Provisions Applicable to Non-residents
mentioned in Chapter-II a person who is non-resident is liable
to tax on that income only which is earned by him in India. Income
is earned in India if -
- It is directly or indirectly received in India; or
- It accrues in India or the law construes it as having accrued
following are some of the instances when the law construes and
income to have accrued in India:-
income from business arising through any
business connection in India (refer Chapter X);
- income from property if such property is situated in India;
- income from any asset or source if such asset or source is in
- income from salaries if the services are rendered in India.
In such cases salary for rest period or leave period will be regarded
as earned in India if it forms part of service contract,.
- income from salaries payable by the Government to a citizen
of India even though the services are rendered outside India;
income from dividend paid by an Indian company
even if the same is paid outside India;
- income by way of interest payable by Government or by any other
person in certain circumstances ;
- income by way of Royalty if payable by the Govern≠ment or by
any other person in certain circumstances;
income by way of fees for technical services
if such fees is payable by the Government or by any other person
in certain circumstances.
The following income even though appearing to be arising in India
are construed as not arising in India:-
- If a non-resident running a news agency or publishing newspapers,
magazines etc. earns income from activities confined to the collection
of news and views in India for transmission outside India, such
income is not considered to have arisen in India.
- In the case of a non-resident, no income shall be considered
to have arisen in India if it arises from operations which are
confined to the shooting of any cinematography film. This applies
to the following types of non-residents:-
- individual who is not a citizen of India; or
- firm which does not have any partner who is a citizen of India
or who is resident in India; or
- company which does not have any shareholder who is resident
Exempted income of non-residents
Certain income of non-residents are
totally exempt from income tax. Such income are mentioned in Chapters
VII to X.
avoid difficulties in working out the net income of a non≠resident
from his gross receipts in India, the law provides for taxation
or most of the income of non-resident on 'Gross income basis',
which means that the tax liability is determined on the basis
of gross receipts without going into the question of expenses
incurred in earning those receipts. Such 'Gross receipt basis'
taxation operates in two ways.
a) By laying down the rate of tax
to be applied on gross receipts. The rates are determined at a
figure lower than the general rate of tax applicable to total
income as it takes account of the possible expenses in earning
the income. Such provisions are:-
Tax on dividend (other than dividend from
do≠mestic companies), interest, royalty, fee for technical services
and income from Units (Sec. 115A).
- Tax on income and capital gain in respect thereto from units
purchased in foreign currency by off shore funds (Sec. 11 SAB).
Income and capital gain in respect thereto
from Bonds and shares purchased in foreign currency or acquired
in resulting or amalgamated com≠pany as a result of demerger
or amalgamation (Sec 115 AC.).
- Tax on income other than dividend of Foreign Institutional Investors
from Securities & Capital gains arising from their transfer
(Sec. 115 AD).
- Income of sportsman or Sports association (Sec. 115BBA).
b) By laying down a percentage to
be applied on gross receipts to determine the net income. The
tax is then calculated at the normal rate of tax on such presumptive
income. Such provisions are:-
- Profits of shipping business (Sec. 44B)
- Profits of business of providing services etc. to be used in
the business of prospecting, explora≠tion or production of mineral
oils (Sec. 44BB)
- Profits from operation of aircraft (Sec. 44BBA)
- Profit from business of civil construction etc. in certain turnkey
power projects (Sec. 44BBB)
With a view to attract investment
by Non-resident Indians and Indian Nationals living abroad, special
provisions exist in Chapter XIIA providing incentives in the form
of reliefs and concessional tax rate as also simplifying the tax
assessment procedure for such persons. Non-resident Indian has
been defined as an individual, being a citizen of India or a person
of India origin, who is not a resident. A person is of Indian
origin if he or either of his parents or any of his grand parents
was born in undivided India. These special provisions are dealt
with in Chapter XI.
Provisions for tax avoidance
When in a business carried on between
a resident and non-resident, the course of business is arranged
in a manner that the business produced to the resident either
no profits or less than the ordinary profits, the Assessing Officer
would determine the profits which may reasonably be deemed to
have been derived therefrom. This problem arises where the dealings
between the two are not at arms length and arrangement through
transfer pricing is resorted to reduce the profit taxable in India.
In such situations, the assessing officer can take recourse to
estimation of income on any rational basis. Rules 10 and 11 of
Income Tax Rules govern the estimation of such income.
Assessment of non-residents through 'Agents' (Sec. 163)
A non-resident may be assessed to
tax in India either directly or through agents. Persons in India
who may be treated as 'agent1 of a non-resident are:-
- employee or trustee of the non-resident;
- any person who has any business connection with the non-resident;
- any person from or through whom the non-resident is in receipt
of any income;
- any person who has acquired a capital asset in India from the
A broker in Indian who has independent
dealings with a non-resident broker acting on behalf of a non-resident
principal is, however, not treated as an 'agent' of the non-resident,
if the transactions between the two brokers are carried on in
the ordinary course of their business.
Before any person is treated as an
'agent' of non-resident, he is given an opportunity of being heard
and any representation from him in the matter is considered.
