Seven Answers A Resident Must Know Before Buying Property From A Non Resident?

Since the immovable property sale by non resident entails payment of sale consideration by the buyer who is resident Indian , tax has to be deducted at source and paid to government as per section 195 of the I T Act before paying the sum to the non resident seller of the property .
1. Who is responsible for deduction of tax?
As per section 195 of the I T Act , the person who is paying any sum to non resident , is responsible for deducting tax before making payment or crediting the payment in his accounts. So, the buyer of the property is responsible for deducting tax.
2.What are the consequences of non deduction of tax?
A resident buyer of the property from a non resident ,but fails to deduct the tax at the time of payment or credit of the amount to his account, shall be liable for penalty equal to the amount of tax not deducted or after deducting not depositing the tax .
A person is also liable for prosecution for such failure.
3.Can the resident buyer be assessed under I T Act for income arising to a non resident?
Yes, Clause ( C ) of section 163(1) of the I T Act says
“

For the purpose of this Act , agent in relation to a non-resident ,
include any person in India –
(a)…….
(b)……..
(c ) from or through
whom the non-resident is in receipt of any income , whether directly or
indirectly ; or……

So , a buyer through whom the income to non-resident arises can be treated as agent of the non-resident and therefore can be assessed as “representative assessee” as per section 160(1) of the I T Act.
4.What is the amount on which tax has to deduct?
Tax at source on Gross amount of payment or only on the gains.
Supreme Court set the confusion at rest by its order in Transmission Corporation (239 ITR 587) where in it has been ruled that tax should be deducted on the income embedded in the payment.

But confusion regarding quantum still remains there , regarding the decision about the computation of gain. The points for confusion for the deductor are knowledge of cost. The seller , may also claim exemption u/s 54 or 54EC , which may make his gains tax exempt, in that case there is no need of deduction of tax .Therefore, solution to sort out such problem are taking one of the following steps :

1. TDS should be deducted only after making an application in Form 13 before A.O u/s 195(2) for determination of the amount on which tax has to be deducted.
2. Even Non Resident seller can also make an application in Form 13 before A.O u/s 195(3) for determination of quantum of tax to be deducted .

5. What is the rate of deduction?
The rate of deduction in case of 20 % . plus Education Cess 3 %.
6.When is the amount required to be deducted and deposited?
The amount is required to be deposited
1. Within one week from the end of month in which the payment was made.
2. Within two months from the end of month in which credit was made.
7. What are other formalities under I T Laws to be done?
1. Get a Tax Deduction Number (TAN )by applying in Form 49B to Utitsl or NSDL.
2. File a statement of tax deduction in Form 27Q of the I T Act quoting TAN .
3. Issue a certificate of deduction in Form 16A to the Non Resident within one month from the end of month in which payment was made.

Have You Read These Answers?

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What Are The Laws Regarding Repatriation Of Sale Proceeds of Property Purchased by NRI ?

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Are There Some Special Reliefs For NRI or PIO?

Yes, Income Tax Act , under the Chapter XIIA provides some special provisions which grants reliefs to Non Resident Indians or Person of Indian Origin. The provisions are contained in section 115C to 115 I .The special relief is regarding special tax rates for two types of income-investment income and income from long term capital gains- of a Non Resident Indian.

Investment income

Investment income is defined in section 115C to mean that any income generated from following specified assets :

(i) shares in an Indian company;
(ii) debentures issued by an Indian company which is not a private company

(iii) deposits with an Indian company which is not a private company

(iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944);
(v) such other assets as the Central Government may specify in this

Long term capital gains.

Long term gains are long term gains on any assets as stated in aforesaid "specified asset{i to v} . So do not confuse with all types of long term capital gains. In simple terms it means any of the assets , stated in [i to v] ] purchased in foreign exchange can only qualify for the special treatments.

Special Rates

The provision under section 115E provides rates as under

1. on investment income on specified assets @ 20%
2. On long term gains on specified assets @ 10 %
3. On long term gains on all other types assets @ 20 %

Am I compulsorily assessed under these provisions?

No , these provisions are applied if the Non Resident Indian has not opted out of these provisions. That is , when you are filing return of income, you must state that chapter XIIA should not be applied in your case. If you have not stated any thing, it means that this chapter will apply on every Non Resident for income as stated above.

I am Person Of Indian Origin. Will I be Covered under these provisions?

As per section 115C , clause (e) "non-resident Indian means an individual, being a citizen of India or a person of Indian origin who is not a resident." Also note that Explanation to section 115C states "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;".Therefore ,A person of Indian origin is defined as Non Resident Indian for the Chapter XIIA of the I T Act.

