Taxation of Non-Residents

1. TEST OF RESIDENCE

A. Individuals

• An individual is regarded as ‘Resident’ of India if:
  1. He stays in India for 182 days or more during a previous year;
     OR
  2. He stays in India for 60 days or more during a previous year, and 365 days or more during the 4 years preceding that previous year.

  The short period of stay in India of “60” days, however gets extended to 182 days (i.e., even though an individual is in India for 365 days or more during preceding 4 previous years) in respect of an Indian citizen who leaves India in any previous year for employment or as a member of the crew of an Indian Ship;

  However, the requirement of 182 days has been reduced to 120 days for an Indian citizen or a person of Indian origin’s who is abroad, comes on visit to India in any previous year and having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year. Further, such person shall be treated as ‘Resident - Not Ordinarily Resident’ if his stay in India is less than 182 days.

  Citizenship is governed by the Citizenship Act, 1955, as amended by the Citizenship (Amendment) Act, 2019. If the individual whose total income, other than income from foreign sources is upto ₹ 15 lakhs, such individuals would qualify to be Non-Resident if their stay in India is less than 182 days.

  Further, in case of an individual being citizen of India and member of crew of foreign bound ship leaving India, the period or periods of stay in India, in respect of such voyage shall be determined in terms of Rule 126.

• An individual – Deemed Residency test in India if:

  An individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

  Explanation to Section 6 defines he term “income from foreign sources” to mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India.

  The Central Board of Direct Taxes (CBDT) has vide a Press Release issued on 2 February 2020, clarified that the deeming provisions are intended to bring into the tax ambit the income earned outside India from an Indian business or profession only.

  Further, the Press Release also indicates that necessary clarification will be codified in the legislation.

  Further more, CBDT Circular 11 of 2020 dated 8 May 2020, relaxing the residency conditions for FY 2019-20 for individuals stranded in India owing to COVID-19 lockdown.

  The CBDT has introduced the following relaxations (for determining the residential status of an individual for FY 2019-20) in respect of an individual who came to India before 22 March 2020 and was:

  • unable to leave India on or before 31 March 2020. In such cases, the period of stay in India from 22 March 2020 to 31 March 2020 will not be taken into account for determining the residential status; or
  • quarantined in India due to COVID-19 on or after 1 March 2020 and departed from India through an evacuation flight by 31 March 2020, or was unable to leave India by 31 March 2020. In such cases, the period of stay in India from the start of quarantine to the date of departure or 31 March 2020, as the case may be, will not be taken into account for determining the residential status; or
  • departed from India on an evacuation flight by 31 March 2020. In such cases, the period of stay in India from 22 March 2020 to the date of departure will not be taken into account for determining residential status.

  The CBDT by way of a Press Release dated 8 May 2020 has clarified that a similar circular for determining residential status of individuals for FY 2020-21 shall be issued after normalisation of the lockdown status.

• An individual is regarded as ‘Resident but not Ordinarily Resident’ if:
  1. He is a non-resident in India in 9 out of 10 previous years preceding the previous year;
     OR
  2. He has stayed in India for 729 days or less during 7 years preceding the previous year.
• An individual is regarded as ‘Non-Resident’ if

  He does not satisfy any of the condition mentioned above.

B. HUF/FIRM/AOP

1. Resident – They are regarded as resident, even if part ‘control and management of its affairs’ is in India.
   [Note: An HUF will be ‘Resident but not ordinarily resident’ if it is a resident and its manager fulfils condition as mentioned in A above]
2. Non-resident – They will be regarded as non-resident, if control and management is wholly outside India.

C. Company

An Indian company is always treated as resident in India. In respect of foreign company the criteria to determine residential status changed from “Control & Management of its affairs is situated wholly in India” to “Place of Effective Management – POEM in that year, is in India” and the same applicable w.e.f. A.Y. 2017-18.

POEM is a place where key management and commercial decisions necessary for the conduct of the business as a whole are made. It is not sufficient to hold Board Meetings & AGM in the overseas jurisdiction but the team implementing such decisions should not be resident of India. Key Management Personnel such as CEO/CFO etc., should be resident of overseas jurisdiction where the foreign company is located.

The CBDT has issued final guidelines for determination of POEM (guiding principles) on 24th January, 2017 which will apply only when the turnover or gross receipts exceeds INR 50 crores.

The key features of the guiding principles are set out below:

1. Shareholder decisions
2. Examples of management and commercial decisions
3. Delegation of authority to make key decisions
4. Circular resolution
5. Following group policy (to determine if the Board has stepped aside and not exercising its powers)
6. Clarification on determination of value of assets (to determine whether a company is engaged in active business)
7. As per the press release, the POEM guidelines shall not apply to companies having turnover or gross receipts of ₹ 500 million or less
8. Clarification on computation of income (to determine whether a company is engaged in active business)
9. Clarification on determination of number of employees (to determine whether a company is engaged in active business)
10. Data of prior years for determining if company is engaged in active business
11. Situations which by itself does not establish effective management
12. Prior approval required for initiating proceedings for holding a company incorporated outside India as a resident of India on the basis of POEM
13. Exclusion of interest income in case of banks or other public financial institutions.

