Chapter 10

Taxation of Non-Residents [Chapter XII andXIIA of Income-tax Act}

10.1 Incomes taxable in case of non-residents As already discussed under chapter on Residential Status, incidence of tax does not depend upon the nationality or domicile of the tax payer but on his residential status in India in the relevant previous year. In case the assessee is a non-resident in India, he is liable to pay tax on the following incomes: (a) Incomes received or deemed to be received in India. (b) Incomes which accrue or arise in India or are deemed to accrue or arise in India. 10.2 Meaning of'Non-resident' According to section 2(30), Non-Resident means a person who is not a resident in India. However in the following cases, it also includes a person who is not ordinarily resident in India: (a) Section 92-relating to computation of income from international transactions having regard to arm's length pnce. (b) Section 93-avoidance of income tax by transactions resulting in transfer of income to non-residents. (c) Section 168-Executors. 10.3 Types of Non-resident in India Under Income Tax Act, non-resident in India can be of two types: (a) Non-resident Indian The definition of this term is given under section 115C (Chapter Xll-A) which deals with special provisions relating to certain income of non-resident Indians. According to section 115C(e), non-resident Indian means an individual, being a citizen of India or a person of Indian origin who is not a resident. *r 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; if non-resident Indians can only be individuals. (ft) Any other non-resident person i.e. Foreign Nationals (other than individuals of Indian origin) or foreign companies or Overseas financial organisations (Offshore funds) or foreign institutional investors, etc. Therefore, in the following discussion wherever the term non-resident in India is used, it includes persons covered in category (a) and (h) above. On the other hand where the term non-resident Indian is used, it refers to individuals only, of category () mentioned above.

156 Corporate Tax Planning & Management Chap. 10 10.4 Taxation of Non-residents (A) Incomes which are exempt from income-tax /. In case of non-resident Indian/non-resident in India (d) Interest on notified securities or bonds held by a non-resident including income by way of redemption of such bonds or interest on Non-Resident (External) Account in any bank in India in accordance with the rules laid down for that purpose, in case of an individual. [Section 10(4)]. (b) Interest on notified Savings Certificates issued before 1-6-2002 which was purchased in convertible foreign exchange and held by a non-resident who is a Indian Citizen or a person of Indian origin. [Section 10(4B)]. (c) Tax payable on royalty or fees for technical service on behalf of foreign company in pursuance of an agreement entered into before 1-6-2002 [Section 10(6A)]. (d) Tax payable on certain income (not being salary, royalty or fee for technical service) of and on behalf of a non-resident or a foreign company by the Government or the Indian concern in pursuance of an agreement entered into before 1-6-2002. [Section 10(6B)]. (e) Tax payable on income from leasing of aircraft, etc. under an agreement entered into after 31-3-1997 but before 1-4-1999 or entered into after 31-3-2007 [Section 10(6BB)].

(/) Income of foreign companies providing technical services in projects connected with security of india. [Section 10(6C)]. (g) Remuneration or fee received by non-resident/non-citizen/citizen but not ordinarily resident 'consultants'^ for rending technical consultancy in India under approved programme including remuneration of their employees, and income of their family members which accrue or arise outside India. [Sections 10(8A), (8B) and (9)]. (/?) Interest on notified bonds. [Section IO(15)(//W)]. (/) Interest to Foreign Banks on any deposits made by it with the approval of the RBI, with any scheduled bank. [Section 10(15)(//7o)]. (/) Interest payable by Government/Financial Institutions, etc. on money borrowed by it or debts owed by it before 1-6-2001 to sources outside India. [Section 10(15)(/v)]. (k) Any payment made by-an Indian company to acquire an aircraft on lease from foreign Government or enterprise under an agreement entered into before 1-4-2007. [Section 10(15 A)]. (B) Incomes which are taxable A Non-resident person, other a company, having total income exceeding the maximum exemption limit is liable to pay tax at the same rate as in the case of a resident assessee except in the following cast"!'. 1. Income from certain specified assets/sources falling under sections 115A, 1I5AB, 115AC, 115AD, 115BBA covered under Chapter XII of the Income-tax Act. In these cases, tax on such income is chargeable at a special flat rate. 2. Certain Incomes of Non-resident Indians covered under Chapter XIIA of Income-tax Act, consisting of section 115C to 1151. hi this case, the nonresident Indian has been given an option to pay tax either under Chapter XIIA at certain special flat rates or as per the other provisions of the Act. Chap. 10 To. It may be mentioned that the liable to surcharge, on income-tax a provision to assess a non-resit inherent difficulties in ensuring hi the possibilities of effecting recov
1. Foreign company means a < company means an Indian cor liable to tax under the Incorr declaration and payment withi shares) payable out of such inc 2. Although a foreign company is of tax in case of certain income 3. Non-resident can also choose assessee to adopt either the c why such option should not b< adopt the cash system of acco C/7~(2003) 259 ITR 391 (Bom)

Determination of income in the Assessing Officer is of opin arising to any non-resident pers< business connection in India or tl any asset or source of income in brought into India in cash or in k income for the purposes of assess (0 at such percentage of Officer may consider to (if) on anv amount which b the business of such accordance with the pro bear to the total receipts (Hi) in such other manner as Income of non-resii which is chargeable t 115AC, USADand 10.5 Tax on dividends, interc foreign companies [Section 1 If This section deals with the f A. Tax on dividends/interest (Section 115A(l)(a)l Special provisions regardii (not being a company) or of a ft (/) dividends (other than d (if) interest received from < debt incurred by Govei
W.e.f. 1-6-2011 interest receix be taxable @ 5% of the g Amendments.

