Whether incomes of a non-resident are taxable in India, regardless of whether the non-resident assessee has PE or Business Connection in India?
There is misconception in the minds of few non-resident assessees that their income are not taxable in India if they have neither business connection nor permanent establishment in India but there are certain income for which non-resident are taxable in India irrespective of whether they have PE or business connection in India.
Now let us see which income are taxable in hand of non-resident regardless of whether Non-resident has PE or business connection in India.
As per section 5(2) of the Income-tax Act, 1961 the income of a non-resident shall be taxable in India, if it is
– Received or deemed to be received in India;
– Accrue or arises in India
– Deemed to accrue or arise in India
Further, under Section 9, the following incomes are deemed to accrue to arise in India.
Section 9(1)(i) – Income through or from:
– any property in India (includes both moveable and immovable property) or any source of income in India;
As per Section 9, any income accruing or arising, whether directly or indirectly, through or from any property in India is deemed to accrue or arise in India. The DTAAs also provide primary right to tax the income from immovable property to the country in which the immovable property is situated. Thus, if a non-resident is earning income from a house property situated in India, it shall be taxed in India irrespective of the fact that such income is received in India or outside India.
Whereas, income arising from foreign house property is taxable in India only when such income is received in India. However, as per DTAAs, the income is taxable only in country in which house property is situated. Thus, the assessee can avail the benefit of DTAA in such cases.
– transfer of a capital asset situate in India
As per Section 9, Any income accruing or arising through the transfer of capital asset situated in India is always deemed to accrue all arise in India.
An asset or capital asset being any share or interest in a company on entity registered or incorporated outside India shall deemed to be in India if the share or interest derived its value directly or indirectly substantially from the asset located in India. Hence, a Non-resident person is liable to pay tax in India even in case of indirect transfer of capital asset.
Section 9(1)(ii) – Salaries earned in India
Non-resident individual is liable to pay tax in respect of salaries income that has been either received or deemed to be received in India or that has been accrued or arisen in India. Salary is deemed to be earned in India if it is payable for services rendered in India even if it is paid in India or outside India. However, exemption is allowed for the short-term employment earned by foreign national Indian sources as per section 10(6) of the Income Tax Act, 1961.
Section 9(1)(iii) – Salaries payable by the Government to a citizen of India for services rendered outside India
Non-resident is liable to pay tax in respect of salary income that is paid or payable by Government to the citizens of India for services rendered outside India. If income is earned by a person who is not a citizen of India by rendering services outside India, then section 9(1)(iii) will have no application. Similar will be the case if salary is payable to a person by a private organisation for rendering services outside India – Grindlays Bank Ltd. v. CIT [1991] 56 Taxman 213 (Cal.).
Section 9(1)(iv) – Dividend paid by an Indian company
Non-resident is liable to pay tax in respect of dividend income which is paid by Indian company. Dividend income paid to a non-resident is deemed to accrue in India only on payment and not on declaration. As per Bombay High Court Judgement in the case of Pfizer Corporation v. CIT [2003] 129 Taxman 459 (Bom.). It was held that dividend income paid to non-resident is deemed to accrue in India only on payment and not on declaration. As per Section 9(1)(iv), Dividend paid by an Indian company outside India will constitute income deemed to accrue in India on effecting such payment.
Section 9(1)(v), (vi) and (vii) – Interest/ Royalty Fees for technical services payable by
– the Government;
– a person who is resident – except where the amount is payable in respect of any business or profession carry on by such person outside India or the purposes of earning any income from any source outside India.
– a person who is non-resident, where the amount payable for the purpose of a business or profession carried on by such person in India.
A non-resident is liable to pay tax in India on royalty or FTS which accrue or arise in India or is deemed to accrue or arise in India. However, if a foreign company becomes resident in India due to its place of effective management is in India, it shall be liable to pay tax in India even on income which accrue or arise outside India. Hence, world-wide income of foreign company shall be taxable in India in such cases.