2. TAX INCIDENCE

1. Resident & Ordinarily Resident (including deemed residents) – Global Income is taxable.
2. Resident but not Ordinarily Resident – Income earned/ received in India; or income which accrues or arises or is deemed to accrue or arise in India or income arising abroad out of business controlled in India is taxable.

   Non-Resident – Only income earned/received in India and income deemed to accrue or arise in India is taxable.

3. INVESTMENT INCOME OF A NON-RESIDENT

A. Interest income received by a non-resident from Government or from any other person in India is taxable in India.

Interest received by non-resident in certain case

In terms of section 9(1)(v)(c) of the Act if any interest is payable by the branch offices of non-resident foreign banks to either the head office or to any other branch offices outside India, of the non-resident, then such interest shall be deemed to accrue or arise in India. Thus, the branch office in India shall be obligated to deduct tax at source on such interest payable. Interest so remitted shall be attributable to Indian Permanent Establishment (PE) as a separate and distinct person of non-resident of which it is a PE, in addition to its other income arising and accruing in India.

B Dividend income

Any income by way of dividend from shares or income received in respect of the units of a Mutual Fund specified under section 10(23D) or from the Administrator of the specified undertaking as defined; or from the specified company received by non-resident is taxable subject to the respective treaty relief, if any.

Deduction u/s. 57 will be allowed to the shareholder only in respect of interest expense for purchase of such investments, with an overall limit of 20% of dividend income.

C. Exempt Investment Income

Following types of investment income are exempt:

1. Interest on NRE account paid or credited to individual non-residents Indian who are permitted by RBI to maintain such account. Section 10(4)(ii) (including person who may be ‘Resident’ in India as per Income Tax law, but are resident outside India under FEMA).
2. Section 10(15)(ii)(c) – In the case of an individual or a Hindu Undivided Family, interest on such relief bonds as the Central Government may, by notification in the Official Gazette, specify in this behalf.
3. Interest paid by a scheduled bank on RBI approved foreign currency deposit, FCNR & RFC A/c to non-resident or Not Ordinarily Resident is exempt. [Section 10(15)(iv)(fa)].
4. Any interest received by a non-resident or a person who is not ordinarily resident in India on a deposit made on or after the 1-4-2005, in an Offshore Banking Unit referred in section 2(u) of the Special Economic Zones Act, 2005 is exempt under section 10(15)(viii).
5. Any gains arising because of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company held by non-resident, shall be ignored for the purposes of computation of full value of consideration under section 48.
6. Interest income earned by the non-resident under a loan agreement or by way of issue of any long-term bond including long-term infrastructure bond, or rupee denominated bond were taxed at a concessional tax rate of 5%. However, in case of monies borrowed in foreign currency by way of issue of long term bond or rupee denominated bond on or after 1st April 2020 but before 1st July 2023 and which is listed on a recognised stock exchange located in any IFSC the rate of tax deduction will be 4%.

D. Special Tax Rate and Surcharge applicable on Investment Income of non-resident

Tax Rates

Sections 115A to 115AD prescribe tax rates for various types of investment income of different non-resident entities. However, if the non-resident is covered by a particular DTAA, he may apply the rates prescribed under that DTAA, if beneficial, without any surcharge and education cess. This position has been upheld in the case of Sunil V. Motiani vs. ITO (ITA No. 276/Mum/2012).

1. Section 115A – Income tax payable on income derived by non-resident by way of:
   1. Dividend – 20% subject to applicable surcharge & education cess;
   2. Interest received from Government or an Indian concern on monies borrowed or debt incurred in foreign currency – 20% subject to applicable surcharge & education cess;
   3. Interest received from a notified Infrastructure Debt Fund referred to in section 10(47) – 5% and shall be increased by applicable surcharge & education cess (Section 194LB);
   4. Interest income payable by a Specified Company or business trust to a non-resident/foreign company is liable to deduct income-tax @ 5%, subject to applicable surcharge & education cess. This section is applicable if interest is paid or payable at approved rate. The interest should be in respect of monies borrowed in foreign currency from a source outside India –
      • Under a loan agreement (at any time on or after 1st July, 2012 and 1st July, 2023 or
      • By way of issue of long-term bonds including long-term infrastructure bonds (at any time on or after 1st October, 2014 but before 1st July, 2023 (Section 194LC)
   5. Interest income payable by way of issue of long-term bond or rupee denominated bond on or after 1 April 2020 but before 1 July 2023 which is listed only on a recognized stock exchange located in any International Financial Services center is liable to deduct income-tax @ 4% (as per Finance Bill, 2020).
   6. Interest paid to a Foreign Institutional Investor or Qualified Financial Investor on or after 1st June, 2013 but before 1st July, 2020 on account of investment made by them in Rupee denominated bonds of Indian currency or Government securities, will be liable to tax at a concessional rate of 5%, subject to applicable surcharge & education cess (Section 194LD)
   7. Income by way of interest received by the business trust from SPV is not taxable in the hands of the trust. [section 10(23FC)]. However, when such interest is distributed by business trust to unit holders, who are NR or foreign company, withholding tax @5% shall be applicable. [Section 194LBA(2)].

      It is clarified that TDS, under section 194LBA of the Act, by business trust on dividend income paid to unit holder shall not apply in respect of income of the nature referred to in Section 10(23FC)(b) of the Act, if the SPV referred to in the said clause has not exercised the option under section 115BAA of the Act. There seems to be mistake apparent in section 194LBA as the intent is that TDS shall not be applicable if the SPV has exercised the option under section 115BAA. Therefore, clarity on this aspect needs to be awaited.