Chap. 10

Taxation of Non-Residents 157 It may be mentioned that the non-residents, including foreign companies, are also liable to surcharge, on income-tax as well as education cess. The income-tax law has also a provision to assess a non-resident through his agent under section 163 due to the inherent difficulties in ensuring his physical presence during assessment proceedings and the possibilities of effecting recovery of the due taxes.
1. Foreign company means a company which is not a domestic company. A domestic company means an Indian company or any other company which in respect of its income, liable to tax under the Income-tax Act, has made the prescribed arrangements for the declaration and nayment within India, of the dividends (including dividends on preference shares) payable out of such income. 2. Although a foreign company is liable to tax <a 40% but it shall also be liable to special rate of tax in case of certain incomes covered under Chapter XII. 3. Non-resident can also choose the method of accounting: Section 145 gives an option to an assessee to adopt either the cash or mercantile system of accounting. There is no reason why such option should not be available to a non-resident, so that such nonresident may adopt the cash system of accounting of its income liable to income-tax. [Pfizer Corporation v CIT (2003) 259 ITR 391 (Bom)].

Determination of income in case of non-residents |Rule 10|: In any case in which the Assessing Officer is of opinion that the actual amount of the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax may be calculated: (/') at such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable, or (/'/) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with '.he provisions of the Act.) as the receipts so accruing or arising bear to the total receipts of the business, or (//';') in such other manner as the Assessing Officer may deem suitable. Income of non-residents from certain specified assets/sources which is chargeable to tax at a special rate [Section 115A, 11 SAB, 115AC, USADand 115BBA| (Chapter XII of Income-tax Act) 10.5 Tax on dividends, interest, royalty and technical service fees in the case of foreign companies (Section 115A'| This section deals with the following two types of income: A. Tax on dividends/interest income of non-resident including a foreign company (Section 115A(l)(tf)| Special provisions regarding rate of ta\: Where the total income of a non-resident (not being a company) or of a foreign company, includes any income by way of: (/) dividends (other than dividends referred to in section 115-O); or (if) interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency; or

158 Corporate Tax Planning & Management

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(Hi) 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. However, this income shall again be exempt w.e.f. assessment year 2004-05 as per section 10(34). The income tax on the total income of su'-h person shall be chargeable at the following rates: (a) On the dividend income (other than dividend referred to in section 115-O) 20% (b) On the interest income covered under clause (/'/) above 20% (c) On the income from units referred to in clause (Hi) above. Exempt (d) On the balance income included in the total income Special rates/Normal rates as the case may be
1. The above section 115A(1)(a) is now practically relevant only for interest received from Government or Indian concern on money borrowed by the Government/Indian concern in foreign currency as neither the dividend from Indian company nor income for Units of UTI or Mutual Funds covered under section 10(230) are taxable. 2. The interest income is taxable under this sub-section when the money is borrowed or debt is incurred in foreign currency by Government or Indian concern which may include bonds/ debentures/public deposits of a company but it does not include interest on bank deposits as bank deposits are not money borrowed by banks.________________________

B. Tax on income by way of royally/fee for technical services received by a nonresident/foreign company [Section 115A(l)(b)\ Special provisions regarding rate of tax: Where the total income of a non-resident (not being a company) or a foreign company includes any income by way of royalty or fees for technical services other than income referred to in section 44DA(1) received from Government or an Indian concern in pursuance of an agreement made by the nonresident/foreign company with Government or the Indian concern, the income tax on total income of such non-resident/foreign company shall be chargeable at the following rates: (a) On the income by way of royalty and fee for technical services received in pursuance of an agreement made after 31-3-1976 but before 1 -6-1997 30% (b) On the income by way of royalty and fee for technical services received in pursuance of an agreement made after 31-5-1997 but before 1-6-2005 20% (c) On the income by way of royalty and fee for technical services received in pursuance of an agreement made after 31 -5-2005 10% (e) On the income covered under section 115A(l)(tf) covered at the rates given under para 10.5A above in that para i.e. 20% (/) On the balance income included in total income Special/normal rates as the case mav be

Chap. 10 Taxation of Non-Residents

159
5. (b) where such agreement relates to transfer of copyright in any book 1 to an Indian concern, (c) where such agreement relates to transfer of computer software to a person resident in India provided the computer software is permitted to be imported into India under Open General License under the Import Trade Control Policy for the time being in force. The branch of a foreign company/concern in India is a separate entity for the purposes of taxation. Interest paid/payable by such branch to its head office or any branch located abroad would be liable to tax in India and would be governed by this section. If the Double. Taxation Avoidance Agreement with the country where the parent company is assessed to tax provides for a lower rate of taxation the same would be applicable. [Circular No. 740, dated 17-04-1996\. As per provisions of section 10(6A), if the tax on the income of a foreign company by way of royalty/fee for technical services is paid by the Government or the Indian concern (in pursuance of an agreement entered into before 1-6-2002} to the Central Government, the tax so paid will not be included in the total income of the foreign company and shall be exempt u/s 10(6A) [See illustration No. 10.2 below]. Where the payment is received by a non-resident/foreign company in a country with which India does not have any agreement for avoidance of double taxation, interest, royalty and fee for technical services would be liable to tax in India as per the provisions piven above. On the other hand, if the recipient is of a country with which India has an agreement for avoidance of double taxation, the taxability would depend upon the provisions of the agreement for avoidance of double taxation provided the tax liability under such agreement is lower.