Can I avail of the benefit if I become resident?

yes, section 115H provides that if a non resident Indian has invested in foreign exchange in specified assets [as listed above in i to v] and subsequently becomes resident of India, he can give in writing toi the assessing officer that Chapter XXA shall continue to apply to him. The provision is as under

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

Is there any other relief?

There is one for those NRIs or PIOs who have no income other than income from foreign exchange assets [as stated above ] or long term gains on those specified assets. In those types of cases , it is stated in section 115 G that if tax has been deducted at source on those income by the payer , then there is no need to file return of income by the non resident.

What about zero tax on long term gains on shares? Will that not apply?

The said exemption very much apply to every assessee , be it resident or non resident because the said exemption is provided u/s 10(38) of the I T Act which basically provides that if any share which is sold through stock exchange after being held for more than 12 months ,and on which securities transaction tax (STT) has been paid , gains on such sale of shares shall be tax free.Similaraly if the mututal funds are purchased and sold from any company specied u/s 10(23D) and on whcih STT is paid, gain on such sale will be tax free. The section u/s 10(38) is applicable to all class of assessee whether Resident or Non Resident .

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Can An NRI Gift Property Owned By Her Expired Parent ?

Our mother died recently and left some immovable (building) property to her children. I as one of the beneficiaries would like to gift my share to my niece who also received part of the property. We have two units to be shared between three family members. My niece will keep one unit with my share gifted to her and the other unit will probably be sold to pay off the other family member, who wants cash.Can you help me understand the best way to accomplish? We are all NRIs here if that makes a difference. lakshmi, Banglore

Your question has following issues

1. Whether you are fit to gift?
2. If yes, how income tax affect such gift?
3. Since you are NRI , whether Foreign Exchange Management Act allows gift of immovable property?

Whether you are fit to give gift?
The owner of the property was your late mother. So , you can gift the property only if you are the owner of the property. In case of your mother's death , you can become owner in following ways

1. Your mother left a will where your share has been stated therein. In this case , you will have to apply for probate in the local court.
2. Your mother died intestate , in that case also you and all other claimants have to apply to court under Hindu Succession Act for succession certificate.

Thus you become fit to give gift.

Taxation Issues
As far as gift is concerned , since it will be to your relative, there will not be any tax on such gift either on donor or donee. However , your plan to sale one unit and then distribute cash is not very good planning because in that case the capital gains income may arise in the name of late mother. That will make the heirs liable to file return and pay tax under section 168 of the I T Act.It is better if the immovable property is sold by individuals who get it. Let then sell it individually , that will make les complexity and will have less tax burden as the income will get shared.

FEMA applicability?

Since you are NRIs , foreign Exchange management comes into play. However, gift of immovable property by an NRI to an Indian resident is allowed by RBI . Read question 3 and 4 of RBIs FAQ here.

In the end I suggest you take help of a good civil lawyer who deals in property

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What Are The Laws Regarding Repatriation Of Sale Proceeds of Property Purchased by NRI ?

The earlier FAQs were on following topics

On Acquisition of property in India.
On Sale or Gift or transfer of property.

Now the subject of repatriation of sale proceed of immovable property purchased by the non resident or person of Indian origin are being covered in this post .These are excerpts from the same "Frequently Asked Questions" answered by Reserve bank of India for the benefit of non residents and PIO .

1.Can NRI / PIO repatriate the sale proceeds of immovable property? If so, what are the terms?

A.22. NRI / PIO may repatriate the sale proceeds of immovable property in India

(a) If the property was acquired out of foreign exchange sources i.e. remitted through normal banking channels / by debit to NRE / FCNR (B) account
The amount to be repatriated should not exceed the amount paid for the property:
1. in foreign exchange received through normal banking channel or
2. by debit to NRE account(foreign currency equivalent, as on the date of payment) or debit to FCNR (B) account.

Repatriation of sale proceeds of residential property purchased by NRI / PIO out of foreign exchange is restricted to not more than two such properties.
Capital gains, if any, may be credited to the NRO account from where the NRI/PIO may repatriate an amount up to USD one million, per financial year, as discussed below.

(b) If the property was acquired out of Rupee sources, NRI or PIO may remit an amount up to USD one million, per financial year, out of the balances held in the NRO account (inclusive of sale proceeds of assets acquired by way of inheritance or settlement), for all the bonafide purposes to the satisfaction of the Authorized Dealer bank and subject to tax compliance.

Q.2.Can an NRI/PIO repatriate the proceeds in case the sale proceed was deposited in NRO account?