   8. Income received by a business trust being a Real Estate Investment Trust (REIT) by way of renting, or leasing or letting out any real estate owned directly by such business trust is not taxable in the hands of such REIT [Section 10(23FCA)]. However, when such income is distributed by REIT to unit holders, who are NR or foreign company, withholding tax shall be as per Rates in Force which should be 30% increased by applicable surcharge and education cess [Section 194LBA(3)]
   9. Income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under section 10(23D) or of the Unit Trust of India is taxable at the rate of 20% subject to applicable surcharge & education cess.
   10. Income other than Profits & Gains of Business of Alternative Investment Fund (Category I or II) is not taxable in the hands of fund [Section 10(23FBA)]. However, income accruing or arising to or received by non-resident unit holder of an investment fund is taxable at the rates in force (section 194LBB). Application for lower deduction of tax can be made under section 197 (amended in the Finance Act, 2016).
   11. Income received by a non-resident investor in respect of an investment in a securitization trust, withholding tax at rates in force at the time of credit of such income or at the time of payment thereof shall be applicable. (Provisions of Section 194LBC are effective from 1st June 2016). Application for lower deduction of tax can be made under section 197 (amended in the Finance Act, 2016).
   12. Income received by a non-resident investor in respect of an investment in a securitisation trust, withholding tax at rates in force at the time of credit of such income or at the time of payment thereof shall be applicable. (Provisions of section 194LBC are effective from 1st June 2016). Application for lower deduction of tax can be made under section 197 (amended in the Finance Act 2016).

4. SPECIFIC INCOMES OF NON-RESIDENT

1. Section 196B - Tax on overseas financial organisation (approved by SEBI) in respect of income by way of long-term capital gains arising on sale/repurchase of units of mutual fund/UTI purchased in foreign currency is 10% subject to applicable surcharge & education cess. [Section 115AB].
2. Section 196C - Tax on non-resident in respect of interest on bonds of an Indian company issued in accordance with Central Government notification, on bonds of a public sector company sold by the Government, and purchased in foreign currency; and long-term capital gains on sale of such bonds/Global Depository Receipts is 10% subject to applicable surcharge & education cess. [Section 115AC].
3. Tax on approved Foreign Institutional Investor (FII)/ Foreign Portfolio Investor (FPI) is as follows:
   • Income by way of interest on securities – 20%
   • Income by way of dividend on shares – 20%
   • Short-term capital gain on sale of other securities – 30%
   • Short-term capital gain on sale of listed shares with STT, units – 15%
   • Long-term capital gain on sale of other securities – 10%
   • Long-term capital gain on sale of listed shares and securities with STT, units – 10% subject to grandfathering (Refer 13 H hereinbelow for further details)
   • Interest referred to in section 194LD – 5% [Section 115AD]

     Further, definition of the term “Capital Asset” has been amended to provide that securities held by FIIs in accordance with the SEBI regulations will be regarded as Capital Asset and not as stock-in-trade.

4. Income of non-resident sportsman (who is not citizen of India) or sports associations or institutions, by way of participation in India in any game other than section 115BB or sports; or advertisement; or contribution of articles in newspapers, magazines or journals, is chargeable to tax @ 20% subject to applicable surcharge and education cess [section 115BBA].
5. Income of Non-Resident entertainer (who is not citizen of India) such as musicians, radio, television or theatre artists) arising from performance in India, is chargeable to tax @ 20% subject to applicable surcharge & education cess [section 115BBA].
6. Winnings from lotteries, crossword puzzles, or race including horse race (not being income from activity of owning and maintaining race horse) or card game and other game of any sort or from gambling or betting of any form or nature is chargeable to tax @ 30% subject to applicable surcharge & education cess [section 115BB].
7. Deemed accrual of receipts –
   • At present, a receipt of money or immovable property or specified movable property (in excess of the specified amount) without consideration or for inadequate consideration is taxed in the hands of the recipient under section 56(2)(x).

   With the insertion of Section 9(1)(viii), receipt by a person outside India from a person resident in India on or after the 5th day of July, 2019 shall be deemed to accrue or arise in India. However, the existing exceptions provided in section 56(2)(x) continue to apply to such receipts.

8. Summary of withholding tax applicable on dividend income received by Non-Resident under the Income-tax Act, 1961

Section (chargeability of income)	Section (withholding of tax)	Nature of Income	Rate of TDS (Payee is any other non-resident)	Rate of TDS (Payee is a foreign company)
Section 115AC	Section 196C	Dividend on GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency	10%	10%
Section 115AD	Section 196D	Dividend income of FPIs from securities	20%	20%
Section 115E	Section 195	Dividend income of non-resident Indian from shares of an Indian company purchased in foreign currency.	20%*	-
Section 115A	Section 195	Dividend income of a non-resident in any other case	20%*	20%

5. SALARY INCOME OF NON-RESIDENT DURING SHORT STAY IN INDIA

Any remuneration received by foreign citizen as an employee of a foreign enterprise for services rendered by him in India is exempt, provided the following conditions are fulfilled—

1. The foreign enterprise is not engaged in any trade or business in India;
2. His stay in India does not exceed in the aggregate a period of 90 days in such previous year; and

Such remuneration is not liable to be deducted from the income of the employer chargeable under the Income-tax Act [Section 10(6)(vi)].

