should have been accrued to the taxpayer and received by them outside India in the previous year.
   • The income should have been taxed both in India and in the country with which there is no DTAA.
   • The individual or corporation should have paid tax in that foreign country.
2. Bilateral relief: Bilateral relief is covered under section 90 of the Income Tax Act, 1961. It offers protection from double taxation through a DTAA. This type of relief is offered in two different ways.
   • Exemption method: The exemption method offers full and complete protection from being taxed twice. That is, if an income earned outside India has been taxed in the relevant foreign country, it is not subject to tax in India.
   • Tax Credit method: According to this method, the individual or the corporation can claim a tax credit (deduction) for the taxes paid outside India. This tax credit can be utilized to set-off the tax payable in India, thereby reducing the assessees’ overall tax liability.

4.3 Provisions regulating transfer pricing

Transfer pricing law in India applies to both domestic and international transactions which fall above a threshold in terms of deal value. Transfer Pricing was introduced through inserting Section(s) 92A-F and relevant Rule(s) 10A-E of the Income Tax Rules 1962. It ensures that the transaction between ‘related’ parties is at a price that would be comparable if the transaction was occurring between unrelated parties. The following sections of the Income Tax Act, 1961 apply to international transactions in terms of transfer pricing.

Computation of income from international transactions having regard to arm’s length price (Section 92)

This section states that any international or specified domestic transaction between associated enterprises which has been mutually agreed and undertaken for the purpose of allocation or apportionment of any cost or expense incurred or to be incurred for a benefit, service or facility undertaken or to be undertaken by one or more of the enterprises, then the cost or expense allocated, must be contributed having regard to the arm’s length price of such benefit, service or facility.

Meaning of international transaction (Section 92B)

This section defines international transaction(s) for the purpose of this Section and the Section(s) 92, 92C, 92D and 92E as a transaction between two or more associated enterprises, wherein either one or both the enterprises are non-residents. The nature of transactions between the enterprises shall be recorded through a mutual agreement or arrangement. It can be a purchase, sale or lease of tangible or intangible assets, provision of services, borrowing or lending of money or any other transaction which has some effect on the profit or income or loss or assets of the enterprises and the enterprises have mutually agreed to apportion cost or expense incurred in the process of such transactions.

Meaning of Associated Enterprises (section 92A)

For the purpose of Sections 92, 2B, 92C, 92D, 92E, and 92F the term associated enterprises in relation to another enterprise shall mean, an enterprise-

• Which participates either directly or indirectly or through one or more intermediaries in the control or management or capital of the other enterprise.
• In respect of one or more persons that participate either directly or indirectly or through one or more intermediaries in the control or management or capital are the same persons that participate either directly or indirectly or through one or more intermediaries in the control or management or capital of the other enterprise.

For the purpose of sub-section (1), two enterprises will be deemed to be associated enterprises if any time during the previous year at any time-

• One enterprise holds directly or indirectly, shareholding carrying not less than 26% of the voting power in another enterprise.
• Any individual or an enterprise holds directly or indirectly not less than 26% of the voting power in each of such enterprises.
• Any loan advanced from one enterprise to the other company constitutes not less than 51% of the book value of the total assets of the other enterprise.
• The guarantee of one enterprise is not less than 10% of the overall borrowings of the other enterprise.
• More than half of the board of directors or the governing board, or the executive members or directors are appointed by the other enterprise.
• One enterprise has a dependency in terms of know-how, patents, trademarks, rights or any other business or commercial rights or any data, documentation, drawing or specification relating to any such patent, invention, model or design for manufacturing or processing of goods, and the other enterprise holds the rights to such patents.
• 90% or more of the raw materials or consumables are supplied by the other enterprise or by persons specified by the other enterprise, and the prices and other conditions relating to supply are influenced by such other enterprises.
• The goods or articles required by one enterprise are supplied by another enterprise, and the prices and other several conditions relating to supply are influenced by such other enterprises.
• Where one enterprise is controlled by an individual and the other enterprise is also in control of the same individual or his relative jointly.
• Where one enterprise is controlled by an undivided Hindu family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative.
• Where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than 10% interest in such a firm, an association of persons or body of individuals.
• There exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

Audit under Transfer Pricing (Section 92E)

A report from an accountant has to be furnished by persons who are entering into an international transaction or a specified domestic transaction. A report from an accountant in a prescribed form, duly signed and verified by the accountant must be obtained before the specified date by any person entering into an international transaction or specified domestic transaction in the previous year. The audit is applicable to both international and specified domestic transactions. Form 3CEB must be filed.