Tax clearance certificate before departure from India
The following categories of persons
are required to produce a tax clearance certificate from the concerned
assessing officer prior to their departure:-
a) persons who are not domiciled in
India, and in whose case the stay in India has exceeded 120 days;
b) persons of Indian or non-Indian
domicile whose names† have been communicated to the airlines/
shipping Companies by the Income Tax authorities;
c) persons who are domiciled in India
at the time of their departure; but
- intend to leave India as emigrants; or
intend to proceed to another country on a
work permit with the object of taking any employment or other
occupation in that country; or
in respect of whom circumstances exist, which
in the opinion of the income tax authorities render it
necessary for him to obtain the Tax Clearance Certificate.
certificates is granted where there are no outstand≠ing taxes
under the Income Tax Act, the Excess Profits Tax Act, the Business
Profits Tax Act, the Wealth Tax Act, the Expenditure Tax Act or
the Gift Tax Act against him or where satisfactory arrangements
have been made for the payment of any such taxes. Obtaining guarantee
from the employer of the person leaving the country is one of
the methods of ensuring satisfactory arrangement for payment of
taxes. For those who have to go abroad frequently for employer's
work, facility of one-time Clearance Certificate has been provided
to the foreign employee who has a fixed tenure of service in India
or upto 5 years on furnishing an employer's guarantee in the prescribed
form for payment of any tax that may be found due against him
during the entire period of contract plus two years.
With a view to avoiding dispute in
respect of assessment of income tax liability in relation to the
transaction undertaken by or with a non-resident, a scheme of
Advance Ruling has been introduced by incorporating Chapter XIX-B
in the Income Tax Act, 1961. The Scheme now enables the parties
to obtain, in advance, a binding ruling from the Authority for
Advance Rulings on issues which could arise in determining their
Such Advance ruling:-
Helps non-residents in planning their income
tax affairs well in advance.
- Brings certainty in determining tax liability.
- Helps avoiding long drawn and expensive litigation.
advance ruling can be sought on any question of law or fact specified
in the applications in relation to the concerned transaction.
Advance ruling cannot, however, be
sought where the question:-
- is already pending in the case of the applicant before any income
tax authority, the Appellate Tribunal or any court; or
- involves determination of fair market value of any property;
- relates to a transaction which is designed prima facie for avoidance
of income tax.
applicant may seek advance ruling by making an application to
the Authority in quadruplicate in the prescribed Form† No.† 34C†
either† in† the† person† or by an† authorised representative or
by registered post. The applicant is entitled to represent his
case before the Authority either personally or through an authorised
representative. If the applicant desires to be represented by
an authorised representative, a duly authenticated document authorising
him to appear for the applicant should be enclosed. The applicant
may withdraw his application within 30 days from the date of filing
The application should be accompanied by a free of Rs. 2,500/-
(two thousand five hundred Indian rupees) through a bank draft
drawn in favour of the† Authority for Advance Ruling payable at
advance ruling is required to be pronounced by the Authority within
six months of the receipt of the application.
ruling pronounced by the Authority would be binding in respect
of the transaction(s) in relation to which ruling has been sought:-
on the Commissioner and the income tax authorities
subordinate to him in respect of the applicant; and
on the applicant who had sought it.
Deduction of Tax at Source from payments to Non-residents
Any person responsible for making
any payment (except dividend declared after 1.6.97) to a non-resident
individual or a foreign company is required to deduct tax at source
at the prescribed rate at the time of credit of such income to
the account of the payee or at the time of payment thereof. If,
however, person responsible for making the payment is the government,
public sector bank or public financial institutions, deduction
is to be made at the time of payment only.
the person responsible for making such payments considers that
the whole of such sum would not be income chargeable in the case
of recipient, he may make an application to the assessing officer
to determine the appropriate proportion of such sum which will
be chargeable to tax and upon such determination tax† is† required
to† be deducted† only on the chargeable proportion.
rate at which tax is to be deducted at source will be the rates
as specified in the Finance Act of the relevant year or the rate
specified in any agreement for avoidance of double tax whichever
is beneficial to the assessee.
In respect of income of the nature
referred to in para 7.2(iii) arising to Offshore Funds and of
the nature referred to in para 7.2(iv), tax is deductible at the
rates at which such income is taxable.
For certain† remittances,† the† Reserve† Bank† of†
India Exchange Control Manual requires production of a no objection
certificate from the Income-tax authorities. The Central Board
of Direct Taxes, vide circular No. 759 and 767, has simplified
the procedure by dispensing with such requirement. The person
making the remittance has only to furnish an undertaking (in duplicate)
addressed to the Assessing Officer which should be
accompanied by a certificate from a Chartered Accountant in the
prescribed form. The undertaking should be submitted to the Reserve
Bank of India or the authorised dealer in foreign exchange who
will forward a copy to the assessing officer.
Any tax deducted in excess of the required amount is normally
refundable to the non-resident on making a proper claim for it.
Sometimes the non-resident returns the amount in respect of which
tax was deducted or, circumstances occur in which tax is found
to be non-deductible or, in which tax is found to have been deducted
in excess and the non-resident is either not able to claim refund
or does not show initiative in claiming such refund. In such cases,
the CBDT has by circular No. 790 dated 20.4.2000 permitted refund
of excess tax to the person making the deduction.