16. On perusal of Balance Sheet of a Resident Company, the AO finds entry regarding some payments to a Foreign Company. He wants to treat that payment as income of the non-resident Company. Is the action of the AO correct?
No and Yes . If the AO concluded regarding the place of receipt of the amount shown in the Balance Sheet merely on the basis of entry in the Balance Sheet, then, he is not correct. Because, explanation 1 to section 5 is clarifies that income accruing or arising outside India could not be deemed to be receipt in India u/s. 5 of the I T Act merely on the ground that it has not taken into account by the Resident Company in its Balance Sheet. If the action of the A.O is based on facts and evidences on record that the payment was indeed can be defined as income accrued, received or deemed to be accrued or received.In this regard it should also be noted with caution that the credit entry by resident Company for any payment under an agreement for royalty or technical fees even before the remittances have been made, shall make the Non-Resident payee liable to tax even if the Non-resident follows a different accounting system. Decision of Apex court in this regard worth reading are :
1. Standard Triumph Motor Co. Ltd. v. CIT (1993) 201 ITR 391
2. Raghava Reddy v. CIT (1962) 44 ITR 720 (SC
17. How is the question of residency settled in case of company and in case of firm?
In case of a foreign company, if the control and the management of the affairs of the company is situated wholly in India, it is considered resident. However,in case of a Partnership Firm or an AOP, the said foreign concern shall be regarded as resident in India in every case where even a negligible portion of the control and management of the affairs of the firm or AOP is situated in India.
Relevant section 6 of the I T Act is reproduced below:
“(3) A company is said to be resident in India in any previous year, if-
(i) it is an Indian company; or
(ii) during that year, the control and management of its affairs is situated wholly in India.
(4) Every other person is said to be resident in India in any previous year in every case, except here during that year the control and management of his affairs is situated wholly outside India “
18. Is it beneficial for foreign collaborator or Indian companies to employ Indian citizens ?
Yes. To understand it , go through the provision contained in Section 6(1) which is given below : “(1) An individual is said to be resident in India in any previous year, if he-
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
Explanation.-In the case of an individual, -
(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted ;
Thus, if a Non Resident foreign company hires an Indian citizen , he shall have the benefit of staying in India for 181 days without being termed resident whereas in other cases if that person who is not Indian citizen and who stayed in India for 365 days in aggregate in four preceding years , then his stay for mere 60 days will make him resident and thus all expense on him , his salary whether paid by Foreign company or India Company shall be treated as his Income and will be taxed accordingly.
19. Whether foreign company falls within the definition of company given under IT Act and Wealth Tax Act.?
Yes. Section 2(17) of the I T Act states "company" means-
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or “
Even in case of Wealth Tax purpose, it has been held by Calcutta High Court in Imperial Chemical Industries Ltd. vs. CWT (1979) 119 ITR 46Cal that the foreign company carrying on business in India from an office of Indian subsidiary or fall within the scope of term companies even if Wealth Tax purpose.
20. An official liquidator of a foreign company is appointed by High Court. how will it affect the taxation of income of the foreign company? In this case, the foreign company shall be regarded as resident in India u/s. 6(3) and the financial liquidator would taxable on behalf of the foreign company. So, as held by Calcutta High Court in CIT vs. Bank of China (1985) 154 ITR 617.
21. Wherein assessee files return stating the status is non-resident, later on the AO issued notice u/s. 154 for rectification on the ground that the assessee actually resident. Whether the action of AO is correct?
No .As per Calcutta High Court’s decision in Vijay Mallya vs. ACIT (2003) 263 ITR 41, the determination of residential status is a debatable issue, except for rectification is not valid. Hence the action u/s 154 of the I T act can not be the remedy.
22. How is the method of accounting important for tax panning in case of no resident foreign companies ?
This can be understood by the fact that in case of Non-Residents, income are taxable only if it is
received or deemed to be received in India.
accrues or deemed to accrue in India .
Therefore, Cash System is more beneficial . In this regard , the decision of Calcutta High Court in [CIT v. Bengal Waterproof Ltd. (1999) 239 ITR 265 (Cal)]. is of importance that merely based on the fact that the mercantile system of accounting is followed, would not by itself make the income taxable if no money was received in that year.
23. State the condition under which income of a Non –resident company is deemed to accrue or arise in India. Are there exceptions ?
Section 9 of the I T Act gives deeming provisions. Incomes deemed to accrue or arise in India are:-
all income accruing or arising, 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 the transfer of a capital asset situate in India.
In following cases, income of Non-Resident shall not be taken as Deemed to accrue or arise in India
If business are carried out in India but not fully from India, then only proportionate income as is reasonably attributable to the operations carried out in India shall be taken as deemed income of non resident.
non-resident confines its activity to the purchase of goods in India for the purpose of export;
in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India
in the case of a non-resident, being-
(1) an individual who is not a citizen of India; or
(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or
(3) a company which does not have any shareholder who is a citizen of India or who is resident in India,
no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;
24. Whether the interest on loan advanced by the non-resident to a resident necessarily bring the interest paid by the resident to the non-resident to tax? No, only the facts & circumstances can decide if the interest paid by resident to non-resident is taxable in India. Merely, on the ground that the money is lent by the non-resident to a resident one can not conclude that there exists business connection of Non Resident .What is envisaged under the IT Act is that any income should be of the profit or gains arising from business connection. Two important laws given below should read:
CIT Vs. Currimbhoy Ibrahim & Sons Ltd. (1935) 3 ITR 397; in this case, it was held that merely on the ground that the interest was paid on a loan which was utilized for business within taxable territories , itself not gives rise to business connection, unless it is proved that non-resident was interested directly or indirectly in the business of Indian tax payer over & above the payment of interest on loan and the repayment of installment.
CIT Vs. National & Grindlays Bank (1969) 72 ITR 121; in which Calcutta High Court held that where the money was lent outside India and interest on such advance, but also received by non-resident outside India. Such interest can not be deemed to accrue in India if there is no other evidence on record that the interest was earned in India. However, if the interest is paid or payable by a resident to a non-resident India, such interest will be deemed to accrue in India u/s. 9(1)(iv) which says “(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India;
The exception is provided in Section 9(1)(vi) that only in those cases where the interest is related to a debt incurred or money borrowed and used for the business or profession carried on by the resident Indian taxpayer outside India or for earning income from any source outside India , in such cases the interest paid to a non resident shall not be regarded as income deemed to accrue in India.
25. Whether the income of foreign company from supply of machines to Indian companies taxable in India if the orders are procured by an Indian agent appointed by it and whose only job as per a written agreement is only of procurement of orders for the foreign party and passing on the same to the foreign company for acceptance or rejection for the order materializes?
From the facts stated above, it seems the ratio of Supreme Court in CIT Vs. R. D. Agarwal & Company (1965) 86 ITR 20 squarely applies in this case. The Apex court held that there exist no Business connection of a non resident who appointed an Indian agent whose only job was to procure the order and pass the amount to non-resident company for acceptance or rejection. The agent was entitled to a commission on the accepted orders. No other work was being done by the Indian Agent. Therefore, as the Court held, income of non-resident would not be deemed to accrue in India. The Supreme Court clarified
“Business connection postulates a real and intimate relation between trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his activity. In this case such a relation is absent”.
In another case of Carborandum Co. V. CIT (1977) 108 ITR 335 , Supreme Court held that mere agreement between non-resident and the resident tax payers would not give rise to a business connection unless there is evidence on records that non-resident has carried out operations or transaction in India in respect of which income is sought to be aroused. Mere association with an Indian taxpayer would not make the non-resident chargeable to tax under the IT Act.
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