UNIT 4: AREAS OF TAX PLANNING STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 Classification of Companies 4.3 Private Company 4.4 Public Company 4.5 One Person Company 4.6 Factors Governing the Decisions for Suitable Form of Organization 4.7 Nature of Business Activity 4.8 Scale of Operations 4.9 Tax Implication 4.10 Summary 4.11 Keywords 4.12 Learning Activity 4.13 Unit End Questions 4.14 References 4.0 LEARNING OBJECTIVES After studying this unit, you will be able to: State the various kinds of companies Explain the characteristics of various kinds of companies Discuss the concept of OPC Explain some of the important factors governing the decisions for suitable form of organisation. 4.1 INTRODUCTION Business organisation refers to all necessary arrangements required to conduct a business in an optimized manner. It refers to all of the actions that must be taken to build and maintain a working relationship between men, materials, and machinery in order to run a profitable business. This is referred to as the planning and organising 51 CU IDOL SELF LEARNING MATERIAL (SLM)
process, which is an important element of business management. A business undertaking or organisation is the arrangement that results from this process of organising the factors needed to start and run a firm. Types of Business Entity Sole Partnership Hindu Undivided Limited Liability Co-operative Company Proprietorship Family Partnership societies Fig 4.1 Types of Business Entity The choice of a business entity is critical to a company's success. The choice of a business entity will be determined by the object, type, and size of the entity's business, which will vary from case to case, as well as the will of the business entity's owners to achieve their goals.Sole Proprietorship, Partnership, Hindu Undivided Family (HUF) Business, Limited Liability Partnership (LLP), Co-operative Societies, Branch Office, and Company, which can be any type of company including one person company (OPC), private limited company, public limited company, guarantee company, subsidiary company, statutory company, insurance company, and so on. In addition, a company constituted under Section 8 of the Companies Act, 2013 or Section 25 of the previous Companies Act, 1956 is a non-profit commercial entity. There can also be Association of Persons (AOP) and Body of Individuals (BOI), Corporation, Co- operative Society, Trust etc. Essentially, companies could be either private limited or public limited companies. Public limited companies could be unlisted or listed. Before picking one of the forms of business entity that best suits the nature and scale of the business that the entrepreneur / business owner want to pursue, each entity must sit down and carefully analyse all of the advantages and disadvantages of each type of entity. A business can be owned and organised in a variety of ways. Each type of organisation has advantages and disadvantages. The ultimate decision of business structure is determined by weighing the benefits and drawbacks of various business structures. The correct business structure is critical since it defines the entrepreneur's power, control, risk, and responsibility, as well as the allocation of profits and losses. Because it is a long-term commitment, the type of business should be chosen after much study and consideration.The choice of a proper form of business organisation is a crucial entrepreneurial decision since it has an impact on a company's success and growth — for example, it determines profit division and distribution, business risk, and so on. 52 CU IDOL SELF LEARNING MATERIAL (SLM)
It is very difficult to switch from one form of business organisation to another because it necessitates the winding up, dissolution of the existing organisation, which may be treated as a case raised by oneself to deal with complex issues and procedures, resulting in a waste of time, effort, and money. Furthermore, business closure will result in the loss of revenue, money, and jobs. The magnitude of risks and obligations, as well as the owners' willingness to accept them, are other crucial factors to consider when selecting the correct company entity. As a result, the type of business entity should be chosen after careful thinking and evaluation of all sides of the golden coin of each type of business entity, as well as its fit for an entrepreneur's company ideas. When deciding on a suitable business structure, there are a number of aspects to consider. As previously said, the various kinds of private ownership organisations differ in terms of profit allocation, control, risk, legal formalities, adaptability, and so on. As a result, this component of planning should be given careful study, and only the form of organisation best suited to the type of business should be adopted. Because the need for business organisation selection emerges both at the outset of a firm and subsequently for satisfying the needs of its growth and expansion, it is important to address this issue at both levels. 4.2 CLASSIFICATION OF COMPANIES a) Classification on the basis of Incorporation: Companies may be Incorporated under the following categories: i) Statutory Companies:A special Act of Parliament or the State Legislature establishes them. They are exempt from the provisions of the Companies Act of 2013. Reserve Bank of India, Life Insurance Corporation of India, and others are examples of these types of businesses. ii) Registered Companies: The companies which are incorporated under the Companies Act, 2013 or under any previous company law and registered with the Registrar of Companies, fall under this category. b) Classification on the basis of Liability: Under this category there are three types of companies: - i) Unlimited Companies:The liability of the company's members is unlimited in this form of corporation. According to Section 2(92) of the Companies Act, 2013, an unlimited company is one that has no limit on the liability of its members and may or may not have share capital. They might be either a public or private corporation. The members are liable to the company as well as to anyone else. 53 CU IDOL SELF LEARNING MATERIAL (SLM)
ii) Companies limited by guarantee:A company limited by guarantee is defined by Section 2(21) of the Companies Act, 2013, as a business whose members' liability is restricted to the amount that the members may each agree to contribute to the company's assets in the case of its winding up, as set down in the memorandum. A guarantee company's members are effectively put in the position as guarantors for the company's debts up to the agreed-upon sum. Members are liable to the company as well as to anyone else. iii) Companies limited by shares:A company limited by shares is one in which the members' responsibility is restricted by the liability clause in the memorandum to the amount, if any, unpaid on the shares they each own. Section 2(22) of the Companies Act, 2013 provides that “company limited by shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. For example, a shareholder who has paid Rs. 75 on a share of face value Rupees 100 can be called upon to pay the balance of Rupees.25 only’. Companies limited by shares are by far the most common and it may be either public or private. c) Other Forms of Companies A) Section 8 Companies:A person or an association of persons who proposes to be registered as a limited company under this Act and proves to the satisfaction of the Central Government that the company – - has as one of its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, environmental protection, or any other object. - intends to apply its profits, if any, or other assets to the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, or any other object; and -intends to prohibit the payment of any dividend to its members such person or association of person may be allowed to be registered as a limited company without addition to its name of the word “limited” or private limited by the Central government by issuing a license and by prescribing specified condition. The association proposed to be registered under section 8 shall not be proposed to be an unlimited company. However, the same may be company limited by guarantee or a Company limited by shares. Government Companies:According to section 2(45) of the Companies Act, 2013, a \"Government company\" is one in which the Central Government, or any State Government or Governments, or partly by the Central Government and partly by one or more State 54 CU IDOL SELF LEARNING MATERIAL (SLM)
Governments, owns at least 51 percent of the paid-up share capital, and includes a subsidiary company of such a Government company. Explanation - Where shares with differential voting rights have been issued, the \"paid up share capital\" will be read as \"total voting power\" for the purposes of this article. ii) Foreign Companies: As per section 2(42) of the Companies Act, 2013 the “foreign company” means any company or body corporate incorporated outside India which, - A) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and B) conducts any business activity in India in any other manner. iii) Holding and Subsidiary Companies: As per section 2(46) of the Companies Act, 2013 46) the “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies, and the expression “company” includes anybody corporate. As per section 2(87) of the Companies Act, 2013 “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company – A) controls the composition of the Board of Directors; or B) exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. Explanation. - For the purposes of this clause, – (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company. (b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors. (c) the expression “company” includes any bodycorporate. (d) “layer” in relation to a holding company means its subsidiary or subsidiaries. As per section 2(11) of the Companies Act, 2013, the “body corporate” or “corporation” includes a company incorporated outside India, but does not include – 55 CU IDOL SELF LEARNING MATERIAL (SLM)
(i) a co-operative society registered under any law relating to co-operative societies; and (ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf. iv) Associate Companies/ Joint Venture Company: As per section 2(6) of the Companies Act, 2013 the “associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. Explanation. - For the purpose of this clause, – (a) the expression “significant influence” means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement. (b) the expression “joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. v) Investment Companies: the term investment company” includes a company whose principal business is the acquisition of shares, debentures or other securities and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than fifty per cent. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income. vi) Producer Companies: Producer Company means a body corporate having objects or activities specified in section 581B of the Companies Act, 1956 and registered as Producer Company under the Companies Act. The Producer Company's objectives shall be related to all or all of the following: i. Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of Members, or import of goods or services for their benefit: Provided, however, that the Producer Company may engage in any of the activities listed in this clause either directly or through another institution. ii. Processing of its members' produce, such as preserving, drying, distilling, brewing, vinting, canning, and packaging. iii. manufacturing, sale, or supply of machinery, equipment, or consumables, mostly to its members. iv. giving education on the ideas of mutual help to its members and others 56 CU IDOL SELF LEARNING MATERIAL (SLM)