A.23. From the NRO account, NRI/PIO may repatriate up to USD one million per financial year (April-March), which would also include the sale proceeds of immovable property.

Q.3.If a Rupee loan was taken by NRI/PIO from Authorised Dealer or housing finance institution for purchase of residential property can an NRI / PIO repatriate the sale proceeds of such property?

A.24. Yes, provided the loan has been subsequently repaid by remitting funds from abroad or by debit to NRE/FCNR(B) accounts (Please see A.P. (DIR) Series Circular No. 101 dated 5.5.2003)

Q.4If the property was purchased from foreign inward remittance or from NRE / FCNR (B) account, can the sale proceeds of property be repatriated immediately?

A.25. Yes.

Q.5 Is there any restriction on number of residential properties in respect of which sale proceeds can be repatriated by NRI / PIO?

A.26. Yes, sale proceeds of not more than two residential properties can be repatriated.

Q.6. If the immovable property was acquired by way of gift by the NRI/PIO, can he repatriate abroad the funds from sale?

A.27. The sale proceeds of immovable property acquired by way of gift should be credited to NRO account only. From the balance in the NRO account, NRI/PIO may remit up to USD one million, per financial year, subject to the satisfaction of Authorised Dealer and payment of applicable taxes.

Q.7 If the immovable property was received as inheritance by the NRI/PIO can he repatriate the sale proceeds?

A.28. Yes, general permission is available to the NRIs/PIO to repatriate the sale proceeds of the immovable property inherited from a person resident in India. NRIs/PIO may repatriate an amount not exceeding USD one million, per financial year, on production of documentary evidence in support of acquisition / inheritance of assets, an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes vide their Circular No.10/2002 dated October 9, 2002. [cf. A. P. (DIR Series) Circular No.56 dated November 26, 2002].

In case of a foreign national, sale proceeds can also be repatriated even if the property is inherited from a person resident outside India. But this is allowed only with prior approval of Reserve Bank. The foreign national has to approach Reserve Bank with documentary evidence in support of inheritance of the immovable property and the undertaking and the C.A. Certificate as mentioned above.
The general permission for repatriation of sale proceeds of immovable property is not available to a citizen of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan and Iran and he has to seek specific approval of Reserve Bank.
As FEMA specifically permits transactions only in Indian Rupees with citizens of Nepal and Bhutan, the question of repatriation of the sale proceeds in foreign exchange to Nepal and Bhutan would not arise.

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What Every NRI Would Like To Know About Sale or Rent or Gift Of Immovable Property?

Previously , the FAQs published by Reserve Bank Of India on the subject of acquisition of immovable property in India was published here. The second in series is the frequently asked question regarding "transfer of properties by various mode like sale,gift etc.

Q.1 Can an NRI/ PIO/foreign national sell his residential / commercial property?

A.1. (a) NRI can sell property in India to-

i) a person resident in India or
ii) an NRI or
iii) a PIO.

(b) PIO can sell property in India to

i) a person resident in India.
ii) an NRI or
iii) a PIO – with the prior approval of Reserve Bank

(c ) Foreign national of non-Indian origin including a citizen of Pakistan or Bangaladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan can sell property in India with prior approval of Reserve Bank to

i) a person resident in India
ii) an NRI
iii) a PIO

Q.2. Can an agricultural land / plantation property / farm house in India owned / held by a non-resident be sold?

A.2. (a) NRI / PIO may sell agricultural land /plantation property/farm house to a person resident in India who is a citizen of India.
(b) Foreign national of non-Indian origin resident outside India would need prior approval of Reserve Bank to sell agricultural land/plantation property/ farm house in India

(ii) Transfer by gift

Q.3. Can a non-resident gift his residential / commercial property?

A.3. Yes.
(a) NRI / PIO may gift residential / commercial property to -

(i) person resident in India or
(ii) an NRI or
(iii) PIO.
(b) foreign national of non-Indian origin needs prior approval of Reserve Bank.

Q.4. Can an NRI / PIO / Foreign national holding an agricultural land / plantation property / farm house in India gift the same?

A.4. (a) NRI / PIO can gift but only to a person resident in India who is a citizen of India.
(b) foreign national of non-Indian origin needs prior approval of Reserve Bank

(iii) Transfer through mortgage
Q.5. Can residential / commercial property be mortgaged?

A.5. i) NRI / PIO can mortgage to:

(a) an authorised dealer / housing finance institution in India –
without the approval of Reserve Bank.
(b) a party abroad - with prior approval of Reserve Bank.

ii) a foreign national of non-Indian origin can mortgage only with prior approval of Reserve Bank
iii) a foreign company which has established a Branch Office or other place of business in accordance with FERA/FEMA regulations has general permission to mortgage the property with an authorized dealer in India.

