Deferring Significant Economic Presence (SEP) proposal, Extending source rule, Aligning exemption from taxability of Foreign Portfolio Investors (FPIs), on account of indirect transfer of assets, with amended scheme of SEBI, and rationalising the definition of royalty.
Section 9 of the Act contains provisions in respect of income which are deemed to accrue or arise in India. Sub-section (1) thereof creates a legal fiction that certain incomes shall be deemed to accrue or arise in India.
Clause (i) of sub-section (1) deems the following income to accrue or arise in India:
“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.”
Finance Act, 2018, inter alia, inserted Explanation 2A to said clause so as to clarify that the “significant economic presence” (SEP) of a non-resident in India shall constitute “business connection” in India and SEP for this purpose, shall mean:
(a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or
(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.
Said Explanation further provided that the transactions or activities shall constitute significant economic presence in India, whether or not, the agreement for such transactions or activities is entered in India; or the non-resident has a residence or place of business in India; or the non-resident renders services in India. It was also provided that only so much of income as is attributable to the transactions or activities mentioned at para 2(a) and (b) shall be deemed to accrue or arise in India.
Therefore, for the purposes of determining SEP of a non-resident in India, threshold for the aggregate amount of payments arising from the specified transactions and for the number of users were required to be prescribed in the Rules. However, since discussion on this issue is still going on in G20-OECD BEPS project, these numbers have not been notified yet. G20-OECD report is expected by the end of December 2020. In the circumstances, it is proposed to defer the applicability of SEP to starting from assessment year 2022-23. Certain drafting changes have also been made while deferring the proposal.
The current SEP provisions shall be omitted from assessment year 2021-22 and the new provisions will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-23 and subsequent assessment years.
[Clause 5]
Further, as per the discussion going on in international forum, countries generally agree that income from advertisement that targets Indian customers or income from sale of data collected from India or income from sale of goods and services using such data collected from India, needs to be accounted for in Indian revenue . Hence, it is proposed to amend the source rule to clarify this position.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years. However, for attribution of income related to SEP transaction or activities the amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-23 and subsequent assessment years.
[Clause 5]
Further, the Finance Act, 2012, inter alia, had inserted Explanation 5 to said clause to clarify that an asset or capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Second proviso to said Explanation, inserted through the Finance Act, 2017, provides that the Explanation shall not apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 [SEBI (FPI) Regulations, 2014].
Vide Gazette Notification No. SEBI/LAD-NRO/GN/2019/36, SEBI has notified Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 [SEBI (FPI) Regulations, 2019] and repealed the SEBI (FPI) Regulations, 2014. The difference between these two regulations pertinent in the present context is that the SEBI has done away with the broad basing criteria for the purposes of categorization of portfolios and has reduced the categories from three to two. In view of the same, necessary modification needs to be made in the proviso so inserted. Hence, it is proposed that the exception from said Explanation 5 provided to an asset or a capital asset, held by a non-resident by way of investment in erstwhile Category I and II FPIs under the SEBI (FPI) Regulations, 2014 may be grandfathered. Further, similar exception may be provided in respect of investment in Category-I FPI under the SEBI (FPI) Regulations, 2019.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
[Clause 5]
Clause (vi) of sub-section (1) of section 9 deems certain income by way of royalty to accrue or arise in India. Explanation 2 of said clause defines the term “royalty” to, inter alia, mean the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films.
Due to exclusion of consideration for the sale, distribution or exhibition of cinematographic films from the definition of royalty, such royalty is not taxable in India even if the DTAA gives India the right to tax such royalty. Such a situation is discriminatory against Indian residents, since India is foregoing its right to tax royalty in case of a non-resident from another country without that other country offering similar concession to Indian resident. Hence, it is proposed to amend the definition of royalty so as not to exclude consideration for the sale, distribution or exhibition of cinematographic films from its meaning.
These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.
[Clause 5]
It is further proposed to amend section 295 of the Act so as to empower the Board for making rules to provide for the manner in which and the procedure by which the income shall be arrived at in the case of,-
(i) operations carried out in India by a non-resident; and
(ii) transaction or activities of a non-resident.
The amendment at clause (i) will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years. The amendment at clause (ii) will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-23 and subsequent assessment years.
[Clause 103]
Extract of Relevant Clauses of Finance Bill, 2020
Clause 5
“Clause 5 of the Bill seeks to amend section 9 of the Income-tax Act relating to income deemed to accrue or arise in India.
Clause (i) of sub-section (1) of said section provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India.
Clause (a) of Explanation 1 to said clause provides that for the purposes of said clause, in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India.
It is proposed to amend said clause (a) so as to provide that the provisions contained therein shall not apply to the business having business connection in India on account of significant economic presence.
This amendment will take effect from the 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.
Explanation 2A to said clause, interalia, clarifies that the “significant economic presence” of a non-resident in India shall constitute “business connection” in India.
It is proposed to omit the said Explanation with effect from the 1st April, 2021 and will, accordingly, be omitted from the assessment year 2021-2022 and subsequent assessment years.