10.5a Consequential provisions due to special rate of tax u/s 115A(l)(a) and (b) 1. No deduction of any expense or allowance: Since special rate of tax are applicable in case of income by way of dividend other than dividend referred to in section 115-O, interest, royalty and fee for technical services, no deduction in respect of any expenditure or allowance shall be allowed to the assessee u/s 28 to 44C and section 57 in computing such income [Section 115A(3)]. 2. No deduction under Chapter VIA from such income except in case of income bv way of royalty and fee for technical services: Deductions from G.T.I, under Chapter VIA (i.e. Section 80C to SOU) shall not be allowed from the income by way of such dividend and interest covered under sub-section 1 (a) above. But such deduction will be allowable from income by way of royalty or fee for technical services covered under I(b) above.
Where the gross total income of the assessee consist of other income also, then the gross total income shall be reduced by the income by way of such dividend and interest covered under section 7(a) above and the deduction under Chapter VIA shall be allowed from such reduced gross total income [Section 115A(4)]. In other words, deduction under Chapter VIA shall be allowed from the gross total income after deducting income by way dividend or interest referred to in section 115A(!)(). . 3. No return of income necessary in some cases: As per section 115A(5), no return is required to be submitted in this case under section 139(1) if the following conditions are satisfied: (a) The total income of the assessee consist only of such dividend and interest mentioned in clause (a) of in this section, and

(b) The tax deductible at source has been deducted from such income.

160 Corporate Tax Planning & Management Chap, lo However if there is a income from royalty or fee for technical services, the return of income in that case is required to be submitted under section 139(1). 4. Set off in carry forward and set off of losses allowed from incomes mentioned under section I ISA but unabsorbed depreciation not allowed'. Although no expenditure/ deduction mentioned in points 1&2 above are allowed but the provisions of Chapter VI regarding set off of loss of current year, earn,' forward and set off of losses of earlier years are applicable and such losses of current year and brought forward losses of earlier years can be set off against such specified incomes subject to the provisions of Chapter VI. However, the unabsorbed depreciation of any business of the current year or any earlier year brought forward to this year cannot be set off against the above incomes as it is covered u/s 32 which falls within sections 28 to 44C.
In case of a non-resident individual, initial exemption of ?1,60,000 shall not be applicable in respect of income referred to in section 115A or any short-term capital gain referred to in section 111A or any long-term capital gain referred to in section 112 although it is applicable for other income.

10.5b No special provision regarding capital gain on the transfer of above income earning capital assets under section 115A: In case any capital asset, on which income mentioned above is earned, is transferred during the previous year by the nonresident, there are no special provisions given under section 1 ISA which are applicable for taxing such capital gain. Hence, in such a case the regular provisions of taxing such capital gain shall apply. Therefore, the long term capital gain in such case shall be taxable as per provisions of sections 112, which may be @ 20% or 10% as the case may be plus surcharge and education cers as applicable. Further, proviso I (regarding conversion of cost of acquisition into foreign currency) or proviso 2 (regarding indexation of cost of acquisition and improvement), as the case may be. shall be applicable. It may also be noted that where the total income (exclusive of long term capital gain) of a non-resident individual i? less than the maximum exemption limit, there is no provision of shifting the long term capital gain to other income for claiming full exemption of ^1,60,000, as it is not allowed in case of non-residents.
1. In case of a non-resident individual, initial exemption of ?1,60,000 shall not be applicable in respect of income referred to in section 115A or long-term capita! gain referred to in section 112 although it is applicable for other incomes. 2. Long-term capital gain arising from the sale of equity shares though a recognised stock exchange in India shall be exempt under section 10(38) if such transaction is subject to securities transaction tax. Further short-term capital gain arising from the sale of equity shares through a recognised stock exchange shall be taxable @ 15% provided it is subject to securities transaction tax. No deduction under Chapter VIA shall be allowed from such short-term capital gain. __________________ _______

Illustration 10.1: Massy incorporated, ;\ foreign company furnishes the following data for the previous year endina 31 -3-2011. ? (;') Royalty from Indian concern under an agreement made on 15-9-1995 approved by Central Government 3.00.000 (//') Expenditures as per section 28 to 44C for earning such income 2.00.000 (Hi) Interest from an Indian company on money lent in foreign currency 11.00,000 (/v) Expenditure on collection of above interest 50,000 (v) Income from units purchased in foreign currency 5,00,000 (vi) Collection charges for collecting above income 40,000 (vvj) Gross sale of business in India 30,00,000 (vi'ri) Expenditure as per sections 28 to 44C for above business 28.00,000

