'r

CHAPTER TWO

Residen~ak s t a t a s and t a x incidence

Residential status General norms
23. One has to keep in mind the following norms while deciding the residential status of an assessee.

4 3 . 8 0ifferen.t ~. taiab~einiiiies seCtiol@ . entities.: -. ., .. . ; . .... .. . a -, b: a.Hcndu undivided,.., Earn&. .. c . c. a l i r e or an + ~ s g c ~ a i i ' 6 n o k . p e dr i ~i ~Gody ~ s of individuals ;

. . .. . ~

i
,

tus - Assessees are either {a)resident in India, or ib) non- . , and Xndu undivided families are cgncerned,.they (a)resident and ordin'acilv resident, or (b)t e r a firm, an association of persons, a company and every other-person)can s~mplybe either.a resident or a non-resident..

/&3.3~iffment r&sidei&.zl,st&tus in. respect o f different previous years of fhe same assessment yearnq$possible[Sec. 6(5)] If a perso~lis resident in a previousyear relevant to an assessment . . ,, year ... in resp"e'it.of-amy-~ou~ee~o$~hcome, he shall be deemed,toberesideis in-India inthe previous yea~(sj , relevintto~thes~~e<8s'sessm.inent:~year in respectof eachof:'tiis,otliessources of income[see~.problem ;j' ~. , . : 24-P9]. ,, , 6 2 3 . 4 Differeir~ pesidentialsrarusfo~differe~~rassessmrnr years - An asscsszernsy cnjoy Jiiiercnr !-S&ntial <larusiordiiierent asscssmcnt \.ears.Forinslanc:, ar, indi\,it!ual \rho has bc?nrceuiari\. assesse&:as. resident ii7-Ci5iddinarily rksident, has to be trekted nbniresident in a particul& 5 *. ass.ess'&knt.yearif he satisfies noneof the conditions of section 6(.l) in ihat'iear [see para 24. TI:'. /~ B 23.5 Resident in India andabroud - It IS not ncczss3r)-[hat ~l.pe~s"r~ \\,hi, .. i : -rcsiilent i r India, ~ can1101 . . brwinr. ri.sidrn: in an\ other counlr\. 101. ~ h same c sssc-ssmeu~ vr:ir. .A Drridn ma\. be I esicien~ ill more. than.oa:eicountry a$the.same,time for tax purposes;though h'e:cannot have two do~niiiles simultaneously. It is, 'thereto&, n 6 t neksiary .that a:person.,whwis: r e s i d e n h India, will be nonresident for: all:otheq crouNries.6 ~ ~ ~ ~ h e s a m e . a s ~ ~ s m e n t .' : y..e a r . . ., . . ..,
.,
,
/

9. resi8entor.a .. non-resident isia'@uestionpf fact and

.~ .

fact+ before tlie:

has to'be a residentEi Iritlia.and!tlieohusof proving that they arcriot residents is on.them. However: the burden of proving that an individual or a co mentMoosa S...Madha,&,Azam.Sl-Madhay., .. CLT[1973
, ,

, -

. .

<

, '

*
i:

37

Para 24

Income-tax - Reszdentzal status and tax znczdence

38

Residential status of an individual TSec. 61 . 24. An individual may be (a)resident and ordinarily resident, (b)resident but not ordinarily resident, or. (c)..non-resideot. . . . . ....... . . . . . . . . . 24.1 Resident and o~dinarily vesident [Sec. .@~i;%~~.p(@(pj~:~~T6~$'q~:ovt, whether a n individua,fis "resident and ordinarily resident" in India, one has to proceed as follows ,

, 1j

..

... - .-

. . . . . .

. .

. -

.,

IVho C J I I : ~ ~ ! ; z . ~ lrrnziir hd d j ~x r s r ~ d r d p ~ r i. o d . .-. 5

. . .r. - ..

Ezrr.rdrcl period

182 days, 5 An Indi.an citizen who le?ves Jn&i dur,&g the previous year, fgrthe purposrof ernployment outside India [see para 24:i-iai].or an Indian cit+li who , .iiaves+diaduringthk: ,., . . m&m(jer.o+ t&&!(<iw.of anIndiansh$+, I ........ ' . . . 2 : ' . . .: !. . . . . . . . . . . . . . . . . . . . . , . . . . - ... , . ,. . . . . . ,.>.. . . . . . . . . . . ., . . . . ~ . ,. . . . . . . . . . . . . a Eiceptiom two.. B y : & n e of Explhr?afiik,.@i)$o &ecti.oq~6(1jj the peri@:d:ot%@days".sefemedd~toiin ., ,.... ;

....

(b) . . above has been extended as follows v,,,.,f

;{ L , G ; p

"

..% L*.

f ; * ,!;~:,^s,:I$,. : '. . .... ... :... ; .. .. ?rz : ; ; , ~!S~~~;~:E:?:-;~~..::<%?:~~~><~;>& ..... . : . : ; , . y : : > 2 2 kt,,ea , s j t 2 *y, a : y : , a > A ; . . ,,.&aex28~<z,~~ . . . . . . . .<. . . . . . . . .z>x*. . . . z...aw...crs:?;.<lri. . . . . .. . . . . . . .... .: . . .: .. . .> .. .; .. .. . .;..
f%,.,..
r.

*..*..<*>.. ............. ~,,,,~,.,.~$sk.:~&~: ,8s&*b,3 ?.., <, .%+ "+!.r4;,.,,, p g * ,-* $ w gF&&pJ$ .... ,...* ;,-.. ~ 6 & ~ ~ ~ 8 & ~ $ $ ~ + ~ ~ @ 8 $ ~ @ ~ ~ ~ ~ s ~ $ 2"-. s ~ ~ ~ ~ ~ ~ ~ ~ 4% # ~ ~ ~ L ...'.&&$a@&.?. , 6%
,.,L..>.,
i . . . . . . .

Indian citiz~n:. oy a : ~ $ ~ s ? . n Jndian : ~ & . origin , . [see ~~a,24;1-la~]~yho.coqes,ona.vi+t, ........ ..... . . .to .......... India d u i b g t h e p r e ~ o u s ye% , . . . ,. . . .. .. ,. .. . . . . . . . . . . . , . . , . , . . < : ; ..... ., ....................
~

$82 days., .
, :
7 .

. .

..:,

.,

24.1-la. E i n p l q i i i d i i r . ot~rsidd InLila - .\l?ar?ini:u j - The reyuil-en-~<~~t is not lca\iny/ind;a tor ~.rnplv\rrlenrbut ir is Lsa\.~ng India fur . PUI P O ~ v ~ S i c ~ n p l o \ r n c)utsi~k ~ n ~ I n ~ l i Cc)r~iequ?ritl~; ~. an . indhi&al need not be-&.&employed p.erson!~wbo, leaves indi.a for. employment owtside IndiaBr+ti.sh Gas India ,fiR)rLitdd,. Inve [2006~155~,1~~~a?n.;326~(~~.~.-,~e:w,~eIhi);.. ' :; . , , . For instance, a private sector c o m p a n y ~ k d i & emppoysX$ ,an:~&a~citiZ;dniHe It.aves:Z,&ar(foI:f&e first . . timeJjon . September,27 .... ,.. . .A 2008 ..... for Takyo,forcompleting . , < ,. - . . ,+pyeI;seas proj,ect,o&,;heemplo.yer; , : c o 9 p q y . H$jw@,~+~v+.,backaf$er~-7 mcmths, X. .cantiket&,benefit.l?f the exc~$tiori'given,~bove. Since his total stay in India during the p r e v i o , ~ ~ y e q ? O ~ ~ l'e O ssssithan Q~ . i. s 182 days,.he wiU be ?onr . residentin : I : . ., . for i : ! i $e,prev;ious ...,. ..., . . . . .year . 2008-.q?.l . . . . . . . . . . . India 24. 1-,La2 Person.q$J~dian;ox~gip - A person:.is.deemedito Indian ~,t$& if he, o r either hi ; parents;or,any; ot hi~.gr+nd~pa~$ng,~as,b?rn~+ ydividedhdia. It may be noted that grand parents include bq&,maternal~wdiQa;ternat g ~ a g $ p q ~ n t s .: . ,. . . .
a>
8

& 4.f

, , , ,

02

4 4 . 1 - 2 ADD~TIONAL CONDITIONS TO -TESTWH~N;A RESIDENTINDIVIDUAL ISORDINARILY R E S I D E N T : I N . I N D I A - ~nder>ection 6161. , . a residmt individual is treated as "resident and ordinarily resident" in India if he ...... satisfies the following two8ddrl1onal conditions-

6, "

any person leaving on or before 28-sept will be in INDIA for less than 182 days.

39

Rule of reszdence zn brtef

He has been resident in India i

Para 24.4

In brief it can be said that anindividual b satisfies at least one of the basic condition
24.1-3 OTHER POINTS - I n determikog, the
A

s resident and ordinarily resident. in India if'he e two additional conditions [ie., (ij and (it)].
.. .
~

ial status of an assessee,the following settled

orouositions have to be borne in mind : a Stay at the same place xornecessary -It is not essential that the stay should be at the same Kinloch v. IRC 14 TC 736. It is equally not necessary that the stay should be continuous. Similarly place of stay or purpo'se of stay is not material. m Stay in territorial waters - A stay by an individual on a yacht moored in the territorial waters of India would be treated as his presence in India for the purpose of this section-Bavard Brown v. Burt 5 TC 667. ss Presence for apart of a day -Where a person is in India only for a part of a day, the calculation of physical presence in Lndia in respect of such broken period should be made on an hourly basis.,.% total of 24 hours of stay spread.over a number of days is to be counted, as being equivalent to the stay of one day- Walltie v. IRC[l952] 1 AER 92. If, however, data is not available to calculate the period of stay of an individual in India in terms of hours, then 'the day on which he enters India as wellas the day on which he leaves India shall be takeniuto account as stay of the individuatin India. . Advance Ruling P. No. 7 of 1995, In re [I9977 90 Taxman 62 (AAR - New Delhi).
24.2 Resident but not ordinarily reside~t[Sec. 6(J), 6(B)(a)]-An individual who satisfies at least para 24.1-1 but does not satisfy the two additional one of the baslc condltlons men~1EiTEEn conditions ize., conditions (11 and i l l ? mentioned m oara 24.1-21, is treated as a resident but not ordinarily resident in India.'~nothe; .words,..an:ind~vidual.bec~mes .,.. . , . . ~ . resident but 'not ordinarily , . . . . ..,. resident inIndia in any 66 the following circum~tances :. , ., . : .
. . -

,.

. .

&is~ I

I! lie iariiilc5 21 l c ~ s Jnc t 31 t!ie bas~;;dnditioiib ,i.d. :oiiJin~~n ;I i n a l u r l n 2 . i, 3 r d i~) of per2 2 i : - 2 : .

-. . .

3r u

or ~31.3 23. I - I] > U I ~ l o oi x .IIC

--- . .
GI'

-.

I\\..

.r he sJt,jrlss st i ~ , ~ s xi? z of 1l1e SIC ;oildi~i<,i~~ [ L L ' :ond:iion a.!dlrlonsl x n J i t l ~ r . s [ L C . i an.i :i or par3 4 1-21,

1 ,

31. bj

para 14.1-I..inJ one

~~

31 t

h ~

a-

24.5 Noz-resident-Anindividualis anon:re~identinhdiaif hesatisfies none ofthe basic cbndit~ons 24: I- I]. In the case bf ~~-r~Si~i~t,'tlie'~~diti~n~l.l.cond.itio~s [ie.,.(4 and (if) of . .. pa<i.2&.l-f,are . . ,.. not relevant. . ~ . . ..~. ~. 24.4 Rule of residence in'iJvief - The Table,gi?en below summarjses the rule of residence for the assessment year 2009; lo-"
, , ~,

..

,,

RULEOF RESIDENCE
bill --

, . ,

.. .. .

- -...

-- -. .. ---

Kazde17r und ~ ~ r d i n a ~ l l y

no1 ordilzariiy ,-eside>rr

.Yorr-resi~eizr
-

Must satisfy at least one of the b a s ~ / conditions-and the two additional conditions [ie:, one of (a)or (b)and both of (1) and (it)]

~ Must satlsfv at least one o i the b a s ~/ ~ Should not satlsfv anv of the b a s A conditions -and one or none of the conditions additional conditions [ie., one of (a) or (b)and one or none of ( 1 ) or (it)]

TAccordlng to bas~c cond~tions noted above

Para 2.4.4

Income-tax - Restdenttal status and tax aznctdence

BASIC CONDITIONS A T A GLANCE

/I a;

Presence h a t least 182days in India during the previous year 2008-09 b. ~ot.junctiona1 , ,

/.

a. Presencefor a t least 182.dav6 ;in>/ ! a. Presence.foi.atieast.182days

&A

India during the previous ;ear, 2008-09. b. Nor functio

.. .

lI
.

I1

. .
,

2008-09. . ,. b. Presencein India.Eorat !east 60.:' clays duhg'the previou?ye& 2008;09':indi j65dBvs &~g,.4 ', /! . years immediately: pwked~&i:./ . . the previous y.e<F. tie.,. during, Aaril 1.2004and'karchj1.2G0K1:
~.

- hdiaduring. the,pr.evious:;ear.-

ADDITIONAL. AT A GLANCE ... , CONDITIONS . . . ,

i . Resident:in Indisin atleast 2 out of 1:O-yearsimmediately precechg'the previous year [ie., he must satisfy:at,' least one of the basic conditions,in:2out of10 immediately precedhg previous years (ie.,during previous years 1998-99 and 2007-08)]. ii Presence inIndia for at least 730 days during 7 years immediately preceding t.he previous year (ie.,during April 1, Z O O 1 and March 3t,.2008).