v. rendering technical services, consulting services, training, research and development, and all other activities relating to primary produce for the promotion of its members' interests. vi. generation, transmission, and distribution of power, revitalization of land and water resources, their use, conservation, and communications vii. insurance of producers or their primary produce. viii. promoting techniques of mutuality and mutual assistance. ix. Welfare measures or facilities for the benefit of Members as determined by the Board. x. any other activity, ancillary or incidental to any of the activities referred to above or other activities that promote the principles of mutuality and mutual assistance among the Members in any other way. xi. financing of procurement, processing, marketing, or other activities specified above that include but are not limited toextending of credit facilities or any other financial services to its members. The Companies Amendment Bill, 2020 as introduced in the Lok Sabha on 17th March 2020 provides for introduction of separate Chapter (Section 378A to 378ZU) relating to Producer Companies under the Companies Act, 2013 vii) Nidhi Companies:A Nidhi company is a form of non-banking finance company in India that is recognised under section 406 of the Companies Act, 2013. Its main business is borrowing and lending money among its members. Permanent Funds, Benefit Funds, Mutual Benefit Funds, and Mutual Benefit Company are other names for them. These companies are regulated under the Nidhi Rules, 2014 issued by the Ministry of Corporate affairs. viii) Dormant companies are defined as those that are formed and registered under the Companies Act 2013 for the purpose of carrying on a future project or holding an asset or intellectual property but have not been carrying on any business or operation, have not made any significant accounting transaction in the last two financial years, or have not filed financial statements. ix) Non-banking Financial Companies:A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 / 2013 that engages in the business of loans and advances, the acquisition of shares/stocks/bonds/debentures/securities issued by the government or a local authority, or other marketable securities of a similar nature, leasing, hire-purchase, insurance business, or chit business, but does not include any institution whose principlebusiness is that of agriculture activity, industrial activity, purchase or sale of 57 CU IDOL SELF LEARNING MATERIAL (SLM)
any goods (other than securities) or providing any services and sale/ purchase/construction of immovable property.A non-banking financial firm is a corporation that receives deposits under any scheme or arrangement in one single payment or in instalments by way of contributions or in any other method. x) Listed Company: “listed company” means a company which has any of its securities listed on any recognised stock exchange. xi) “Small company” means a company, other than a public company, — (i) paid-up share capital of which does not exceed fifty lakh rupees, or such higher amount as may be prescribed which shall not be more than ten crore rupees; and (ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees: Provided that nothing in this clause shall apply to - (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act. 4.3 PRIVATE COMPANY As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles, – (i) restricts the right to transfer its shares. (ii) except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that – (A) persons who are in the employment of the company; and (B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and (iii) prohibits any invitation to the public to subscribe for any securities of the company. It is important to note that the number of members is limited to two hundred. A private corporation may issue debentures to an unlimited number of people, with the exception that public solicitation of debenture subscriptions is prohibited. 58 CU IDOL SELF LEARNING MATERIAL (SLM)
The aforementioned definition of a private limited company describes the constraints, limitations, and prohibitions that must be specifically stated in a private limited company's articles of association. According to the proviso to Section 14 (1) of the Act, if a company that is a private company changes its articles so that they no longer contain the restrictions and limitations that are required to be included in the articles of a private company under this Act, the company ceases to be a private company as of the date of the change. A private limited company must add the words \"Private Limited\" to the end of its name. A private company can be incorporated for any lawful purpose by two or more people signing a memorandum and complying with the registration procedures of this Act, according to section 3(1). A private business must also have a minimum of two directors, according to Section 149(1). The only two members could also be the private company's two directors. Characteristics of Private Limited Company Members –According to the Companies Act of 2013, a minimum of two members and a maximum of 200 members are necessary to form a company. Limited Liability –Each member's or shareholder's liability is limited. It means that if a company experiences a loss under whatever condition, its shareholders are not obligated to sell their own assets to make up the difference. As a result, the shareholders' personal assets are not at risk. Perpetual succession –Even in the event of death, insolvency, or bankruptcy of any of its members, the Company continues to exist in the eyes of the law. As a result, the company will continue to exist in perpetuity. The company's life will continue to exist indefinitely. Index of members –An index of the names entered in the different registers of members, and the index shall contain sufficient indication in respect of each folio to allow the entries relating to that folio in the register to be easily identified. If the number of members in the company is less than fifty, there is no need to have a member index. This is a privilege granted to a private company with less than fifty members. Number of directors –A private company must have at least two directors when it comes to directors. A private company can be established, and operations can begin with the presence of two directors. Paid up capital – There is no minimum capital requirement. Prospectus –A prospectus is a thorough summary of a company's affairs that is issued to the public by the company. In the case of a private limited company, however, the act bans any offer to the public to subscribe for any of the company's securities; there is no need to prepare a prospectus because the public is not invited to register for the company's shares. 59 CU IDOL SELF LEARNING MATERIAL (SLM)
Commencement of Business –A company incorporated after the Companies (Amendment) Act, 2019 and having a share capital cannot begin any business or exercise any borrowing powers unless: (a) A director files a declaration with the Registrar within one hundred and eighty days of the date of incorporation of the company, stating that each subscriber to the memorandum has paid the value of the memorandum. (b) The Company has filed with the registrar a verification of its registered office. Name – It is mandatory for all the private companies to use the word “private limited” after its name. 4.4 PUBLIC COMPANY By virtue of Section 2(71), a public company means a company which: (a) is not a private company; and (b) has a minimum paid-up share capital, as may be prescribed Provided, however, that a company that is a subsidiary of a company that is not a private company is presumed to be a public company for the purposes of this Act, even if the subsidiary company's articles state that it is a private company. A public company can be incorporated for any lawful purpose by seven or more people signing their names or his name to a memorandum and complying with the registration requirements of this act, according to section 3(1)(a). A public company is defined as an association with at least seven members that is registered under the Act. Any member of the public who is ready to pay the price can buy shares or debentures in the company. A public company's securities can be traded on a stock exchange. The number of members does not have to be limited to 200. Section 58(2) states that any member's securities or other interests in a public business are freely transferable. Any contract or arrangement between two or more people for the transfer of securities, on the other hand, is enforceable as a contract. The concept of free transferability of shares in public and private companies is very succinctly discussed in the case of Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Ltd. [2010] 154 Com Cases 593 (Bom). It was held that the Companies Act, makes a clear distinction in regard to the transferability of shares relating to private and public companies. By definition, a “private company” is a company which restricts the right to transfer its shares. In the case of a public company, the Act provides that the shares or debentures and any interest therein, of a company, shall be freely transferable. 60 CU IDOL SELF LEARNING MATERIAL (SLM)
The law's provision for the free transferability of shares in a public business is based on the idea that members of the public should be able to buy and sell shares, and that any shareholder should be able to transfer them. The formation of a firm in the public sphere, as opposed to the private sphere, has distinct legal repercussions and imposes legal requirements. Those who promote and manage public enterprises are responsible for these responsibilities. Some rights, which the law recognises as inherent in members of the public who subscribe to shares of the corporation, correspond to those obligations. CHARACTERISTICS OF PUBLIC COMPANY Board of Directors A public company's board of directors must have a minimum of three members and a maximum of 15. After passing a special resolution, the company can appoint more than 15 directors. The shareholders elect these during the annual general meeting. They serve as the shareholders' representatives in the company's management. A board of directors and the company's key management personnel lead public limited businesses. The company's articles of association, as well as the applicable rules and regulations, specify the composition of the board of directors. Limited Liability The liability of shareholders for the company's losses is limited to their share contribution. This is what distinguishes it from its stockholders as a legal entity. The company can be sued without the involvement of its shareholders. Because one person can only own a portion of the corporation, it does not belong to anyone. Number of Members A public limited company must have at least seven shareholders or members and can have an unlimited number of them. It is allowed to have as many stockholders as its share capital allows. Transferable shares A public limited company's shares are purchased and sold by its shareholders; whereas, a listed company's shares are exchanged on a stock market where the company's shares are listed. They can be freely transferred between its members and stock exchange traders. Life Span A public limited company is unaffected by the death of one of its shareholders; the shares are transferred to the deceased shareholder's next of kin or legal heir, and the firm continues to operate normally. In the event of a director's death, the Board of Directors is empowered to fill the resulting casual vacancy, which must be confirmed by members at the next general meeting. Financial Privacy 61 CU IDOL SELF LEARNING MATERIAL (SLM)
