Taxation of non-resident companies under Assessment of Companies – Income Tax

Taxation of non-resident companies under Assessment of Companies :

The rates at which tax would be payable by such a company on the different categories of its income are stated above. When a nonresident company declares dividends outside India, then non-resident shareholders of such company would not have to pay any tax in India on their individual income even though the dividends would have been declared out of profits made by the company in India. Foreign companies deriving income from royalties, patents, licence fees and fees for technical services in India are liable to be taxed in India. In the case of fees for technical services rendered, only that portion of income which relates to the services rendered in India is liable to tax in India and that received for services rendered outside India is not so liable. In respect of the income arising to a foreign company in India by way of specified royalties or fees for technical services rendered, the rate of tax is 50% if the royalties or fees are received from Government or an Indian concern pursuant to an agreement approved by the Government of India between 1.4.1961 and 31.3.1976 (in case of royalties) and between 1.3.1964 and 31.3.1976 (in case of fees for technical services).

Special rates of tax for taxing dividends, fees for technical services and royalties in the case of foreign companies [Section 115A]

1. Where the income of a non-corporate non-resident or a foreign company consists of –

(i) dividends (other than dividends referred to in section 115-O)

(ii) interest received from Government or from an Indian concern on monies borrowed or debt incurred by the Government or the Indian concern in foreign currency; or

(iii) income received in respect of units purchased in foreign currency of a mutual fund specified under section 10(23D) or of the Unit Trust of India,

the same will be taxed at 20%.

However, the following interest income would be subject to a concessional rate of 5% on gross interest –

(i) Interest income received by a non-corporate non-resident or a foreign company from an infrastructural fund referred to in section 10(47) .

(ii) Interest of the nature and to the extent referred to in section 194LC i.e., interest received by a foreign company or a non-corporate non-resident, in respect of borrowing made by an Indian company or business trust in foreign currency from sources outside India between 1.7.2012 and 30.6.2017 or by way of issue of long-term infrastructure bonds between 1.7.2012 and 30.9.2014 or by way of issue of long-term bonds between 1.10.2014 and 30.6.2017.

(iii) Interest of the nature and to the extent referred to in section 194LD i.e., interest payable during the period between 1.6.2013 and 31.5.2015 in respect of investment made by an Foreign Institutional Investor (FII) or Qualified Foreign Investor (QFI) in a rupee denominated bond of an Indian company or a Government security.

(iv) Distributed income, being interest referred to in section 194LBA, taxable in the hands of non-resident unit holders of a business trust.

2. No deduction in respect of any expenditure or allowance shall be allowed to the assessee under sections 28 to 44C in computing the aforesaid income. Further, where the gross total income of these assessees consists only of incomes mentioned above, no deduction shall be allowed to them under Chapter VIA of the Income-tax Act, 1961. Further, where the gross total income includes the aforesaid incomes, Chapter VIA deductions will be allowed as if the gross total income as so reduced were the gross total income of the assessee.

3. It shall not be necessary for the aforesaid assessees to furnish a return of their income under section 139 if the total income in respect of which they are assessable under the Act during the previous year consisted only of the income referred above, and the tax deductible at source has been deducted from such income.

4. Where the total income of a non-corporate non-resident or a foreign company includes royalty or fees for technical services, other than income referred to in section 44DA(1), received from Government or an Indian concern in pursuance of an agreement made by the foreign company after 31.3.1976, the same will be taxed @10%, subject to the following conditions:

(a) such agreement must be made with an Indian concern ;

(b) the agreement must be approved by the Central Government, or

(c) where it relates to a matter included in the industrial policy for the time being in force the Government of India, the agreement should be in accordance with that policy.

Illustration
X Ltd., an Indian company, entered into an agreement with Mr. M, a non-resident, on 1.7.2006 and pursuant to the agreement, fees for technical services (FTS) of Rs 10 lakh, which is taxable under section 115A, is payable to Mr. M every year. Examine the tax consequence of the said transaction in the hands of Mr. M for the A.Y.2016-17, if –

(i) Mr. M is a resident of a country with which India has no DTAA.

(ii) Mr. M is a resident of a country, with which India has a DTAA, which provides for taxation of such FTS@8%.

(iii) Mr. M is a resident of a country with which India has a DTAA, which provides for taxation of such FTS@12%.