.
,

24-PI X, o foreign noiionol [notbeihpo person oiindian'origin), come to indio for the first time from. USA on July I I , 2002. He stayed here for o siretch of 3 yeors anu left for iopon on July 1 I , 2005. He returned io indio on April 10, 2006 and remained here fill August 17, 2006; wh.&n-hkwki~tbock to USA. He dgoin come bock f o . . ~ ~ d i p ~ ~ - , ~ Jonuoiy 30, 2009 at 1'7.59p:m. and continued to stay in india ihereoiier: Deiermine his residential sioius for the . . ' ossessmeni year 2009- I.0;:. , -. . . ,.. SOLUTION : ~ortheaisessrneht yeai~.0b9~i!@;~li~o~~i~i'yedi'2'~~8-~ year. 9 9 ' During i~~,Pr the k ~p or~ ~sv i o ~ $ a r 2008.09, Xis in India for o period of 50 days (i.e:; J~nuarj:2009~:-1"i'Fkbrua~2009':'28day~ +'M'artfi2Qt@9: 31' day's)'.Mdreover;'duririg byeats i'immediaie~~preEediiipfh-eprevrous year2008-09; he is in india foiS97day~ (i.e.,2,0,04':05 : 365 days; 2005-06: 102 ddys;2006~07:'~f30'd&~sand2007-08 :Nil).Thus, hesatisfies cend/tion (b)mentioned in. paro.24.1.- I (namely, presence of at. reait60-.days!8~ringthe previous yearbnd. 365days.diiring 4 yeQprecedingihe previous fear);.MB,-therefore,becoinesresideniinlhdiii.. A resideni individual.may eitfierybe ordi'6aiilv-.rksideni or not ordinarily resideni in India. To'determine it, 6ne.lids to . . , the test of two aaditi~nal . . .. . ,~.. ~. . . ~. . . . , ~. - . -.- . , -. ., cqnditions mkniio"ed in pato 24, i-2. . , : . j . , 'i . ;. , ;. . . .. , , . :,:, ... , ,,,,, ,, , .....: * .'' ..:;..,. "..:?.., pr&rd$ .,.,. fedC ,., 2.d ~ . 8 , ::0 9 , ;,,.~ . i$ ; i i.' I ~ &1.227 ~i~rd a y ~ ~ n ~ ~ d ~ ~ ,~ . ,., ~ , n g : - l : O - y e Du&& 1F.ars . . i,mmediat~l~.pie~~di.'rj~t~e , , .il>_, immedidi6ljiprecKdin~ it?; pfevidds'yebr 2008:09; he is iesident in.liidid for 5 years os foiFows : . .

'

, ,

,,

(Pi

365 366 264

Nll Nll
Nil

[a) as well as [by

(0)
(0)

Nil

None None None None

Thus, he satisfies one of the basic conditions and the two additional conditions. He will, therefore, be treated as resident and ordinarily resident in India for the assessment year 2009-10. If X comes to lndio at any time after zero hour or1 January 30, 2009, he will be non-iesident for the assessment y e a r 2009-lo.,

41

Rule of reszdence zn brzef

Papa 24.4

24-Pax, a chief executive of a compony hod undertaken ioreign tour on various occasions for company's work and was oui of lndia for o toial number of 225 doys during ihe previous year ending March 3 1, 2009. He submiis his return of income for ihe ossessment year 2009- I 0 in the sioius oinon-resideni. is he justified ? He visited a foreign couniiy for ihe iirsi iime during May 2007. y virtue o i section b(l)(cj, an individual will be resident in lndia in any previous year if hehas. been SOLUTION : B and at baht365 jays during 4 years preceding the in India far a period of at leks: 60 days during the previous year. However, as per Explbnation (a) where an Indian citizen haves india tor the purpose of employment ouiside India, the above period o i 60 dayshas been extended . . , to 182 days. In the given prqblem, X had left india for purposes of empioymenibutside lndia. In otherwords, Explanation ja/.will beappii='a,blk. Accordingly,Xwill betreatedasnon-residentf0r~heasse.ssmeni~ear2009-10. Hence,ihesubmission ofhis return of income for the hssessment y.ear 2009-10 in the stpius of non-resident is justified. .. . , 4-P3During his 196days'siay in India in ihe previous year 2008-09 X, aciiizen o i U.K. is all ihe time moving from ,;. He claims that he is non-resident in lndio far ihe asses~mep year 2009-1 0 on ihe following .. .
.,
~ , .
, :

e had never visited lndia before April

. ,

1 , 2007.

urinc'2008-09, though he is inlnaia for 196 days, he couldnoi Gend'iwo coiseiuiive nighis of any one place. Far the assessmeni year 2009- 10, he is resident in U.K. according to ihe English income-tax Aci. He insists ihai he cannoi be resident of iwo countries for ihe same ossessmeni year. Go you agree wiih him ? SOLUTION :The claim ofxis noitenable, as he is in lndio for 196daysduring the previous year2008-09. Hesatisfies one of the two basic conditions (namely, presence of I 8 2 days or more during the previous year 2008-09) and none oithe additional conditions. He is, therefore, resideni but not ordinoriiy resident in lndia forthe ossessmentyear 2009.; 0. Thefactihathe couid not spendiwo consecutive nightsatany one place is immoterial. h/\oreover,o person who is resident in lndio, may become resident of any other country according to ihe tax lows of that country for t'he same or a different assessment year. 24-P4 X, afier about 30 years'stay in lndio, reiurns to America on Januaiy 29, 2006. He reiurns tolndia in June 2008 to join on American compony as its overseas branch manager. Deierrnine his resideniiai siatus for the assessmeni year 2009- 10. SOLUTION : For the assessment year 2009.1 0, the year 2008-09 is the previous year. During 2008-09, X i s in lndia for more thon 271 days. He is, therefore, resident in lndia. He is resident in lndio for 2 years out of, 10 years (i,e., 1998-99 to-2007-08),andhe has stayed-iormore thon 730daysduring the seven years precedingthe previous year 2008-09.He is, therefore, resident and ordinarilyresident in lndia for the assessment year 2009-TO!. . . ' 2 4 - ~ 5 - ~ : ~"p'o e i s new profkssion on January 14; 2008 andkeeps his books o f atcouni on the basis bffiixiiciai year. Tiibu~h'he hos'nevei gone oui bflndia, h& claims ihbi he i s resident and not ordinarily resident Poi the assessment year 2009-10. For ihe support of his claim, he submits ihoi he does noi fulfil one of iheaddiiional 'conditions-(i.e., he is.naf"resideni in lndia,far aileasi 2,awi,of i 0 preceding.yebrsL as-h e has not beenbssessed ~ os.residentduiing .?'but oTihe:preceding 10 yearsdue to absence of taxable: income. Comment on. the. cloimof X and determine his residential status ior ihe ossessment year 2009-10:

SOLUTION :The:.claimof X is not acceptable. Section b(6j:presciibes add,iiional conditions for deciding whether or not a resident individual is ordinarily resident. These conditions arei6ased;upon physicalpresence in the preceding :7 years and residential staius during preceding, liO years. Residential status during.-preceding.10 years:is: to be : . determined,,whether or notan individua1.i~ assessed as resident in the post. In otherwords, an individual who does not,have taxobieiincomedwring preceding-I 0 yea~s,.doesnatbecome.nan-resident,(;n preceding.i0~yeors)perely because of the fact that he was noi assessed as resident during these years. Ciaim ofX is, therefore, not;justified. As goneout of India, he willsatisfy basicaswell asadditional conditions . . and, accordingly, . , he will.beresident ., . resident fqr ihe asGssment, . 2009- 19. .,

24-P6X is a fijreign ciiizen, noi being a person of Indian origin. Deierminehis residential staius for the assessmeni ihai during financiaiyears 1994-95 to 2008-09 he was preseni in lndia as.follows : year 2009- 10 on~theassumption
...

!994-95
1995-96 1996-97 . ,. ..200Oz0i

221 days 22 days 50 days 30 days,

i 991-98 1 9ps-99
i 999-2000
2004-05.
. , . ..

72days 130 days 340 days 1:O.O days

Pasa 24.4
200 i3 2 2002-03 2003-04

Income-tax - Residen:8jalsrat.us:andtan incidence

i60,days
96 doys 286 days
.

$2
It82 dhys 85 days 28Odays
'

2005-06 2006-07 2007.08 2008-09

86 days
: {

thepre$ous.~eai.D~;ring.200$%9, X is inkdiefor a periodjf86 dbys qnd d"ring iouryepbs pr+ed?ng t h ~ ? & v i o " s .2008-09, y ~ ..., . .. . heisin . indid I , ...:.; f0f647 ,, days. Thus, he iatisfies one bf the iwo:basii ioiditionslaid:down by,ieciipn 611) [i.?., ~b~ditio &],me"titined n . .'; r . in para 24.1 -11 and, consequently, hebecomes teside'nt in lhdia'. A resiheiit individudl inbyeither bg an ordinarily .;:>,,:, . , . . , . . .. , residknt, &;;has ,.whetherX'i3 ., . , Oidihariiy'isid&ntor noi'bkdindrily .. . . residsnt,dy , n&?o$di"?rilf , : . ; , . : C . , . . ;$$identi T O ... ,., de?irinihe . .. i ? tLsi the two addition~itondiiions a ; f '? i 8 8bkn ijy ieciion b(6)(d)[see t&nditioi+(i)' and (ii) i7 para. 2;l.t-21. " Information pr&en;ed'i'n tiie Table given beibw'hay be "sid'toi6it the addiiionbl Lbnditions :

SOLUTION . . , . :. Foithe . bisessment year ?0@:10,. finan.cigly~ar ..., . , .

211@8-09,~i

I1

r-': . . year'
2?3'-:8

'

T:. ~r?;en=e .. . . .

-. .

irt ndio [nuinbar c f d&s)

. .

. .. .

,.

.St?!?+

..

... ,

~i);ch,;/~3;~di#0 .ql:Jr 1 1 ,bi . . . ,puri 24. i ~ i ' i s rai.sb,ed . la become resioenr '61 ' . :. . ., "o,rr~yid&,f. ' ':,
' '

'

2FC

Ker ,t..r

: or I .

. . . .

.,'...

~ o n d i i i o (?$:of n para 24.1:-2 -Thiscondition requi'cesthat an individual should be resident in lndiafor at least 2 out of, 10-yearsimmedjaiely preceding the releyar?tprevious year. X, in the present case, is resident in India:i~?pors . . out of $.Oyeass(i.e:,dur~ng'l:998-$9.io.200f-08,,;he,is5~:esident inlndia in oil the:years except 2000-01). He, thus, ~~t,isfi~s~~~s,.c~ , .~ . d ~ t i o n .. .. , .

--..Conditian:jii~of~p~rot24.;!l:-2~Tbis~condition requires.that an!indiuidualshould-be.present. in lndia for at Ieost:-730

da,ys du.ring;Z years imhediaiely preceding the~relevant-previous year. X is:.im lndia for 1 1g89 days,during 200.1.-02 .. ., to 2007-08. He, thus, satisfies this condition:
'

X.satikiiesoneofihetwo.b;asiccondiiions a.~d:theiw~rad.ditiond;.cooditions. Meis, thereforejresidentond~ord~n:arily .::~;es,ide.nt.in l~m~i.aior.the.assessment:year 2@9-1.0;. . . i : ; .. , . . .. .. .

.,

: i ; ,2437ir-X;,dn, Im&dn?ci.fizeri;who 3;. fiowihe;:fir&.$ihe :ah, &pie&ber

~

isappoinfedtos Senior:PoidtionOfficer'by ihe Government of Iran, leaves.India, 1.0, 200.7 for joifiing his duties in Iran During i h e previous year 20O8-09; he , . . : .., .>. , t6mes-io . ' ; ,:hd'. , ro~ona.~visit.foi.i'8.i,days, Determ.ineiheresiden.tio1siaius of X for ibe assessmenPyears.200809 and

:...

.'.soruifa;wi: o:;l""'; ".' urir1gthe.~revio6s year 2007108,'X i~in'~lhdiafor'l'S3'd.ays (and during fourye&rsiinmedibtely
..

3@09-71a;,.; fl,:;:::;,t$?.

? , 'x. -.

.., .

. , .. .,,~

..

. ...,~.
:.
:,

<,,>

,,

,.

preceding the previous year 2007-08, he was in India for'mtk than 365'days). ~ h o u g h i i e sailsfis-oneof the conditiogs: laid d.own.in:section6(lr),,.yet by, virtue of Explanotiog,,io. section 6(J), he will be, non-resident-itit ihe assessmemt:year 2008-04 (an Indian etizen, leaving l n d i a f ~ r t h e purposeof employment,,will be treated,os resident in lndia only if he has been in India in that, year for at least 182 doys). buring the previous year 2008-09 ;;f ( theassessmen+year 2009-10), X come: to lndia for 181 days. ihdteibre, X does not satisfy one of the conditions Said down by section 6(1) [read with Explanaiion to section 6j.ljj. W e will, accordingly, be treated as non-residetifin I&& for the assessment year 2009-1 0.

.A

24-B8 X is a foreign ciiizen (noi bei&o p&rson of Indian origin). Since i981. tie visits Indio every year in-ihemonih of April for 100 doys. Find out the residential status of X for the assessment year 2009- 10.

43

W h e n a HUF zs reszdent or non-resident

Para 25.1

SOLUTION : During the previous year 2008-09, X i s in lndio for 100 doys and during 4 years preceding the yebi: 2008-09 (i.e., 2004-05 io 2007-08), he is in lndio for 400 days. Thus, he soiisfies basic condition'(b)to become s ordinarily resideni or inat ordinarily resident,.one.has resideni in India. To determine, whether a resident individual 1 to test two additional conditions os laid dohn by section 6(6)(o). Condiiion (i) ofpora24.1-2- ~ v e r y ~ e o r ~ s a t i s basiccondition fie~ (b), as he is in lndiofor 100daysduringihe relevant previous year and 400 days during 4 years preckding the previous year. Therefore, he satisfies this condition. . , ' Condiiion (ii) oipaio 24.1-2 -Xis in Indiafor 700 doys during 7 years prior to the previous year 2008-09. H; dqes not satisfy this condition. . . ~, X satisfies one of the basic condiiions:and oneof the two addition01 conditions: lie. is, therefore, resident but not ordinarily resideni i n India for the assessment year 2009-1 0. .,

14,

?.$-+9X comes tq,india for ihe first iime on Sepiember 1, 2008. On Sepiember 15, 2008, he loins a company oo
monthly salary o f ~ s ,60,000, as o pod-time pioduciion consuliant.[.duiy hours : 6.30 PM io 9 . 3 0 ' ~ ~ Prior ) . lo SGPiemberi5, 2008, X does noi have onysource of income. On Ociober 9, 2008, he storis o trading business in cornputer hofdwore after obiaining opprovol of'his employer. For ihe previous yeor ending Morch 3 1 , 2009; H e . hos , ihe following income : Salary from ihe pod-time employment : Rs. 3,90,000, income from ihe business of iroding in compuier hardware in lndio : Rs. 7,86,000 ; and foreign income from the some business : $ 40,000. Find oui the resideniial siotus of X for ihe ossessmeni year 2009- 10. SOLUTION : For the assessmeni.year 2009.10, X has the following sources of income in lndio :

1.