Public limited companies are heavily regulated, and they are compelled by law to publish their yearly financial statements in their entirety. This ensures that they disclose their genuine financial situation to their owners and potential investors, allowing them to assess the true value of their stock. Capital Because they can issue shares to the public through the stock market, public limited corporations have a greater ability to obtain funds. They can also raise money from the public by issuing debentures and bonds through the same market. Debentures and bonds are secured or unsecured debts provided to a company by the general public or its members, based on the company's integrity and financial success. 4.5 ONE PERSON COMPANY (OPC) Background of OPC The One Person Company (OPC) is a new type of entity created by the Companies Act of 2013. The incorporation of OPC into the legal system is a move that will stimulate the corporatization of micro companies and entrepreneurships. The JJ Irani Expert Committee in India suggested the founding of the OPC in 2005. It had advised that such an entity be given a simplified legal regime through exclusions, so that the small business owner is not forced to spend a lot of time, energy, and money complying with onerous legal requirements. OPC is a single-shareholder entity with sole legal and financial responsibility for the company. Status of OPCin other countries A single person can start a company in other nations such as the United Kingdom, Australia, Singapore, Pakistan, and others. Various nations (including China, which approved it in October 2005) allow this type of business company, in which the promoter is both the director and the shareholder. The amended Pakistan company legislation allows a single person to incorporate a single- member company by making a nomination in the appropriate form with the registrar at the time of formation, naming at least two individuals to function as nominee director and alternate nominee director. A single-member Limited Liability Company can be formed and operated in numerous states in the United States (LLC). In China, one person is permitted to file for the formation of a limited liability corporation with a minimum capital of 1,00,000 Yuan. The amended Chinese law requires the owner to 62 CU IDOL SELF LEARNING MATERIAL (SLM)
pay the investment capital all at once and prohibits him from starting a second company of the same type. In most countries, company law allows a single-member company to have more than one director and exempts such companies from holding annual general meetings (AGMs), albeit records and documentation must be kept. 4.6 FACTORS GOVERNING THE DECISIONS FOR SUITABLE FORM OF ORGANISATION For a new or proposed business, the selection of a suitable form of a business organisation is generally governed by the following factors: 1. Nature of business activity 2. Scale of operations 3. Capital requirements 4. Managerial ability 5. Degree of control and management 6. Degree of risk and liability 7. Stability of business 8. Flexibility of administration 9. Division of profit 10. Costs, procedure and government regulation 11. Tax implication 12. Geographical mobility 13. Transferability of ownership 14. Managerial needs 15. Secrecy 16. Independence We will try to understand some of the important factors in detail. 4.7 NATURE OF BUSINESS ACTIVITY This is a significant factor that has a direct impact on the type of ownership chosen. Sole proprietorship is common in small trading firms, professions, and the provision of personal services. 63 CU IDOL SELF LEARNING MATERIAL (SLM)
Laundromats, beauty salons, repair shops, consulting firms, small retail stores, pharmacies, dentists, accounting firms, boarding houses, restaurants, specialty ships, jobbing builders, painters, decorators, bakers, confectioners, tailoring shops, small scale shoe repairers and manufacturers, and so on are examples. In all circumstances where a sole proprietorship is appropriate, a partnership is appropriate if the business will be carried out on a slightly larger scale with the assistance of one or more partners (owner). Furthermore, in the case of small-scale production, forming a partnership is useful. On a smaller scale, the financial, trading, and real estate industries appear to be well-suited to partnership structures. Tax, accountancy, stockbrokerage, and consultancy firms are among the financial businesses that benefit from this structure. Partnerships can be formed for service enterprises such as hotels and lodging establishments, trading enterprises such as wholesale trade and retail stores, small scale manufacturing enterprises such as small medication manufacturers, and so on. Similarly, large chain stores, multiple shops, super-bazaars, engineering industrial activities with substantial capital and working capital requirements, and software industrial activities are all typically carried out by corporations. A One-Person Company is formed when people who want to start a business want to start a business that has a legal status and is in corporate form, but they only own and control it (OPC). In India, an OPC is a mixture of a sole proprietorship and a company. Because such organisations retain the character of a single proprietorship, provide limited liability to the sole proprietor, and are clothed with a legal existence separate from its owner, the notion opens up incredible opportunities for sole proprietors and entrepreneurs. Under the Limited Liability Partnership Act of 2008, a Limited Liability Partnership (‘LLP') is an alternative type of business organisation in which two or more people are involved in the formation of the business. These types of entities have become increasingly common in recent years. In contrast to the partnership form of business organisation under the Indian Partnership Act, 1932, where the joint and several obligations of the partner(s) is one of the aspects, the LLP's liabilities (if any) are borne by the entity rather than the individual partners. The liability of a partner in an LLP is limited to the amount of his contribution to the LLP, unless the partner commits willful fraud or commits a wrongful act of omission or action. The partner's investment in the business, as well as any personal assurances he may have provided, are on the line. Such business structures, on the other hand, are best suited to the service industry and situations where big sums of money are not required from outside sources. 64 CU IDOL SELF LEARNING MATERIAL (SLM)
In the eyes of the law, a One-Person Company (OPC), LLP, or limited company exists as a separate business entity, creating a barrier between the investor's personal assets and the business's assets. As a result, personal property of the owner(s) is safeguarded in these types of business organisations, allowing the owner(s) to build business credit, obtain loans, and raise capital. 4.8 SCALE OF OPERATIONS Scale of Small Sole operations proprietorship Neither too small nor too or OPC large Partnership or LLP Large Company Fig 4.2 Scale of operations The scale of activities is the second factor that influences the type of corporate organisation. If the scale of business operations is small, a sole proprietorship or a One Person Company (OPC) is appropriate; if the scale of operations is moderate — neither too small nor too large — a partnership or limited liability partnership (LLP) is preferable; and if the scale of operations is large, a company is preferable. The size of the market region served determines the scale of business activities, which is determined by the magnitude of demand for goods and services. Local, sole-proprietorship, OPC, or partnership are the best options if the market region is tiny. If the demand comes from a vast area, a partnership, such as an LLP or a corporation, may be used. 4.9 TAX IMPLICATION Tax implications are a major consideration when deciding on a business structure. The tax liability of smaller companies, such as a sole proprietorship or partnership, is determined by the amount of profit earned. The owner(s)' liability, on the other hand, is limitless. In the case of corporations or limited liability partnerships, shareholders' responsibility is restricted to the value of the shares they purchased. Tax liabilities may be higher in the case of corporations or limited liability partnerships (LLPs). The applicable tax rates for different forms of business organisation are summarised below: (i) Sole Proprietorship 65 CU IDOL SELF LEARNING MATERIAL (SLM)
In case of sole proprietorship (where the age of the proprietor is less than 60 years), the income tax rates for assessment year 2019-20 is Nil for taxable income up to Rs.2,50,000, 5% for taxable income between Rs.2,50,000 to Rs.5,00,000, 20% for taxable income between Rs.5,00,000 to Rs.10,00,000 and 30% for taxable income above Rs.10,00,000.If the proprietor is between 60 years & 80 years, up to 300,000, income tax rate is Nil. If the proprietor is above 80 years of age, more tax concession is available,up to 5,00,000, Income Tax if Nil. (ii) Partnership firm In India, partnership firms are categorised into two types: registered partnerships and unregistered partnerships. Partnership firms that have received a registration certificate from the Registrar of Firms are considered registered. Unregistered partnership firms include all other partnerships that do not have a registration certificate. “Persons who have joined into a partnership with one another are called individually “partners” and collectively “a firm,” and the name under which their business is conducted on is called the “firm name,” according to the Income Tax Act. Partnership firms (including Limited Liability Partnership Firms) must pay 30 percent of their total income in income tax. When total income exceeds Rs. 1 crore, a partnership firm must pay an income tax surcharge of 12 percent on the amount of income tax. The surcharge, however, will be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees). In addition to the income tax and surcharge, a partnership firm must pay (a) education cess at the rate of 2% on tax plus surcharge. (b) secondary and higher education cess at the rate of 1% on tax plus surcharge. (c) The above-mentioned cess is applicable on the amount of income tax and the applicable surcharge at the rate of 1%. Partnership firms, like a private limited company or LLP, are required to pay an alternative minimum tax of 18.5 percent of their \"adjusted total income.\" The appropriate surcharge, education cess, and secondary and higher education cess would be added to the alternative minimum tax. (iii) Domestic Company Net Profit of a domestic company (including a Limited Liability Partnership to which the Income Tax rates for domestic companies is applicable) is taxable at 30%. However, tax rate is 25% if turnover or gross receipt of the company in the previous year 2018-19 does not exceed 250 crores. In addition, there is: 66 CU IDOL SELF LEARNING MATERIAL (SLM)
(a) Surcharge at 7% of tax where total income exceeds Rs.1 crore and below Rs.10 Crores and 12% of tax where total income exceeds Rs.10 crores and (b) Education Cess at 2% of tax plus surcharge (c) Secondary and Higher Education Cess at 1% of income tax and surcharge. (iv) Co-operative Society The tax rate is 10% for taxable income upto Rs.10,000, 20% for taxable income between Rs.10,000 to Rs. 20,000 and 30% for taxable income above Rs.20,000. In addition, there is: (a) Surcharge at 12% of tax where total income exceeds Rs. 1 crore; However, the surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees). (b) Education Cess at 2% of tax plus surcharge (c) Secondary and Higher Education Cess at 1% of income tax and surcharge. 4.10 SUMMARY The choice of a business entity is critical to a company's success. Different types of private ownership organisations differ in terms of profit allocation, control, risk, legal formalities, adaptability, and so on. Control of at least 20% of total voting power, or control of or involvement in company decisions under an agreement, is referred to as \"substantial influence.\" The term \"joint venture\" refers to a joint arrangement in which the parties that share joint control of the arrangement have rights to the arrangement's net assets. “Private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles, – restricts the right to transfer its shares. except in case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that – persons who are in the employment of the company; and 67 CU IDOL SELF LEARNING MATERIAL (SLM)
persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and prohibits any invitation to the public to subscribe for any securities of the company. The board of the public company comprises of a minimum number of three members and a maximum of 15. The size of the market region served determines the scale of business activities, which is determined by the magnitude of demand for goods and services. Local, sole- proprietorship, OPC, or partnership are the best options if the market region is tiny. If the demand comes from a vast area, a partnership, such as an LLP or a corporation, may be used. 4.11 KEYWORDS OPC – One Person Company MD – Managing Director CFO – Chief Financial Officer AO – Assessing Officer 4.12 LEARNING ACTIVITY 1. Learn more about producer companies and Taxation provisions for such companies. ___________________________________________________________________________ _____________________________________________________________________ 2. Compare between Foreign Subsidiaries and Foreign Branches. Discuss merits and Demerits of the same from taxation perspective. ___________________________________________________________________________ ___________________________________________________________________________ 4.13 UNIT END QUESTIONS A. Descriptive Questions 68 Short Questions 1. Explain how the scale of operations is affecting the choice of business organisation. 2. List out the characteristics of public company. 3. Discuss about the computation of tax liability in case of partnership firms. CU IDOL SELF LEARNING MATERIAL (SLM)
4. Compare the tax implications between a resident company and a non-resident company. 5. The total income of a Company is ₹ 4,50,000. Compute the tax payable including cess if any, if a. The company is a domestic Company b. The Company is a Foreign Company Long Questions 1. What is private company? Explain its characteristics. 2. Write short notes on public company and explain its characteristics. 3. What is OPC? What is the status of OPC in other countries? 4. Discuss the meaning of Company as per Income Tax Act, 1961. 5. Explain the tax implications of various forms of organisations in brief. B. Multiple Choice Questions 1. ____________ restricts the rights to transfer its shares. a. Public Company b. Private Company c. Both (a) and (b) d. None of these 2. Which of the following is a characteristic of a private company? a. Maximum 200 members b. Minimum 2 directors c. Prohibits invitation to the public to subscribe for securities of the company. d. All of these 3. Minimum member requirement for a public company is a. 2 b. 3 c. 5 d. 7 4. __________ is a one shareholder corporate entity a. Private Company b. One person Company c. Public company d. None of these 5. A Company would be resident in India a. Only if it is an Indian Company 69 CU IDOL SELF LEARNING MATERIAL (SLM)
b. Only if POEM is in India c. Either (a) or (b) d. Neither (a) nor (b) 6. The basic income tax rate applicable for a foreign company is a. 30% b. 25% c. 40% d. None of these Answers 1-b, 2-d, 3-d, 4-b, 5-c, 6-c 4.14 REFERENCES V.K. Singhania,DirectTaxes,Taxman Publication (P)Ltd.,Delhi,Latestedition. Lakhotia R.N., Income Tax Planning Handbook, Vision Books, New Delhi, Latestedition. H.C. Mehrotra–IncomeTaxLaw&Practice. Bhagwati Prasad: LawandPracticeofIncomeTaxinIndia H.P.Ranina:CorporateTaxation: AHandbook(Taxmann). V.S.Datey:IndirectTaxes– LawandPractice(TaxmannPublicationsLimited).V.S.Datey:IndirectTaxes– LawandPractice(TaxmannPublicationsLimited). 70 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 5: LOCATIONAL ASPECTS OF TAX PLANNING STRUCTURE 5.0 Learning Objectives 5.1 Introduction 5.2 Deduction under section 80IB 5.3 Deduction under section 80IC 5.4 Deduction under section 80IE 5.5 Summary 5.6 Keywords 5.7 Learning Activity 5.8 Unit End Questions 5.9 References 5.0 LEARNING OBJECTIVES After studying this unit, you will be able to: State the benefits of choosing the right location of operations for the specified undertakings Appreciate the tax deductions applicable under various conditions Calculate the taxable income after deducting all the aforesaid deductions. 5.1 INTRODUCTION We know the tax deductions which are based on our investment in specified savings instruments. But there are deductions for certain entities which are purely based on where it is operated from. Because of the backward development in certain areas the Government encourages undertakings by way of tax incentives to operate from some of the specified locations. In this unit, we are focusing on some of the location-based deductions which are provided under the Income-tax Act, 1961 in order to strengthen our tax planning knowledge. 5.2 DEDUCTIONS IN RESPECT OF PROFITS AND GAINS FROM CERTAIN INDUSTRIAL UNDERTAKINGS OTHER THAN INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS, ETC. [SECTION 80-IB] Applicability: 71 CU IDOL SELF LEARNING MATERIAL (SLM)
This section will be applicable to assessees, whose gross total income includes any profits and gains derived from any of the following business activities - (1) An industrial undertaking including a small-scale industrial undertaking (SSI) in Jammu and Kashmir (2) An undertaking which begins commercial production of mineral oil or commercial production of natural gas in licensed blocks. (3) An undertaking deriving profits from the business of processing, preservation and packaging of fruits or vegetables or meat and meat products or poultry or marine or dair y products or from the integrated business of handling, storage and transportation of food grains. Conditions to be fulfilled, amount of deduction and period of deduction The rate and period of deduction and the conditions required to be satisfied by the different categories of businesses are given below: (1) An industrial undertaking including a small-scale industrial undertaking (SSI) in Jammu and Kashmir [Sub-sections (2) and (4)] Conditions: In order to be eligible to claim deduction under section 80-IB, an industrial undertaking must fulfill the following conditions: (i) It manufactures or produces any article or thing or operates a cold storage plant. (ii) In case of a manufacturing industrial unit, it should employ 10 or more workers (if manufacture is carried on with the aid of power), or 20 or more workers (if manufacture is carried on without the aid of power). Quantum and period of deduction:For the first five years, the amount of deduction for an industrial undertaking in Jammu and Kashmir will be 100% of the profits and gains received from such industrial venture, and then 25% of such profits and gains (in case of a company, the rate is 30 percent ) If the industrial undertaking commences manufacturing or producing products or things or operating a cold storage plant between 1-4-1993 and 31-3-2012, the cumulative term of deduction should not exceed 10 consecutive assessment years. The deduction will be allowed for 12 assessment years (rather than 10) if the industrial venture is a co-operative society, including the initial assessment year. Part C of the Thirteenth Schedule also includes a negative list of items that should not be made or produced by such businesses. Tobacco cigarettes/cigars, manufactured tobacco and alternatives, distilled/brewed alcoholic beverages, and aerated branded beverages and their concentrates are all on the list. 72 CU IDOL SELF LEARNING MATERIAL (SLM)
(2) An undertaking which begins commercial production of mineral oil or commercial production of natural gas in licensed blocks [Sub-section (9)] Conditions: In order to claim deduction under the section, the undertaking should be engaged in commercial production of mineral oil or commercial production of natural gas in licensed blocks. The following further conditions should be fulfilled – (i) In case of an undertaking engaged in commercial production of mineral oil where such operations are carried out in any part of India, it begins commercial production on or after 1.4.1997. Note - Commercial production of mineral oil should have commenced on or before 31.3.2017. No deduction would be available under section 80-IB where the commercial production of mineral oil commences on or after 1.4.2017. The above deduction for commercial production of mineral oil will not be available for blocks licensed under a contract awarded after 31.3.2011 under the New Exploration Licensing Policy announced by the Government of India vide Resolution No. O- 19018/22/95-ONG.DO.VL, dated 10th February, 1999 or in pursuance of any law for the time being in force or by the Central or a State Government in any other manner. (ii) In case of an undertaking engaged in commercial production of natural gas in licensed blocks– (a) the blocks are licensed under the VIII Round of bidding for award of exploration contracts (\"NELP-VIII\") under the New Exploration Licensing Policy announced by the Government of India vide Resolution No.O-19018/22/95-ONG.DO.VL, dated 10th February, 1999; or (b) the blocks are licensed under the IV Round of bidding for award of exploration contracts for Coal Bed Methane blocks and begins commercial production of natural gas on or after 1st April, 2009. Note - Commercial production of natural gas in licensed blocks should have commenced on or before 31.3.2017. No deduction would be available under section 80-IB where the commercial production of natural gas commences on or after 1.4.2017. Note – All blocks licensed under a single contract, which has been awarded – (1) under the New Exploration Licencing Policy announced by the Government of India vide Resolution No.O-19018/22/95-ONG.DO.VL, dated 10.2.1999 or (2) in pursuance of any law for the time being in force or (3) by Central or a State Government in any other manner to be treated as a single “undertaking” 73 CU IDOL SELF LEARNING MATERIAL (SLM)
Quantum and period of deduction:For 7 consecutive assessment years, including the initial assessment year, i.e., the assessment year relevant to the prior year in which the enterprise begins commercial mineral oil production, the deduction will be permitted at 100% of earnings and gains from such activity. (3) A business that makes money from the processing, preservation, and packaging of fruits and vegetables, meat and meat products, poultry, marine, or dairy products, or the integrated business of handling, storage, and transportation of foodgrains [Subsection (11A)] Conditions:To be eligible for a deduction, the undertaking must meet the following criteria: (i) It should generate profit from the processing, preservation, and packaging of fruits and vegetables, meat and meat products, poultry, marine, and dairy products, or from the integrated business of food grain handling, storage, and transportation. (ii) It must begin operating such a business on or after April 1, 2001. (iii) In the case of an undertaking profiting from the processing, preservation, and packaging of meat or meat products, poultry, marine, or dairy products, it must commence operating such business on or after 1.4.2009. Quantum and period of deduction:The amount of the deduction is 100 percent of the income and gains obtained from such business for five assessment years, starting with the initial assessment year, which is the assessment year relevant to the prior year in which the undertaking started such activity. Following that, a deduction of 25% is allowed. In the case of a company, the 25% tax will be replaced with a 30% rate. The total number of assessment years for which deductions are allowed should not exceed ten. The provisions of sub-section (5) and sub-section (7) to (12) of section 80-IA shall apply to the eligible business under section 80-IB. 5.3 SPECIAL PROVISIONS IN RESPECT OF CERTAIN UNDERTAKINGS OR ENTERPRISES IN CERTAIN SPECIAL CATEGORY STATES [SECTION 80-IC] (i) Applicability: This section allows tax holiday to the undertakings which manufacture or produce specified article or thing or existing undertakings on their substantial expansion in the states of Himachal Pradesh and Uttaranchal. (ii) Meaning of “substantial expansion”: It entails an increase in plant and equipment investment of at least 50% of the book value of the plant and machinery (before depreciation in any year) as of the first day of the previous year in which the substantial expansion is carried out. 74 CU IDOL SELF LEARNING MATERIAL (SLM)