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11 FAQs Every NRI Should Know Before Acquiring Immovable Property In India!

The law regarding acquisition of immovable property are governed by Reserve Bank of India. It has put certain frequently asked question on its web site. Given below are the excerpt from those FAQs

Q.1 Who can purchase immovable property in India?
A.1 Under the general permission available, the following categories can freely purchase immovable property in India:
i) Non-Resident Indian (NRI)- that is a citizen of India resident outside India
ii) Person of Indian Origin (PIO)- that is an individual (not being a citizen of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Nepal or Bhutan), who

1. at any time, held Indian passport, or
2. who or either of whose father or grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955).

The general permission, however, covers only purchase of residential and commercial property and not for purchase of agricultural land / plantation property / farm house in India.


Q.2. Whether NRI/PIO can acquire agricultural land/ plantation property / farm house in India?
A.2. No. Since general permission is not available to NRI/PIO to acquire agricultural land/ plantation property / farm house in India, such proposals will require specific approval of Reserve Bank and the proposals are considered in consultation with the Government of India.

Q.3. Do any documents need to be filed with Reserve Bank of India after purchase?

A.3. No. An NRI / PIO who has purchased residential / commercial property under general permission, is not required to file any documents with the Reserve Bank.

Q.4. How many residential / commercial properties can NRI / PIO purchase under the general permission?
A.4. There are no restrictions on the number of residential / commercial properties that can be purchased.

Q.5. Can a foreign national of non-Indian origin be a second holder to immovable property purchased by NRI / PIO?
A.5. No.

Q.6. Can a foreign national of non-Indian origin resident outside India purchase immovable property in India?
A.6. No. A foreign national of non-Indian origin, resident outside India cannot purchase any immovable property in India. But, he/she may take residential accommodation on lease provided the period of lease does not exceed five years. In such cases, there is no requirement of taking any permission of or reporting to Reserve Bank

Q.7 Can a foreign national who is a person resident in India purchase immovable property in India?
A.7. Yes, but the person concerned would have to obtain the approvals, and fulfil the requirements if any, prescribed by other authorities, such as the concerned State Government, etc However, a foreign national resident in India who is a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan would require prior approval of Reserve Bank. Such requests are considered by Reserve Bank in consultation with the Government of India.

Q.8 Can an office of a foreign company purchase immovable property in India?
A.8. A foreign company which has established a Branch Office or other place of business in India, in accordance with FERA / FEMA regulations, can acquire any immovable property in India, which is necessary for or incidental to carrying on such activity. The payment for acquiring such a property should be made by way of foreign inward remittance through proper banking channel. A declaration in form IPI should be filed with Reserve Bank within ninety days from the date of acquiring the property. Such a property can also be mortgaged with an Authorised Dealer as a security for other borrowings. On winding up of the business, the sale proceeds of such property can be repatriated only with the prior approval of Reserve Bank. Further, acquisition of immovable property by entities who had set up Branch Offices in India and incorporated in Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan would require prior approval of Reserve Bank to acquire such immovable property. However, if the foreign company has established a Liaison Office, it can not acquire immovable property . In such cases, Liaison Offices, can take property by way of lease not exceeding 5 years.

Q.9 Whether immovable property in India can be acquired by way of gift ?
A.9. (a) Yes, NRIs and PIOs can freely acquire immovable property by way of gift either from
i) a person resident in India or
ii) an NRI or
iii) a PIO.
However, the property can only be commercial or residential. Agricultural land / plantation property / farm house in India cannot be acquired by way of gift.
(b) A foreign national of non-Indian origin resident outside India cannot acquire any immovable property in India through gift.

Q.10. Whether a non-resident can inherit immovable property in India?
A.10. Yes, a person resident outside India i.e.
i) an NRI
ii) a PIO and
iii) a foreign national of non-Indian origin can inherit and hold immovable property in India from a person who was resident in India. However, a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan should seek specific approval of Reserve Bank.

Q.11. From whom can the non-resident inherit immovable property?
A.11. A person resident outside India (i.e. NRI or PIO or foreign national of non-Indian origin) can inherit immovable property from
(a) a person resident in India.
(b) a person resident outside India
However, the person from whom the property is inherited should have acquired the same in accordance with the foreign exchange regulations applicable at that point of time.

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Is No Objection Certificate Required From IT Department Before Remiting Payments to Non Residents?