Salary income

Business income

September 15, 2008 to Morch 31, 2009 October 9, 2008 to ,March 31, 2009

198 days 174 doys

.

., ,

For the firsi source of income, X becomes resident in lndio by sotisiying one of ihe bosic conditions. As he comes to theadditional conditions. Thus, he isa resident bui not. lndio for the first time in 2008, he.is unable to saiisfy ony~of . . ,. . . ..,.. ordinarily resident in India for the first previous yeor.
FO; thesecond sour& of income, X is anon-resideni, as he saiiifies none of thebasic conditions. It may be noted that he is non-resideni in Indioforthe business income ond resident but not ordinarily resident forthe salary into&. in viewof seciion 6(5), if:a person is residini in Indiafordne ofihesourceiof income, he will bedeemed to be reSident: in India for all other sources ?f,income in the sameqssessment year. In respeci ofthe assessrnemt 200'9(1:0; & will, iherefore, be regqrded as resident but not ordi?,arily.residentfor all squrcesof income. . ~ , .

: .

ed.family is either ordinarily resident or not ordinarily resident.. A resident Hin 23.T When i a Hindu undivided family i s resident or.&n-~eSiclent- A Hindu undivided family is said to be resident in India if control and ma~~agement of its affairs is wholly or partly situated in India: W Hindu.iuidiyi&edfamily is non-resiaeijt in Indiaif cb~+trol and management of itsaffsis is w?ill'y situatkd .~,. outside . .. India. The . ., . table..giv& . . below jigh)ights . the same prqp&ition , , ,~

y (like an individual) is either resident in India or non-resident

Hindu . undkidseli' . " family . [Sc: .

, , , ,

&(2)]
.

undivided family is lib WAY i n India

a Wholly out of India
.
,

'

'

s Partly in India and partly outside India

Resident Nan-resident Resident

See parii25.2.

>

See para 25.2

.. ,. .. .
"

Note - In order to determine whether a Hindu,undivided family is resident. or non-resident, the residential status.of the k a a a of the.Family during theprevious.year is not relevant. Residential status of the karta during th? preceding years is considered for determining whether a resident family is "ordinarily residentJ'-see para 25.2.

Para 25.1

Income-tax - Reszdenizal status and tax znczdence

4%'

25.1-1 WHAT IS "CONTROL AND MANAGEMENT"' - Different courts have defined the term "controland management" as follows a De facto control - Control and management means de facto control and management tifr& not merely the right to control or manage-CIT v. NandZal Gandaltzl [I9601 40 ITR 1 (SC). Place of control and managemenr - Control and management is situated at aplace where the head, the seat and the directing power are situated. The fiead and brain is situated where vital decisibns concerning the policies of the business, such as, raising finance and its appropriation for specific purposes, appointment and removal of staff, expansion, extension, or diversification of business, etc., are taken-Sun Paulo (Brazilian) Railway Co. v. Carrer[l'886]AC 3 1 (HL). a Residence of HUF in India -The mere fact that the family gas a house in India, where someof .. .,.:,its members reside or the kartais in India in theprevious year; 806s not constitute that place as'tl'ie'seat of control and management of the affairs ofthe family, unless the decisions concerning the affairs ! t b a ~ ~ l a cThe k. fact of the absence of kartafromlhdiadoesrio~~ake of the familyare taken a the family non-resident-Annamalai Ckettiarv. 1~6[1958134 ITR 88 (Mad.). w Broad propositions -The following propositions can be stated on the basis of the rulings $ken in S~rbbayya~Chettiar v. CIT119511 19 ITR 163 (SC) and Narasimha Rao Bahadurv. CIT[1950] 18 ITR 181 (Mad.)1. Generally, HUF shall be taken to be resident in India unless control and management of its-affairs is situated wholly outside India. 2. HUF maybe residing in one place and doing a great deal of business in other place. 3. Occasional visit of a non-resident karta to the place of HUF's business in India would be insufficient to make HUF ordinarily resident in India. 2 5 2 When a resident Bindu undividedfamily is ordinarily resident in dndia - A resident Hindu undivided family is ordinarily resident in India if the karta or manager OF the family (including successive karta)satisfies the tollowing twoadditionai conditions as 1aid.down by section 6(6)(b) :
.,. , ,. , ., . . . , . ,,.. . :, . . .:,',, # .. ~n@ttioni{:t). . , !..'?: . .. .. . ,;, ...,.., ..
;

K@a. has been present in India for a period o E 730 days or more during 7 years immediately preced'mg the previous year. , ,, . , ::,$$gdg~;?@fX+~,;:
.
,

. .-

[accord.hg to thebasic Kana has been resident inIndia i n a t leasi.2 t o ; of't0 prkvious .condition .. mentioned in'para-24:1-I]imrn$di&elY preceding the relevant previous year ,
,

If the karta or manager of a resident Hiiduiindi~~idedfamily 'doesnot satisfy the two additional conditions, the family is ,treated . ,. . .as residentrb.ut,,not . , . . . . . .., c osd@arily,resident ..; . . in,India.,. >.,. , . : : :-': . ; , :,; ,..,: . ;
Hindi und~videdfomiiy, is situated in Hong Kong. The family is ma 1980) who'ii resideniin~lndia,in only 3 out of i 0 yebrkpiecding the previous yeor 2008:ORind h e is.ptesknt?iiii. indio for more thon729'days.during ihe last 7 years. Determine.thi residenti,alstot"s ofthe iomiiyiorfhe.assessmeni year 20Q9-10 if the offoirs of the family's business.pre.joj,. wholly , , , .cogtroli,ed . , ,. from Hong ,. . Jong,. (,bJ,parilyco~trolied ~. from Indio., . . ,,.. ,.. , ,.:,, . . , .,., .,., . '.. . :"i , . .. . . . SOLU~ION :I! offairsof a ~indu.uodi~ihediamiiy,ar~ contr?lkd.iro.m.b . . . , . blc&duiside lndia,.the fqmily,willtberron: .. . ~, . residkiit.~ c c o r d i ~ g XY l y Hindu undivided fomily i4'kn-resideeniforthe assessmentyeo~ 2009- 1 Obnderiit,yaiion-(a). Under situotion (b), affairs of the family's business ore portly controlled from lndia during the previoos yew 2008-09. Therefore, the fomilv is resident in ln8ia:Wow&$&r;'iiw6ul&be brdiiiarii~ iesident in lndio ifkori&'sati$EieS . . ., tbe follp~in,~:~~.condit.iOns ..,,. ,.,:,.. , l ',. a i t l i,,, ~6ysedion:bjaljb) ~,..,....., o~ .,... ii
5 '

2 5 4 1 The Heod Office of&,

,.

._

.,

.,

,,;

'.

, ,

~~

I.He his-been-resid.ent in lndio.in.ai-leasi 2 oui-of iOyears preceding the- previous year.

2. He has been present in lndia for at !east 730 days during seven i;edrs preceding the previous:,yeor. A s the-karto is iesident in lndio in 3 out of 10 years preceding the previous yeor, the family would be residenf a,nd ordinarily r-esident in lndio for the assessment year 2009-10 in situotion (b). , ~

25-P2 A Hindu undivided lomily (Xis korto, A, B ond C are other coporceners) carries on cioth business in Burma. Acomes to lndio and storis o cioth business at Bombay in porinershipwith some other persons. The copiiol supplied by.A to this firm is found. to hove.come from,thefomily. Subsequer>fij/,B joins the firm os paiiner, Later on another business is stciied.at Benaroswith.the somepersons mnd. one outsider;as.:pa$ner. C joins this firm. The Asse~2j~g Officer wonts to treoi. the family as iesident oo the ground thot its coparceners ore partners in funds, and the firn.8 are iesident in indio. Is theksessing Officer iegoily correct ? the firms, financed out of the forn~iy

45

Reszdentzal status of a company

Para 27

SOLUTION : Acose on similorfocts wosexomined by the Supreme Courtof lndia ini'hecoseof CITv. NandlolGondolo~ [!?60j 40 i i R 1, wherein ihe Court pointed out :hot boih under the Hindu law and underthe law of porinership,.ihe Hindu undividedfamily ossuch couldexercisenocontroloverthe monogemeniofafirm in whichsomeof itscoparceners were poriners, even if capital contribuied by coparceners was iound i o have come from ihe family. The position in Hindu law with regard i o coporcener who has enteredinio partnership with others is well senled.. The parinerrhip is a contraciuol partnership and is governed by the Indian Partnership Act, 1932. The p'artnership is between the coparcener individually and partners and not between :he iamilyand other partners. This remains s'o even if ihe coparcener is occouniable to the family for the income received. Thus, control and management oveiihe firm's business lies in the hands of individual coparceners and not in :he hands of the family. The Assessing Office) is, :herefore, noi jusiified while holding ihe Hindu undivided family as resident in lndia.
. . . ,.

Residential status of the firm and association of persons [Sec. 6(2)]

26. A partnership firm and an association of persons are said to be resident in India i f control and management of their affairsare wholly or partly situated within India during the relevant previous year. They are, however;treated as non-resident in India i f control and'management o f their affairs ..~ are situated wholly outside India. s The above rule may be summarised as follows ,
~

Control and management of the affairs of a fii-m/association of persons is 3 Wholly in lndia a Wlrolly outside India a Partly in India and partly outside India

'I

Note - A f i r m f a n associatioil o f persons cannot be "ordinarily" o r "not ordinarily resident". Theresidentialita'tus o f the pastners/meinbers o f the firm/association is not relevant in determining the status of the f i r m i association. . ,

26.1 What is "control and management"- While in the case of a f i r m , control and managernenr is iested.in partners, in case o f an association o f persons it ii'vestedinthe prindipkl officer.Corit,r41 and management means de fictd conti-01 and management and not merely the right to cbntrbi6r manage. Control and management is usually situated at a place where the head, the seat and the directing power are situated. Where the partners.of a firm are resident i n ~ n d i a t h enormal p$esumption is that the firm is resident ii1,India.This pi.esurnptio,n can, however, be effectively control and management of the affairso f the firmis situatedwholly rebutted by showing that~the outside.lndia. The onus o f rebutling the pcesumption.is on the assessee:.
.

29. An Indian company is always resident in India

......

during the previous year, cont~ol and management

* l

management of its affairsis either wholly or partly situated out,o f India. The table given befi%-

/
IG

Control and management of the affa~rs of a company /for meanlng . . . see para 333.11 is Wholly in India Wholly outside India inIndia and pai-tly outside India

I
Resident Resident Resident Resident Non-resident Non-resident
,

(Am <<:~arlly

....

Note - A

company can never be "u~.dinarily"o r "not ordinarily resident" in India.

I.

.,

..,

Para 27.1

Income-tar - Reszdentzal status and tax znczdence

46

27.1 'What is control and naanagement - In determining residential status of a cmpan;y;?he . . , , . following broad propositions should be kept in view : .. Controland management - The term "control and management" refers to "headandbiain" wliich directs the affairs of policy, finance; disposal of profits andvital t h i n ~conceining s the ma$iKe'&i-nt . . .. ot"a cam any Controlis not necessarily situated in the country in which the companyisregistered. Un er the tax laws a company may have more than one residence-Unit Construction Ca.'Lfd. ., , v. Bullock[1961] 42ITR 340 (HL). The mere fact that a company is also resident in a foreigncountry, would not Gecessariiy displace its residence in India. 8 ~ e e t i of n Board ~ of directors - Usually control and managgement of a company's affairs is situated foboard of directors are held. Moreover, control and management referred to insectiori6 is central controlaniiinianagement and not fhe iarrying 6n:bf day:ttidag business by servants, employees or agents-Narottam &Pereira Ltd. v.. CLT [I 953123 ITR.454 . . . . (Born3 ...*, and CITv. Bank of China (in-liquidation)[1985] 23 46 . . (Cal.). . . . ., : " . ~..!';>, rr Partial.control from o u ~ ~ d- 'C,ontrol i a and management' does not mean..carrying.o p a day: to-day business. Even a partial control of the company outside Indiais suffficienf to hold,a figreign company as a nun-resident-Radha Rani Holdings (P.)Ltd. v. DITE2.0071 16 SOT 495 (Delhi).. .,

e,

2 . s .

axm man

Residential status of "every other person" [Sec. S(4P-1

. .

28. Every other person is resident in Indiaif control and management of his affairs is wholly or partly situated withinIndiaduring the relevant previous year. On the other hand, every other personis nonresident in India if control and management of his affairs is wholly situated outsicle India.
I

Relation bemeem residential status and incidence of tax [Sec.

29. Under the Act, incidence of tax on a taxpayer depends on his residential status place an tlme of accrual or receipt of income. 29.1 Indian income a n d fore-eign &come - In order to understind the relation&iip'biide& residentialstatus and taxliability, one must understand the meaning of "Indianincom2an@Forei& ,.. ,. . .. . . '.)'..;. income". 29.1-1 "INDlAN INCOME - Any of the fonowing three is an Indian income 1.If incoke is receivEd (or deemed to be received) in India during the previous year and at thesame time it accrues (or arises or is deemed to~accrue or arise) in India during the previous year., 2. If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year. .,, 3. If income is received outside India dwingthe , .. . . . .. pfF?iius.y$r . .. . . . but it accrues (oy:arises,.~~is:d&fkd . . .. .,.. to accrue or arise) in India during the previous year. .. . ., I P , -If the following.twoconditions .. are satisfied, . , . then . such income is!'foieign . .' . .. . - .

-0'

,,

-% .

..

. ,. .-. . , .