(iii) Rate of deduction: In the states of Himachal Pradesh and Uttaranchal, the tax holiday will be 100% for the first five assessment years and 25% (30% in the case of a company) for the next five assessment years. (iv) Eligible business: Undertakings or enterprises which manufacture or produce from 7.1.03 and ending before 1.4.2012 in the state of Himachal Pradesh or Uttaranchal – - any article or thing, not being any article or thing specified in the 13th Schedule (namely, tobacco, aerated beverages, pollution causing paper and paper products etc.) in • any export processing zone or • integrated infrastructure development centre or • industrial growth centre or • industrial estate or • industrial park or • software technology park or • industrial area or • theme park as notified by the Board or, - any article or thing specified in the 14th Schedule (v) No deduction under any other section of Chapter VIA of the Act in respect of such profits: In relation to the revenues and gains of these activities, no benefit will be available under any of the sections in Chapter VIA. (vi) Maximum permissible deduction: The period for which the benefit under section 80IB has already been claimed, if any, must also be considered for calculating the overall term of ten years. (vii) The provisions of sub-section (5) and sub-section (7) to (12) of section 80-IA shall apply to the eligible undertaking or enterprise under this section. 5.4 TAX HOLIDAY IN RESPECT OF PROFITS AND GAINS FROM ELIGIBLE BUSINESS OF CERTAIN UNDERTAKINGS IN NORTH- EASTERN STATES [SECTION 80-IE] 75 CU IDOL SELF LEARNING MATERIAL (SLM)
(i) Applicability: This section provides for an incentive to an undertaking which has during the period between 1st April, 2007 and 1st April, 2017, begun or begins, in any of the North-Eastern States (i.e., the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura) - (1) to manufacture or produce any eligible article or thing; (2) to undertake substantial expansion to manufacture or produce any eligible article or thing; (3) to carry on any eligible business. (ii) Meaning of certain terms: Terms Meaning a. Eligible article or thing the article or thing other than b. Substantial expansion - goods falling under Chapter 24 of the First Schedule to the c. Eligible business Central Excise Tariff Act, 1985 which pertains to tobacco and manufactured tobacco substitutes. - pan masala as covered under Chapter 21 of the First Schedule to the Central Excise Tariff Act, 1985. - plastic carry bags of less than 20 microns; and - goods falling under Chapter 27 of the First Schedule to the Central Excise Tariff Act, 1985 produced by petroleum oil or gas refineries Investment in plant and machinery of at least 25% of the book value of plant and machinery (before depreciation in any year) as of the first day of the previous year in which the major expansion is undertaken. Business of - - hotel (not below two-star category); - adventure and leisure sports including ropeways. - providing medical and health services in the nature of nursing home with a minimum capacity of 25 beds. - running an old-age home. - operating vocational training institute for hotel management, catering and food craft, entrepreneurship development, nursing and para-medical, civil aviation related training, fashion 76 CU IDOL SELF LEARNING MATERIAL (SLM)
designing and industrial training. - running information technology related training centre. - manufacturing of information technology hardware; and - Biotechnology. (iii) Quantum of deduction and period: When an assessee's gross total income includes any profits and gains derived from such an undertaking, a deduction of 100 percent of the profits and gains derived from such an undertaking shall be allowed in computing the assessee's total income for 10 consecutive assessment years beginning with the initial assessment year. The assessment year relevant to the previous year in which the undertaking begins to manufacture or create products or things, or completes significant expansion, is referred to as the initial assessment year. (iv) No deduction under any other section of Chapter VIA or section 10AA of the Act in respect of such profits: In relation to the earnings and gains of these activities, no benefit will be available under any of the sections in Chapter VIA or section 10AA. (v) Maximum permissible deduction: The period for which the benefit under section 80-IC has already been claimed, if any, must also be considered for calculating the overall term of ten years. (vi) The requirements of section 80-IA, subsections (5) and (7) to (12), apply to the eligible undertaking under this section. 5.5 SUMMARY Location of operations of a business entity is also an important aspect of tax planning. A wise choice should be made in choosing the right place for better operations and incentives from government. Assessees whose gross total income includes profits and gains from any of the following business operations will be subject to Section 80-IB. An industrial undertaking in Jammu and Kashmir, including a small-scale industrial undertaking (SSI). A company that starts commercial mineral oil production or commercial natural gas production in licenced blocks. A company that makes money by processing, preserving, and packaging fruits and vegetables, meat and meat products, poultry, marine, or dairy products, or 77 CU IDOL SELF LEARNING MATERIAL (SLM)
by running an integrated business that handles, stores, and transports food grains. An undertaking claiming deduction under section 80IC or 80IE will not be entitled to claim any of the deductions under other sections of chapter VI A. The period for which the benefit under section 80-IC has already been claimed, if any, must also be considered for calculating the overall term of ten years. 5.6 KEYWORDS SSI – Small-scale Industrial Undertaking Substantial Expansion - Increase in the investment in the plant and machinery by at least 25% of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken AY – Assessment year 5.7 LEARNING ACTIVITY 1. You are the business owner of some eligible business eligible to claim deduction under section 80IE. Make a business plan to optimize the deduction under this section or any other sections of the Income-tax Act. ___________________________________________________________________________ _____________________________________________________________________ 2. Learn about the other tax holiday provisions under the Income-tax Act. ___________________________________________________________________________ _____________________________________________________________________ 5.8UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What are the eligible businesses in terms of section 80IC? 2. Define the term ‘substantial expansion’ in the context of section 80IE. 3. Briefly elaborate the provisions of section 80IC. 4. What are the conditions to be satisfied for claiming deduction under section 80IB 5. Explain the meaning of eligible article or thing in the context of section 80IE. Long Questions 78 CU IDOL SELF LEARNING MATERIAL (SLM)
1. Alpha Ltd. is a company that produces mineral oil commercially. It claimed a deduction under section 80-IB for earnings and gains earned from such a firm, including government-provided transportation, interest, and power subsidies. The Assessing Officer denied the deduction for these three subsidies, claiming that they were not \"derived\" from the business of commercial mineral oil production but rather fell to the category of ancillary earnings and hence did not qualify for a deduction under section 80-IB. Discuss if the Assessing Officer's behaviour was correct. 2. Navi Limited has raised the following concerns regarding its eligibility to claim a deduction under section 80-IB for the assessment year 2021-22, which you should evaluate and advise on: 3. (i) It runs two different industrial units. One unit is qualified for a deduction under section 80-IB, whereas the other is not. Should the eligible unit claim deduction after offsetting the loss of the other unit against the earnings of the eligible unit? 4. (ii) The profit from a single unit includes the sale of import entitlements, duty drawback, and interest from consumers for late payments. Is it permissible to claim a deduction for these types of earnings? 5. Explain the provisions of section 80IE relating to the tax holiday for profits and gains from eligible business of specified firms in North-Eastern States. 6. Special provisions in respect of certain undertakings or enterprises in certain special category States. Explain this within the context of Section 80IC. 7. Discuss in detail about the provisions of section 80IB of the Income Tax Act,1961. B. Multiple Choice Questions 1. The amount of deduction for an industrial undertaking in Jammu and Kashmir will be ____ of the profits and gains derived from such industrial undertaking for the initial 5 years and thereafter _____ of such profits and gains for the next 5 years. a. 100% , 25% b. 100%, 50% c. 50%, 25% d. 50%, 50% 2. Substantial Expansion is defined as an increase in plant and equipment investment of at least _________ of the book value of plant and machinery (before depreciation in any year) as of the first day of the preceding year. a. 26% b. 25% c. 20% d. 10% 3. Eligible business under section 80IE is 79 CU IDOL SELF LEARNING MATERIAL (SLM)
a. hotel (not below two-star category) b. running an old-age home c. manufacturing of information technology hardware d. All of these 4. A business loss can be carried forward for a maximum period of ____ assessment years immediately succeeding the assessment year in which the loss was incurred. a. 7 b. 5 c. 8 d. None of these 5. The loss in speculation business can be carried forward for a maximum period of ______ a. 3 years b. 4 years c. 5 years d. 8 years Answers 1-a, 2-b, 3-d, 4-c, 5-b 5.9 REFERENCES V.K. Singhania,DirectTaxes,Taxman Publication (P)Ltd.,Delhi,Latestedition. Lakhotia R.N., Income Tax Planning Handbook, Vision Books, New Delhi, Latestedition. H.C. Mehrotra–IncomeTaxLaw&Practice. Bhagwati Prasad: LawandPracticeofIncomeTaxinIndia H.P.Ranina:CorporateTaxation: AHandBook(Taxmann). V.S.Datey:IndirectTaxes– LawandPractice(TaxmannPublicationsLimited).V.S.Datey:IndirectTaxes– LawandPractice(TaxmannPublicationsLimited). 80 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 6: TAXATION OF NON-RESIDENTS STRUCTURE 6.0 Learning Objectives 6.1 Introduction 6.2 Scope of total income 6.3 Exempt income of non-residents 6.4 Summary 6.5 Keywords 6.6 Learning Activity 6.7 Unit End Questions 6.8 References 6.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Explain the concept of cross-border transactions State the scope of total income. Discuss what all incomes are exempt for a non-resident 6.1 INTRODUCTION Taxation of cross-border transactions are generally based on the two concepts: 1. Residence based taxation 2. Source based taxation Residence based taxation: The notion of resident-based taxation states that natural persons or individuals, regardless of their source of income, are taxable in the country or tax jurisdiction in which they establish their abode or domicile. In the case of corporations, the place of incorporation or effective administration is usually regarded the company's residence. Source based taxation: According to this concept, a country considers certain income as taxable income, if such income arises within its jurisdiction. Such income is taxed in the country of source regardless of the residence of the taxpayer. The overview of residence and source rules in India may largely be gathered from sections 5, 6 & 9 of the Income-tax Act, 1961. Non-residents are taxed on their India- source income, which is money that is received in India or that has accumulated or is presumed to accrue in India. Residents are taxed on their worldwide income. 81 CU IDOL SELF LEARNING MATERIAL (SLM)