We are in process of constructing a hotel in Gurgaon. to provide Civil, Architect, Horticulture Consultancy we appoint a firm from Singapore to advice to construct the hotel. now we want to make some advance to him. now bank is asking for certificate from CA.
1. TDS u/s 195 will apply or not?
2. What will be TDS Rate ?
3. For all such remittance we need CA certificate ?
4. What is the basis on which we have not to deduct TDS.
Aishwarya Goyal, Gurgaon

Since the non resident company is giving you consultancy to be used in constructing hotel , it is definitely liable to tax at source in India. The rate is 10 % as per Double Taxation Avoidance Agreement between India and Singapore. Article 12 of the DTAA between two countries states

Article 12 : Royalties and fees for technical services - 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent.

Whether certificate from C.A required for remittance?

Yes, the remittance to non resident concern is permitted by RBI only when you submit to the

bank two documents

1. A certificate from a chartered accountant
2. An undertaking by the remitter in prescribed format.

CBDT issued circular no 10 of 2002 wherein the prescribed formats of the accountant's certificate (read C.A) and the the undertaking are given . The circular is as under

Circular No. 759 dated 18-11-1997 was issued by the Central Board of Direct Taxes to dispense with the requirement of a No Objection Certificate from income-tax authorities for remittance to a non-resident as required by the Reserve Bank of India. By the aforesaid circular, remittances were allowed to be made by the RBI without insisting upon a No Objection Certificate from the Department provided the person making the remittance furnished an undertaking in duplicate accompanied by a certificate from an accountant. The format of the application and the certificate has been circulated to the authorised dealers by the Reserve Bank of India through their Circular No. AD (MA Series) Circular No. 48 dated 29-11-1997.

2. However, it has recently been observed that often the certificates have been issued prescribing nil deduction of tax at source in certain cases where tax was liable to be deducted or prescribing deduction of tax at a lower rate than was payable on the basis of the provisions of the Act and the applicable DTAC. The certificate does not provide for necessary details or the reasons for adopting a certain rate for deduction of tax. This results in unnecessary calling of information from the assessees at a later stage and thus gives rise to an avoidable perception of grievance on the part of the tax payer. Therefore, in order to streamline the procedure as well as to ensure the correct deduction of tax at source, the proforma of the undertaking to be given by the remitter and the certificate to be issued by a chartered accountant have been re-considered and new formats are being prescribed which are enclosed as Annexures A and B to this circular. The revised proforma for undertaking as well as the certificate shall to apply in terms of Circular No. 759, dated 18-11-1997 of CBDT. Other requirements of the Circular remain unchanged. It is reiterated that the persons making the remittances shall submit the undertaking and certificate as per Annexures A and B to the Reserve Bank of India/authorised dealer banks, who shall in turn forward the same to the Assessing Officer mentioned in the undertaking.

3. The Reserve Bank of India is being requested to circulate the amended format of the undertaking and the certificate to their authorised dealers.

4. This circular comes into effect with immediate effect.

The forms ?

Click here to get the forms required as per CBDT circular no 10 of 2002 .

Therefore, now you do not need no objection certificate from I T authorities , but those tow documents have to be submitted to the authorised dealer who in turn will send one copy to the A.O concerned.

Who should sign the Undertaking?
The undertaking given by the remitter has to be signed by the person authorised to sign return of income of the concern or a person authorised by such person.

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Should TDS Return For Payment of Rent To NRI Be Filed?

I want to know that whether a NRI having rental income more than minimum income not chargeable to tax is required to obtain PAN no or not?If the answer to the above question is no, Person paying rent is a company and in my view will deduct tax u/s 195.How a Company paying rent to NRI and deducting tax will file its TDS return with a fact that total no. of deductees are only two?

Atul Goel, New Delhi

The non resident Indian should get the PAN allotted for following two reasons

1. Getting the credit for the TDS as the TDS statement to be filed now require quote of PAN.
2. The NRI is required to file income tax return as he will have taxable income. The return can not be filed without PAN.

How to get the PAN for non resident can be read here.

Filing of TDS return

Regarding the obligation of filing TDS return by the payer  company , it should be known that the law requires that the company paying rental amount u/s 195 should deduct the tax and file return in Form  27Q  even if the number of deductee is one because there is no exemption for even one deductee. The said Rule 37 A related to the responsibility of deductor regarding filing of return in case of payments u/s 195  is given below :

Returns regarding tax deducted at source in the case of non-residents.