(or not deemed to be received) in indiB; and does not accrue or arise (or does not deem to accrue or arise) in India,

29.1-3 ~ ~ o v l s lI&.:BRIEF.; o ~ i The.above provisions mav be exul&eii i n brief 'isfollows:

rZtX,-income ii re~;.ivrd'(oi-deerned
. ,

. -- .

--.

r-'

ro hc received, in i ~ d i a driring rlic rel2vanr yrurs

\l'herfzer income accrba cur (crises ~ J Iti dct:nud ro ucciur or a n s q in Indm duriz~g rkCFe1aanr years

I
Indian mcorne Indianmcorne Indian lncorne

Yes Yes No No

Yes No Yes No

47

Provtrzons rllustrated
- .. . .-.

Para 29.4

29.2 Incidence of fax fordiffeuent taxpayers - Tax incidence o E different taxpayers is as follows-

-%

Mian:incdme? . a Foreig-n iiicomet

,

I
'

I I

Individual ~2nd Hiiidu undii~ided [ainil). RisidenraiiJ u~-dinr;riI\' licjiiirnr bur nor re s. id e~ in~Indiu -. . . Taxable in India Taxable in India Only two types of foreign Taxib'le'in ,,... India incomes (ie.,. Case I and Case2 given below) are taxable in India Any other foreign mcome is not taxable in 1n8ia .

Taxable in India Not taxable in India

I

The following foreign incomes are taxable in the hinds of a resident but not ordinariiy iesident'in IndiaCase 1 - Business income and business is controlled wholly or partly from India: Case 2 - Income from profession which is set' up ill Inclia. No other foreign income (like salary, rent, interest, etc.) ii taxablein India inthe hands of a resident but not ordinarily.resident taxpayer.

1 Foreign incoinei

1
,
~

Taxable in India
,

Not taxable m India

29.3 Conclusions - The followini,:b. .r. . ~ ,. +. h . "~o~~lu can sion~ drawn -

u/l. Indian incoqe --Indianincorne~is.tilwa~s.taxab1e ....., of the residential status of, . in India .irrespective ,~, .
,.......,.,..
,,
,

>,'

~. the taxpayer, / 2 . F&eign i&ome - Foreign incOmetjs taxable inthe haqds residen.t (in the case of a firm, AOP; ,.,., ' , . . . of , company a every . . .. ' . . and ordinarily resident (in the case of an individual or a Hind%div%ed-iucamei.s ,,... . nat taxable in the hands of non-resident ,>: n i* .... . . the hands of resident but no.; qqdinarily , , . .. . , reSidint . ., . . taxpayer,.foreign .. income.is taxable only if it. is. (a) business income and business is:controll;edwholly or partly from 1ndia;'or (b)'psofissi~nal' income from a profession wfiich~is set upin Xndia. In any other case; foreign illcome is not taxable in the hands of resident but n o j ordinarilyresid'en~ faxpayers. . ,'
, ,
',

'),',.

'

&

29.4 Provisions illustrated - Different situations are covered in the table gven below -

I. Rental income of Rs. 36,000ii 1'1t'is~ndian'income. Indian income is received in India on May 10,.2008 (it / always taxable may accrue outslde Indla or m India)

Yes

Yes

'

For . meaning . of,'!Indian&comevand "foreign income", see para 29.1 ' ~ icasc.of.a l f i m , ' ~ o p , . c o m ~and ++~ every otheS'@erson. "In case of an individual or a Hindu undivided family.

Para 29.4

income-tax - Resideniial status and tax incidence

"

... 'In casc o E a firm, AOP, company and every other person .. . . . ~. '"in case of an individual or a Hindu undivided Family. ?if aggregate amount of gift received by an i n d i v i d u a l l ~ during ~ ~ a Financial year ilxceeds Rs: 50000, it is taxable is or ,,::.: atthe time oPmarriage "income'.. This rule is,however, not applicable if gift is received by anindividuai'fromaie1atii.e , . . , , , , : or by will-see para 199 for detailed discussion.

49

Actual recezpt v. Deemed recezpt

Para 3@:4

9. Gifti of Rs. 1 lakh rece by an individual on November 30, 2008 from a friend. 10. Income of Rs. 96,000 received outside India but later o n remitted 200.8-09:

Receipt of income
30. Income received in India is taxable in all cases irrespective of residential status of the assessee. The following points are worth mentioning in this respect: 30. B Receipt vs. Remittance -The "receipt"of income refers to the first occasion when the recipient gets the money under his control. Once an amount is received as income., any remittance. or transmission of the amount.to.anotherplace does not result in "receipt" at the other place-Keshav Mills Ltd. v. CIT[1953]23 ITR 230 (SC):For instance, an assessee, after receiving an income outside India, cannot be said to have received the same again when he brings or remits the same to India. 'The position will remain the sameif income is received outsidelndiaby an agent of the assessee.(may be-a bank or some other person) who.later on remits thesametoIndia. Income after the-Cirstreceipt. merely moljes as a remittance of money. The same income cannot.b.e received bythe same person .. . . . , . ... . twice, once outside India and once within India. 302 Cash vs. Kind - It is not necessary that income should be received in cash. Income may 66 receivedin cashor kind. For instance, value of a-free residential house provided,to an empl-oye.eis taxable as salary in the hands of theemployee ihou.gh theincome is.not received in cash. .
,

30.3 Receipt vs. ACCYUQZ - ~ e c e i pis t not the sore test of chargeabiliti to tax. 1f an Yncomi i s,not . .. .. .,.. taxable on receipt basis, it may be taxabte on accruai. basis: . .. . . . . . '. 30.4 Actual receipt vs. Deemed receipt - It is not necessary that an. income should be actually received in India in order to attract tax liability. An income deemedto be received u3 India; iii't& previous year, is also included inihe taxable income of tbe assessee. The Act enumerates the following as income deemed.to be received in India : o Annual accretion lie., interest inexcess of 9 3 per cent) tq the credit balance of an employee in. the case of recognised providens fund jsee paras 56 and 56.1-21. o Excess contribution of employer (ie., in excess,d 1'2 per cent of saiary)'in the caseof recopised provider~t fund [see para 56.1,-21: . . a Transfer balance,[see para 49.121.. o Contribution made by the.Centra1 Government or any other employer in the previous year, to the account of an employee under a notified pension scheme referred to in section 80CCD (applicable from the assessment year 2004-05).
,

4 .
, ,

'

'

,!

' I n case of a firm, AOP, company and every other person.

'"In case of an individual or a Hindu undivided family.

tIf aggregate amount of gift received by an individual1HUF during a financial year exceeds Rs. 50,000,it is taxableas
"income".This ruleis, however,not applicableif gift is received by anindividual fromareiative or at the timeof marriage or by will-see para 199 for detailed discussion.

Para 30.5
3

Income-tax - Reszdentzal status and tax znctdence

50

Tax deducted at source [sec. 198-see paras 405 to 4271. o Deemed profit under sectlon 41 [see para 1561. 30.5 Receipr by ctgelrr .K x < i pol ~ income by a bank, broker ut.orhcr 1122111vt thc ~ S S Z S S C Cib , trcawd as receipt oii~!cotned n behalf a i ~ l l ass>ssez--K~.jhc2!i e .llilLi Co. lid 1;. C I T [ I 3531 2.3 ITR 230 (SC). If good; are sent by VPP, income is received at the time of payment by buyer to the Post Office, irrespectiveofthe fact whether buyer directs the goods to be sent by VPP or the seller does so on! his own accoi-2 Simikarly;where goods are sent by rail and the railway receipt is sent through a bank: for being delivered to the purchaser against payment, income is received at time and. place of .. payment to;the bank-CITv. P.M. Rathod & Co. [I9591 37 ITR 145:(SC). 30.6 Receipt of income in the caseof advance money - In CITv. Mysore Chromite Ltd. ['I955127 ITR 128,the Madras branch of Eastern Bank Ltd. used to advance.to the assesseetinMadras, 80per'cent of the amount of provisional invoice.consignedby the. asseSsee $nd sale.$roce.edswere received from the foreign buyers on behalf of the assessee.by Eastern,BanliLtd. in London,,whichadjusted against the sale consideration. The Supreme Court heldtWthe entire price was receivedin L"on&dn. The payment of 80 per cent of the amount of provisionaIinvoice by the Madras braiich of Eastern Bank Ltd., was not a payment on account of price, but was an advance made.by.them;to !hi! o w . @ customer on security of goods covered by the bill of lading. The Court further observed that the price was first received by the Eastern Bank Ltd., Loncfon; on behalf of the assessee. Accordingly the Court held that the entire price was received ourside India. 30.7 Receipt in the case ofsale by commission agent - In CITv. S.K.F. BallBearing Co. Ltd. E1960'j 40 ITR 444; the Supreme Court heidthat where a commissiorl agent effected sale and recovered,the, proceeds in Jndiaon behalf of a foreign principal, profits on sale would be received in India, even if the commission agent had remitted a substantial portion o f the value of goods to the foreign principal abroad before the actual realisation of sale proceeds in India. Similarly, where a foreign consignorsent goods to an Indian.consi,gneewhoeffected sales in Indiaand collected sale proceeds and after deducting its commission remitted the balance to theforeign consignor, it was hheldthab income from sale of goods was received in India by the consignee on behaif of the consignor-. ,& , ; Turner ililorrison & Co. Ltd. V. CIT[1953] 23 ITR 152(SC). 30.8 Receipt by cheque - A receipt of cheque is equivalent to receipt of money. Inother words,wkea a cheque, bond or other negotiable instrument is received, the date of receipt is the date. when instrument is received and. not the date when the instrument is encashed-RajaMohan Raja Bahadurv. CIT[1967] 66 ITR 378 (SC), Gurdas Singh v. CIT[19.64] 54 ITR 259 (Punj.): This , r.ul.eis ,. applicable even if the cbequehnstrument was accepted conditionally, proGided the cheQue,$,not, .,,.. . . ., , dishonoured subsequently on presentation for payment. , . .,. , 30.9 I2eceip.t when cheque is sent bypost - In the absence of & express or implied reqiieit by the creditor or an agi-eement'betGeen . the parties regarding the iendipg of che&ie by post, the mere posting of cheque would not operate as delivery of the cheque to the creditor. h s u c h a case, receiit would be at the place where'the cheque is deli'veredby the post office to addressee. Where,'ho&ev+ a cheque is sent' by; posdin pursuance of an~expressiimpIied~agreement/request,the~p~st ot.fice would be treated as an agent of the creditor azldz$hereQeiptwoeld be at:the.pIace where cheque is . ... : . . posted-Azamjahi Mi'lls Ltd..v. CIT [1976], 103 ITW 449 (SC): .,., sr Determiningplace ofpayment -In the case of payment by chequedent bypost thedetermination of the place of payment would depend upon the agreement between the parties or the course of conduct o the parties.. If it is shown that .the creditor authorised the debtor either expressly or creditor as soon,?s it impliedly to send a cheque by post, the pro.perty:ipthecheque passes to &he is posted. Therefore, the post office is an agent of the person to whomthe cheque is posted:$,t$ere be an express or implied authority to send it by post-CIT v. Patney & Co. [1959].36 ITR 4.88 (sc).. If there was nothing more, the position in law is that the post office would not become the agent of . . the addressee-Shri Jagdish Mills Lid v. CIT[1959] 37 ITR 11'4 (SC). . . .... . ,, . . .. . 30.1.0 Whensaleproceeds a~e.received.in.kind - If sale proceedi on payment is received in the for% of immovable property, the date of receipt of income is the date when conveyance is executed-CIT
, ,
~

.?.,!h

51

Accrual of buszness proflt

Para 31.3

v. Kameshwar Singh 119331 1 ITR 94 (PC):On the other hand; if sale proceedslpayment isreceived in the form of inovable property, the date of receipt of income is the date when thenlovable asset is received. In caseof sale ot trading assets for fully paid shares in another. company, date of realisation of income is the date of allotment of shares-Gold Coast Selection Trwst Ltd. v. Humphrey [I9491 17 ITR (Suppi.) 19 (HL). These propositions are applicable even if the. assets (movable, immovable or slwres).areneither realised nor. realisable,till later. 30.8 1.Mere b o o k e n m is nozsufficiem6- To constitute a receipt of anything there mustbeapeTsan to.receive,and a person from whoin he receives, and something received by the forlnerfrom bhe latter. A mere entry in an account whicE does-notrepresent such a transaction does-Gotprove any receipt, whatever else it may be w0rS.h.-Gresham LifeAss.u.ra?ce Sociely v. Bishop h1.9021 AC 287 (HL).When, however, amount due to an assessee is.credited on his instructiontoan account h t .,.. he books of the payer, such credit amounts to receipt by assessee. Moreovw, entryin balance s11eet.does not amount to.receipt of income [ ~ & ~ l ~ n i ~t t oisec. o n$ .I. 3@;12Burden ofproving- The burdenof proving that any i.rxcorneis:receivedby an assessee in.hdi& is on the-revenue-CITv: Bfianer Trading Co. Ltd [1970].78.'lTR12 (SC). 30.i3 Ouestion o f f a c t - The question regarding place of receipt of income is a question of fact.