The term “Non-resident” is defined under section 2(30) of the Income-tax Act, 1961 as a person who is not a \"resident\", and for the purposes of sections 92 ,93 and 168 includes a person who is not ordinarily resident within the meaning of section 6(6). 6.2 SCOPE OF TOTAL INCOME Section 5 of the Income Tax Act provides the scope of total income in terms of the residential status of the assessee because the incidence of tax on any person depends upon his residential status. Summary of Scope of Total Income Particulars Resident and Not Non- Ordinarily Ordinarily Resident Resident Resident Income received or deemed to be received in Yes Yes Yes India whether earned in India or elsewhere Income which accrues or arises or is deemed to Yes Yes Yes accrue or arise in India during the previous year whether received in India or elsewhere Income which accrues or arises outside India and Yes Yes No received outside India from a business controlled from India Income which accrues or arises outside India and Yes No No received outside India in the previous year from any other source Income which accrues or arises outside India and No No No received outside India during the year(s) preceding the relevant previous year and remitted to India during the relevant previous year i. Income deemed to accrue or arise in India Certain types of income are presumed to accrue or arise in India under section 9, even though they actually accrue or originate elsewhere. 82 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig6.1 Income deemed to accrue or arise in India The categories of income which are deemed to accrue or arise in India are: (1) Any income accruing or arising to an assessee in any place outside India whether directly or indirectly (i) through or from any business connection in India, (ii) through or from any property in India, (iii) through or from any asset or source of income in India or (iv) through the transfer of a capital asset situated in India would be deemed to accrue or arise in India [Section 9(1)(i)]. (i) What is Business Connection? 83 CU IDOL SELF LEARNING MATERIAL (SLM)
‘Business connection’ shall include any business activity carried out through a person acting on behalf of the non-resident [Explanation 2 to section 9(1)(i)] For a business connection to be established, the person acting on behalf of the non-resident must – (a) have the authority to conclude contracts on behalf of the non-resident or habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts by that non-resident, and such contracts must be - in the name of the non-resident; or - for the transfer of the ownership of, or for the granting of the right to use property owned by that non-resident or that non-resident has the right to use; or - for the provision of services by that non-resident, or (b) If he does not have such power but has a stock of goods or merchandise in India from which he routinely provides goods or merchandise on behalf of a non-resident, or (c) habitually secures orders in India, mainly or wholly for the non-resident. There may also be instances where someone acting on behalf of a non-resident secures an order for other non-residents. In such situation, business connection for other non-residents is established if, i. such other non-resident controls the non-resident or ii. such other non-resident is controlled by the non-resident or iii. Other non-resident is subject to the same restrictions as non-resident. In all three cases, a business relationship is created when a person regularly secures orders in India, primarily or entirely for non-residents. 84 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 6.2 Business Connection Agents having independent status are not included in Business Connection:A business link is not created, however, if the non-resident does business through a broker, general commission agent, or any other independent agency working in the ordinary course of business.When a broker, general commission agent, or any other agent does not operate primarily or exclusively for a non-resident, he is considered independent. He will, however, not be considered to have an independent status in the three situations explained above, where he is employed by such a non-resident. Only the portion of revenue attributable to the operations carried out in India is deemed to accrue or arise in India when a business is carried on in India through a person referred to in (a), (b), or (c) of (i) above [Explanation 3 to Section 9(1)(i)].The following, however, shall not be recognised as a business connection in India in the case of a non-resident [Explanation 1 to section 9(1)(i)]: (a) In the case of a business [Explanation 1(a) to section 9(1)(i)] in which all operations are not carried out in India: If a business does not carry out all of its operations in India, the income deemed to accrue or arise in India is limited to that portion of the revenue that is reasonably attributable to the operations carried out in India.As a result, any income that cannot be properly ascribed to operations in India is not regarded as accruing or arising in India. (b) Buying products for export in India [Explanation 1(b) to section 9(1)(i)]: No revenue shall be regarded to accrue or arise in India to a non-resident through or from operations that are limited to the purchase of commodities in India for the purpose of export. 85 CU IDOL SELF LEARNING MATERIAL (SLM)
(b) Gathering information and opinions in India for dissemination outside the country [Section 9(1)(i) Explanation 1(c)]: No revenue shall be deemed to accrue or arise in India to a non-resident who is involved in the business of running a news agency or publishing newspapers, periodicals, or journals through or from operations confined to the collection of news and views in India for transmission out of India. d) Cinematograph film production in India [Section 9(1)(i) Explanation 1(d)] : If a non- resident is: • an individual who is not a citizen of India; or • a firm that does not have any partner who is a citizen of India or who is resident in India; or • a company that does not have any share capital in India, no income shall be deemed to accrue or arise in India through or from operations that are confined to the shooting of any cinematograph film in India. (e) Activities confined to display of rough diamonds in SNZs [Explanation 1(e) to section 9(1)(i)]: No income may be regarded to accrue or arise in India to a foreign corporation engaged in the business of diamond mining via or from operations confined to the display of uncut and unsorted diamonds in any special zone authorised by the Central Government in the Official Gazette in this regard. (ii) & (iii) Income from property, asset or source of income in India Any income which arises from any property in India (movable, immovable, tangible and intangible property) would be deemed to accrue or arise in India. Examples: For the usage of machinery or structures located in India, hire costs or rent are paid from outside India. Deposits with an Indian corporation that earn interest outside of India, and so on. (iv) Income through transfer of a capital asset situated in India Capital gains arising from the transfer of a capital asset located in India are deemed to accrue or arise in India in all cases, regardless of whether the capital asset is movable or immovable, tangible or intangible. whether the capital asset is movable or immovable, tangible or intangible; and whether the place of registration of the document of transfer, etc., is in India or outside; and whether the place of payment of the consideration for the transfer is in India or outside. Accordingly, the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of” [Explanation 4 to section 9(1)(i)]. 86 CU IDOL SELF LEARNING MATERIAL (SLM)
Furthermore, if a share or interest in a company or entity registered or incorporated outside India derives, directly or indirectly, its value substantially from assets located in India, the asset or capital asset is deemed to be and will always be deemed to have been situated in India [Explanation 5 to section 9(1)(i)]. Explanation 6 to section 9(1)(i) states that a share or interest in a company or entity registered or incorporated outside India is deemed to derive its value substantially from assets (whether tangible or intangible) located in India if the value of Indian assets, on the specified date, - • exceeds the amount of 10 crore; and • represents at least 50% of the value of all the assets owned by the company or entity, as the case may be; Meaning of certain terms: Term Meaning Value of an Asset The fair market value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, determined in prescribed manner. Specified date The date on which the company's or entity's accounting period ends prior to the date on which a share or an interest is transferred. However, if the book value of the company's or entity's assets on the date of transfer exceeds by at least 15% the book value of the assets on the previous balance sheet date preceding the date of transfer, the date of transfer shall be the specified date of valuation. Accounting Period Each 12-month cycle begins on April 1st and ends on March 31st. However, if a company or an entity referred to in Explanation 5 adopts a period of twelve months ending on a day other than March 31st for the purpose of— (a) complying with the provisions of the tax laws of the territory in which it is a resident for tax purposes; or (b) reporting to persons holding the share or interest, then the period of twelve months ending on the other day referred to in Explanation 5 applies. First Accounting The company's or entity's first accounting period begins on the date of its Period registration or incorporation and ends on the 31st of March or such other day, as the case may be, after the date of such registration or incorporation. Later accounting The subsequent accounting periods will be twelve-month intervals. period Accounting period If the company or entity ceases to exist before the conclusion of the accounting of an entity which period, as described above, the accounting period will end immediately before 87 CU IDOL SELF LEARNING MATERIAL (SLM)
ceases to exist the company or entity ceases to exist. Table 6.1 Meaning of certain terms Note - The manner of determination of fair market value of the assets of the foreign company is given in Rule 11UB. Determination of income attributable to assets in India is given in Rule 11UC. Explanation 7 to section 9(1)(i) provides that In the following instances, no income is deemed to accrue or arise to a non-resident from the transfer outside India of any share or interest in a company or an entity registered or incorporated outside India: 1. Foreign company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, does not hold • the right of management or control in relation to foreign company or entity; or • the voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, as the case may be, of the foreign company or entity; or 2. Foreign company or entity indirectly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, does not hold • the right of management or control in relation to foreign company or entity; or • any right in, or in relation to, such foreign company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India; or • such percentage of voting power or share capital or interest in foreign company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India. In effect, the exemption will be available to the transferor of a share of, or interest in, a foreign entity if he, along with his associated enterprises, - neither holds the right of control or management, nor holds voting power, share capital, or interest in the foreign company or entity directly holding a share of, or interest in, the foreign company or entity directly holding a share of, or interest in, the foreign company or entity directly holding a share of, or interest in, the foreign company or entity directly (direct holding company). 88 CU IDOL SELF LEARNING MATERIAL (SLM)