10.6 Tax on income from units purchased in foreign cur arising from their transfer [Section 115AB]

This section is applicable only in case of Overseas Finar, known as Off Shore Funds. Special provisions regarding rate of tax \Secfion USA income of the above assessee, includes: (a) income received in respect of units purchased in foreign assessment year 2004-05); or (b) income by way of long-term capital gains arising frc purchased in foreign currency: the tax on its total income shall be chargeable as under: (/) on the income from units mentioned in clause (a) above (/;') on the income by way of long-term capital gains referrei in clause (h) above (///) on the balance income included in total income 50.00.000
1. 'Overseas financial organisation' means any fund, institution ass inccrporotcd or not, established under the laws of a country outsid in!o an arrangement for investment in India with any public secti institution or a mutual fund specified under section 10(23D) E approved by SEBI for this purpose; [Upto 31-5-2001, it was to b( Government]. 2. W.e.f. assessment year 2005-06, long-term capital gain ario. >g fr equity oriented fund shall be exempt under section 10(38) if such 1-10-2004 and it is subject to securitiss transaction tax. 3. As per newly inserted section 111A short term capital gain aribin an equity oriented fund shall be chargeable to tax & 15% piovide transaction tax. Further deduction under Chapter VIA shall not be term capital gain 4. Short-term capital gain on the transfer of units other than of eqi taxable at the normal rate of income-tax. j. 'Unit' means unit of mutual fund specified under section 10(230) o

)64
Corporate Tax Planning & Management Chap. 10 10.6a Consequential provisions due to special rate of tax under section 115AB(1) [Section 115AB(2)|

/. Second proviso to section 48 not applicable: Where the Gross Total Income includes income by way of Long Term Capital Gain mentioned under clause (6), above, the second proviso to section 48 regarding indexation of cost of acquisition & improvement shall not be applicable for such Long Term Capital Gain. The First Proviso to section 48 regarding conversion of sale consideration and cost, etc. in foreign currency for computation of Capital Gain otherwise is not applicable as the same is applicable only for shares and debentures of an Indian company. 2. No deduction under section Chapter VIA from such income: No deduction under Chapter VIA (80C to SOU) is allowed from the long-term capital gain. But where the Gross total income of the Overseas Financial Organisation consist cf other incomes also, then the deduction under Chapter VIA will be available in respect of other incomes. The normal provisions of the Income-tax Act will apply to the other incomes. It may, however, be mentioned that deduction under Chapter VIA is not allowed from short-term capital gain on shares referred to in section 111 A. 3. No exemption from filing of return: There is no exemption for filing return of income even if the total income of such offshore funds consists of only such income and income from long-term gain on transfer of such units. 4. Carry forward and set off of loss allowed but unabsorbed depreciation not allowed: The provisions of Chapter VI regarding set off of current year loss and set off of brought forward losses shall be applicable in this case. Thus if there are current years losses from other heads of income, these can be set off from long-term capital gain from such units. Further if there are brought forward long-term capital losses, these can be set off from long-term capital gain.
Illustration 10.3: A foreign Company which is an Overseas Financial Organisation has entered into an agreement with a public financial Institution in India and such agreement is approved by SEBI. Compute the income and tax payable tor the assessment year 2011-12 from the following information furnished oy such organisation.
Date of Purchase Cost (purchased in foreign currency) 20,00.000 Date of sale Sale consideration income collection earned charges for during income year earned.

Units of UTI other than the

1-5-2008

31-01-2011

24,00,000

2,00,000

10,000

equity oriented fund Units of Canara Bank Mutual fund which is an equity oriented fund Units of UTI other than the equity oriented fund Units of UTI of an equity oriented func Besides the above, the company has also received 73.00,000 on account of fee for technical services from an Indian concern under an agreement made and approved by the Central vjovennnent on J 5-5-2000 for which the foreign company incurred an expenditure of 71,00,000. 10-9-2010 10,00.000
25-3-201.1

1 -7-2004

8,00.000

28-02-2011

9,00,000

80,000

5,000

1-9-2010

12.00.000

28-02-201 1 14,00,000

60.000

2,000

11,00,000

10,000

1,000

166 Corporate Tax Planning & Management

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10.7 Tax on income from bonds or global depository receipts purchased in foreign] currency or capital gains arming from their transfer (Section 115AC| Tax on income from bonds or Global Depository Receipts purchased in foreign^ currency or capital gains arising from their transfer
Special provisions regarding rate of tax: Where the total income of an assessee ; being a non-resident, includes

(a) income by way of interest on bonds purchased in foreign currency of (/) an Indian company issued in accordance with such scheme as the Central Government may. by notification in the Official Gazette, specify in this behalf; or (if) a public sector company sold by the Government; or (b) income by way of long-term capital gains arising from the transfer of bonds referred to in clause (a) or, Global Depository Receipts purchased by him in foreign currency, the income-tax on the total income shall be chargeable as under: (/) on the income by way of interest in respect of bonds referred to in clause (a) above ' 10% (if) on the income by way of long-term capital gains referred to in clause (ft), above 10%'. (//O on the balance income included in total income Special/normal rate as the case maybe
Consequential provisions due to special rates of tax under section H5AC(1) [Sections 115AC(2)f(3)/(4)f(5)]

1. No deduction of any expenses or allowance: Where the gross total income of the non-resident consists only of income by way of interest in respect of bonds referred to in clause (a) above, no deduction under sections 28 to 44C or section Sl(iii) shall be allowed from such interest income. 2. Both provisos to section 48 shall not apply: Where the Gross Total Income includes income by way of Long Term Capital Gain mentioned under clause (b) above, neither proviso 1, nor proviso 2 to section 48 shall apply for the computation of such Long Term Capital Gain. In other words, if there is a short-term capital gain proviso 1 to section 48 relating to conversion of sales consideration and cost in foreign currency shall apply. 3. No deduction under Chapter VIA: No deduction under Chapter VIA (sections 80C to SOU) shall be allowed from such income by way of interest. Deduction under Chapter VIA is otherwise not available from long-term capital gain included in Gross Total Income. Where the gross total income of the assessee consist of other income also, then '.lie gross total income shall be reduced by the amount of income by.way of interest and long term capital gain covered under clause (a) and (b), above and deduction under Chapter VIA shall be allowed from balance income. 4. A'o return oj income necessary in a particular case: No return is required to be submitted under section 139(1) if the following conditions are satisfied: (a) The total income of the assessee consist only of income by way ol interest, and (b) The tax deductible at source has been deducted from such income.