37A. The person making deduction of tax in accordance with sections 193,194, 194E, 195 , 196A , 196B , 196C and 196D of the Act from any payment made to—

(i) a person, not being a company, who is a non-resident or a resident but not ordinarily resident, or

(ii) .................

shall send within fourteen days from the end of the quarter a statement in Form No. 27Q to the Director General of Income-tax (Systems) or the person or agency authorised by the Director General of Income-tax (Systems) referred to in rule 36A :

Therefore in my opinion to lessen the complexity in future and saving yourself from penalty for contravening law , it is better that NRI should apply for PAN and the rent payer should file return in Form 27Q within stipulated time.

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When Is Technical Fee To Non Resident Not Liable To TDS?

We are an Indian Company and doing 100% Software Export Sales to Countries like USA and other Asia Pacific Regions providing services in Application Software Development.We are handling projects for USA / Asia Pacific Region. We have given sub software design work to US Company for the same project. The US Company submits their reports to our Indian office in turn will submit the same to our client in USA. We need to pay the charges for the services done by the US Company at USA from India through our EEFC account in India. While making the payment to US Company whether we need to deduct tax at source under Section 195 of IT Act. - Soundar Rajan.P, Chennai

First principal for TDS is that income which is to be subject of tax at source has to be income chargeable to tax under I T Act. Therefore , whether the payment to US company is chargeable to tax in India or not is required to be examined.

As per section 5 of the I T Act , in case of non resident an income is chargeable to tax in following cases

a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

From your question,it is clear that the payments to US company for sub software does not fall under "received or deemed to be received in India as the same will be paid in US out of your EEFC account. It also did not accrue or arise in India as the work is being carried out by the non resident outside India . Thus there remains only the last condition to be verified : if it falls under the terms "deemed to accrue or arise in India".

Section 9 of the I T Act defines such deemed income . Clause (vii) of subsection 1 of section 9 is specific to deeming provision in case of 'fees for technical services" under which your payments to US company certainly falls. The said clause provides as under

9(1) The following incomes shall be deemed to accrue or arise in India :

(vii) income by way of fees for technical services payable by

(a) ..............; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in 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 ; or

(c) ...........

So , it is clear that the income by way of fees for technical services paid by resident Indian are deemed to accrue or arise in India , yet it does not fall under that category if the payment is done by the RESIDENT for earning any income from any source outside India or for services utilised in a business carried out on by such person outside India.

In this background, the facts presented by you are examined and it is noted that it is apparent

1. The payer is an Indian company.
2. It is in 100 % software export sale.
3. The source of income of payer is out side India.
4. The sub-software for which services of US company was hired is to be utilised for the projects outside India.
   
5. Payment is out of export earning and outside India.
   

Therefore, the payment for such service is out of scope of deeming provision as clause (vii) of section 9(1) which clearly make an exception for such payments.

CBDT circular circular 786 dated 7/2/2000 is fully applicable in this case which can be read in this answer . Hence in my considered opinion, the payment to non resident who gave you service for sub software is not chargeable to tax in India . If it is not taxable in India, such payment can not suffer tax at source.

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Can Non Resident Having Taxable Income Afford Not To File The Return Of Income?

I m a NRI, and do not have any source of income in India. therefore i m not filling my returns.however there is a possibility of some income in India in near future whereby the income earned is with TDS.Can you pls advice me if it is required to file tax returns ? or the income earned in India can be directly deposited in NRO account after the deduction of tax at source.Narender Sharma, Gurgaon

The answer is yes, but this facility is only for Non Resident Indian , provided certain conditions are fulfilled.Chapter XII-A in the I T Act provides special provisions relating to certain incomes of non-residents. Under this chapter, there is express provision u/s 115 G of the I T Act as under:

115G. It shall not be necessary for a non-resident Indian to furnish under sub-section (1) of section 139 a return of his income if

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

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

Most Important Point
In the aforesaid provision, investment income and capital gains have special meaning. Section 115C provides definition of these terms as under:

115C. In this Chapter, unless the context otherwise requires,

(a) convertible foreign exchange means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder;
(b) foreign exchange asset means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;
(c) investment income means any income derived other than dividends referred to in section 115-O from a foreign exchange asset;

(d) long-term capital gains means income chargeable under the head Capital gains relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset;
(e) non-resident Indian means an individual, being a citizen of India or a person of Indian origin who is not a resident.

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

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

(i) shares in an Indian company;
(ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);
(iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);
(iv) any security of the Central Government as defined in clause (2) of section 2of the Public Debt Act, 1944 (18 of 1944);
(v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.

As you can see that all assets are not covered under this chapter for capital gains or investment income purpose. Only shares in Indian companies which have been acquired in foreign exchange , can be eligible for such relaxation regarding return of income.