6. BUSINESS INCOME OF NON-RESIDENT

1. Income from business of operation of ship taxable at 7.5% of the gross receipts from such business [section 44B].
2. Income from business of providing services or facilities in connection with plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils including petroleum and natural gas is taxable at 10% of gross receipt from such business, unless the assessee claims lower profits and gains by maintaining proper books of account and other documents, get the same audited and file the audit report along with return of income. [section 44BB].
3. Income from business of operation of aircraft taxable at 5% of the gross receipts from such business [section 44BBA]
4. Income of foreign company from business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government is chargeable at 10% of the gross receipts from such business, unless the assessee claims lower profits and gains by maintaining proper books of account and other documents, get the same audited and file the audit report along with return of income. Such income tax return will be subject to scrutiny assessment. [section 44BBB]
5. In any other case, for computing the business income of non-resident, expenditure in the nature of head office expenses is allowable at least of:
   • Up to 5% of the adjusted income as specified in section; or
   • Actual expenditure attributable to business in India [section 44C].
6. Income from storage of crude oil in India – Exemption under section 10(48A)
   1. The Indian Strategic Petroleum Reserves Limited (ISPRL) is in the process of setting up underground storage facility for storage of crude oil as part of strategic reserves. The Government has explored the possibility of meeting a substantial part of the financial burden through participation of foreign national oil companies (NOCs) and multinational companies (MNCs) storing and selling crude oil from outside India. However, the storage of crude oil by NOCs/MNCs and its sale in India would create tax liability for these entities.
   2. In order to achieve neutrality in terms of taxation to encourage the NOCs & MNCs to store their crude oil in India, it is provided that any income accruing or arising to a foreign company on account of storage of crude oil in a facility in India and sale of crude oil there-from to any person resident in India shall not be included in the total income, if, –
      • Such storage and sale by the foreign company is pursuant to an agreement or an arrangement entered into by the Central Government or approved by the Central Government; and
      • Such agreement or arrangement are notified by the Central Government.
7. Foreign Companies engaged in mining of diamonds – Income shall not be deemed to accrue or arise in India to a foreign company engaged in mining of diamonds, through or from activities which are confined to display of uncut and unassorted diamonds in any notified special zone.

Expansion of scope of business connection

The current Explanation 2 to section 9(1)(i) relates to the definition of business connection through dependent agents. With an objective to align with Article 12 of the Multilateral Instrument (MLI) forming part of the BEPS Project to which India is a signatory, Explanation 2(a) has been substituted. It now extends the scope of business connection to include any business activity carried on through an agent that habitually concludes contract or habitually plays a principal role leading to conclusion of contract by that non-resident and the contracts are:

• In the name of that non-resident; or
• For the transfer of ownership of, or for granting the right to use of, the property owned by that non-resident or that non-resident has the right to use; or
• For the provision of services by that non-resident
• The exclusion in the existing Explanation 2(a) for activities limited to the purchase of goods for the non-resident is now deleted. The impact of this exclusion is to be read along with Explanation l(b) of the same section which states, “in the case of non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export.”

With effect from 1 April 2022, the above business shall not include business connection in India on account of significant economic presence.

Significant economic presence resulting in Business Connection

The Finance Act, 2018, inserted Explanation 2A to section 9(1)(i) w.e.f. 1st April 2019 to clarify that the SEP of a non-resident in India shall constitute “business connection” in India. The threshold of transactions constituting SEP has not been prescribed. Discussions on the issue of taxation of digital/digitized businesses is undergoing in G20-OECD BEPS project of which India is a participant. Accordingly, the said Explanation is omitted.

While existing Explanation 2A is omitted, a new Explanation 2A with modified definition of SEP has been inserted which defines SEP to include transactions in respect of any goods, services or property carried out by a non-resident with any person in India. Further, systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India will also result in SEP. For this purpose, the threshold limit of interactions resulting into SEP may be prescribed. The words “through digital mean” in erstwhile Explanation 2A are deleted. Consequently, interactions with users in India by any means shall constitute SEP.

Clause (a) of Explanation 1 to section 9(1)(i) provides that only such part of income from business which is reasonably attributable to the operations carried out in India is considered deemed to accrue or arise in India. A corresponding change in clause (a) of Explanation 1 to section 9(1)(i) is made to provide that the provisions contained therein shall not apply to the business having business connection in India on account of SEP.

It is also provided that the newly inserted Explanation 3A relating to income attributable to the operations carried out in India shall also apply to cases where business connection is established through SEP.

Clause (iib) is inserted in section 295(2)(b) to empower the Board for making rules to provide for the manner in which and the procedure by which the income shall be arrived at in the case of transactions or activities of a non-resident.

The existing Explanation 2A is omitted with effect from 1st April, 2021 while the new Explanation 2A is inserted with effect from 1st April, 2022. Explanation 3A is inserted with effect from 1st April, 2021 while its applicability to cases where business connection is established due to SEP under Explanation 2A is effective from 1st April, 2022.