Chap. 10 Taxation of Non-Residents 167 However, if there is income by way of long-term capital gain from the transfer of such bonds and GDR's, the return of income is required to be submitted under section 139(1). 5. Carryforward and sc' off of losses allowed but set off of unabsorbed depreciation not allowed'. Although no expenditure/deduction mentioned in points 1 and 2 above are allowed but the provisions of Chapter VI regarding set off, carry forward and set off of losses are applicable and such losses can be set off against the above incomes subject to the provisions of Chapter VI. However, the unabsorbed depreciation ^.u,,,,u'i be set off against the above income as it is covered under section 32. 6. Transfer ofbonds/GDRs by a non-resident to another non-resident outside India is not a transfer. It may also be observed as per section 47(v;7a) relating to transactions not regarded as transfer, any transfer ofbonds/GDRs mentioned above made outside India by a non-resident to another non-resident shall be not regarded as transfer for capital gain purposes. 7. Where the assessee acquired Global Depository Receipts or bonds in an amalgamated or resulting company by virtue of his holding Global Depository Receipts or bonds in the amalgamating or de-merged company, as the case may be, in accordance with the provisions of sub-section (1), the provisions of that sub-section shall apply to such Global Depository Receipts or bonds.
1. "Approved intermediary" means an intermediary who is approved in accordance with such scheme as may be notified by the Central Government in the Official Gazette; 2. "Global Depository Receipts" means any instrument in the form of a depository receipt or certificate (by whatever name called) created by the Overseas Depository Bank outside India and issued to non-resident investors against the issue of ordinary shares or foreign currency convertible bonds of issuing company. 3. Dividends from Global Depository Receipts covered under section 115-O shall be exempt in the hands of the recipient w.e.f. assessment year 2004-05. 4. In the above non-resident shall include foreign company which is non resident in India. __

Chap. 10 Taxation of Non-Residents

Tax liability

169

Tax on long-term capita! gain of ? 1,50,000 @ 10% (as per section 115AC) 15,000 Short-term capital gain on shares of F Ltd. 15% of ?23.000 as per section 111A 3,450 Tax on short-term capital gain of ?1,35,000 (Not taxable as less than ?1,60,000) Nil 18,45u Add: Surcharge . Nil Add: Education cess & SHEC - @ 3% 554 Tax rounded off 19,000
1. The benefit of section 11 SAC shall be available only when the assessee is non-resident at the time of accrual of such income. 2. The benefit of shifting the capital gain to ether income to claim full exemption of ?1,60,000 is not allowed in case of a nonresident.

10.8 Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer [Section 115AD| This section is applicable only to Foreign Institutional Investors. Special provisions regarding rate of tax: Where the total income of the above assessee includes: (a) income received in respect of securities (other than units of mutual funds covered under section 10(23D) or of Unit Trust of India); or (b) income by way of short-term or long-term capital gains arising from the transfer of such securities, the income-tax on the total income shall be chargeable as under: (/) on the income in respect of securities referred to in clause (a) above, 20% (//) on the income by way of short-term capital gains referred to in clause (b) above, 30% (See note 2 in box) on the income by way of long term capital gains referred to in clause (A), above ,10% (See note 1 in box) on the balance income included in total income Special/normal rate as the case may be

1. W.e.f. assessment year 2005-06 long-term capital gain arising from the sale of equity shares shall be exempt under section 10(38) provided such transaction is subject to securities transaction tax. 2. As per newly inserted section 111 A, shon-term capital gain arising from the transfer of equity shares shall be taxable @ 15% provided such transaction is subject to securities transaction tax. Further, no deduction shall be allowed under Chapter VIA from such short-term capital gain. 3. It is not necessary that the above securities should be listed on a recognised stock exchange in India.

10.8a Consequential provisions due to special rate of tax under section 115AD /. No deduction under Chapter IV or Chapter VIA: Where the gross total income of the assessee includes income in respect of securities mentioned in clause (a) above, neuher deduction under section 28 to 44C nor under section 57C, nor under Chapter VIA (80C to SOU) shall be allowed from such income. 170 Corporate Tax Planning & Management Chap. 10