Accrual of income
31. Income accruing in India is chargeable to tax in a U cases irrespective of the residential status of the assessee. The words "accrues"and "arises" are used in contradistinction to the word "receive". ~ right to receive the income Income is said to be received when it reaches the assessee ; w h e the becomes vested in the assessee, it is said to accrue or arise-Lll v. Ashokbhaz L'hlmanbhai[l965] 56 ITR 42 ISC'I. ~, One should keep in view the following broad propositions : 31.1 '%ccruaE"isgene~ally unconditional- Income hastbeensaidto"accruen when there is aright to payment and when there isunconditionalliability on behalf of the payer top8yitto the taxpayer.H. Liebes & Co>v.. CIRCCA 90 F.2d.932,93.6.I.fiit.notdepelldent~ponhappening~of same.c~n&jngency, the right or obligation may be clas~ified~as "accrued"-Heiveringv. Russia.n.Finance&Constrxction Corp. CCA, 77 F.2d.324, 327. In other words, a liability depending.upon a contingency is not a debt ivlpraesentior. in f~.tu@o.tiU the contingency happens. But if it is a debt, thefact that the amount hascta be%scertdme&doesnot make it any thelessa debtif the liabilityiscertain and what remaills is only the quantification of . . ..: . . . ., theamount-CITv. Shri:Goverdhan Ltd El9681 69:ITR 675 (SC). : . . 31.2 Income is said to a'cbuse when it becomes due :'Iiicbme can be said to accrue when $it! i die. Postponement of date of payment has a bearing onlyinsofar asthe.time of payment is con2erned; but it does not affect the accrual of income-~Worvi Industries Ltd v:C$h[197$];82 ITR 835 (SC). However, income "accrues" to the', taxpayer at the tiine it becomes due only where there is reasonable expectancy that the right will be converted into money or its equivalent-Franklin CountyDistiLZing Co. v. C1;R CCA 6, 225.F.2d 800,804,805.Amereei;aimto a profit or a.!iability isblot sufficient to make the pl-ofit accrue-CITv. Associated CommercialCorpn. [1963:]48,ITR:li (,Born:): . .. 3.1.3 Acccrual-of buiinessprofit - The concepe of accruai of profit of a businessinvolves its cleterminabion by the methoa'of accounting at theend,of the accounting year: Ifprofits accrue:to the assessee di'rectly from tliebusi'ness the question whether they accrue day byday or at the close of the year of account has at best an academic significance, but when upon ascertainment of ~rokit the right of a person tofasharetherein is-determined,th'e question:assumes practical importance, for it is only on the. right to receive profits or income, profits. accrue to that person. In case of partnership,.whereaccounts.are to.be madeat statedintervals,right of a partner to demand his share of ~ r o f i t s does not arise until. the contingency which gives rise to that right has arisen-CIT v. Ashokbhai ChimanbhaiLl965] 56 ITR 42 (SC).

Para 3 1.4

Income-tax - Resldenttal status and tax tnczdence

52

Where under a contract, income arises onrendefmg of a year's service and is linkedto annual profits, no income c,an accrue before the year end-E.D. Sassoon & Co. Ltd v. CIT[1954] 26 ITR 27 (SC); Where the managing agency agreement provides for payment of commission atthe end of the year, commission will accrue to managing agentsonly thereafter-Cotton Agents L t d . . ~ CLT[1960].40,ITR 135 (SC). ., . 31.4 It is incowect to state thatprofits do not accrue until actuully computed - Unless the ri'ght , to profits comes intoexistence, there is no accrual of pro&$.If,.2lowever, there is vigihr to receive profit, thetax incidence cannot be suspended.merelybecauseprofits are not.actually computedCIXv. K.R.M I: I: Thiagaraja Cherty &. Co. [I9531 24 ITR 52.5(SC).. ,., It is, thus, true that the accrual of fncome-doesnot depend uponits ascertainment or theaccounts .. cast by the assessee. The accounts maybemade up at'a much laeeerdate: It is not a universal rule that in respect of asingle venture spreadover aperiod of years, profits accrue . . only when the accounts of that venture are closed bytlieas.sessee.'Howewer,where the assessee himself treats a transaction,spxeadlovera number of years as.asingl&venture,.ret~urnsincorriefrorn such venture only at the end of it.andthe accounts maintained bythe assesse:e do.esnot show m~ relevanr details for finding the profit at the endof. each year, the profit from such transaction will accrue only at the end of the transaction-Chinnathumbi ~ o w t h e& r Co. 11.CIT[1975] 99 ITR 490 (Mad.). . . 3 1.5 i f income is taxable at the time of accrual, it cannot be taxed on receipt basis -If a particular income is taxable on accrual basis, it is not possible For the Assessing Officer to ignore the accrual and'thereafter to tax it as the income of another year on the basis of receipt-Laxmipat singhaniu v. CIT[1969] 72 ITR 291 (SC).Thisrule is, however, subject to exceptions providedby sections 151~) and 45(5). 31.6 Accrual of business income in the case of composite business - In case of composite business, ie.,in the case of a person who is carrying on a number of businesses, it is always difficult to decide as to the place of accrual of profi$s.and their apportionment inter se. For instance, where a petson carries. on manufacture; sale; export and.import,itis not possible to:say that the place where,the p r o h a;ccrne- to.hi.m,is. the: pl;ace of sale. The propiti received relate fitst$ to. his bnsiness. tik rnanufactwrer, secondly kohis.trading operatidns, ancVthirdly to-his business of import o r ex.port: Profit or loss has to be apportioned between these businesses in a business-likemanner and accordulg,to the well established principles of,acc,qunt,mcy. In such,.cases,the profits attributable to,m~ufiacturing bus@issare:said.to.accrue or ?rise at the place where manufactuyiqgaope~ati,on is being done and profits which arise by reason ocsale are said to arise at the place wherethe sales busMess.are s,aid.toarise at the place *ere are made and the profits in respect of Mport/e~port the business is,conducted-CITv. Ahmedhhai Uinaubhaz &Co.[1950], 18 ITR $72,(SC . . . . ,~ ... .. . : ' ... . 31.5 piace w h e r ~ , p r o p e rin t ~go.odspasses'.dec;>esaccrzgal of profit in the.caseof sale o f goods - In the case of sake of good,s, profir arises at + place. where the property in goods. passes to the purchaser-Se.th Pushalal b1ans.isghka.[P.) Ltd. v,.. CIT[1,967] 66ITR 1% (SC): , . . m Retaining cowtrolovergaodstiI1d~.stiviaiion -Where;fay instance, ... .. ?hesellerretainsthis canrral over goods $old b$ takiiig bill of Ya&g in his name. and prmperty in goods passes only zit destination f,ie::outsid&India), the profits embedded in the transaction arise outsi&e India-CIT v. /Mysore Ckvqmite Ltd.. [I9554 27 ITR. 128.(SC)iWhere seller ret,ains control,o,ver go.o~s:by,ob.taiping.bi~ af iadjng, not w,ith.an & e n t h of.,w~thdrawing,g~ods from contract but,for secyqing contract pyiq, property may pass either forthwith subject to seller's lien.or conditional on performance by buyer of hi.s part of contract. . ; Place of eon'tractoj saleand piace of sale are different - In cases wheretbe contractsof saleare made in onep1ac.e and the sales-take place in another, the profits should be apportioned ; apart of the profits accrue at a place where the income producblg contracts-for saie are made and a part at the. place where contracts are performed or sales are actually effected-see CIT v. A.S;T.'F. Rodrigz~ez & Co. [I95 11 20 ITR 247 (Mad.) and CIT v. h i o n TireEnporters [1.969].7 1 ITR 453-(SC);
, ,

53

No proflt arses on valuatron of closzng stock

Para 31.13

a Goo& sent by rail - Where goods are sent by rail consigned to self, income accrues at place oE delivery of goods-CITv. P.M. Raihod & Co. El9591 37 ITR 145 (SC). Where goods are sent by-VPP, illcomeaccrues at the place where goods are delivered on payment to postal authorities. : a Ascertained goods - In the case of specific goods in a deliverable state, whose sale i s an unconditional one, the property in the goods passes to the buyers at the place where the contract of sale is made-Chhaganlal Savchand v. CITL1966162 ITR 133 (Born.). Una.scevtai?zedgoods -Inthe case of sale of unascertained goods, the sale takes place at the ptace where the property in the goods passes to the purchaser. Sections18 to 23 of the Sale of GoodsAct only come into play if there is no agreement between the parties. If it is possible to infer fromthe contract itself the place and the time when the property in the goods was to pass, there is no scope for pressing the Sale of Goods Act into service-Binod MillsCo. Ltd. v. CIT[.l966] 62 ITR 424.(AlI.); 38.8Accrualofprofit i n the case of fowardcontract - In the case of speculative~forward contract, profits accrue at the place where the contract is made-Rupajee Ratnachandv: CIT[1955] 28'ITR 282. (AP). 31.9 SeZ2ing agents' commission accrues at a place where sales are effected - Selling 8gen.C~' commission accrues at theplace where sales are effected. If, however, contract of saie is made in one place and the sale takes place at another place, a part of sellingagents' commission accrues at the place where contract is made-CIT v. Union Tile Exporters [I9691 71 ITR 453 (SC). 31.10 Commission payable for other services accrues at the place where service is rendered Normally commission payable to managing director accrues at the place where duties of managing director are performed--Shooiji Vallabhdar & Co. v. CIT[1960] 39 ITR 775 (SC)..If commission is payable to the managing director at a percentage of net profit, the entire commission accrues at the place where service is performed, even if a part. of the profit arises outside India-see K.R.M. T.T. Thiagaraja Cherty & Co. v. CITE19531 24 ITR 535 (SC).Similarly, remuneration of a director accrues at the place of rendering service-La&shmipat Singhaniav. CIT[1969] 72 ITR 291 (SC).Commission payable for rendering otherjervices accruestatthe $ace where services are rendered-K coal Distributing Co. v. CIT[1958]..j4 . , V. R 182 (B&.). . . 31.1 1 Interest accvueswhere money is lent - In case of B money-lending transaction, ,the accrual.of interest wouldbe the place where the money is actually lent, irrespective of whe,reit came from, since, without actual advance, no commission or interest accrues-or arises. The actualp1ac& of user of the money may not have a bearing in deciding the situs. Moreover, moiley-lending ti-ansaction is not'comparzible to thr businessof manufacturing and sale ofgoods and it isnot . . .. possibl&to extend the dbctrine of apporiionment to a cask of money-lending-<G. .. . xri3fiYlaswdmi . . . ,.,., '. . ., . .'. Naidu v: ~ I ~ [ 1 9 6 6 ]'6 ITR 2 686 (Mad.j. . . ... ,. j1.12 l n t i r e s t in the case 6 f COmpulsovyacquisitio6 - ~ ' n d e section r 34 of t b e ~ a n d Acq,iisition Act, the right to recover interest arise: the moment the owner is deprived of his property ~inde? the Land ~ c ~ u f s i t i oAct. ' n The rate at which he is entitled to interest is also spe-cified.The~'04nerof properly after his dispossessibn under section 17 of the Land' Acquisition i4ct is 8eprived .of the iiicomefrom the same. Therefore, it is obviOus that the benefit6hich he was to acquire frdm ?he property or land was benefit accruing every yearwhich is compensated by way of interest under ,., .. ,.,,,,, section 34. The interest is definitely accruing each year and is payable as such after....the..,possession is taken from the owner. Therefore, onli' theinterest;elating lo a pir6vioui y e & k assessablein ti~ecorresponding assessment year-ClT,v. Dr. Sha,m La1 Navula [I9721 84 ITR 625 Panigrahi an v. CITE19741 9.3 ITR 102 (Ori.), CITv. Santi DeviE19831 13.9, (Punj. & ~ ~ . ) , . ~ d y a n a r a y ITR 489 (Cal.). 31.F3 Noprofit avises,on.the valuation of closi.ng;stock-It i s a misconception to,think that any profit "arises out of the valitation of closing stock". Valuation of unsold stock at the ciose.of an accounting period is a necessary part. of the process of determining the trading result of th'at period and call in no sense be regarded as the "source" of such profits, nor can the place where such valuation is made be regarded as the situs of their accrual-Chainrup Sarnpatra7nv. CIT[I 9531 24 ITR 48 1 (SC).
,
'

Para 31.14

Income-tax - Reszdentral status and tax rncrdence

54

31.14 Profitsloes notaccrue in transfers between headoficeandbranch office- If a branch office situated outside India sends goods to-its head office in India at an.invoice price (which includes a margin of profit), the entire profit accrues at the head-office where goods:aresold; In suah-a,case; profit does not accrue or arise at the branch office because one mancannot trade with himself-RamLal Bechairam v. CIT(J9.46114 ITR 1 (Ail.)! ,. 31.15 Dividends accrue at theplace where theregister of members is kept - Dividends declared by a non-Indian company accrue.or arise at the place where theregister of members is. kept-Kt*sumben:D.il/akadevia v. CITL1:963]43 ITR 214 (Bom.), On.the other hand, dividend paid by an Indian company. outside India is always deemed to accrue or arise in India by virtue of section 9(l)(iv) [see para 32.61. 3 1.16Damages accvue when theamount isdecreedoradmitted - Da$maages for breachof contract accrue when the amount is decreed or admittedi T i e of making,payment fs not reIeuant-:C(T . .. . ,. . Y. Associated Commercial Corpn. [I963148 ITR 1 (Bom.): 38.1 7 Commission payable on passing of audited accounts accrues only on the date of meeting - I f cqmmission is to be paidton passing of audited accounts,inthegeneral meet~.gq$shareholders of the company paying commission, ~ornm~ssion can accrue to the recipient only on,thedate of said meeting-see LP. Shrivastava &Sons v. CIT[1965],57ITR 624(SC). 31.1 8 P ~ o f ion t devaluation arises in the yearof devaluation -Profit on:devaluation arises.in the year in which currency is devalued.. 31.19 Share of profit from a vesidmt f i m t accruesor arisesin h d i a - Share of profit from a resident firm accrues or arisesin India. It, therefore, follows that a non-resident partner of aresident firm is not entitled to exclude from his share of income of the.firm.,determined under section 182, income accruing or arising to the firrnoutside India-Rm Ramanufhaw Chettiarv. CIT[1970] 78 ITR 10 (SC). 31.20 h f i t on mortgage sale arises on the date of confinnation of sale - Where a mortgagee purchases the mortgaged property in Court sale and thus realis&sthe amount due,,fheprofits muSr be deemed to have arisen on the date of confirmation of the sa1e;anh not on she date of decree'.or , date of actual sale-Raja Raghunandm Pvasad Singh v : CIT[1933] 1I'F,R 1.F3 (PC?: 31.21 Mesneprofit Mesne profit is taxable in the year in which such profits are determinedPr Mariappa Gounder v. CIT[1998] 232 ITR 2(SC). 31122 Question asto sourceofincome .is'not , . . . > relevant ,.. ..The questionas the source of the . income is notrelevant for the purpose of asc.ert&@gwhether the income accruesor arises in India, . . .because ,,.. . section 5(2) provides that all inconie "from whatever source,derived" is to.be'included . in . . thetotal . . ,,.. income of a non-resid'entassesseeif theincome accrues or arises inIndia during.the . relevant . yearsP&r/:okming Right Socie@Ltd v ~ 1 ~ f 1 9 7f7 b1 6 ITR 1P (SC). . . 31.23 Question offact/law - The question whether, on given facts,,certiinincome &n besaidto have'accrued b o a talipayer is a questionof. law-CITv. Ja'iParkish OmParkph CO.Ltd. [[964] 52 1% 23 (SC).Oo the &her haid,:.thequestion as to whatincomelias accrued is'aquestian 0fYai.tC p v . Western litd&~ngg. Co. [1971] 81 ITR 712 ( ~ i j . ) .
,
,

.,

, ,

...3.