This amendment would apply irrespective of whether or not:-

1. the agreement for such transaction or activities is entered in India; or
2. the non-resident has a residence or place of business in India; or
3. the non-resident renders services in India

The following shall be regarded as significant economic presence of the non-resident in India with effect from the 1 April 2022.Transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

• Systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India as may be prescribed.

  In such cases, only so much of income as is attributable to above transaction or activities shall be deemed to accrue or arise in India.

Provisions to promote International Financial Services Centres (IFSC) – Section 47, 115JC and 115JF

In order to encourage IFSCs, certain tax incentives have been provided as follows –

The transfer of a bond or Global Depository Receipt (GDR) referred to in section 115AC(l), or rupee denominated bond· of any Indian company, or derivative, executed by a non-resident on a recognised stock exchange located in any IFSC shall not be considered as a transfer under newly inserted section 47 (viiab) if the consideration for the transfer is paid in foreign currency. As a result, capital gains from such transaction would not be taxable.

Further, a unit located in an IFSC, which derives its income solely in convertible foreign exchange, shall be liabile to AMT at a reduced rate of 9% as against 18.5%.

Incentives to IFSC/IFSC Units

1. Increase in the quantum of deduction for IFSC units

   Currently, profit-linked deduction is available to units of an IFSC of (i) 100 percent of income for first five years, and (ii) 50 percent of income for the next five years.

   To incentivize operation of units in IFSC, amendment made to increase the quantum of deduction for IFSC units under section 80LA to 100 percent of income for any 10 consecutive years out of 15 years, beginning from the year of obtaining the requisite permission for setting up the unit.

2. Restriction for no deduction under Chapter VI-A not to apply to IFSC units

   Currently, interest and other specified income of NRs and foreign companies is taxed on gross basis under section 115A, and no deduction is available in relation to such income under Chapter VI-A, which inter alia includes section 80LA, that gives tax deduction to an IFSC unit.

   It is amended to provide that the conditions in sub-section (4) of section 115A will not apply to deduction allowed under section 80LA to a unit of an IFSC.

3. Exemption for interest payable to a NR

   The amendment made to provide an exemption under section 10 for interest payable to an NR by an IFSC unit in respect of monies borrowed by it on or after 1 September 2019.

4. Exemption for transfer by category III AIF

   The benefit of newly inserted exemption provision i.e. section 10(4D) for transfer of a capital asset on a recognized stock exchange located in IFSC is extended to category III AIF, established or incorporated in India removing the section 47(viiab) :

   • Which is located in IFSC,
   • Which is deriving income solely in convertible foreign exchange, and
   • Of which all the units are held by NRs.

   The type of capital asset covered under the exemption is proposed to be widened to include such other securities as may be notified by the CGT.

5. No DDT for dividends paid out of accumulated income

   Currently, no DDT is chargeable in respect of the total income of a company, being a unit of an IFSC, deriving income solely in convertible foreign exchange, on dividend declared, distributed, or paid out of its current income.

   The amendment provide an exemption from DDT will be extended to dividends declared, distributed, or paid out of accumulated income derived from operations in IFSC after 1 April 2017.

6. No tax on income distributed by specified mutual funds

   The amendment made towards that no additional tax will be payable on income distributed on or after 1 September 2019 by a mutual fund on its income derived from transactions made on a recognised stock exchange located in any IFSC, subject to the following conditions:

   • Mutual fund is located in an IFSC.
   • Mutual fund derives income (received or receivable) solely in convertible foreign exchange.
   • All the units of the mutual fund are held by NRs.

Section 9A-Provisions for NR Fund Managers

Fund managers in India not to constitute Business Connection in India.

Section 9A has been inserted w.e.f. April 1, 2016 which states that –

1. In the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India of the said fund, and
2. An eligible investment fund shall not be said to be resident in India for the purpose of section 6 merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India.

The above relaxation is subject to fulfilment of conditions as spelled out in Section 9A(3).

1. Any income earned in India in Indian Rupees from the sale of crude oil by a foreign company is exempt u/s. 10(48), provided the following conditions are satisfied:
   • The income earned by the foreign company is pursuant to an agreement with the Central Government or after taking approval of the Central Government.
   • The foreign company and the agreement should be notified by the Central Government.

The foreign company should only be engaged in the activity of receipt of such income in India.

Further, one of the conditions for an investment fund to be eligible for the special regime is that the monthly average of its corpus shall not be less than INR 100 crore. Where the fund has been established or incorporated in the previous year, instead of the monthly average condition for eligibility, the corpus of fund is required to be not less than INR 100 crore at the end of such previous year.

It is provided that the monthly average condition for eligibility shall not apply in the year in which the fund is being wound up.

As a measure of providing certain relaxation in the above conditions

It is provided

• that for the purpose of calculation of the aggregate participation or investment in the fund, directly or indirectly, by Indian resident, contribution of the eligible fund manager during first three years up to INR 250 million shall not be taken into account;
• to allow the offshore fund to satisfy the aforesaid corpus condition where the fund has been established/incorporated in the previous year, within twelve months from the last day of the month of its establishment/incorporation.

7. INDIRECT TRANSFER OF SHARES

The Finance Act, 2012 had inserted certain clarificatory amendments in the provisions of section 9. The amendments, inter alia, included insertion of Explanation 5 in section 9(1)(i) w.e.f. 1-4-1962. The Explanation 5 clarified that ‘an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.