Further, no deduction under Chapter VIA (80C to SOU) shall be allowed from such capital gain whether shortterm or long-term. Where the gross total income of the assessee consist of other income also, then the gross total income shall be reduced by the amount of income/capital gain mentioned in clause (a) and (b) ->ove, and the deduction under Chapter VIA shall be allowed from such reduced gross total income. 2. Both provisos 1 and 2 to section 48 not applicable: For computing long term and short-term capital gain on the transfer of securities mentioned above, both the proviso 1 and 2 to section 48 shall not be applicable. 3. No exemption of filing any return: There is no exemption for filing return of income for incomes mentioned under this Section. 4. Chapter VI applicable: The provisions of Chapter VI relating to set off, carry forward and set off of losses shall however, be applicable in this case also but unabsorbed depreciation shall not be allowed to be set off against the income referred to in section 115AD.
1. The expression Foreign Institutional Investors means such investor as the Central Government may by notification in the Official Gazette, specify in this behalf. 2. The expression "securities" shall have the meaning assigned to it in section 2(/i) of the Securities Contracts (Regulation) Act, 1956 and it means: "Securities" include (0 shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (/a) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (//) Government securities; (//a) such other instruments as may be declared by the Central Government to be securities; and (///) rights or interests in securities. 3. Flls are also allowed to make investments ir unlisted shares and honce this section shall be applicable. ,__

10.9 Tax on Non-Resident sportsman or sports associations (Section 115BBA'| Sub-section (!)() of this section is applicable to a sportsman (including an athlete) who is not a citizen of India and is a non-resident:

Special provisions regarding the rate of tax: Where the total income of the above sportsman includes income received or receivable by way of; (/) participation in India in any game (other than a game the winnings wherefrom are taxable under section 115BB) or sport; or (//) advertisement; or (/;'/') contribution of articles relating to any game or sport in India in newspaper. magazines or journals; such income shall be chargeable to tax @ 10% and the balance income included in the total income at the normal rate.
1 A new section tiSBBD has been inserted w.e.f. A.Y. 2012-13 lo provide that the dividend

Chap. 10 Taxation of Non-Residents 171 I0.9a Sub-section (\)(b) of this section is applicable to non-residents sports association or institution Special provisions regarding rates of tax: Where the total income of the non-resident sports association/institution includes any amount guaranteed to be paid or payable to such association or institution in relation to any game (other than a game the winning wherefrom are taxable under section 115BB) or sport played in India, the tax shall be payable on such income @ 10% and on the balance income at normal rates. The payment by way of guarantee money to non-resident sports associations needs to be considered in terms of the article on "Other income" or on "Income not expressly mentioned" of the relevant DTAA. In cases where such guarantee money is taxable in India under the DTAA, income would be determined in accordance with section 115BBA of the Income-tax Act and the tax deducted at source under section 194E of the Income-tax Act. [Circular No. 787, dated 10-2-2000}.
\, No deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the income referred to in sub-section (1a) or (1b), above 2. It shall not be necessary for the assessee to furnish under section 139(1) a return of his income (a) if his total income in respect of which he is assessable under this Act during the previous year consisted only of income referred to in sub-section (1)(a) or (1 )(>), above; and (b) the tax deductible at source has been deducted from such income under section 194E.

Special provisions Relating to certain incomes of non-resident Indian as per Chapter XIIA of Income-tax Act [Sections 115C to 115-1} 10.10 To whom the Chapter is applicable The provision regarding special rate of income tax under sections 1 ISA and 115 AC discussed earlier are applicable for any non-resident who may be an Indian or Foreign National. Further, provisions of section 115BBA are applicable to a sportsman wiio is a non-resident and non-citizen. Where as the provisions of Chapter XIIA (Sections 115C to 115-1) are applicable only for the benefit of Non-Resident Indian. 10.11 Who is a Non-Resident Indian (Section 115C(?)] Non-resident Indians mean an individual, being a citizen of India or a person of Indian origin who is not a resident. Person of Indian origin: 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. 10.12 Tax on investment income and Long-term Capital Gains [Section 115E| Special provisions regarding rate of tax: Where the total income of the non-resident Indian includes: (a) any investment income; or (6) income uy way of long-term capital gains from a foreign exchange specified asset, the tax on the total income shall be chargeable as under: (/) on the income in respect of investment income referred to in clause (a) above 20% (/'/) on the income by way of long-term capital gains on specified asset referred to in clause (b) above 10% (.*? nof" below)

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(///') on the balance total income included in the total Amount of income tax which income would have been payable on "\ total income exclusive of income referred to clauses ^ (a) and (b) above. Note.W.e.f. assessment year 2005-06 long-term capital gain arising from the " transfer of equity shares sold through a recognised stock exchange of India on or after f 1-10-2004 shall be exempt u/s 10(38). 10.13 Investment income (Section 115C(c)l "I For the purpose of above, "investment income" means any income (other than dividends referred to in section 115-O) derived from a foreign exchange asset. 10.14 What is the foreign exchange asset (Section 115C(6)| Foreign exchange asset means any specified asset as given below which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange.

10.15 What is a specified asset (Section 115C(/)( Specified asset means any of the following assets, namely: shares in an Indian company; debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956; deposits with an Indian company which is not a private company as defined in the Companies Act, 1956; (/v) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1956; (v) such other assets as the Central Government may notify. Hence, income from investment shall mean any income (other than dividends referred to in section 115-O) derived from the above specified assets acquired or purchased with or subscribed to in convertible foreign exchange. 10.16 Meaning of Long-Term Capital Gains for the purpose of this Chapter (Section 115C(<OI 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. 10.17 Other special provision for computation of Total Income of non-residents (Section 115D| Section 115D makes special provisions lor computation of "investment income" of a non resident Indian. According to this section, if the assessee elects to be governed by the provision of this Chapter, the following shall be the consequences: (/) No deduction from investment income: No deduction in respect of any expenditure or allowance shall be allowed under any provision of the Income-tax Act in computing the investment income of a non-resident Indian. (/;') No deduction under Chapter VIA: If the Gross Total Income of the non-resident . Indian consists only of interest income or income by way of Long-term capital gains from a foreign exchange specified asset or both, deduction under Chapter VIA (80C to SOU) from such income shall not be allowed.