"

Income deemed to accrue or arise in India [Sec. 91

32: Ceflain income is d-eemed,toaccrue or arise in India under section 9; even though it may aetuakly accrue or arise outside India. Section 9 applies to ail assesseesirrespective of their residential s<atFs and place of business. However, where income is actually received or has accrued in Tndia, resort to;thedeeming provision under section.9,is .notwarranted..h s,xch acase;!theprovision cqntritned in section 5(2) is sufficient to create a charge in respect of non-resident's income-Mustag Ahhed; In re [2009] 176 Taxman 65 (AAR - New Delhi).
.
.

55

Income fuonz bus~ness connection

Para 3 2 1

The categovies of income which are deemed,toaccrue or arise in India under section 9 are as-under::

Income from any property, asset or source of income in India Capiral profit on transfer of a capital asset which.is situated in India Income from saianr if service is rendered in India Income from salary (not being perquisiteiallowance) if service is rendered outside India, the employer is Government of India and the zmployee is a citizen of lndia

Yes Yes Yes Yes No

I

32.2 32.4

:.

32.3. - . 32.5.:

Income from salary if service is rendered outside India (not being a case staied above)

Interest

Government of India

Any

Yes No

32.7 32.7

earning any income outside India Borrowed capital used by the payer of interest for any other purpose
A person non-residentin India

Yes Yes

1
.
1

. .
'

,,

32:7,. 32.7

. , ,,, . , ,

.I1
:

Interest

Borrowed capital was used by the b aver . - busi, of interest forcarrvi~lgon nessiprofession in India Borrowed capital used by the payer of interest for any other purpose

No Yes
,

32.7 32:s and '32.9.:i

.
' '

Royalty/fees for technical services for technical services

Government of India

... . . ., .. .. ,

A person resident in India

/
A person non-resident in India

'/
I
/

Payment is relatable to a business or profession or any other. source carried by the payer outside India Payment is relatable to any other source of income payment is relatable to a business or profession or any other source carried by the payer in India

No -

I'
I

Yes Yes
.

1
1

32.8and . .32,9 32.8 qnd

'

::

'

. .
,
'

3:,9

..

.,I
'

Royalty/fees for technical services

32.8and.~, 3x9
.

Pavment is relatable to anv other soirce of income

No
,..

32.8 and 32.9 ,

,

1
. .
, . . a

.,

..
(

32.1 Income from business con~ection[Sec. 9 ( l ) ( i J ]- T& following conditions s h o d d be .., , . ,. .. satisfiedm Condition One - The taxpayer has a "business connection" in India. Condition Two - By virtue of "business connection" in India, ulcome actually arises outside.lncifa; If the above two conditions are.satisfied, income which arises outside India becauserof '"business connection" in India is deemed to accrue or arise in India.

Para 32.1

Income-tar - Reszdenttal status and tar tnczdence

56

A business connection involves a reLationbetween, a business carried on by a non-resident whhic& yields profits or gains and some activity in India which contributes to the earning of these profits org&s. A business connection can arise betweenanon-resident andaresident if bothof them carry on business and if the non-resident earns income through such a connection-CITv. Ashok Jain [2002] 121 Taxman 328 (Delhi) (Mag.). It predicates an e l L e n t of continuity between the business of the non-resldent and the activity in India: a strav or isolated transaction 1s not normally ~arded . r eas busifiess connection. Business connkction may take several forms :it may include carrying on a part of main business of. the non-resident through an agent, or it may merely be a relation between-the businessof thenonresident and the activity in India which facilitates or assists the carrying on of that business. The expression "businessconnection"postu1ates areal and intimate.reLationbetween the trading activiiy carried on outside India and the trading activity within India, the relation ,between,th&.two contributing to the earning of income by thenon-residenr in his trading, activity-CIT'v. ,.,:. R:D!, ,!:: Aggav$va.L& Co; [I-9651 56 ITR 20 (SC); The matter in which one has a right of interference comesl withinthe ambit of the expression "business connection"-BaredaProsadRoyv:IT0~1973] 91.1TR 82.(Cal.). An isolated transaction between a non-resident.and a resident inIndia witfiout.any coiirse -fiir.ali:-:gs such as might fairly be described 8s business connection does not attract section 9:There I . I . : i .;i:!i\,;i,:ir., o i continuirig business relation w!ien a person purcnases machinery or. other goods: . ';;,jac. ~ir:i!li?el, them in inc!la and earns protit-CITv, Fried Kruppi~ciustvies [I9811 128 ITR$27 (Mac1.j. Where, however, iheie is a continuit). of business relationship between the person itilndia who helps to make the profits and the person outside India who receives and reahses the profit,.such i-i:laiioi~ship does consritute a business connection-Anglo Fi+ench Textile Co. Ltd. il. CIT[1953] 23 ITK 101 (SC). In each such case whether. there is a business connection from or through which, income arises or accrues must be determined upon the facts and circumstances of that case-Blue Star Engg. Co, (Bom.j(P) Ltd. v. CIT[1969j 73 ITR 283 (Bom.). 32.1-1 WHAT IS BUSINESS CONNECTION AS DEFINED IN THE ACT - It includes a profession collnection. It iilcludes a person acting on behalf of a non-resident.and who performs any one or more of the: following . -. .. .. ..~ . .~ . Activity one - He exercises in India an authority t o conclude contracts on behalf of the n:onresident (it does not cover the activity of only the purchase of goods or merchandise for the nonresident.). m ~ c t i ~two i t -~He has no such authoritybut habitually maintains in India a stock of goods or merchandise from whickrheregularly deliversgoods or merchandise on behalf of the non-resident; .< .. , ., . - . m ~ciiGt$ three -He habitually secures order in India (mainly or wh61ly) for thenon-resident or for non-residents under the same management. . . . . . .. .. . Whene a business is carried on-in India through a person referred to in Activity one, two or three. (szipva) only so much of income as is attributable. to the operations carried out in India shaB be .., ,.; , . .. ...., : deemed to accrue or arise in IndiB. 32.1-la. INDEPENDENT BROKERS/AGENTS A R E EXCLUDED - The "business connection", shall not include cases where thenon-resident carries on businessthrough-abroker, general commission agent or any other agent of an indepen+k.nt status, that such a person is acting in the ordinary,courSe of his business. Where a broker, generaLcommission agent or any other agent works (mainly or wholly) on behalf of a non-resident or other non-residents under the same management, he shall not be deemed to be a'broker, general commission agent or an .agent of an independent status. ,..
6
,.
~

'

'

NOT TAKEN AS BUSINESS CONNECTIONS - The following operations do not amouii to business connection by virtue of specific provisions in the Act :

OPERATIONS

32.1-3aWHEREALLOPERATlONSARE NOTCARRIED,OUTINlNDlA[EXPLANATION(o)TOSEC. 9(1)(i)]-If all business operations are not carried.outin India, the income of the business deemed to accrue.or arise inIndia shall be only such part of income as is reasonably attributable to the operations carried out in India,

57

Income from buszness connectzon

Para 32.1

The apportionment of profits should be on a rational basis and should not be arbitrary-Bikaneu Textile ~Vle~chants Syndicate Ltd. v. CIT[1965]58 ITR 169 (Raj.). .The AssessingOfficers shall compute the advertisingincomein the cases o f the foreigi~telecasting companies (FTC)which are not having any branch officeor permanent establishinent in hdia or o are not maintaining country-wise accounts, by adopting presumptive profit rate of 10 per cent.C the gross receipts mearit for reinittance abroad or the income returned by such companies, whichever ishigher*-Circular No. 742, dated May 2! 1996 and.Circular No. 765, dated March 15; 1998. The Board has, however, withdrawn Circular No. 742 with effect. from the assessment year . 2002-03-Civcula'r NO. 6j2001, dated March 3,2001t. . , 32.1-3b PURCHASE OF GOODS FOR EXPORT [EXPLANATION.(b) TO SEC. 9(1)(i)]- h t h e case,of non-resident: no income shall be deemed.to accrue or arise inIndia to him through or from operations which are . confined.to the purchase of-goods in India for the purposeof export. Where the assessee, a non-resident, carried on business in readymade garments in Japan andhe ha& anarrangement with a commission agent in India t o purchase readymade garments on his behalf o f Enplanation to sectibk and export them to him, the assessee's case was covered by clause (b), 9(1)(1)and not by clause (a)thereof and, therefore, the assessee was not liable to betaxed on any income deemed to accrue or arise from conversion of materials purchased- for the purpose of export-CIT v. N.K. Jain [1994j 206 ITR 692177 Taxman l i (Deihi). 32.1-Jc COLLECTION OF NEWS AND VIEWS [EXPLPNATION (c! TO SEC. 9(1)(i)1 - No income shall be deemed. to accrue or arise in the case o f a non-resident engaged in the business o f running a news agency or o f publishing newspapers, magazines or journais from activilies'confinedto collection o f news and views in India for transmission out o f India. 32.1-3d SHOOTING OF CIbIEMATOGRAPHFILMIN INDIA(EXPL4NATION(dj50SEC.9 0 ) ji)j -In the caseof anonresident no income shall be deemed to accrue or arise in India through or from operations which are confilled to the shooting oE any cinematograph. Eilm in India, if such non-resident is either an. a ci~jzen. individual, who.is not a citizen o f India, or a firm which does not.have any partner w.kio.is. of India or who is a resident in India, or a company which does no$ have any shareholder who-isa . . citizen o f In&a or is resident in India.
~

32.1-4:CLn;RfFICATIONFROM BOARD- The followine clarifications-given bv the Centra.1Board o f Direct: ~axes.i.idk~ircb$.ar~os. 23 (datedJuly 23,1969)ind 163~(dated:kaY29~l975) wouldbe found useful in deciding questions regarding the applicability of the provisions o f section 9 in certain specific: situations : , . . 32.r-48 NON~:RESIDENT EXPORTER SELLINGGOODSFROMABROADTD II(IDIAW IMPORTER - No liability by him where the transactions.of sale on accrual basis to the non-resiaent on the profits madee: between the two parties are on a priricipalito-prlncipai basis, In all cases, the real relationship between t h e parties has to be looked info t h e basis o f agreement existing between them bat wh'ere : a. the purchases made by resident are outright on his own account ; b. the transactions between therksideni and ihe non-resident are made at arm's length and at prices which would be normally chargeable to other Customers ;
, ,

'It is applicable evenin respect of pending &sessments. ?The total income of FTCS from advertisements shall now be determinedby the Assessing Officers in accosdahce &it'll the otherprovisions of the Act, in relation to the assessment year 2002-03 and thesubsequent assessment years. in case, accounts for Indian operations are not available, the provisions of rule 10 may be invoked: Where the FTC is aresiiient. of acountry with which India has a Double TaationAvoidance Agreement (DTAA), its business income (intruding receipts Erom,adve~tisement),can be taxed only if it h a s a permanent establishment in W i a . Thecefore, the taxability of a FTC in thisregard shall be determined on the facts and circumstances of eachcase. Taxation of FTCs which are residents of countries with which India does not have a DTAA, shall be governed by the pirovisions of section ?read with section 9.

Para 32.1
.

Income-tax - Reside.nria1 status and tu.~ incidence

58

:.

the:non-resident exercisesnocontrol o.v.erthe business of the resident and sales are made by the latter on his own account ; or d. the payment to the non-resident ismadeon deliveryof documents and isnotdependent in a@: way onthe sales to:be effected-by the resident,.. . it'can be inferred that the transxtions'are on the-basisof principai-to-prin~ipal. question may arise in the abdve type ofcases whether thereisany liability oftfie non-resident under section 5(l)(a) on the h s i i df receipt of sale pra&ed~ including the profit in'kdia: If rhe'non-' reside& makes over tbe ~ h i ~ p i h g d ~ c u ~to en a tbanit s in his own country which~discbuntsiEe documents and sends them for collection to the bankkrs in India, the non-resiclent wiu'kot-6e'liagre te:t.axoathe profit.aridng.out of the sales on receipt basis. Even if the shippingdocuments aEemr cliscounted.inthe:fo~eign country,,,b.m$ are handed ovier.in:Indiaagainst payment oracceptance,.na portion of the profits wiU be chargeable totax unden thehct, if this is the only operation carried-o:n in. . lndiaon behalf. of the . n.o:n-re~iden!;~: . ,,., , . . ,..., ,. ,.,. ITS.INDIAN SUBSIDIARY - AqueStiori 3 2 . 1 4 ;L,OW~RESIDENT c & p , ~ ~SEL' y LING(;o~Ds. mpany and its Indian subsidilfy may arise whether.tbe dealfngs between a can at i U be regar-dgdas being p n a principal-to-principal basis since the former wout&be i & a position to exercke control~over the affairs of the latter.ksucKacase, if the transactions are acfually on a principal-to-principalbasis and'are at arm's length anathesubsidiary company functions a2d~ ~arries on businessioni,tsown, insteadof functioning as an agent of the parent company, tbe.meqe fact that the Inean company isa subsidiary of the non-resident company will' not be considered a valid ground for invoking section 9 for assessing the non-resident.
,