If the transfer is of shares or an interest in a foreign entity that does not directly hold Indian assets, the transferor will be eligible for the exemption if he, along with his associated enterprises, - neither holds the right of management or control in relation to such company or entity, - nor holds any rights in such company that would allow it to exercise control or managementof the direct holding company or entity or entitle it to voting power or share capital or total interest exceeding 5% in the direct holding company or entity. Furthermore, where all of the assets owned, directly or indirectly, by a company or, as the case may be, an entity registered or incorporated outside India are not located in India, the non-resident transferor's income from the transfer outside India of a share of, or interest in, the foreign company or entity, deemed to accrue or arise in India under this clause, shall be only that part of the income deemed to accrue or arise in India under this clause. “Associated enterprise”, in relation to another enterprise, means an enterprise— • which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or • in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) Income from salaries earned in India [Section 9(1)(ii)] Income, which falls under the head “Salaries”, deemed to accrue or arise in India, if it is earned in India. Salary payable for service rendered in India would be treated as earned in India. Furthermore, any money paid under the heading \"Salaries\" for a time of rest or leave that is preceded and followed by services given in India and constitutes part of the service contract of employment is considered income earned in India. (3) Income from salaries payable by the Government for services rendered outside India [Section 9(1)(iii)]. Income from ‘Salaries’ which is payable by the Government to a citizen of India for services rendered outside India would be deemed to accrue or arise in India. However, allowances and perquisites paid or allowed outside India by the Government to an Indian citizen for services rendered outside India is exempt, by virtue of section 10(7). ILLUSTRATION 2 J is an Indian citizen who works in the Indian Embassy in Tokyo, Japan. For services done in Tokyo, he got salary and allowances from the Government of India for the year ended 89 CU IDOL SELF LEARNING MATERIAL (SLM)
31.3.2021. Furthermore, the government granted him perquisites. For the assessment year 2021-22, he is a non-resident. Examine the taxability of J's salary, allowances, and perquisites for the assessment year 2021-22. SOLUTION Salaries paid by the government to an Indian citizen for services conducted outside India are deemed to accrue or arise in India under section 9(1)(iii). As a result, even though J was a non-resident for A.Y. 2021-22, the wage he earned is taxable. All allowances or perquisites paid or allowed as such outside India by the government to an Indian citizen for delivering services outside India are exempt from taxation under section 10(7). As a result, J's allowances and perquisites are excluded under section 10(7). (4) Dividend paid by an Indian company outside India [Section 9(1)(iv)] Dividend paid by an Indian company outside India is deemed to be accrue or arise in India and would be taxable in India in the hands of non-resident shareholders. (5) Interest [Section 9(1)(v)] Under section 9(1)(v), an interest is deemed to accrue or arise in India if it is payable by - (i) the Government. (ii) a person resident in India. Exception: It will not be deemed to accrue or arise in India if it is payable in respect of any debt incurred or money borrowed and spent for the purposes of a business or profession carried on by him outside India, or for the purposes of making or earning any income from any source outside India. (iii) a non-resident, when it is payable in respect of any debt incurred or moneys borrowed and used, for the purpose of a business or profession carried on in India by him. Exception: Interest on money borrowed by a non-resident for any reason other than business or profession is not considered to accumulate or arise in India. Example 5: If, a non-resident ‘A’ borrows money from a non-resident ‘B’ and invests the same in shares of an Indian company, interest payable by ‘A’ to ‘B’ will not be deemed to accrue or arise in India. Meaning of interest: Interest includes any service fee or other charge in relation to the moneys borrowed or debt incurred (including a deposit, claim, or other similar right or obligation) and any service fee or other charge in relation to the moneys borrowed or debt incurred or in relation to any credit facility that has not been used. (6) Royalty [Section 9(1)(vi)] Royalty will be deemed to accrue or arise in India when it is payable by - 90 CU IDOL SELF LEARNING MATERIAL (SLM)
(i) the Government; (ii) a person who is a resident in India Exception: When it is paid for the transfer of a right, the use of a property or information, or the use of services for the purposes of a business or profession carried on by such person outside India, or for the purpose of making or generating any income from any source outside India, or (iii) a non-resident only when the royalty is payable in respect of any right, property or information used or services utilised for purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India. Important points: 1. Lumpsum royalty not deemed to accrue arise in India:A resident's lump-sum royalty payments for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with computer hardware under any scheme approved by the government under the policy on computer software export, software development, and training, 1986 are not deemed to accrue or arise in India. 2. Meaning of Computer software: “Computer software” means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customised electronic data. 3. Meaning of Royalty: The term ‘royalty’ means consideration (including any lumpsum con-sideration but excluding any consideration which would be the income of the recipient chargeable under the head ‘capital gains’) for: (i) the transfer of all or any rights (including the granting of license) in respect of a patent, invention, model, design, secret formula or process or trademark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trademark or similar property. (iii) the use of any patent, invention, model, design, secret formula or process or trademark or similar property. (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. (v) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB. (vi) the transfer of all or any rights (including the granting of license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting. 91 CU IDOL SELF LEARNING MATERIAL (SLM)
Consideration for sale, distribution or exhibition of cinematographic films is covered within the scope of royalty w.e.f. A.Y.2021-22. (vii) the rendering of any service in connection with the activities listed above. The definition of ‘royalty’ for this purpose is wide enough to cover both industrial royalties as well as copyright royalties. The definition specially excludes income which should be chargeable to tax under the head ‘capital gains. 4. Consideration for use or right to use of computer software is royalty within the meaning of section 9(1)(vi) By clarifying that transfer of all or any rights in respect of any right, property, or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred, the consideration for use or right to use computer software is royalty [Explanation 4]. As a result, because consideration for use or right to use computer software falls under the definition of royalty, the provisions of tax deduction at source under section 194J and section 195 would be attracted. 5. Consideration in respect of any right, property or information – Is it royalty? Royalty includes and has always included consideration for any right, property, or information, whether or not (a) the payer has possession or control of the right, property, or information. (b) the payer uses the right, property, or information directly; or (c) the right, property, or information is located in India [Explanation 5]. 6. Meaning of Process The term “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret [Explanation 6]. (7) Fees for technical services [Section 9(1)(vii)] Any fees for technical services will be deemed to accrue or arise in India if they are payable by - (i) the Government. (ii) a person who is resident in India 92 CU IDOL SELF LEARNING MATERIAL (SLM)
Exception: When the fees are paid for technical services used in a business or profession carried on by the person outside of India, or for the purpose of making or earning money from any source outside of India. (iii) a non-resident, only if the fees are payable in respect of services provided in the course of the non-resident's business or profession in India, or where such services are provided for the purpose of making or earning any revenue in India. Any remuneration (including any lumpsum value) for the delivery of any managerial, technical, or consultancy services is referred to as fees for technical services (including providing the services of technical or other personnel). It does not, however, include consideration for any construction, assembly, mining, or similar undertaking done by the beneficiary, or consideration that would be income subject to the ‘Salaries' heading. ILLUSTRATION 3 Miss Vivitha paid Mr. Kulasekhara, a Colombo-based management consultant who specialises in project financing, an amount of 5000 USD. In Colombo, the payment was made. Mr. Kulasekhara is a non-resident of the United States. The consulting is for a project in India that may involve Ceylonese participation. Is this money taxable in India if Mr. Kulasekhara receives it? SOLUTION A non-resident is only liable to tax on income earned outside of India if that income accrues, originates, or is deemed to accrue or arise in India. Income from fees for technical services, which includes any remuneration for performing any managerial, technical, or consultancy services, is included in the income deemed to accrue or arise in India under section 9. As a result, payment to a management consultant for project finance falls within the category of \"fees for technical services.\" The Explanation under section 9(2) clarifies that income from services rendered in India, such as fees for technical services, is deemed to accrue or arise in India in the case of a non- resident and is included in his total income, regardless of whether such services were rendered in India or whether the non-resident has a residence, place of business, or business connection in India. Because the services were performed in India, the payment received by Mr. Kulasekhara, a non-resident, in Colombo is subject to tax in India because it is deemed to accrue or arise in India. (8) Any sum of money paid by a resident Indian to a non-corporate non-resident or foreign company [Section 9(1)(viii)] Income arising outside India, being any sum of money paid without consideration, by a Indian resident person to a non-corporate non-resident or foreign company would be deemed 93 CU IDOL SELF LEARNING MATERIAL (SLM)
to accrue or arise in India if the same is chargeable to tax under section 56(2)(x) i.e., if the aggregate of such sum received by a non-corporate non-resident or foreign company exceeds ₹ 50,000. It may be noted that this deeming provision applies to only sum of money paid outside India to a non-corporate non-resident or foreign company, and not in respect of property, movable or immovable, transferred outside India without consideration or for inadequate consideration to a non-corporate non-resident or foreign company. 6.3 EXEMPT INCOME OF NON-RESIDENTS Section 10 of the Income-tax Act, 1961 exempts from tax various incomes including the following in the hands of a non-resident: 1. Interest on moneys standing to the credit of individual in his NRE A/c [Section 10(4)(ii)] As per section 10(4)(ii), in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-resident (External) Account (NRE A/c) in any bank in India in accordance with the Foreign Exchange Management Act, 1999 (FEMA, 1999), and the rules made thereunder, would be exempt, provided such individual. • is a person resident outside India, as defined in FEMA, 1999, or • is a person who has been permitted by the Reserve Bank of India to maintain such account. It should be emphasised that joint holders of NRE Accounts do not create an AOP simply because they have these accounts in shared names. The advantage of the exemption under section 10(4)(ii) will be accessible to such joint account holders, provided that each of the individual joint account holders meets the other conditions set forth in that section. Example 6:Mrs. Neena Kansal has been a Singapore resident from the year 2000. She has a non-resident account with the Bank of Baroda in New Delhi. During the fiscal year 2020-21, a total of ₹ 10,000 in interest was credited to this account. While she files her tax return for A.Y. 2021-22, she will be exempt from paying income tax on any interest income she earns. 2. Interest income of a non-corporate non-resident or foreign company on specified off-shore Rupee Denominated Bonds issued by an Indian company or business trust [Section 10(4C)] Interest payable by an Indian company or business trust to a non-corporate non-resident or a foreign company in respect of money borrowed from a source outside India by way of issue of rupee denominated bond during the period from 17.9.2018 to 31.3.2019 would be exempt. 3. Income of a specified fund on transfer of certain asset [Section 10(4D)] Following income accrued or arising to or received by specified fund would be exempt - 94 CU IDOL SELF LEARNING MATERIAL (SLM)