Chap. 10 Taxation of Non-Residents 173 However, where the gross total income of the assessee consist of other income also, then the gross total income shall be reduced by the amount of income referred to in clause (if) above, and the deduction under Chapter VIA shall be allowed from such reduced gross total income. It may however be noted that deduction under Chapter V'A also shall not be allowed from short-term capi.al gain arising from the sale of equity shares referred to in section 111 A. (//'/) Proviso I to section 48 applicable but proviso 2 not applicable: Second proviso to section 48 regarding indexation of cost in case of Ic:::; term capital gains shall not apply for computing long term capital gain on such specified assets. But 1st proviso to section 48 regarding conversion of sale consideration and cost into foreign currency shall be applicable while computing capital gains on shares and debentures.
Deductions under Chapter VIA are not allowed from long-term capital gain.

10.18 Capital gains on transfer of foreign exchange assets not to be charged in certain cases [Section 115F|

Where an assessee, who is a non-resident Indian, transfers any long-term foreign exchange asset, he can claim an exemption in respect of the long-term capital gains if the following condition is satisfied. He has invested within a period of six months after the date of such transfer, the whole or any part of the net consideration in any of the specified assets, i.e.: (a) Shares of an Indian company; (b) Debentures of a Indian public limited company; (c) Deposit with an Indian public limited company; (d) Central Government securities; (e) Such other assets as may be specified. Quantum of deduction (/) 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 gains shall be exempt; (if) 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

. gains the same proportion as the cost of acquisition of the new asset bears to the net consideration, shall be exempt. In other words, it may be calculated as under:
_ . , . Amount invested Long-term Capital Gam x Ncl Consideration

Withdrawal of exemption: The exemption granted under section 115F will be withdrawn under the following circumstances. Where the new asset is transferred or converted into money within a period of three years from the date of its acquisition, the exemption granted, on the basis of cost of the new asset, shall be deemed to be income chargeable under the head Capital gains of the previous vear in which the new asset is transferred or converted into money and shall be taxed as long-term capital gains.

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assessment year 2011-12 on the assumption that telegraphic transfer buying and selling rate of US dollars adopted by the State Bank of India is as follows: TTBR TTSR US$ USS 16-9-1990 18 20 3-10-1990 19 21 28-2-2011 43 45 (b) What would be your answer if the above shares are sold through a recognised stock exchange. Solution US$ Sale consideration (?3,52,000/44) 8,000.00 Less: Cost of acquisition (? 1,20,000/20) 6,000.00 Long-term capital gain . 2,000.00 Capital gain converted into Rupees (2,000x43) ?86,000.00 Less: Exemption u/s 115F (86,000 x 1,76,000/3,52,000) 43,000 Long-term capital gains 43,000 (b) Long-term capital gain on sale of shares through a recognised stock exchange shall be fully exempt. Hence, there is no question of any exemption under section 115F. 10.19 Return of income not to be filed in certain cases [Section 115G] It shall not be necessary for non-resident Indian to furnish return of his income u/s 139(1) 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 from foreign exchange specified asset or both; and (b) the tax deductible at source has been deducted from sucli income. 10.20 Benefit under this chapter to be available in certain cases even after the assessee becomes resident |Section 115H] Where a non-resident Indian, in respect of the total income of any subsequent assessment year, becomes assessable as resident in India in any previous year, he, may if he so opts, continue to be governed by the provisions of this chapter in respect of the investment income of all the above foreign exchange assets except shares of an Indian companv. until the transfer or conversion (other than by transfer) into money of such assets. If the non-resident decides to make such option, he will furnish to the Assessing Officer a declaration in writing alongwith 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 the above foreign exchange asset. Judic'al decision To avail the benefit of section 115H, it is not necessary that the assessee should have been assessed as a nonresident. As long as the asset was a foreign exchange asset, the income of which could have been eligible for the benefit of the lower rate of tax under Chapter XII-A of the Income-tax Act the assessee would be entitled to the benefit. [CITv N.P. Mathew (Deed.) (2006) 280 ITR 44 (Ker)]. 10.21 Option to assessee not to be assessed under this Chapter XIIA [Section 115-1] A non-resident Indian may elect not to be governed by the provisions of this chapter for anv assessment year by furnishing his return of income for that assessment year under