Proviso to Explanation 5 has been inserted to clarify that Explanation 5 shall not apply to any asset or capital asset, being investment held by a non-resident, directly or indirectly,
in a Foreign Institutional Investor (as referred to in section 115AD Explanation clause (a)) and registered as Catergory-I or Category-II Foreign Portfolio Investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (retrospectively applicable from AY 2012-13).

It is now provided that the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets (without reducing the liabilities) exceeds the amount of 10 crore rupees; and represents at least 50% of the value of all the assets (without reducing the liabilities) owned by the company or entity, as the case may be.

The value of assets shall be Fair Market Value (to be computed as per method to be notified in the rules).

It is further clarified that the term “specified date” shall be the last date of the previous accounting period of the company/entity or, in cases where the total book value of the assets on date of transfer exceeds the book value on the last day of previous financial year by 15%, then the specified date shall be the date of transfer.

However, ‘book value’ of the assets is to be considered as against ‘FMV’ in case where the date of transfer is taken to be the ‘specified date’ as above.

8. TAXATION OF ROYALTY & FEES FOR TECHNICAL SERVICES (FTS) RECEIVED BY NON-RESIDENTS

1. Royalties and fees for technical services received by non-residents (not being company) or a foreign company (provided income is not attributable to a permanent establishment in India) from an Indian concern or the Government are taxed at a uniform rate of 10%. The date of agreement under which such income is received will henceforth be irrelevant [section 115A(1)(b)].

   Section 9(1)(vi) of the Act defines the taxability of royalty income in India and had defined royalty to include transfer of all or any rights (including the granting of licence) in respect of patent, invention, model, design and secret formula or process or trademark or similar property. The definition of ‘Royalty’ is now modified to even include consideration received from the sale, distribution or exhibition of cinematographic films under its scope.

   Section 9(1)(vii) of the Act defines FTS, as fees for rendering of Managerial, Technical or Consultancy services. It is interesting to note that these three categories of services do not include ‘commercial services’ such as services provided by Commission Agents, Freight & Forwarders, Transportation services and similar other services.

   Non-resident earning income in the nature of Royalty & FTS is required to file Return of Income u/s. 139(1).

   The relaxation of not filing Return of Income is available only in respect of dividend income (referred to in section 115-O) and Interest Income on which tax has been deducted [section 115A(5)]. Further, section 115A(5) has been amended to also extend the relief from filing of the return of income having receipts in the nature of royalty and fees for technical services, where tax has been deducted at source at the prescribed rates of section 115A(1).

2. Royalties and fees for technical services received by non-resident (not being company) or a foreign company from an Indian concern or the Government in pursuance of agreement entered after 31-3-2003, if the non-resident has a Permanent Establishment in India or renders professional services from a fixed place shall be taxed on net income [section 44DA].
3. Any income by way of royalty or fees for technical services arising to any foreign company (as may be notified by the Central Government from time-to-time) under an agreement entered into with that Government for providing services in connection with security of India is exempt [section 10(6C)].

9. EQUALISATION LEVY – Chapter VIII of Finance Act, 2016

In order to overcome the challenges of tax issues relating to e-commerce transactions i.e., characterisation of nature of payments, establishing nexus between a taxable transaction, activity and a taxing jurisdiction and keeping in view, the Organization for Economic Co-operation and Development (OECD) in respect of Action 1 of the Base Erosion and Profit Shifting (BEPS) project, a new chapter is inserted which deals with equalisation levy, its collection and recovery.

On and from date of commencement of this chapter equalisation levy @ 6% of the amount of consideration shall be charged for any specified service received or receivable by a non-resident from a person resident in India and carrying on business or profession or a non-resident having a permanent establishment (PE) in India.

The equalisation levy shall not be charged where

1. The non-resident providing the specified service has a PE in India and the specified service is effectively connected with such PE.
2. The aggregate amount of consideration of specified service received or receivable by non-resident from a person resident in India and carrying on business or profession or from a non-resident having a PE in India, does not exceed one lakh rupees.
3. Where the payment for specified service by the person resident in India or the permanent establishment in

India is not for the purposes of carrying out business or profession.

Specified services are online advertisement, any other provision of digital advertising space, any other facility or service for the purpose of online advertisement and any other services as may be notified.

This chapter extends to whole of India except the State of Jammu and Kashmir and this chapter shall come into force from a date to be notified by the Central Government. This chapter also contains necessary provisions regarding collection and recovery of levy, furnishing and processing of prescribed statement of all specified services, issuing intimation and rectification of mistakes therein, interest on delayed payments, penalties and prosecution for failures and appellate mechanism.

With the introduction of this chapter, Section 10(50) has been inserted to provide exemption for income arising from the above mentioned specified services chargeable to equalisation levy.

An equalization levy of 2% on consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it to the following persons:

1. An Indian resident
2. Any non-resident in case of sale of advertisement, which targets a customer, who is resident in India or customer who accesses the advertisement through internet protocol address located in India.
3. Any non-resident in case of sale of data, collected from a person who is resident in India who uses internet protocol address located in India.
4. Any person who buys such goods or services or both using the IP address located in India.

