We are going to discuss taxability of income of a foreign company for downlinking television channels in India and income of a foreign citizen by display of uncut and u assorted diamonds on Bharat Diamond Bourse a notified Special zone at surat.
PROBLEM: Discuss whether the following transactions are subject to tax as deemed income-
1) ABC Ltd., is a broadcaster of news channel in India. It pays to Malaysian Company [having no Place of Business(PE) in India] for downlinking television channels into India and International footprints through a channel.
2) Mr. A, a foreign citizen and a diamond merchant from US ,has earned income of Rs. 10.00 Crores from display of uncut and u assorted diamonds in the Bharat Diamond Bourse a notified Special Zone in Surat.
LET’S CONSIDER APPLICABLE PROVISIONS OF INCOME TAX ACT, 1961
SECTION 9 IN THE INCOME- TAX ACT, 1995 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA;
(1) The following incomes shall be deemed to accrue or arise in India-
(i) 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.
Explanation.- For the purposes of this clause-
(a) 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;
(b) in the case of a non- resident, no income shall be deemed to accrue or arise in India to him through or from operation,., which are confined to the purchase of goods in India for the purpose of export;
(c) in the case of a non- resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;
(d) in the case of a non- resident, being-
i) an individual who is not a citizen of India; or
ii) a firm which does not have any partner who is a citizen of India or who is resident in India; or
iii) a company which does not have any shareholder who is a citizen of India or who is resident in India,
(e) In the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to display of uncut and unassorted diamond in any Special Zone notified by the Central Government in the Official Gazette in this behalf.
Please Note That : no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematography film in India;
(ii) income which falls under the head” Salaries” if it is earned in India.
Explanation.- For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded as income earned in India;
(iii) income chargeable under the head” Salaries” payable by the Government to a citizen of India for service outside India;
(iv) a dividend paid by an Indian company outside India;
(v) income by way of interest payable by-
(a) the Government; or
(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of 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) a person who is a non- resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India;
(vi) income by way of royalty payable by-
(a) the Government; or
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of 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) a person who is a non- resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:
Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, de sign, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976 , and the agreement is approved by the Central Government:
Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a nonresident manufacturer along with a computer or computer- based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.
Explanation 1-For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976 , shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub- section (1) or sub- section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977 , or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976 .
Explanation 2.-For the purposes of this clause,” royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head” Capital gains“) for-
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(v) 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; or
(vi) the rendering of any services in connection with the activities referred to in sub- clauses (i) to (v);
Explanation 3.- For the purposes of this clause, the expression” computer software” shall have the meaning assigned to it in clause (b) of the Explanation to section 80HHE;
(vii) income by way of fees for technical services payable by-
(a) the Government; 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) a person who is a non- resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976 , and approved by the Central Government.
Explanation 1-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976 , shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
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”.
2. Notwithstanding anything contained in sub- section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in Article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947 , to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935 , continues to serve on or after the commencement of the Constitution as a Judge in India.
ANSWER;
1. Income of a foreign company for downlinking television channel in India: – by virtue of Explanation 2(ii) of Section 9(1)(vi0 for the Income Tax Act, 1961 as mentioned above the expression “ Process” in the definition of royalty includes “Transmission by satellite( including up-linking ,amplification, conversion for down-linking of any signal) ,cable, optic fibre or by any other similar technology (whether or not such process is secret). Consequently , the payment by ABC Ltd., to the Malaysian Company will be treated as “ Royalty”, which is deemed to accrue or arise in India.
In given case the payment given by ABC Ltd., to Malaysian company will be treated as income accrue or arise in India and accordingly taxable in India.
2 Display of uncut and u assorted diamonds:- Explanation 1( e) of section 9(1)(i) of the Income Tax Act, 1961 provides that -In the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to display of uncut and unassorted diamond in any Special Zone notified by the Central Government in the Official Gazette in this behalf.
Main conditions to be satisfied to claim exemption by a foreign company are
1. The recipient of income is a foreign company;
2. It is engaged in the business of mining of diamonds.
In the given case Mr. A is an individual diamond merchant residing in US and has not fulfilled above conditions of Explanation 1(e)of section 9(1)(i) of the Act, 961 and Haney his income from displaying uncut and u assorted diamonds at Bharat Diamonds Bourse will be considered as income accrue or arise in India.
*****
DISCLAIMER; above write up is an attempt to share information and knowledge with our readers. The view expressed here are the personal views of the author and same should not be considered as a professional advice. It is advisable to consult with your tax consultant before acting on any part of this article.
Author Bio