Chap-10 Taxation of Non-Residents 175 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 (i.e. sections 115C to 115H) 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 including Chapter XII (specially sections ]15A, II5 AC, 115AD and II5BBA) discussed earlier. 10.22 Special provisions for computing profits and gains of shipping business in the case of non-residents (Section 44B| Notwithstanding anything to the contrary contained in section 28 to 43A in the case of an asscssee, who is a nonresident and is engaged in the business of operation of ships, a sum equal to 7.5% of- (a) the amounts paid or payable whether in or out of India to the assessee or to any person on his behalf, on account of carriage of passengers, livestock, mail or goods shipped at any port in India, and (b) any amount received or deemed to be received in India by or on behalf of the assessee, on account of carriage of passengers, livestock, mail or goods shipped at any port outside India, shall be deemed to be the profits of such business. The carriage amount will also include amount paid or payable or received or deemed to be received by way of demurrage charge or handling charge or any other amount of similar nature.
Section 44B overrides the provisions of sections 28 to 43A and the income of such assessee has to be determined as per the provisions of section 44B. However, section 44B does not override the provision of sections 70 to 80 of Chapter VI (relating to set off and carry forward of losses) and Chapter VIA (relating to deductions under sections 80C to SOU). [Circular No. 169, dated 23-61975] Thus the current year and brought forward losses can be set off against profits determined under section 44B but unabsorbed depreciation cannot be set off against such profits. [Universal Orgo Carriers Incv CIT (1987) 165 ITR 209 (Cal)]. ________________

Sections 172 vis-a-vis section 44B: In case the assessee is covered under section 172, he lias to pay tax @ 40% (plus surcharge plus education and secondary and higher education cess as applicable) (i.e. the rate or rates in force which is applicable to the total income of the foreign company whether such non-resident is a foreign company or not). Such assessee is, however, still given an option u/s 172(7) to get his assessment of total income done in accordance with the other provisions of the Income-tax Act (i.e. as per provisions of section 44B). If he opts for assessment under section 44B, he will be entitled to the following three benefits: (a) benefit of sections 70 to 80; (b) benefit of sections 80C to SOU; and (c) the tax payable, in this case, shall be determined in accordance with normal provisions of the Act which will be much less than 40% if the assessee is not a foreign company. If such option is exercised, tax paid under section 172 shall be treated as payment in advance of tax leviable for that assessment year and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by the assessee or refunded M him. The Supreme Court in the case ofA:S. Glittre v C/7(1997) 225 ITR 739 (SC) held that: The assessment made under section 172(4) shall be an 'ad hod assessment and it will be superseded if a regular assessment is opted as per the provisions of the Act. Since in this case, the regular assessment has been made, the tax paid "nder section 172 will be treated as advance tax for all purposes and all the provisions in the Act in respect of the payment of advance tax shall apply. On effecting the regular assessment, if there is any 176 Corporate Tax Planning & Management Chap. IQ

excess payment made by the assessee then the assessee would be entitled to excess amount paid and also interest for payment made in excess of tax assessed. Similarly if the assessee opts for normal provisions, he shall be liable to interest under section 234B and 234C, if the default is committed under these sections, [Circular No. 9/2001, dated 9-7-2C.31].
10.23 Special provisions for computing profits and gains in connection with the business of exploration, etc., of mineral oils (Section 44BB|

Notwithstanding anything to the contrary contained in section 28 to 43A, except section 42 the income of a non-resident engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire, used or to be used, in the prospecting for, or extraction or production of, mineral oils shall be computed at a flat rate of 10% of:

(c) the amount paid or payable whether in or out of India to the assessee or someone on his behalf on account of the provision of such services and facilities and supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils in India, and (b) The amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India. Provisions of section 44BB not to apply in certain cases: The provisions of this section shall not apply to any income to which the provisions of sections 42 or section 44D or section 44DA, 1 ISA or 293 A apply tor the purpose of computing profits or gains or any other income referred to in these sections. The assessee can declare income under section 44BB to be lower than 10% [Section 44BB(3)|: The Finance Act, 2003 has amended this section w.e.f. assessment year 2004-05 to provide that such assessee may claim lower p.ofits and gains than the aforesaid amount of 10% if the following two conditions are satisfied: (a) The assessee keeps and maintains such books of account as are required u/s 44AA(2), and (b) The assessee gets the accounts audited and furnishes a report of such audit as required u/s 44AB. However, in this case, the Assessing Officer shall proceed to make assessment of the total income/loss of the assessee only under scrutiny assessment as per section 143(3).
1. "Plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the sa'd business. 2. "Mineral oil" includes petroleum and natural gas.________________________

10.24 Special provisions for computing profits and gains of business of operation of aircraft in the case of nonresidents [Section 44BBA]

Notwithstanding anything to the contrary contained in section 28 to 43A, the income of a non-resident engaged in the business of operation of an aircraft shall be computed at a flat rate of 5% of: (a) the amount paid or payable whether in India or out of India to the assessee or to any person on his behalf on account of carriage of passengers, live-stock, mail or goudsfrom any place in India, and
(b) the amount received or deemed to be received in India, on account of carriage of, such items from a place outside India. ..__

10.25 Special provisions for computing profits and gains of foreign companies engaged in the business of civil construction, etc. in certain turnkey power projects {Section 44BBB] Notwithstanding anything to the contrary contained in section 28 to 44AA, in the case of an assessee, being a foreign company, engaged in the 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 in this behalf, a sum equal to 10% of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". The assessee can declare income under section 44BBB to be lower than 10% (Section 44BBB(2)|: Such assessee may claim lower profits and gains than the aforesaid amount of 10% if the following two conditions are satisfied: (a) The assessee keeps and maintains such books of account as are required u/s 44AA(2), and (b) The assessee gets the accounts audited and furnishes a report of such audit as required u/s 44AB. However, in this case, the Assessing Officer shall proceed to make assessment of the total income/loss of the assessee only under scrutiny assessment as per section 143(3).