KEY TAKEAWAYS

• DOUBLE TAXATION REFERS TO THE PHENOMENON OF TAXING THE SAME INCOME TWICE. TO MITIGATE THE DOUBLE TAXATION OF INCOME THE PROVISIONS OF DOUBLE TAXATION RELIEF HAVE BEEN CREATED.

4.4 Advance rulings

Advance Ruling means written opinion or authoritative decision by an Authority empowered to render it with regard to the tax consequences of a transaction or proposed transaction or an assessment in regard thereto. It has been defined in section 245 N (a) of the Income-tax Act, 1961 as amended from time-to-time.

Applicant —

Under section 245N an advance ruling can be obtained by the following persons:-

1. a non-resident
2. a resident-undertaking proposing to undertake a transaction with a non-resident can obtain advance ruling in respect of any question of law or fact in relation to the tax liability of the non-resident arising out of such transaction
3. a resident who has undertaken or propose to undertake one or more transactions of value of Rs.100 crore or more in total [vide Notification No. 73, dated 28-11-2014]
4. a notified public sector company
5. Any person, being a resident or non-resident, can obtain an advance ruling to decide whether an arrangement proposed to be undertaken by him is an impermissible avoidance arrangements and may be subjected to General Anti Avoidance Rules or not
6. An applicant as defined in section 28E(c) of the Customs Act, 1962
7. An applicant as defined in section 23A(c) of the Central Excise Act, 1944
8. An applicant as defined in section 96A(b) of the Finance Act, 1994

Salient features: —

• a. Relates to a transaction entered into or proposed to be entered into by the applicant: -
• The advance ruling is to be given on questions specified in relation to such a transaction by the applicant.
• b. Questions on which ruling can be sought:—
  1. Even though the word used in the definition is "question", it is clear that the non-resident can raise more than one question in one application. This has been made amply clear by Column No. 8 of the form of application for obtaining an advance ruling (Form No. 34C)
  2. Though the word "question" is unqualified, it is only proper to read it as a reference to questions of law or fact, pertaining to the income tax liability of the non-resident qua the transaction undertaken or proposed to be undertaken.
  3. The question may be on points of law as well as on facts; therefore, mixed questions of law and fact can also be included in the application. The questions should be so drafted that each question can be replied in brief answer. This may need breaking-up of complex questions into two or more simple questions.
  4. The questions should arise out of the statement of facts given with the application. No ruling will be given on a purely hypothetical question. A question not specified in the application cannot be urged. Normally a question is not allowed to be amended but in deserving cases the Authority may allow amendment to one or more questions.
  5. Subject to the limitations, the question may relate to any aspect of the non-resident's liability including international aspects and aspects governed by double tax agreements. The questions may even cover aspects of allied laws that may have a bearing on tax liability such as the law of contracts, the law of trusts and the like, but the question must have a direct bearing on and nexus with the interpretation of the Indian Income-tax Act.
  6. Advance Rulings can be obtained to determine whether an arrangement, which is proposed to be undertaken by any person being a resident or a non-resident, is an impermissible avoidance arrangement as referred to in Chapter X-A or not (General Anti Avoidance Rules).
• c. Time-limit for advance ruling:—
• The Authority shall pronounce it advance ruling within 6 months of receipt of the application.
• d. Binding nature of advance ruling:—

The effect of the ruling is stated to be limited to the parties appearing before the authority and the transaction in relation to which the ruling is given. This is because the ruling is rendered on a set of facts before the Authority and cannot be for general application.

Under section 245R, certain restrictions have been imposed on the admissibility of an application, if the question concerned is pending before other authorities. According to it, the Authority shall not allow an application where the question raised by the non-resident applicant (or a resident applicant having transaction with a non-resident) is already pending before any income-tax authority or appellate Tribunal or any Court of law. Further, the authority shall not allow the application where the question raised in it:—

1. Involves determination of fair market value of any property; or
2. It relates to a transaction or issue which is designed, prima facie for the avoidance of income-tax.

Procedure of application for advance ruling: An applicant desirous of obtaining an advance ruling should apply to the Authority in the prescribed form stating the question on which the ruling is sought. The application has to be made in quadruplicate in Form Numbers:—

34C - applicable to a non-resident applicant

34D - applicable to a resident having transactions with a non-resident

34DA - applicable to a resident seeking advance ruling in relation to his tax liability arising out of one or more transactions valuing Rs.100 crore or more in total which has been undertaken or proposed to be undertaken by him

34E - Applicable to Public Sector Company as notified by government via Notification No.11456, dated 3/8/2000

34EA - for determining whether an arrangement is an impermissible avoidance arrangement as referred to in Chapter X-A or not.