It is proposed to insert a new Explanation 2A so as to declare that for the purposes of clause (i) of sub-section (1) of said section, the “significant economic presence” of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean––
(a)transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be provided by rules; or
(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be provided by rules.
It is further proposed to provide that the transactions or activities shall constitute “significant economic presence” in India, whether or not—
(i) the agreement for such transactions or activities is entered in India; or
(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India.
It is also proposed to provide that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) of the said Explanation shall be deemed to accrue or arise in India.
These amendments will take effect from the 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.
It is also proposed to insert a new Explanation 3A so as to declare that the income attributable to operations carried out in India, as referred to in Explanation 1 of clause (i) of sub-section (1) of said section, shall include income from––
(i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;
(ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and
(iii) sale of goods and services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.
It is also proposed to insert a proviso to Explanation 3A to provide that the provisions of the said Explanation shall also apply to the income attributable to the transactions or activities referred to in Explanation 2A.
This amendment will take effect from the 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.
The Explanation 5 to the said clause provides that an asset or capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Second proviso to the said Explanation provides that the provisions thereof shall not apply to an asset or capital asset, held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014, made under the Securities and Exchange Board of India Act, 1992.
It is proposed to amend the said proviso so as to provide that the exemption provided therein shall continue to apply to such investments prior to repeal of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.
It is further proposed to insert a third proviso to the said Explanation so as to provide that provisions contained therein shall not apply to an asset or a capital asset, held by a non-resident by way of investment, directly or indirectly, in Category-I foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, made under the Securities and Exchange Board of India Act, 1992.
These amendments will take effect from the 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
Clause (vi) of sub-section (1) of said section deems certain income by way of royalty to accrue or arise in India. Clause (v) of Explanation 2 to said clause defines the term “royalty” to mean the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting; broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films.
It is proposed to amend clause (v) of Explanation 2 to said clause so as to provide that the consideration for the sale, distribution or exhibition of cinematographic films shall not be excluded from definition of royalty.
This amendment will take effect from the 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”
Clause 103
“Clause 103 of the Bill seeks to amend section 295 of the Income-tax Act relating to power to make rules.
Sub-section (1) of said section provides that the Central Board of Direct Taxes may, subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes that Act.
Sub-section (2) of said section enumerates the matters for which the rules made under sub-section (1) may provide for.
Clause (b) of said sub-section (2) provides the matter, which the rules made by the Board may provide, to be the manner in which and the procedure by which the income shall be arrived at in certain cases.
It is proposed to amend said clause (b) by way of insertion of sub-clause (iia) so as to provide that the rules made by the Board may provide, for the manner in which and the procedure by which the income shall be arrived in case of operations carried out in India by a non-resident.
This amendment will take effect from the 1st day of April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.
It is further proposed to amend said clause (b) by way of insertion of sub-clause (iib) so as to provide that the rules made by the Board may provide, to be the manner in which and the procedure by which the income shall be arrived in case of transaction or activities of a non-resident.
This amendment will take effect from the 1st day of April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.”
Extract of Relevant Amendment Proposed by Finance Bill, 2020
5. Amendment of section 9.
(a) in clause (i),–
(i) in Explanation 1, in clause (a), for the words “in the case of a business”, the words “in the case of a business, other than the business having business connection in India on account of significant economic presence,”shall be substituted with effect from the 1st day of April, 2022;
(ii) Explanation 2A shall be omitted with effect from the 1st day of April, 2021 and the following Explanation shall be inserted with effect from the 1st day of April, 2022, namely:–
‘Explanation 2A.—For the removal of doubts, it is hereby declared that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean—
(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or
(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed:
Provided that the transactions or activities shall constitute significant economic presence in India, whether or not—
(i) the agreement for such transactions or activities is entered in India; or
(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India:
Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.’;
(iii) after Explanation 3, the following Explanation shall be inserted with effect from the 1st day of April, 2021, namely:–
“Explanation 3A.––For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from––
(i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;
(ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and
(iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.”;
(iv) after Explanation 3A as so inserted, the following proviso shall be inserted with effect from the 1st day of April, 2022, namely:–
“Provided that the provisions contained in this Explanation shall also apply to the income attributable to the transactions or activities referred to in Explanation 2A.”;
(v) in Explanation 5,–
(I) in the second proviso, after the words, brackets and figures “Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014”, the words “prior to their repeal”shall be inserted;
(II) after the second proviso, the following proviso shall be inserted, namely:–
“Provided also that nothing contained in this Explanation shall apply to an asset or a capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, made under the Securities and Exchange Board of India Act, 1992.”;
(b) in clause (vi), in Explanation 2, in clause (v), the words, “but not including consideration for the sale, distribution or exhibition of cinematographic films” shall be omitted with effect from the 1st day of April, 2021.
103. Amendment of section 295.
In section 295 of the Income-tax Act, in sub-section (2), in clause (b),–
(a) after sub-clause (ii), the following sub-clause shall be inserted with effect from the 1st day of April, 2021, namely:-
“(iia) operations carried out in India by a non-resident;”;
(b) after sub-clause (iia) as so inserted, the following sub-clause shall be inserted with effect from the 1st day of April, 2022, namely:–
“(iib) transaction or activities of a non-resident;”.