Answer

(i) The FTS would be taxable@10% as per section 115A, since India does not have a DTAA with the other country.

(ii) The FTS would be taxable@8%, being the rate specified in the DTAA, even though section 115A provides for a higher rate of tax, since as per section 90, the provisions of the DTAA would apply if they are more beneficial.

(iii) The FTS would be taxable@10% as per section 115A even though the DTAA provides for a higher rate of tax, since as per section 90, the provisions of the Income-tax Act, 1961 (i.e., section 115A, in this case) would apply if they are more beneficial.

Tax on income from units purchased in foreign currency or capital gains arising from the transfer [Section 115AB]

(1) Where the total income of an overseas financial organisation (Off -shore Fund) includes the following incomes namely:

(a) income received in respect of units purchased in foreign currency, or

(b) income by way of long term capital gains arising from the transfer of units purchased in foreign currency, the same will be taxed at the rate of 10%.

(2) Where the gross total income of the off-shore fund consists only of income from units or income by way of long-term capital gains arising from the transfer of units or both, no deduction will be allowed to the assessee under sections 28 to 44C or under section 57 or under Chapter VIA. The indexation provisions contained in the second proviso to section 48 will not apply to any long-term capital gains arising from the transfer of units purchased in foreign currency.

(3) Where the gross total income consists of the aforesaid income as well as other income, the deductions under Chapter VIA shall be allowed only on that portion of the gross total income which does not include income from units purchased in foreign currency.

(4) For the purposes of this section, ‘Overseas financial organisation‘ or ‘off-shore fund‘ means any fund, institution, association or body, whether incorporated or not, established under the laws of a foreign country, which has entered into an agreement for investment in India with any public bank or public financial institution or a mutual fund specified under section 10(23D). Such arrangement must be approved by SEBI.

Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer [Section 115AC]

1. Where the total income of a non-resident includes the following types of income namely,

(a) income by way of interest on bonds of an Indian company issued in accordance with such scheme as may be notified by the Government or on bonds of a public sector company, sold by the Government, and purchased by him in foreign currency; or

(b) income by way of dividends (other than dividends referred to in section 115-O) on Global Depository Receipts

(i) issued in accordance with such scheme as the Central Government may specify against the initial issue of shares of an Indian company and purchased by him in foreign currency through an approved intermediary; or

(ii) issued against the shares of a public sector company sold by the Government and purchased by him in foreign currency through an approved intermediary; or

(iii) issued or re-issued against the existing shares of an Indian company purchased by him in foreign currency through an approved intermediary in accordance with a specified scheme; or

The income-tax will be at the rate of 10% on the above income.

2. Where the gross total income includes interest or dividends in respect of bonds or GDRs referred to in this section, no deduction shall be allowed to him under sections 28 to 44C or under section 57 or under Chapter VI -A.

3. Where the gross total income includes interest or dividend (other than dividends referred to in section 115-O) or income by way of long-term capital gains, such gross total income shall be reduced by the amount of such income and Chapter VI-A deduction will be allowed on such balance.

4. The indexation provisions contained in the first and second proviso to section 48 , shall not apply for the computation of long-term capital gain arising out of the transfer of bonds or GDRs.

5. Where the total income of the non-resident consists only of interest or dividends on bonds and GDRs and tax has been deducted at source from such income, he need not file a return under section 139(1).

6. Where the assessee acquired Global Depository Receipts or bonds in an amalgamated or resulting company by virtue of its holding Global Depository Receipts or bonds in the amalgamating or demerged company (as the case may be) these provisions shall apply to such Global Depository Receipts or bonds.

Tax on income from GDRs purchased in foreign currency [Section 115ACA]: This section applies to resident individuals who are employees of an Indian

company engaged in specified knowledge based industry or service, or its subsidiary engaged in specified knowledge based industry or service.

As per section 115ACA(1), income-tax payable shall be the aggregate of:

(i) 10% of income by way of dividends (other than dividends referred to in section 115-O) in respect of Global Depository Receipts of an Indian company purchased in foreign currency in accordance with such employees‘ stock option scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf, if any,

(ii) 10%, in case of long-term capital gains arising from the transfer of the aforesaid Global Depository Receipts, if any, and

(iii) the amount of income-tax on the total income as reduced by the aforesaid income from the said Global Depository Receipts.