Fees for filing the application

The fees payable along with application for advance ruling shall be in accordance with the following table:

Table1: Fee structure of different category of applicant of advance ruling

The application is to be accompanied by an account-payee demand draft for 10,000 Indian rupees drawn in favour of the Authority for Advance Ruling and made payable at New Delhi. The application may be withdrawn within 30 days from the date of the application.

KEY TAKEAWAYS

• ADVANCE RULING MEANS WRITTEN OPINION OR AUTHORITATIVE DECISION BY AN AUTHORITY EMPOWERED TO RENDER IT WITH REGARD TO THE TAX CONSEQUENCES OF A TRANSACTION OR PROPOSED TRANSACTION OR AN ASSESSMENT IN REGARD THERETO.

4.5 Advance pricing agreement (Section 92CC)

An Advance pricing agreement is an agreement between a tax payer and tax authority determining the transfer pricing methodology for pricing the tax payer's international transactions for future years. As per OECD transfer pricing guidelines, APA (or arrangements) is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period. In other words, an APA is an agreement between board and taxpayer/ any person for determining ALP for specifying the manner of determining ALP in relation to international transaction. Section 92CC of income tax act, 1961 enables the board to enter into APA with any person for determining ALP or manner of determining ALP in relation to international transaction.

The provisions related to advance pricing agreement under section 92CC of the Income Tax act, 1961 are highlighted below-

(1) The Board, with the approval of the Central Government, may enter into an advance pricing agreement with any person, determining the arm’s length price or specifying the manner in which arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.

(2) The manner of determination of arm’s length price referred to in sub-section (1), may include the methods referred to in sub-section (1) of section 92C or any other method, with such adjustments or variations, as may be necessary or expedient so to do.

(3) Notwithstanding anything contained in section 92C or section 92CA, the arm’s length price of any international transaction, in respect of which the advance pricing agreement has been entered into, shall be determined in accordance with the advance pricing agreement so entered.

(4) The agreement referred to in sub-section (1) shall be valid for such period not exceeding five consecutive previous years as may be specified in the agreement.

(5) The advance pricing agreement entered into shall be binding—

(a) on the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and

(b) on the [Principal Commissioner or] Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction.

(6) The agreement referred to in sub-section (1) shall not be binding if there is a change in law or facts having bearing on the agreement so entered.

(7) The Board may, with the approval of the Central Government, by an order, declare an agreement to be void ab initio, if it finds that the agreement has been obtained by the person by fraud or misrepresentation of facts.

(8) Upon declaring the agreement void ab initio,—

(a) all the provisions of the Act shall apply to the person as if such agreement had never been entered into; and

(b) notwithstanding anything contained in the Act, for the purpose of computing any period of limitation under this Act, the period beginning with the date of such agreement and ending on the date of order under sub-section (7) shall be excluded:

Provided that where immediately after the exclusion of the aforesaid period, the period of limitation, referred to in any provision of this Act, is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.

(9) The Board may, for the purposes of this section, prescribe15 a scheme specifying therein the manner, form, procedure and any other matter generally in respect of the advance pricing agreement.

[(9A) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the arm’s length price or specify the manner in which arm’s length price shall be determined in relation to the international transaction entered into by the person during any period not exceeding four previous years preceding the first of the previous years referred to in sub-section (4), and the arm’s length price of such international transaction shall be determined in accordance with the said agreement.]

(10) Where an application is made by a person for entering into an agreement referred to in sub-section (1), the proceeding shall be deemed to be pending in the case of the person for the purposes of the Act.

KEY TAKEAWAYS

• AN ADVANCE PRICING AGREEMENT IS AN AGREEMENT BETWEEN A TAX PAYER AND TAX AUTHORITY DETERMINING THE TRANSFER PRICING METHODOLOGY FOR PRICING THE TAX PAYER'S INTERNATIONAL TRANSACTIONS FOR FUTURE YEARS.

References

1. Singhania, Vinod K. And Monica Singhania. Corporate Tax Planning.Taxmann Publications Pvt. Ltd., New Delhi.
2. Ahuja, Girish. And Ravi Gupta. Corporate Tax Planning and Management. Bharat Law House, Delhi.
3. Acharya, Shuklendra and M.G. Gurha. Tax Planning under Direct Taxes. Modern Law Publication, Allahabad.
4. Mittal, D.P. Law of Transfer Pricing. Taxmann Publications Pvt. Ltd., New Delhi.