Income in the nature of royalties and fees for technical services in the hands of non-resident are generally taxed on gross basis under section 115A read with section 9(1)(vi) and (vii) of the Income Tax Act,1961. These two types of income are basically business income and therefore ideally should be taxed on net basis. By and large under all tax treaties these incomes are taxed on gross basis in the state of source. However, where the recipient has a PE in the source state and such income effectively connected with that PE then they are taxed as business profit. As per article 7 of DTAAs provides that profit attributable to PE at source state are taxed in the source state and this article also provides for computation of profit where by deduction of expense is allowed in accordance with the provisions thereof and subject to taxation laws of source state.
It is worthwhile to note that the Article dealing with FTS in the tax treaties usually refers to the terms like paid and payment which are not defined under the tax treaties.
In an Indian context, it is imperative to note the decision of the Mumbai Bench of Tribunal in the case of National Organic Chemical Industries Ltd. Vs Dy CIT (2006) 5 SOT 317/96 TTJ 765 (Mumbai), wherein the court while dealing with India – Switzerland tax treaty held that twin conditions of accrual and payment were to be satisfised for taxability of FTS. Furthermore, the Tribunal also provided that even if FTS has accrued or has arisen but is not paid, the taxability under Article 12 in the source country does not come into play.
In the case of Saira Asia Interiors (P.) Ltd. Vs ITO (2017) 79 Taxmann.com 460/ 164 ITD 687 (Ahmedabad – Trib.) , while dealing with India – Italy tax treaty in the context of royalty, the Ahmedabad Bench of Tribunal held that taxability under the tax treaty is triggered when the actual payment of royalty is made by the Indian resident and the mere fact that an Indian resident credits the amount of royalty payable to an Italian resident does not trigger taxability under Article 13 of the India – Italy tax treaty. This decision was also followed by the Chennai Bench of Tribunal in the case of Dy. CIT Vs. Inzi Control India Ltd (2019) 101 Taxmann.com 112 (Chennai – Trib.).
Furthermore, in the case of DIT Vs Siemens Aktiengesellschaft, the Bombay High Court held that royalty and FTS should be taxed on a receipt basis. However, it may be noted that the Hon’ble Supreme Court has admitted the Special Leave Petition filed by the Revenue against the decision of the Bombay High Court.
In the case of CIT v. Copes Vulcan Inc. [1987] 167 ITR 884 (Mad.) it was held that whether there is a business connection or not, any income by way of fees for technical services should be taken to have been covered by the provision in section 9(1)(vii).
Similarly in case of Meteor Satellite Ltd. v. ITO [1980] 121 ITR 311 (Guj.) it was held that cases falling under clause (vi) cannot be brought under clause (vii) – If the case falls under clause (vi) of section 9(1) and is exempted from the operation of clause (vi) by virtue of the proviso, then one cannot refer to clause (vii) which is a general clause.
It was held in the case of Engineering Analysis Centre of Excellence (P.) Ltd. Vs CIT [2021] 125 taxmann.com 42 that amount paid by resident Indian end-user/ distributers to non-resident computer software manufacturers/suppliers, as consideration for resale/use of computer software through EULAs/distributors agreement, is not payment if royalty for use if copyright in computer software, and thus, same did not give rise to any income taxable in India.
In the OECD Model, exclusive taxation by the country of residence whereas in the UN Model source state also has right of taxation in addition to taxation right of country of residence but rate of taxation in the source restricted to 10 to 20% in India whereas under the domestic law rate of tax is 10%.
The concept of fees for Technical services is typical to many Indian treaties. In OECD Model FTS is taxable as Business profits.
Section 9(1)(viii) — Any sum of money which is in the nature referred to in section 2(24)(viii), paid by a person resident in India to a non-resident (not being a company)
Conclusion
Non-resident are liable to tax even if the assessee has no business connection or PE in India on various Incomes mentioned above. However, it is not necessary for non-resident assessee to file return of income if the assessee fulfils the condition stipulated under section 115A (5).
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