45. Taxation of shares of Indian companies allotted to non-residents in consideration for the purchase of machinery and plant delivered abroad under clause (vi)/(vii) of sub-section (1)

1. Clauses (vi ) and (vii) have been inserted in sub-section (1) of section 9 by the Finance Act, 1976, with effect from 1-6-1976.  As a result, income by way of royalties and fees for technical services is deemed to accrue or arise in India in the cases specified under these provisions.

There are, however, two exceptions to the above general position.  Firstly, lump sum consideration paid under approved agreements made before 1-4-1976 for the transfer outside India of, or the imparting of information outside India in respect of, any date, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark, or other similar property is not deemed to accrue or arise in India, and secondly, income by way of fees for technical services under approved agreements made before that date is not deemed to accrue or arise in India.

2. In this context, certain questions have been raised as to whether the clarifications contained in Public Circular No. 21 of 1969 would be applicable.  In para 11 of this circular, it was stated that in a case where, shares are issued at the time of incorporation of an Indian company in consideration for the transfer abroad of technical know-how or services, or delivery abroad of machinery and plant, and the payment is not taxable under section 5(2)(b ) as income accruing or arising or deemed to accrue or arise in India, no attempt should be made by the department to bring to tax the profits or gains on such transactions merely on the ground that the situs of the shares is in India.

3. As a result of the amendments brought about by the Finance Act, 1976, royalties or fees for technical services paid in pursuance of collaboration agreements entered into on or after April 1, 1976, are chargeable to tax under section 5(2)(b).  The contents of para 11 of Circular No. 21 of 1969 would cover only cases where shares in Indian companies are allotted to a non-resident for delivery abroad of machinery and plant.  Where shares in Indian companies are allotted in consideration for the machinery and plant, the income embedded in the payments would be received in India as the shares in the Indian companies are located in India and would accordingly attract liability to income-tax as income received in India.

4. In view of the legal position, the concessions in paragraph 11 of the said circular are in the nature of extra legal concessions and the Board have decided to withdraw the same.  Paragraph 11 of the Public Circular No. 21, may, therefore, be treated as withdrawn with immediate effect.

Circular : No. 382 [F. No. 484/12/78-FTD], dated 4-5-1984.

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