The Central Board of Direct Taxes (CBDT) had earlier issued a circular (Circular No. 23 dated July 23, 1969) clarifying the India tax liability of non-residents in respect of income accruing or arising through or from, a business connection in India. As per the aforesaid Circular 23, even if a business connection existed under section 9 of the Income-tax Act, 1961 (“the Act”), only so much of the profit which can be reasonably attributed to the operations of the business carried out in India could be subject to tax in India. Circular 23 also provided clarifications on the taxability of non-residents in specific situations.
The CBDT has now vide Circular no. 7/2009 dated 22 October 2009 withdrawn the above referred Circular 23 on the grounds that the Circular 23 does not actually apply to a particular case, or tax payers were interpreting it to claim relief which was not in accordance with the provisions of section 9 of the Act or the intention behind the issuance of the Circular. The CBDT has also withdrawn Circular no. 163 dated 29 May 1975 and Circular no. 786 dated 7 February 2000 which provided certain clarifications with respect to Circular 23. While Circular 163 provided further clarifications to Circular 23, Circular 786 indicated that tax is not deductible at source from payments made to non-resident agents on commission and other charges.
Specific clarifications provided in Circular 23
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Clarification provided by the withdrawn circular |
| Clarification provided by the withdrawn circular Non-resident exporter selling goods from abroad to Indian importer |
No accrual of non-resident’s income in India under section 9 of the Act, provided the goods are sold from abroad to Indian importers on a principal-to-principal basis Goods can be said to be sold on a principal-to-principal basis if the following are true:
- The purchases made by the resident are outright on his own account;
- The transactions between the resident and the non-resident are made at arm’s length and at prices which would be normally chargeable to other customers;
- The non-resident exercises no control over the business of the resident and sales are made by the latter on his own account; or
- The payment to the non-resident is made on delivery of documents and is not dependent in any way on the sales to be effected by the resident.
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| Non-resident company selling goods from abroad to its Indian subsidiary |
No accrual of income in India under section 9 of the Act provided the:
- Contracts to sell are made outside India;
- Sales are made on a principal-to-principal basis and at arm’s length; and
- Subsidiary does not act as an agent of the parent company.
The mere fact that the Indian company is a subsidiary of the non-resident company would not give rise to a business connection in India. |
| Sale of plant and machinery to an Indian importer on installment basis |
Income of the non-resident does not accrue or arise in India if the sale and purchase is on a principal-to-principal basis and the exporter and the importer have no other business connection. |
| Foreign agents of Indian exporters |
Income of the non-resident does not accrue in India as the foreign agent operates in his own country, and the commission is not received by him/on his behalf in India. |
| Non-residents purchasing goods in India |
No liability to tax in India on any income attributable to operations confined to purchase of goods in India for export, even if a non-resident has an office or an agency in India for this purpose.
A resident person would not normally be regarded as an agent of a non-resident where the resident person acts in the ordinary course of his business in making purchases for a non-resident party.
The tax authorities can determine the profits that would reasonably be deemed to have been derived by the resident person and tax such income in the hands of the resident if the resident is closely connected with the non-resident purchaser and the course of business between them is so arranged that the resident person gets no profits or less than the ordinary profits which might be expected to arise in that business.
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| Sales by a non-resident to an Indian customer on extended credit terms |
No accrual of non-resident’s income in India under section 9 of the Act even if the non-resident allows the Indian customer extended credit for payment, provided the sale is executed outside India and is on a principal-to-principal basis. |
| Sales by a non-resident having an agent in India to an Indian customer directly |
No accrual of non-resident’s income in India under section 9 of the Act even if the non-resident is paying an overriding commission on all sales to India provided that:
- Contracts to sell are made outside India;
- Sales are made on a principal-to-principal basis; and
- The sale is not attributable to the existence of the agent in India
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| Sales by a non-resident to an Indian customer through an agent |
Assessment in India will be limited to the profits attributable to the agents services provided that:
- Contracts to sell are made outside India;
- Sales are made on a principal-to-principal basis; and
- The non-residents principal business activities in India are wholly channeled through the agent.
If the non-residents principal business activities in India are not wholly channeled through the agent, the assessment in India would be the sum of the amount attributable to the non-resident’s agent in India and the amount of profit attributable to his own activities in India, less expenses incurred in making such sales. |
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Specific clarifications provided in Circular 23
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Impact of the Circular
1. Circular 23 read with Circular 163 provided guidance in the matter of taxability of non-residents in India in certain identified circumstances. By its withdrawal, the support available to the tax payer in terms of the positions clarified by the CBDT through the circular would no longer be available. However, tax payers could place reliance on judicial precedents on the subject. This could lead to increased litigation.
2. With the withdrawal of the Circular, the powers of the tax authorities in taxing non-resident’s transactions in India may be broadened.
3. With the withdrawal of Circular 786, Indian exporters making payments to agents outside India will need to examine whether such an agent is liable to tax in India and follow the procedure as prescribed in the withholding tax provisions of the Act.
Source: Circular No. 7/2009 [F. No. 500/135/2007-FTD-I], dated 22-10-2009