However, no such equalization levy would be required to be charged where the e-commerce supply or service is effectively connected with a Permanent establishment of the e-commerce operator in India or where the sales, turnover or gross receipts of the e-commerce operator from such e-commerce supply or services is less than ₹ 2 crores (total turnover from all the specified buyers) during the previous year. Also, such levy would not be charged on other specified services on which equalization levy of 6% is applicable.

10. ACTUAL COST OF AN ASSET BROUGHT INTO INDIA BY A NON-RESIDENT

1. For the purpose of computation of business income, actual cost of any asset brought into India by non-resident would be computed as actual cost of acquisition to the non-resident as reduced by the notional depreciation as provided in the Income-tax Act, 1961 from the date of its acquisition as if the asset has been used in India [Section 43, Expl. 11].
2. Where an imported capital asset is acquired on deferred payment terms or out of the foreign loan the actual cost would be after taking into account the fluctuation in exchange rate. For this purpose, actual payment will be considered [Section 43A].

11. DOUBLE TAXATION RELIEF – Section 90/90A

All provisions discussed above are subject to DTAA entered into with various countries or with any specified association in a specified territory outside India. The provision of the relevant tax treaty or domestic law provision whichever is beneficial to the taxpayer would be applicable.

In order to claim treaty benefits the non-resident taxpayer shall be required to provide certificate of his being a resident of country outside India (Tax Residency Certificate) as well as such other documents and information, ‘as may be prescribed’. In furtherance of this provision, Form 10F prescribes the information to be provided by a taxpayer. However, a taxpayer may not be required to provide the information in Form 10F, or any part thereof, if the necessary information is already contained in the Tax Residency Certificate.

Form 10F can be accessed at following link –

http://www.incometaxindia.gov.in/forms/income-tax%20rules/103120000000007197.pdf

Finance Act, 2017 has inserted Explanation 4 in both sections, clarifying that where any ‘term’ used in an agreement entered into under sub-section (1) of sections 90 and 90A of the Act, is defined under the said agreement, the said term shall be assigned the meaning as provided in the said agreement and where the term is not defined in the agreement, but defined in the Act, it shall be assigned the meaning as defined in the Act or any explanation issued by the Central Government.

Section 90(1) empowers the Central Government to enter into Double Taxation Avoidance Agreement (DTAA) with the Government of any country outside India. One of the main purposes of a DTAA is to prevent double taxation of income. Similarly, section 90A(1) empowers any specified association in India to enter into DTAA with any specified association in the specified territory outside India.

Recently, India has signed, ratified and deposited the Multilateral Instrument (MLI) with OECD, along with its list of Covered Tax Agreements (CTAs) sought to be modified by the MLI. The same will have effect on some of India’s DTAA with effect from 1st April 2020. The Article 6(1) of the MLI provides for addition of an amended Preamble in tax treaties.

Now, section 90(1)(b) and section 90A(1)(b) are amended to incorporate the language of the Preamble of the MLI as follows:

“without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory)”.

12. SPECIAL PROVISIONS FOR COMPUTATION OF CAPITAL GAINS ON SHARES & DEBENTURES OF INDIAN COMPANIES

First proviso to section 48 provides that while computing capital gains/loss, if any, on sale of shares or debentures purchased by a non-resident in foreign currency, the sale proceeds, expenditure on transfer and cost of acquisition of such shares or debentures must be converted in the same currency in which the original investment was made. Resultant capital gains/loss then needs to be reconverted into rupee to arrive at taxable capital gains/loss. The benefit of indexation will not be available in such cases.

13. SPECIAL PROVISIONS FOR NRIs – CHAPTER XIIA

A. Section 115C

1. “Non-resident Indian” means an individual, being a citizen of India or a person of Indian origin who is not a “resident”. 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.
2. “Investment Income” means any income derived from a foreign exchange asset.
3. “Foreign Exchange Asset” means any specified asset which the assessee has acquired or purchased with, or subscribed to, in convertible foreign exchange.
4. “Specified asset” means any of the following assets, namely:—
   • Shares in an Indian company;
   • Debentures or deposits with an Indian company, not being a private company;
   • Any security of the Central Government;
   • Other notified assets (no such asset has yet been notified).

B. Section 115D & Section 115E – Computation of Income

Particulars	Investment Income	LTCG
Deduction for expenses	Not allowed	As per normal provision
Chapter VI-A deduction	Not allowed	Not allowed
Tax Rate	20%	10%

The above rates are subject to applicable surcharge and education cess.

C. Section 115F – Exemption of long-term Capital Gains

Capital Gains arising from transfer of foreign exchange asset, is exempt from tax if the following conditions are fulfilled:

1. The asset transferred must be a long-term capital asset;
2. Net consideration must be invested in certain specified assets;
3. Investment to be made within 6 months of transfer;
4. If only a portion of the net consideration is reinvested, then proportionate exemption is allowed;
5. New asset must be held for at least three years.

D. Section 115G – Option not to file income tax return

NRI need not file an income tax return if –

1. His total income consists only of investment income or income by way of long-term capital gains or both; and
2. TDS has been deducted from such income as per the provision of Income-tax Act.

E. Section 115H – Continuation of benefit 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. The benefit shall continue to apply to him in relation to such income until the transfer or conversion into money of such asset. This benefit does not apply to dividend income from shares, however, this doesn’t have any impact, since dividend (with DDT) is exempt. The said dividend income received is not exempt with effect from 1 April 2020.