. ,

32.1-4~ S A L E OF PLANT AND MACHINERY TO AN INDIAN IMPORTER ON INSTALMENT BASIS - Where the transaction of sale and purchase is O n a principal-to.-principalbasis and the exporter and the importer have no.olber business connection, the fact that the exporter allows the.importer top.ay for ahe plantand machiner$n instahents wLUnotby itself render the exporter liable t.o:tax on ~q gro.wnd:thatt.he income is!cJe.e~ed,to a.&e tqhim iri India. The Indianimporter will not,,iqsuch,? . . ;i,.,'~'; ~! case,,be tre:a.atedas+n agent ~f the exporter for the purposes of assessment. 32.1-46 FOREIGN AGENTS OF INDIAN EXPORTERS - A foreign agent of an Indian exporter operates i h his own country and no.pqt of his income arises,in India. His commission is usualiy~ remit to him and is, thecefore;no~reeeived:by him or on,,bis.b.ehalfinhdia. Such an agent is income-tax in India on the commission. , ~.... 32.1-4e NON-RESIDENTPERSON PURCHASING GOODS IN INDIA - A non-resident will not be liable'.io.ta.xh hdia onany income.attributable t~operatfons copfiied to pclrchase of goods.in.bdia,f~t. ,$&~o@! Where aresident person actslin the'ocdxnarycoupe. of his business in making purchases for a - e cesidentparty, he would not normally be reg.+rded.as.an,agentofthenon-resident undersection &63.. Bw,where theresident personi.s,clos~~y connrcte.&yi& the non-resident purchaser-and, the Sourge of business between them is so arranged that the resident person gets no profits or less thanthe ordinary profits which might .be expected LO.. arise i n that bqs,&ess,,the Assessing Officer is of profits wWch$ay reasonably bedeemed tohave_bee$ empowered.lo determine the d.erivzdbji the rksiaent perS6ii from that buib$ss ii$d'&CluXeiukh amount i i the total iixcofd& . ',. Of . : the resident person.
:,,

32.1-4f SALES BY A NON-RESIDENTTO INDIAN CUSTOMERS EITHER DIRECTLY OR THROUGH AGENTS - Where a non-resident allows anIndian customer facilities of extended credit for payment, there wouldbeno assessment merely for this reason, provided that (1) the contracts to set1 were macke outside'kdia: ,. 2. and (i~). the sales were ma'd'e on a'principai-to-principal basis] ..,, . . , . ,. ..Where anon-resident h&:an agent in 1ndia.ahdmakes sales directly to Indian customers, ie:Gt& 9 wiEnot be invoked; even if the resident pays his agent a8n;ooerriding commission o ma U sales..to India;provided'that(t) the agent neither perfiorrnsnor undertakes to perform any service;:Birec%iy or indirectij,in resrjecf of these direct safes and making of these sales can; in no way,be aitngutkd' , . . .,>.. ... .. ,.
, , 1 ,

.,. . . .

59

Dzvrdend paid by an Indran company

Para 32.6

to the existence o f the agency or to any trading advantage or benefit accruing to the principal from the agency, (ii).thecontracts to sell are made outside India, and (iiilthesales are madeton aprincipal, to-principal basis. rn Where a non-resident's sale to'Indian customers accrue through the services-ofan agentin India, the assessment in India of the income arising out o f the transaction will be limited to the alnount o f profit which is attributable to the agent's services, provided that (1) the non-resident principal's business activities in India are wholly channelled through his agent, (ill the contracts to sell are made outside India, and iiii) , , the sales are made on a princival-to-principal basis. While assessine profits. . allowance will be made for the expenses incuried;including.the &enf scornmiision inintiking.thi sales. I f the agent's commissibu fully . represents thevarueof the profit attributable to his service, it should prima facie extinguish the assessment. .. . .. , , e Where a non-resident principal's business activities in Indiaare not wholly channelled t h r 0 u g h . h ~ agent in India, the assessment in India will be on the sum total o f the amount o f prdit attributable to his agent's activities in India and the amount o f profit attributable to his own activities i n ~ n d i a ; less the expenses incurred in making the sales.
- A

32.2 f ~ c o m e through or from any property, asset or source of income in India [See. 9(d)(i)jIncome through or from.anyproperty, assetor source o f iucomeinlndia isdeemed to accrueor arise in India. The term "source" means a real source o f income. The term "property" does not refer to merely house property but it inciudes any tangible movable or immovable property. The term "asset" includes ail intangible rights and. consequently, interest, dividends, patent and,copyright royalties, rents, e t c , will find room in the fow:corners o f the term "asset".
Provisions illustrated - X Lid. a foreign company, owns p r o p e q in Mumbpi. it is given on rent (rent being 2 , 0 0 ~ u S dollar per month) b B Ltd. another foreign company. The iwb companies are non-resident in lndio. The agreement is made outside India. Rent is payable in foreign currency outside lndia. As per agreement rent is accrued outside India,. As theproperty is situated.in India, rent of the property-willdeemed to,be.eam,edin India,
.
,

32.3 Income through the transfekof bapit&lassetsftaatediniiidii[Se&9(l)(i)]Any capitalzaih; within the meaning of section 45 [seepai-aI661; earn.ed by a persdnby transfer any capital'aiset

situated' in India, is deemed to accrue or arise in India In case the dominant purpose o f entering into agreements between two foreign companies is to acquireby one foreign company controlling interest (ie.;business economic interests, tangible and intangible), inari Indian company controlled by another Bdreign company and not merely shares which oITeforeign company held in an. Indisin company Ey a n ~ t ' h e r f o r e icompany, ~n it would. be be subjected treated as transEer of business asset situated &India. Thetransactionsw~uldcenainl~ to municipal laws o f India, including.Indian.IncCo.me-taxxAct ,and, therefore;the income fromsuch a transactionwouldbe deemed to accrue or'arise inIndia-VodafoneI~temationalHoldingsB.V. v. Udl%[.2000] 175,Taxrnan 399 (Bom.). 32.4 Income under the head "Snlaries"[Sec. 9(I)(ii)]- Income chargeable to tax under the head In~diZ,. Income ch~%g.eable urider the "Salaries"is deemed to accrue or arise inLndiaifitis&armedin head "Salaries" payable for service'renderid+&Indi~isregarded as'income earned in.India. Any salary payable for rest period or leaveperiod which is preceded:and succeeded by service in India, will also be regarded as salary earned in India. 32.5 Salary payable abroad b y the Government to a citizen of Pbzdia [Sec. 9(I)(iii)]- Salary received by Indian nationals from the Indian' Gbvernrnent, in respect o f services rendered out o f India, is deemed to accrue or a j s e in India. By virtue o f sectjdn lO(7j, any allowance or perquisite paid abroad is, however, fully exempt from tax.

of'

32.6 Diyidedend paid by a n h-tdian comp&y [ ~ e c 9(I)(iv)] . - Any 'dividend paid by a; 1;dian company outside India is deemed to accrue or arisein India. In the case o f a company other tlian an Indian company, dividend shall be de@me&to. accrue of:arise at a'place where register o f members is kept-Kusumbai D. Mahadevia v. CITE19631 47 ITR 214 (Bom.).The fo!loG~gpoints should be noted -

Para 32.7

Income-tax - Reszdenrzal status and faz znczdence

60

I . Dividend [not being dividend under section2(22)(e)]declared, distributed or paid by a domestic company during June 1,1997and March 3.1.,200.2or after March 31,2003 is not taxable in the hands . . of shareholders. 2. Only dividend "paid"is covered by section 9(l)(iv)-Pfizer Coorpn. v. CIT[2003] 129iTaxrnan 6 9 (Bom.). 32.9 Income by way of interest[Sec: 9(T)(v)]]?. - interest income of the,foIlowingtypes are deemed .. to accrue or arise in India : . .
, ,

32.7-1 RECEIVED FROM.G,OVER~MENT - Interest received from the central Government or any state Government is deemed to. accruelarise in xndia in the hands of recipients. 32.9-2 RECEIVED FROM RESIDENT - Interest received from a residenr shall be deemed to accrue/ in Indiain the hands. of recipien.c in all cases except in the following:: a. interest received;from a resident +respect of any debt incuii-ed, or any money borrowedrm.d used;by the payer of the interest, Fofthe~p5pose of a: bu?ines~-or profession~arriedon'by'~~iin .. . . : . outside India ; and b. interest receivedfrom a resident in respect of any debtincurred,.or any money borroyed,and used by the payer of interest for the purposes of making or earning any income from any squr,ee outside India. It may be noted that where money borrowed by a residen~ for the purposes of a business..or profession carried onby himoutsideindia are actually used for any other purpose, interest payable thereon is deemed to accrue or arise in India. Similarly,interest payable on money borrowed by a resident for purposes of making or earning any income from any source outside India is deemed to accrue,or arise in India if the money is actually used'for any purpose in India:
. A .

32.7-3 RECEIVED FROM A NON-RESIDENT - Interest received from a non-resident shall be deemed to accruelarise in India in the hands of, recipient if it is in respect of any debt incurred, or money
.

., ..

, . ,

tFor the purpose of iedtion 9 ( 1 ] ( v ) ~ ( v ~ ) l ( vincbrne i1j shill be chargeabre to tax according to the provisions given ab6vk in the hands of non-resident regardless of the fact whether (or not) he has a residence or place of business or businiss connection in India.

, ,

61

Income by way of royalty

Para 32.8
tntr ceemec 12 accr~e 01 a r s e :I- 1:io:a . .. . . . .-. , 7 . . . .%r
bVcerner

-3cre

.- . ...- -.

--

'.cr.iil 3i rver~:l recz,veo 9) X

.-.,

- .- . . . . . 1 '
'

I
... . 2. . ''. . .
J ;

e 2 . - , - . .1 .-<, , ~ , - . . - ~ o c , ". ,1.2 2 1 and D Lid has utilized the capiial borrowed from X for
.?:?

:c : ::

roxoole r noio n the n,lnds o i X

/ any cariyingon businessor profession outside India orearning Income outside Indio or etirning income (not being
business or proiessionoi income) in India

No

No

32.8 Income by w a y of royalty [$ec. 9(l)(vi)Tr - Under clause (iv) of section 9(1), royalty income of the following types will be deemed to accrue or arise in India in the hands of recipients : a royalty received from the Central Government or any State Government ; b. royalty received from a resident (except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India) ; and c. royalty received from a, non-resident (if the payment is relafable to a business or profession carried on by the payer in India or any other source of his income in India). Thus, royalty income consisting of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of any data, documeiitation, drawings or specifications relating to any patent, invention, model, design, secret formula or process or trade mark or similar property are ordinarily chargeable to tax in India under section 9(l)(vz).
Provision illus+roted - See the iilustration given in pora 32.9.

32.8-8 MEANING OF ROYALV - For the aforesaid purposes, "royalty"has been defined in Explanation 2 to section 9(l)(vz).The definition is wide enough to cover both industi-ial royalties as weli as copyright royalties. The definition specifically excludes income which would be chargeable to tax under the head!'Capital gains" and accordingly such income is charged to tax as.capitdgains.on.a net basis under the relevant provisions of the law. "Royalty" means consideration fora. the transfer of all or any rights (including the granting of a licence) in respect invention, model, design, secret formula or process or trade marlc-or simil;ir prope b, the'impartihg of any information concerning the working of, orthe use of, a paten . ~ . . mode?, design, secret formula or process or trade mark or similar property ; . . c. the use of any patent, invention, model, design, secret formula or process or trade mark or&imiiar property; d. theimparting of any information concerning technical, industrial, commercial or scientific knawre&e, experience o r sicill ; e. the use or right to use, any industrial, commercial or scientific equipment but not beieg the amount referred to in section 44BB (applicable from the assessment year 2.002-03): f , the transferof all or any rights (including the granting of a licence) in respect of any cop-right, literary, artistic or scientific work including films. or video tapes for use in connection with teievision.or tapes.for use inconnection with,radiobroadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; o r g. the rendering of any servicesin connection with the aforesaid activities. 3 2 1 8 : ZXCEPTIONS - In the following two cases incolneshall not be deemed to accrue'iarise in India :
+Forthe purpose.of:section 9(l)(v)i(vi)l(vil? income shall be chargeable to tax according tothe provisions given above inthe handsof non-resident regardless of the factwhether (or not) he has a residence or place of business or business connection in India.

Para 32.8

Income-tax - Resmdentml status and ray tnczdence

62

32.8-2a EXCEPTION ONE - APPROVED AGREEMENTS MADE BEFORE APRIL I , 1976 - In order to ensure that foreign suppliers of technical know-how who had entered Into agreements or had finalised proposals For the receipt of such lump sum royalties with the approval of the Central Government on the understanding that such Davment would be exempt from mcome-tax. ~thas been vrovided that such lump ium payments rece"ived.under approved dgreements madtibefbi-e.Aprd 1,~'1976 are not to be deemed to accrue or arise in hdia. If an agreement is entered into prior to.April '1, 1976, the royalty payable under the agreement is not l i a b ~ ~be t otaxed under s'ection9(l)(vz),&respective of the date on which the agreement is approved by the Central Government-CIT v. Sri Krishna Oii Complex Ltd. [I9991 107 Taxman 100 (AP). When agreement made after April 1,1976 i s deemed to have be.en made prior to that date - If' an agreement is made on or after April 1,:1976,it will be deemed to have been ma3e . before, that dikg . . . ~. if the following conditions are fuIfilled : a in the case of a taxpayer other than a foreign company, if the agreement'is made in accordance . , .. . , . with proposals approved by the ~ .!.,. e n t r a~ f o v e r n m ebefore ~t thatdate I' . . . . . ', b. in the case of a foreign company, if the condition referred to in (a) above is satisfied, and the foreign company exercises an option by furnishing a declaration in writing to the Income-tax Officer that the agreement may beregarded as having been made before April 1 , 1976. Theoption in this behalf has to be exercised before the expiry of the. time allowed under section 139(1)or section 139(2)(whetherfixed originally or on extension) for furnishingthe return of income for the assessment year 1977-78or the assessment year in which the royalty income first became chargeable to tax, whichever assessment year is later. The option so exercised is final not only for the assessment year in relation to which it is made but also for every subsequent year. 32.8-21, EXCEPTION TWO- ROYALR FOR COMPUTER SOFTWARE - So much of the i i k ~ m e ' tway ; ~ of royalty as consists of lump sum payment made by a person, who is a resident, for the transiGer of all orariy rights (including the granting of a licence) in respect of computer software supplied by a nonresident manufacturer along with computer hardware under any scheme approved un& %lie Policy onCommputer Software Export; Software Development andTrading, 1,9'86d'de C;ove~nmerit of India, shall not be deemed to accrue or arise in hdia:'The expression "computer software?'%eaas any computer programme recorded on any disk, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. 32.9 Income by way of fees for technical sewices [*c. 9(l)(vii)]i. - Clause (viz) specifies.the circumstances in which fees for technical services ar,edeemed to accrue or ariseinkdia. . ., . ,Underthis clause, income by way of " f e e ~ ~ ftechnical or services" of the following types are deemed:to:ac,crue . . . orarise ,in .India in the hands of recipient :. ..,.. ., . , . . . a. fees for technical services received from the Central Government or any ~ t & ~ 6 v e r n m e n; t b; fees for technical services.received from a resident (except where the payment is relatr?bl,e!to a business or profession carried on by the payer outside India orto.any other source oj+h,kinc,ome outside bdia); and c. fees for technical.services received from a nowresident (if the payment is relatable t0.a business or profession ca~ied..on by the payer in India o r t o any other source,of hisincome . inhdia). Even if services are rendered outside India, it is irrelevant for purpose. of- section 9cl).(viz);place where sewices are utilised'is relevant-Raymond Std. v. &'IT [2003]:86LTD 7.91(Mum:).
, , ,, , ,

Provision illusfrated - X is non-resident in india. Only Indian income is taxable in the Hands o f X i n india. During the previous year 2008-09, he receives royoity/technical fees on differenidates as given below. Ih all these.cases, royalty/ technical fee is received outside India. lfin these cases, royalty/technicaliee occruesorarises in lndia,,them itwill belndiap \ .. . incomeand taxable in India. Conversely, if in thesecases, royolfy/technicaifeedoesnotdeem toacc;ueoraris inlhdio, . ~.., it will become ioreign income which will not be taxable in the hands of X, who is non-resident-

?For the purpose.of section Y(l)(v)/(vz)/(viz> income shaU be chargeable to tax according to the p ~ o ~ i s i ogiven n s above inthe hands of non-residentregardlessof the.fact.whether (or not) hehasa residence.or place of business or-business
connection in India.