Since you have not stated nature of your income which is going to be subject to TDS, you better see that the income falls under the category given above.

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Who Is To Tax If A Non Resident Sells Indian Company’s Shares To Another Non Resident ?

Who will be liable to tax if a non resident sells shares of Indian company to another non resident and all dealing including payments are facilitated outside India ? The general perception is that since the non resident who sells and who buy the shares are having no permanent establishment with India, none is liable to tax. However , the Authority For Advance Ruling recently decided an application on similar issue which will clear the air now. In recent time, Vodafone bought share from Hutchison . Both are based outside India .Off course I do not know the full facts of the case .The tax issue is pending and vexing Vodafone now. I feel this decision of AAR , although not binding on any other person, however shall work as guide in deciding such cases. The facts involved in application of Triniti Corporation 295 ITR 258 (AAR) [2007] was :

The applicant ,Triniti Corporation ,was ,a USA based company . This company was non resident as per Indian Income Tax Act . It made an agreement with an Individual non resident for transferring shares in an Indian company. The USA based company which wanted to buy the shares from another non resident individual as per agreement , filed an application before AAR for ruling on the following question :

1. Whether the transfer of shares held by the non resident individual to another no resident company , Triniti Corpoaration , would attract liability to capital gains tax in India;
2. If so, who would be treated as the representative assessee /agent for payment of tax in India.

The income tax department made the claim before the Authority that the Indian company of which the shares were sold should be held as agent of the non resident individual for charging capital gains tax since that non resident had business connection with the Indian company.

The Authority For Advance Ruling ruled as under:

1. “Even if the transaction relating to capital asset takes place outside India but if the capital asset is situated in India , the profits or gains thereon , accrue or arise in India in consonance with the provisions of sections9(1)(i) of the I T Act and are thus assessable under the head “Capital Gains” under the relevant provisions of the Income Tax Act." As per AAR ,situs of capital asset being in India is vital factor.
2. Section 163 of the I T Act provides that the person ,whether Resident or Non resident , can be treated as agent of a non resident if the non resident has acquired by means of transfer a capital asset in India . The said section is as under :

163. (1) For the purposes of this Act, agent, in relation to a non-resident, includes any person in India

(a) who is employed by or on behalf of the non-resident; or

(b) who has any business connection with the non-resident; or

(c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or

(d) who is the trustee of the non-resident;

and includes also any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India :.."

Therefore, the applicant who is purchasing an asset from a non resident is to be treated as an agent of that non resident and has to keep in view the provisions of section 195 of the I T Act

I find this decision of the Authority for Advance Ruling is very important ,specially , when these days shares of Indian company are changing hands outside India.It is settles for now that the non resident purchaser will be liable as an agent u/s 163 of the I T Act to deduct tax at source u/s 195 of the I T Act from the payment made to another non resident as consideration for share of the Indian company.

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Is Consultancy Fee Paid To Non Resident Director Taxable In India?

A non-citizen of India based in the US is a Director of a PVT LTD company in India. The Director also provides consulting services to the Indian company but such services are solely carried out outside India.If company wishes to pay such Director a consulting fee, are there any special tax consequences to be aware of on the company side ? (Of course the Director will have to include that income in her US tax returns). What, if any, taxes should be deducted by the Indian company for overseas consulting fees for this situation.The payment will be done via a foreign currency payment to a bank account in the US. Ernestia,New Jersey

In case of non resident, section 5 of the I T Act provides that income deemed to accrue or arise in India is taxable in India . Section 9 of IT Act provides for income deemed to accrue or arise in India. Clause (vii) of sub-section 1 of section 9 prescribes that fees for technical services shall be deemed to accrue or arise in India if paid by a person who is a resident, except

1. where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or;
   
2. earning any income from any source outside India ;

The explanation is inserted in clause (vii) , which includes consultancy fee within the definition of technical fee. The explanation is as under :

Explanation 2.For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries.

You have not stated whether the private limited company which will pay you consultancy fee , has any business outside India which will utilise the services of your consultancy and not for business carried out in India. If the consultancy services even if carried outside India , is ultimately utilised for business carried out IN India, the said consultancy fee paid will be deemed to arise in India as per section 9(1)(vii) of the I T Act. That the person who is paid consultancy fee resides outside India and such services are solely carried outside India is of no help .What is most important is the place where the business -which uses such consultancy services- is situated . In your case , it is India, therefore payment of consultancy fee will be taxable in India .If it is taxable in India, the company paying sum is liable to deduct tax at source u/s 195 .