F. Section 115I – NRI may opt out of Chapter XIIA

A non-resident Indian may elect not to be governed by the provisions of Chapter XII-A for any assessment year by furnishing a written declaration to Assessing Officer with his return of income. If he does so, 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.

G. Section 112 – Tax on long term Capital Gains

The existing provisions of clause c of sub-section (1) of section 112 provides for tax rate of 10% on long term capital gains arising on transfer of unlisted securities in case of a non-resident (not being a company) or a foreign company.

With effect from A.Y. 2017-18, this section is also made applicable to transfer of shares of a company not being a company in which public are substantially interested.

H. Section 112A– Computation of tax on long term Capital Gains in respect of listed equity shares, etc.

Please refer capital gains section for this.

14. MANDATORY QUOTING OF PAN (OTHER DOCUMENTS AS MAY BE PRESCRIBED) BY NON-RESIDENT TO AVOID TAX WITHHOLDING AT HIGHER RATE

Provisions of mandatory requirement of PAN as per Section 206AA are as follows:

• The payee should furnish its PAN to the payer, failing which the payer would be liable to withhold tax at the higher of following rates –
  1. At the rate specified in the relevant provision of this Act; or
  2. At the rate or rates in force; or
  3. At the rate of 20%.
• The Revenue Officers are prohibited from issuing any certificate for NIL withholding or lower withholding of taxes if the application filed u/s. 197 for this purpose does not contain the PAN of the payee.
• Declaration furnished u/s. 197A shall not be valid unless the person furnishes his PAN in such declaration.
• The PAN of the payee must be referred in all correspondence, Acts, vouchers and other documents exchanged between the parties.

PAN would be required if tax is ‘deductible’. In case where tax treaty provisions are more beneficial and because of access to treaty (for accessing treaty TRC is MUST) tax is not deductible, the provisions of section 206AA would not be applicable.

Higher rate of tax prescribed by Income-tax Act cannot override Tax Treaty Rate:

Pune ITAT in case of DDIT vs. Serum Institute of India Limited, ITA No. 792/PN/2013 dated 30-3-2015 (A. Y. 2011-12) has addressed the uncertainty - whether provisions of Section 206AA override section 90(2) which provides tax treaty shelter to non-residents. The Tribunal held that while section 206AA is not a charging section, it contains procedural provisions dealing with collection of taxes and hence, section 206AA which provides for a higher rate of tax (20%) in cases where PAN details are not provided, does not override section 90(2) of the Act.

With effect from 1st June 2016, the provisions of this section shall not apply to a NR or a foreign company, in respect of payment of interest on long term bonds as referred to in section 194LC and any other payment, subject to such conditions as may be prescribed. Therefore, all payments to non-residents would not attract higher rate of TDS u/s. 206AA on furnishing of alternative documents as may be prescribed by CBDT.

Further, as per 206AA(7) of the Act, the provisions of section 206AA will not apply to non-resident not being a company or to foreign company in respect of:

1. payment of interest on long-term bonds as referred to in section 194LC and
2. any other payment subject to such conditions as may be prescribed.

As per Notification No. 53/2016 dated 24th June 2016 issued by CBDT, Rule 37BC has been inserted which reads as under:

“37BC. Relaxation from deduction of tax at higher rate under section 206AA.-

1. In the case of a non-resident, not being a company, or a foreign company (hereafter referred to as ‘the deductee’) and not having permanent account number the provisions of section 206AA shall not apply in respect of payments in the nature of interest, royalty, fees for technical services and payments on transfer of any capital asset, if the deductee furnishes the details and the documents specified in sub-rule (2) to the deductor.
2. The deductee referred to in sub-rule (1), shall in respect of payments specified therein, furnish the following details and documents to the deductor, namely :-
   1. name, e-mail id, contact number;
   2. address in the country or specified territory outside India of which the deductee is a resident;
   3. a certificate of his being resident in any country or specified territory outside India from the Government of that country or specified territory if the law of that country or specified territory provides for issuance of such certificate;
   4. Tax Identification Number of the deductee in the country or specified territory of his residence and in case no such number is available, then a unique number on the basis of which the deductee is identified by the Government of that country or the specified territory of which he claims to be a resident.”

As per Rule 37BC, details required therein should be required to be obtained to avoid higher rate of deduction of tax i.e. 20% as per Section 206AA of the Act.

15. APPLICABILITY OF SECTION 115JB TO FOREIGN COMPANIES

Provisions of MAT shall not apply to foreign company if such foreign company

1. Is a tax resident of country (or a specified territory) with which India has tax treaty and such foreign company doesn’t have PE in India; or
2. The foreign company belongs to a country with which India doesn’t have tax treaty and is not required to seek registration under any law for the time being in force relating to companies.

This is a retrospective amendment and takes effect from 1st day of April, 2001.

16. DISCLOSURE BY RESIDENT INDIAN OF OVERSEAS ASSETS AND AUTHORITY TO SIGN ANY OVERSEAS ACCOUNT AND OTHER FINANCIAL INTERESTS

Resident Indians having overseas assets or having an authority to sign any overseas account, etc. will have to disclose such facts in Return of Income in Schedule FA. The provision will also apply in a situation where resident is otherwise not required to file return of income; however, in the situation referred above, it will be mandatory for such Resident Indian to file Return of Income.