63

Income by way of fees for technical servzces

Para 32.9

ihe receipt pertains to a business or profession curried on

32.9-6 FEES FOR TECHNICAL SERVICE - MEANING OF [EXPL4NATIOM2 TO SEC. 9(i)(vii)] - The term "fees for technical services" means any consideratiori (including any lump sum consideration) for the rendering of any managerial; technical or consuitancy services (inciudingtheprovisionof services of technical or other personnel) but does not 'nclude consideration for any construction$,.assembly, miningor like project undertaken by the recipient or consideration which,would be income of the reeipienb chargeable under the head "Salaries". .-Some connection to construction - Mere connection of suvervisorv servicesundertaken bi; the assessee would not tantamount to undertaking construction or assembly of ... .the , . , . p l k t wliicfi<iiuld &&&e it ffom definition of 'fees for fe&nical s&rvices' gj.vei:in Exdl&naf?oh2 fd se&ob 9(l)(viz)-IT0 v. SMS Schloemann SzemagAlctzengeselk ~haft&sseldorf [i996] 57 ITD 254 (Hyd.). s Relation with supply of plant and equipment - When a receipt satisfies .ingredients'bf . section 9(l)(vi$ and Explanation 2 thereunder, it has to be treated as fees for tec,hnicalservices,irreGective of the fact that it has a relation to supply of plant and equipment-?TO v. SMS ~chloemann . Sieinag . A'ktiengesel%'ChaftDusseldorf[:1996] 57 ITD254189 Taxman 23 (Hyd.)(Mag.). , . -: . .. &@hjrily ;echni$fi&vi& rendeuedbja human element,:'~n the ~ i ~ l ~ n i z t2 i t6$ection9(l:)(vil),;the on &oPd d"tech&~al"i~$rec'eded by the word 'managerial' and succeeded by the'wofd '~ons$ltb.~cy'. . . , . .. Since the' expression 'technical services' is in doubt and is unclear, the rule of noscitur a soci+ is clearly applicable. This would mean that the word 'technical' would take colour' from thewdrds .. rnanagc.l.ial and ~onsult.~l~c!', bet\v*en \r h ~ c h i i is jand\cichc.d. On going t111. 1,ugh the dictionary inc.aniri~ dl'thc. \r(~rtls inanayerial ~ r 1;il~iii~I~aric\, 0 , i t !s apparenr !hat both rhc. \rurris maiiavr.1-icll and con<ultancy' involve a h;man element and bdth, rnanagerials&rvickand consultancyse~vf6e; areprovf&@d by humans. Consequently, applying the rule of noscitut a,socikjsithe wor&'technicaK as !appearingi nthe.Explanation 2 to section 9(1)(viz)would ako.have to;be construed as i&o%~in$ a human element. It does not include any service provided by machines or robots-CJT,v.Bhtlrti CeI1ular.Ltd.. [2008] 175 Taxman 575 (Delhi). 32.9-2 E X C ~ P ~ O - The N aforesaid provisions of section 9(l)(vi't)shall not apply in relationtoa.ny income by way of fees for technical servicespayabfe in pursuance of an agreementmgd'ebefof6 April~ 1,'1,976, -and approved by ihe Central Government. ,:.
:
~

I,

,?

11t means consideration for actual construction activities undertaken in India and not co~lsideration for any services in connection with construction project-Hotel Scopevista Ltd. v. CI2'[2007] 18 SOT 183 (Dehi).

Para 33

Income-tax - Reszdentzal status and tax znczdence

64

An agreement made on or after April 1,1976 shaU be deemed to have:be.enmadebefore.th& date if the.agreementis madein accordance with proposals approved by the Central ~overnmegt'before that date:.

I-linls,for tax planning in respect of residntiai status

33. For the purposes of tax planning the following broad propositions should beborne i'n.n&d. However, these propositions would hold good only in the context in whch they have been made : a In order to enjoy non-resident status, individuals, who are visiting India on a business trip or in some other connection, should not stay in India for more than 181 days during one previous year and their total stay in India during any fourprevious years preceding the relevant previous year should in no case exceed 364 days. a-1 f individuals, having beeninIndia formore than 365 days.d&ingfouryears precedingthe relevant previous year, wish tostay inIndia formorethan 60days, they shouldptan~theirvisitt&hdiain such a manner that their total stay inkdia fallsunaer two previous years. To illustrate, such persons can come.to India any time in the first week of February and stay up toMay. 29 without incurring any risk of losing their non-resident status. m An Indian citizen or a person of Indianorigin (whether rendering service outside India or not) can stay for a maximum period of 181 d'ays'on a visit to India without losing his non-resident status. If, however, such persons wish to stay in India for more than 181 days, they should plan their visit in such amanner that their maximum stay of 362 days faUunder2 previous years, stay in each previows year being not more than 181. days. a An Indian citizen, leaving India for the purpose of employment, will not be treated as resicient in India, unless he has been in India in that year for 182 days or more. In other words, Indian8c<tizens going abroad for the puipose of employment can stay in India for 181 days,w.ithout becomhg resident in that year, even if they were in India for more than 365 days during the four preceding years. T h s copcesslon is available only to those. who want to leave the country for the purp:ose:of . . L C . .~ employtpe+:t. Howeier,' the. . . term , . .. "employment" is.not defined in the Act..One ,..... .. h*, therefore,, . .,..:..i~.,+ to would be'usiful to quote Dknman and Vaisey, JJ..in.tls . . ... depend Lipon j~dicial~pronouncernents..It context :: Per Denman, J. - "I do not think that employment means only where one is set to work by others ,. to a r p m o n e y ; a man.inay, emplpy himself so as to earn profits in many waysp-Partridge v ,&lalIa$kine.[.l886]: 18 ~Bi3,;276 .- . ( ~ c ) f ,. . . 3 P& vaisey,J. - "Theword .,. 'employment' .. isone of vesy wide significance.But the w o r d ~ : e ~ p l ~ y q : and the 'employee' are much p o r e restricted in their meanings. Thus I may be.said to,'empkyl m y . t i m < ~ r h ital'ects y with&t 8eiiig in any proper sense an employer, and I may'aXso.be.saidto be emproyed in Some pursuit or activity without being an 'employee'"-'Westall . . Richardson LtiS. v. RozjLkjn [ 1 9 5 4 1 3 2 . 2 448. ~~ ,. . , ..,, , . .. ~pp , l ,,. ~in .. g ; .ifdresaid th~ ratios, there is no reason why a professional who,expecti,.to. ,sdt-up . . .. . .. ..:,, . practice in,or a.businessman who wants to shift his activities to,,a.fofeign.coudte . ibdepend~nt shouldbe.,denied.the .,,.. , . benefit . of .,, conckssion. . . ,... ,.. mi Anon-resident.can.escapg.taxliability in.respeet.of incomeearned out!of.Indiaif he f&$ rec.eiyes it. oat .. of h & a a & t b e wmits!the;w.bole ~ 0.rpart of it to lndi?, eventhoughshe bufiness.isco@t~~ued from 'Indi*.. . ' . , . .., ... a A person, who is not ordinarily resident, earning income 0utside:India Erom a business~controEed outside . , ~ , . . India,,can ayoid tax liability if he first receives such incomein a foreign country,and$ea . ., ... ,,, ., ,..,. re,mits the.khole.or part of it to India, either in the same year or.in'the following year(s),.. . . . ~. . . . :. . a Nit ordinarily resident persons can claim set-OKof losses sustained.in the business. contrdUed outside India against their income taxable in India, provided they shift the control of the business to India.
>
$

,,

I 2

2, ,

) :

,,

. .

65

P r o b l e m on yeszdentzal status and tax znczdence

Problem 34-P 1

Problems o n residential status a n d tax incidence

During the previous year 2008-09, X and Mrs. X have the following incomes :

interest on compoiiy deposit lo India income deemed to be earned in iodio income froin business iituoied in Nepoi and controlled from iodio (40 per cent is received
in india and 60 per cent is received outside india)

Salary received in india for sewice rendered outside lndio loterest received fiom the Government of india (received outside indio) ihte:est received fiom o foreign company outside India (on capihi which is vtilised outside India) . .., . . Interest received from a. foreign company ouhide lndio [on ioon which.is.uii1isedfor - dqing business in Indip) Royolw received in lndio from the Government of indio Royally received in lndio, from a non-resident in respect of technology used by such person outside indio
.
,

The iollowin~iriformotion is olsoovai1able.i

: '

.,,. . ,,. . ,,

. . .. ..
X
Mrs. X Fothei of X Mother d X Grandfaihers ofX Giandmoihers of X Father of Mrs. X Mother of Mis; X
. . . , ... .

,,

;.Yiarqf birth :

'P?! . .
..
...,
,

. . : , .
.,

1952 1925 1893 1895 1926

. .

/
1

ihus&t Kai'hmandu Mexi50 md Dubai

1927 1901

Grondfothers of Mrs. X Grandmothers of Mis X

1902

Find out the residential status and gross total incorneof Xand M s . X for the assessment year 2009-1 0. SOLUTION : X and Mrs. X are foreign citizens. W h i k MrsiXis-a~peison:oi.lndianorigin [hergrandmother was;born in wndivided lndio(Karachi)li:X is n o t a personof lndion~arigin;[X:or~his parenisorgrand parents:wasnot boin in ...,.. undivided India).

Problem 34-82

Income-tax - &&fimt.&l

s$&~.

tax incidence
.

X and Mrs. X con become resideni in lndia onlv if they sotisfvionv:of:ihe.foJlowincr basic conditions?:

Condit~on 2

60 days

365 days
... ..

Non-iunoionol

As X satisfies basic condition 2, he is a resident irv.\lndia. However, he is unable i o satisfy one of ihe a.ddiiional conditions (he is n o i resident in at least i w o out 0f;plieceding 10 years). X is, therefore, resident but not osdinarily resideni in I n d i a i o r t h e assessment yeor 2009-10. Mrs. X is a non-resideni in indio, as she is not in lndia focat leasi . . 182 doysduringthe previous year 2@08-09. : . Net i n c o m e b i

x and Mrs. X shall be deterrnined,bs !$:,. f~llows :

.-

, ,

s:**q*<ia.;+
: > ? ; ? . : > : ,
~'.~.~.,h",.<$.',.,

s,., < . , ::*,:h,zfry$ --.. ,.- -91,: e

: , > : . , > :,,,;

> : > .

Inter& on compony deposiis in India Income deemed to be eorned in lndia Income from business in Nepal

- 40% received in lndia

60% recefvedouiside lndia (0s business is controlled in lnd~a)

Saiory from outside lndro Interest from Government of lndio Interest from foreign company (borrowed money is uttlised outs~de India) interest from a foreign company (borrowed money-is,viiiisedin.indio):. t ? ; y a t ly from lhedokrnment ~ovdlh received in lndia Gross totol income

. ,..

34-PZ X furnishes ihe following part~culors o i his income earned during the previous yeor relevant i o ihe ossessmeni

. . , .. ,

3, Interest from propee in USA receiveJou?side lndio [Rs. 92,000 is used in Canada ,.... . . , . . for meeting the education expenses otX's son in Canada and Rs. 2,48,000 is later on remined to India]
~

: ' ,

4. iiicorne eoined from busin& iii iton which is controlled from New Delhi (Rs. 70,000 is received in India)

, .

5. Dividend paid by an Indian &;jiony ., , 6. P&t "ntaxed profit of 2 7. Piofits from o business i
outside India)

; :;. , . ,

d n May

10, 2008 but received outside lndio

dio in May 2008 naged from outside India (60 per cent of the profit is received .
.

8. @bfits on sale of s

, ,", ,., , > a . building:,C..li?dip ijui:ieceiv.qdin Nepal

... .. ... . . .

.. . .

18,74,.000

9. Pension @om a f o r m e r ~ e m p l o ~ e ~ i n . ( 'ieceivgd ~ d i o ; in iron (amount-net'ojsiondord deduction,'

2 1,5;000
80;000

1!0. Gifi,in,foreign.cucre~ay fro.m,o ffiie3d; re,~eie~,d~~~.,lndia.on~Sepiember 4;2@08

Find ouithe~grosstotai incomeoi%~:'(l):if~heis iesidentundordinady resident:im:lndia, (ii) if heis resident bui not ordinorilyiesideni in lndio, and (iiij if he is non-resident for the assessment year 2009- 10.