TAXATION OF NON RESIDENTS

Date: 26 May, 2015

Taxation of any Person, in any Country, is dependant on his Residential Status. Under the Indian Income Tax Laws Global Income of a Resident Person is Taxable in India. However in respect of a Non Resident only that Income which is received or deemed to have been received in India by or on his behalf and income that accrues or arises or is deemed to accrue or arising in India is Taxable in India.

Taxability of NRI

Income which has been received or accruing or arising in India from any source of Income during the Previous Year is Taxable in India in the hands of a Non Resident. i.e. an income received in India and / or deposited in an Account in India in respect of any source in India is Taxable in India. E.g. Rent of any Property situated in India, Income from any Investment in India etc. Also any Income accruing or arising in respect of any source in India, whether received in India or not, is Taxable in India.

The Income Tax Act,1961 also envisages certain deeming provisions under Section 9. As per the deeming provisions following Incomes will be deemed to accrue or arise in India, even though they may actually accrue or arise out of India :-

1. Income from Business Connection in India.
2. Income from any Property, Asset or Source of Income in India.
3. Capital Gains from transfer of any Capital Asset situated in India.
4. Income from Salary earned in India – i.e. if Service is rendered in India. Where a rest period which is preceded or succeeded by services rendered in India forms part of the service contract of employment, the same shall be considered to be income earned in India.
5. Income from salary ( other than perquisite &/or allowance ) paid by Government of India to an Indian Citizen of India even though the service is rendered out of India.
6. Dividend paid by Indian Company outside India.
7. Income by way of Interest in some situations.
8. Income by way of Royalty in some situations.
9. Income by way of Fees for Technical Services in some situations.

In order to understand the Taxability of a non resident, more focus therefore has to be on the deeming provisions. One has to test whether he falls under any of the deeming provisions in order to understand the taxability being a non resident. Some of the above provisions need to be seen in detail for the purpose.

Income From Business Connection In India

Income arising outside India, by virtue of a ‘business connection’ in India, is deemed to have been accrued or arisen in India.

Business Connection includes Profession Connection as well. Any connection which facilitates carrying on any business activity in India is, on a broader term, considered to be a business connection. It includes a person

a)Who has an authority to conclude contracts on behalf of the non resident.
b)Who does not have such authority but habitually maintains stock of goods or merchandise in India from which he regularly delivers the goods or merchandise on behalf of the non resident. c) Who habitually secures orders ( wholly or mainly ) for the non resident or for non residents under same management. Here the words wholly or mainly are very important. This signifies that major proportion of the total activity carried out by the person should be for the non resident.

However if the non resident person carries on his business through a Broker or General Commission Agent or any other Agent of an Independent status, acting in ordinary course of his business shall not be considered to be a business connection.

Following operations are not considered to be a Business Connection:-

1. Purchase of Goods in India for the purpose of export i.e to be sent to a non resident.
2. Collection of news & views in India for transmission out of India by a non resident engaged in the business of running a news agency or publishing news papers, magazines or journals.
3. Shooting of any cinematograph film in India by a non resident individual who is not a citizen of India, or a firm which does not have any partner who is a citizen of India or a resident in India, or a company which does not have any shareholder who is a citizen of India or is a resident in India.

In case of a business where all operations are not carried out in India, the income deemed to have been accrued or arisen in India shall be only such part of the income as reasonably attributable to the operations carried out in India. The apportionment of Profits should however be on some rational basis. It should not be done on arbitrary basis.

The concept more or less matches with or is in line with the concept of PERMANENT ESTABLISHMENT as per Article 5 of the DTAA. Only when a enterprise has a PE in India, its Profits will be Taxable in India as regards its business Income. A non resident therefore has to verify whether he has a business connection in India and has a PE in India for his business income to become taxable in India.

Dividend Paid By Indian Company Outside India

Though the provision is there in the Act, it does not have any practical utility as dividend paid or distributed by a Domestic company is not chargeable in the hands of shareholders.

Income By Way Of Interest In Some Situations

Income in respect of Interest is taxable in the hands of a non resident depending upon the use of the funds bought by the payer of the interest. Following situations has to be considered for the same:-

a)If interest is paid / payable by Government of India to a non resident it is always taxable in India.
b) If interest is paid / payable by a person resident of India to a non resident and where the funds borrowed are used for carrying out business or profession outside India or for making or earning any income from any source outside India, then in such a situation the interest is not deemed to accrue or arise in India and therefore not taxable in India.
 
Thus, if the funds, for which interest is paid / payable, are used for the purpose of carrying out business or profession in India or for making or earning any income from any source in India, then in such a situation the interest is deemed to accrue or arise in India and therefore taxable in India.

c)If interest is paid / payable by a non resident to a non resident and where the funds borrowed are used for carrying out business or profession outside India or for making or earning any income from any source outside India, then in such a situation the interest is not deemed to accrue or arise in India and therefore not taxable in India.

Thus, if the funds, for which interest is paid / payable, are used for the purpose of carrying out business or profession in India or for making or earning any income from any source in India, then in such a situation the interest is deemed to accrue or arise in India and therefore taxable in India.

Income by way of Royalty and Fees for Technical Services in some Situations

In respect of Royalty and Fees for Technical Services also Income is taxable in the hands of a non resident depending upon the purpose of the payments made. Following situations has to be considered for the same:-
a) If Royalty and Fees for Technical Services is paid / payable by Government of India to a non resident it is always taxable in India.
b) If Royalty and Fees for Technical Services is paid / payable by a person resident of India to a non resident and where the right, property or information or services are utilised for the purpose of business or profession carried on by such person outside India or for making or earning any income from any source outside India, then in such a situation the Royalty and Fees for Technical Services is not deemed to accrue or arise in India and therefore not taxable in India.

Thus, if the Royalty and Fees for Technical Services is paid / payable by a person resident of India to a non resident and where the right, property or information or services are utilised for the purpose of business or profession carried on by such person in India or for making or earning any income from any source in India, then in such a situation the Royalty and Fees for Technical Services is deemed to accrue or arise in India and therefore is taxable in India.

c) If Royalty and Fees for Technical Services is paid / payable by a non resident to a non resident and where the right, property or information or services are utilised for the purpose of business or profession carried on by such person outside India or for making or earning any income from any source outside India, then in such a situation the Royalty and Fees for Technical Services is not deemed to accrue or arise in India and therefore not taxable in India.

Thus, if the Royalty and Fees for Technical Services is paid / payable by a person non resident of India to a non resident and where the right, property or information or services are utilised for the purpose of business or profession carried on by such person in India or for making or earning any income from any source in India, then in such a situation the Royalty and Fees for Technical Services is deemed to accrue or arise in India and therefore is taxable in India.

In respect of the payments of Royalty & Fees for Technical Services made in pursuance of an agreement made before 1st April,1976 and approved by Government of India, the aforesaid provisions are not applicable.

Royalty and Fees for Technical Services has a meaning as assigned in the Income Tax Act,1961. Each transaction relating to the same has to be viewed in the light of the said definition.

For the purpose of proper tax planning in respect of NRI, various provisions of the Income Tax Act i.e. Income exempt U/S 10, provisions w,r,t, DTAA U/S 90, Transfer pricing issues dealt with by Section 92 & other provisions of Section 195 etc. needs to be carefully looked into. Different rulings by AAR, Courts & Tribunals set precedents for taking any decision about the taxation of NRIs. DTAA entered into with different countries also needs consideration for understanding the Tax impact of the Non Residents.