Similar issues were taken up by the Authority on Advance Ruling in following two application

• (278 ITR 97 AAR), Wallace Pharmaceuticals (P) Ltd
• South West Mining Ltd (278 ITR 233)

In case of Wallace Pharmaceuticals (P) Ltd , the applicant (Wallace) ,an Indian company had agreement with PENSER , a company incorporated in USA for advisory services and also arranging sales orders in USA . In return , the Indian company had agreed to pay consultancy fee for advice and 10 % commission on orders procured by PENSER in USA . The question before the AAR for settlement by the applicant company (M/s Wallace) was as follows:

• Whether applicant is required to deduct tax at source in respect of the monthly payments (consultancy fees $ 10000) made to consultant whose office and area of operation is situated in U.S.A.?
• Whether applicant is required to deduct tax at source in respect of commission payable @ 10% on the orders procured by the consultant to the applicant.?

Authority on Advance Ruling answered both question in affirmative in following words "

It cannot be disputed that the applicant is an Indian company and a tax resident of India . It is carrying on business in India . It is no doubt true that PENSER is a tax resident of USA but its area of operation for providing consultancy services and inter alia , procuring businesses for the applicant it is not limited to USA. It operates internationally. However, the fact remains that the benefit of consultancy services provided by PENSER whether by way of promoting sales or otherwise is utilized in India by the applicant. The sales are effected by the applicant in India albeit with customers outside India . The nature of consultancy services include “identifying certain target pharma and biotech companies in the United States and outside (“PROSPECTS”) to market WALLACE's products along with any or all support from WALLACE's product team” as per clause (d) of the Agreement. Clauses (f) and (g) require PENSER to explain to PROSPECTS the capability of WALLACE to promote, distribute and sell their products in India the prevailing laws of India for Trademarks and Patents and that all legal and administrative formalities in India, including product registration and EMR filing, on behalf of PENSER and the PROSPECTS will be done by WALLACE to enable them to enter the Indian market.

.................

10 . From the above discussion it is clear that though PENSER is a tax resident of USA, it has rendered consultancy services in India and as the consultancy fee payable in respect of services utilized is not in connection with a business or profession carried on by the applicant outside India for the purposes of making or earning any income from any source outside India, the consultancy fee would be deemed income of PENSER in India. In addition to the monthly consultancy fee under the agreement, PENSER is also entitled to 10% commission on the orders procured by it. The commission will also be deemed income arising to PENSER in India . Therefore, it is also subject to TDS under section 195 of the Act. Even though there is no specific term in regard to reimbursement of advocate fees as it is part of consultancy services under clause (g) of the agreement, therefore it is subject to deduction of tax at source under section 195 of the Act."

In case of South West Mining Ltd (278 ITR 233) ,the facts of the case was

"the applicant, a company registered under the Indian Companies Act, 1956, and a tax resident of India , filed this application under section 245Q(1) of the Income-tax Act, 1961 (for short the “Act”). The applicant is the owner of mines. It is engaged in prospecting and extraction of minerals, metals, ores, etc. It is carrying on business of exporting minerals. For the purpose of its business, the applicant gets the analysis of samples and ores conducted from technical lab of the consultant - Met-Chem, Canada Inc.. Under the agreement between the applicant and the consultant the material required to be analyzed and tested in the laboratory in Canada in respect of specific contents has to be sent to the consultant who will send reports to the applicant from time to time. For technical services rendered outside India the consultant and the lab fees are required to be paid by the applicant in dollars in Canada . However, the technical consultants will also visit India at different intervals for collecting random samples at the mining head of the proposed mining areas of the company for which the applicant has to bear all necessary expenses and to provide assistance and facilities of travel etc. free of cost. On these facts, the applicant seeks advance rulings of the Authority on the following re framed questions:-

• Whether the services rendered by a non-resident company Met-Chem Canada Inc. is considered to be in India or outside India as per the facts already given in Annexure 1 para 2 and Annexure II para 3 of the Form No. 34D.

The Authority on Advance Ruling , following Wallace Pharmaceutical judgment ,answered question in affirmative.

Relief From Double Taxation

Article 12 of Double Taxation Avoidance Agreement is regarding "Royalties and fees for included services" and as per clause 2, it can be taxed in both countries -USA and India.The rate of tax applicable will be 15% as per this article.However , reading of Cluase 4 & 7 shows that in your case , the income out of consultancy should be taken as arisen in India only. Article 25 of DTAA is regrading relief from double taxation .The said article provides as under

Article 25 - Relief from double taxation - 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income

(a) the income-tax paid to India by or on behalf of such citizen or resident ;