As per section 115ACA(2), in the case of the aforesaid resident employee, no deduction shall be allowed under any provisions of this Act where the gross total income consists only of income from Global Depository Receipts. However, where the total income includes income from Global Depository Receipts, the deduction under any provisions of the Act shall be allowed as if the gross total income does not include the income from the Global Depository Receipts.

The first and second provisos to section 48 relating to the computation of capital gains shall not apply in case of transfer of Global Depository Receipts of an Indian company purchased by the resident employee in foreign currency. In other words, no indexation will be available even if the assets are long term capital assets [Sub-section (3)].

The Explanation to the section defines the related expressions as follows:

(a) “Global Depository Receipts” means any instrument in the form of a depository receipt or certificate (by whatever name called) created by the Overseas Depository Bank outside India and issued to investors against the issue of –

(i) ordinary shares of issuing company, being a company listed on a recognized stock exchange in India; or

(ii) foreign currency convertible bonds of issuing company;

(b) “Specified knowledge based industry or service” means –

(i) information technology software;

(ii) information technology service;

(iii) entertainment service;

(iv) pharmaceutical industry;

(v) bio-technology industry; and

(vi) any other industry or service, as may be notified by the Central Government.

(d) “Information technology service” means any service which results from the use of any information technology software over a system of information technology products for realising value addition;

(e) “Information technology software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form and capable of being manipulated or providing inter -activity to a user, by means of automatic data processing machine falling under heading information technology products but does not include non-information technology products;

(f) “Overseas Depository Bank” means a bank authorised by the issuing company to re-issue Global Depository Receipts against issue of Foreign Currency Convertible Bonds or ordinary shares of the issuing company.

Tax on income of Foreign Institutional Investors from securities or capital gains arising form their transfer [Section 115AD]: This section relates to tax

on income of Foreign Institutional Investors from securities or capital gains arising from their transfer.

In the case of a Foreign Institutional Investor, income-tax payable shall be the aggregate of the following:

(1) 20% of the income (other than income by way of dividends referred to in section 115-O) received in respect of securities (other than those units referred to in section 115AB).

However, in case of interest referred to in section 194LD, income-tax is payable@5% of gross income.

(2) 30% of the short-term capital gains arising from the transfer of the said securities. However, the amount of income-tax payable on their income by way of short-term capital gains referred to in section 111A is to be calculated at 15%.

(3) 10% of long term capital gains arising from the transfer of the said securities.

(4) The amount of income-tax on the total income as reduced by the aforesaid items of income.

Where the gross total income consists only of income from the aforesaid securities no deduction will be allowed under sections 28 to 44C or under section 57. However, where the gross total income includes income from securities or capital gains arising from the transfer of such securities, the deduction under Chapter VIA will be allowed as if the gross total income does not include the aforesaid items of income.

The first and second provisos of section 48 relating to computation of capital gains will not apply in the case of transfer of aforesaid securities by the Foreign Institutional Investors.

Concessional rate of tax on dividends received by Indian companies from specified foreign companies [Section 115BBD]

(i) Dividends received by Indian companies from specified foreign companies to be subject to a concessional rate of 15% (as against the general rate of 30% applicable to Indian companies).

(ii) This rate of 15% would be applied on gross dividend, in the sense, that no expenditure would be allowable in respect of such dividend.

(iii) However, this concessional rate would not be applicable in respect of dividend received from a foreign company in which the holding of the Indian company is less than 26% of the nominal value of the equity share capital.

(iv) Therefore, if the total income of an Indian company, includes income by way of dividend declared, distributed or paid by a specified foreign company, the income tax payable would be the aggregate of –

(a) Income-tax @15% on gross dividend from such specified foreign company; and

(b) Income-tax with which the assessee would have been chargeable had its total income been reduced by such dividend.

(v) Specified foreign company means a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital of the company.

Other special provisions: Section 44D and 44DA incorporates special provisions for computing income by way of royalties and fees for technical services

chargeable to tax in the case of foreign companies and these provisions would apply notwithstanding any thing to the contrary contained in section 28 to 44C. These provisions have been explained under the head “Profits and Gains of Business or Profession”. The special provisions in respect of deduction of head office expenditure, applicable to all non-residents contained in section 44C have also been explained. All these special provisions should be borne in mind while determining the liability of foreign companies to income-tax in India.

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