- any income from transfer of a capital asset, being a bond of an Indian Company or a public sector company (sold by the Government and purchased by the specified fund in foreign currency), GDR or rupee denominated bond of an Indian company or derivative or any other notified security, on a recognized stock exchange located in any IFSC and where the consideration is paid or payable in convertible foreign exchange or - any income from transfer of securities (other than shares in a company resident in India) or - any income from securities issued by a non-resident (not being a permanent establishment of a non-resident in India) and where such income otherwise does not accrue or arise in India or - any income from a securitization trust which is chargeable under the head \"profits and gains of business or profession\", to the extent such income accrued or arisen to or is received is attributable to units held by non-resident (not being the permanent establishment of a non-resident in India) computed in the prescribed manner. Meaning of certain terms: S.No Term Meaning 1 Securities Securities includes (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. (ii) derivative. (iii) units or any other instrument issued by any collective investment scheme to the investors in such schemes. (iv) security receipt. (v) units or any other such instrument issued to the investors under any mutual fund scheme. (vi) Government securities. (vii) such other instruments as may be declared by the Central Government to be securities; and (viii) rights or interest in securities It shall also include such other securities or instruments as may be notified by the Central Government. 2 Specified fund established or incorporated in India in the form of a trust or a Fund company or a LLP or a body corporate, – (i) which has been granted a certificate of registration as a Category III Alternative Investment Fund and is regulated under the SEBI (Alternative Investment Fund) Regulation, 2012, made under the 95 CU IDOL SELF LEARNING MATERIAL (SLM)
SEBI Act, 1992 (ii) which is located in any IFSC (iii) of which all the units are held by non-residents other than units held by a sponsor or manager 3 Trust A trust established under the Indian Trust Act, 1882 or under any other law for the time being in force. 4 Unit Unit means beneficial interest of an investor in the fund and shall include shares or partnership interests. 5 Manager Any person or entity who is appointed by the Alternative Investment Fund to manage its investment by whatever name called. Manager may also be same as the sponsor of the Fund. 6 Sponsor Any person or persons who set up the Alternative Investment Fund and includes promoter in case of a company and designated partner in case of LLP. Table 6.2 Meaning of certain terms (4) Remuneration received by individuals, who are not citizens of India [Section 10(6)] (i) Remuneration received by officials of Embassies etc. of Foreign States [Section 10(6)(ii)]:The remuneration earned by an individual who is not an Indian citizen for services as an official of a foreign state's embassy, high commission, legation, commission, consulate, or trade representation, or as a member of their staff, is exempt. Conditions (a) The remuneration received by our corresponding Government officials resident in such foreign countries should be exempt. (b) The above-mentioned member of the staff of such officials should be the subjects of the respective countries and should not be engaged in any other business or profession or employment in India. Examples: a. Mr. A, a citizen of India but resident of USA since year 2012, was appointed as a senior official of the US embassy in India. He earned a remuneration of ` 10 lakhs during F.Y. 2020-21. Being an Individual who is a citizen of India, though fulfilling other conditions of the section, such remuneration shall not be exempt in his hands for A.Y. 2021-22. b. Mr. Vikram Kohli, an Indian born person but currently a resident and Citizen of USA, was appointed as a senior official of the US embassy in India. He earned a remuneration of ₹ 10 lakhs during F.Y. 2020-21. Being an Individual who is not a citizen of India and also fulfilling other conditions of the section, such 96 CU IDOL SELF LEARNING MATERIAL (SLM)
remuneration shall be exempt in his hands for A.Y. 2021-22, subject to fulfilment of conditions. c. Mr. Frank D’Souza, an Irish Citizen but currently the resident of USA, was appointed as a senior official of the US embassy in India. He earned a remuneration of ₹ 10 lakhs during F.Y. 2020-21. Being an Individual who is not a citizen of India, such remuneration shall be exempt in his hands for A.Y. 2021-22, subject to fulfilment of the conditions. (ii) Remuneration received for services rendered in India by a Foreign National employed by foreign enterprise [Section 10(6)(vi)]: The remuneration received by a foreign national as an employee of a foreign enterprises, for services rendered by him during his stay in India is exempt from tax. Conditions (a) The foreign enterprise is not engaged in any business or trade in India: (b) The employee’s stay in India does not exceed in the aggregate a period of 90 days in such previous year, and (c) The remuneration is not liable to be deducted from the income of the employer chargeable under the Income-tax Act, 1961. Examples: a) Mr. A, citizen of India but resident of USA since year 2012, was appointed in India in October 2019 as an employee of a US enterprise. Such US enterprise is not engaged in any business in India. A’s job requires him to visit his US office every twenty-five (25) days for reporting purposes. During F.Y. 2020-21, Mr. A earned a remuneration of ₹ 10 lakhs for his India related assignment and his stay in India in aggregate was 85 days. Further, such US enterprise has not claimed any deduction of such remuneration under the Income-tax Act, 1961. Being an Individual who is a citizen of India, such remuneration shall not be exempt in his hands for A.Y. 2021-22 under this section i.e., section 10(6)(vi), though he may get exemption under any other provision of the Income-tax Act, 1961, subject to fulfilment of conditions stipulated thereunder. b) In the above case, let’s consider that Mr. A is a citizen of USA. All other facts remaining same, his remuneration shall be exempt from tax in his hands for A.Y. 2021-22 under this section. c) Let’s take another variation, Mr. A is a citizen of USA but the remuneration paid to him is borne by the permanent establishment of such US enterprise in India. ₹ 10 lakhs paid to A is cross charged by the US enterprise to its Indian permanent establishment (PE). In this case, the remuneration shall not be exempt from taxation in the hands of Mr. A as the same is getting deducted from the income of the Indian PE of such foreign enterprise. 97 CU IDOL SELF LEARNING MATERIAL (SLM)
(iii) Salary received by a non-citizen for services rendered in connection with employment on foreign ship [Section 10(6)(viii)]:Any income taxable under the head \"Salaries\" received by or due to a non-citizen of India who is also a non-resident as remuneration for services done in connection with his employment aboard a foreign ship is exempt if his entire stay in India during the previous year was less than 90 days. (iv) Remuneration received by Foreign Government employees during their stay in India for specified training [Section 10(6)(xi)]:Any pay received by an employee of a foreign government from their respective government during his stay in India is exempt from tax, if remuneration is received in connection with training in any establishment or office of or in any undertaking owned by, - (a) the Government; or (b) any company owned by the Central Government or any State Government or partly by the Central Government and partly by one or more State Government; or (c) any company which is subsidiary of a company referred to in (b) above, or (d) any statutory corporation; or (e) any society registered under Societies Registration Act, 1860 or under any law and wholly financed by the Central Government or any State Government(s) or partly by the Central Government and partly by one or more State Governments. It may be carefully noted that exemption is available under section 10(6) only to an individual who is not a citizen of India. 6.4 SUMMARY Taxation of cross-border transactions are generally based on the two concepts: Residence based taxation Source based taxation In case of companies, the place of incorporation or the place of effective management is generally considered as its place of residence. ‘Business connection’ shall include any business activity carried out through a person acting on behalf of the non-resident. Royalty will be deemed to accrue or arise in India when it is payable by - the Government. a person who is a resident in India Exception: Where it is payable for the transfer of any right or the use of any property or information or for the utilization of services for the purposes of a business or profession 98 CU IDOL SELF LEARNING MATERIAL (SLM)
carried on by such person outside India or for the purposes of making or earning any income from any source outside India, or a non-resident only when the royalty is payable in respect of any right, property or information used or services utilised for purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India. 6.5 KEYWORDS Fees for technical services - Any remuneration (including any lumpsum value) for the delivery of any managerial, technical, or consultancy services is referred to as fees for technical services (including providing the services of technical or other personnel). It does not, however, include consideration for any construction, assembly, mining, or similar undertaking done by the beneficiary, or consideration that would be income subject to the ‘Salaries' heading. Business connection-shall include any business activity carried out through a person acting on behalf of the non-resident 6.6 LEARNING ACTIVITY 1. Learn the concept of POEM in-depth and list out the important points you have noticed from the concept of POEM. ___________________________________________________________________________ _____________________________________________________________________ 2. List out a few income items and compare the tax implications between a resident and a non-resident on those listed items. ___________________________________________________________________ _____________________________________________________________ 6.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. J is an Indian citizen who works in the Indian Embassy in Tokyo, Japan. For services done in Tokyo, he got salary and allowances from the Government of India for the year ended 31.3.2021. Furthermore, the government granted him perquisites. For the 99 CU IDOL SELF LEARNING MATERIAL (SLM)
assessment year 2021-22, he is a non-resident. Examine the taxable status of J's salary, allowances, and perquisites for the assessment year 2021-22. 2. Mr Raghunathan paid a sum of 6000 USD to Mr. Rajasekar, a management consultant practising in Colombo, specializing in project financing. The payment was made in Colombo. Mr. Rajasekar is a non-resident. The consulting is for a project in India that may involve Ceylonese participation. Is this payment tax deductible in India in Mr. Rajasekar's hands? 3. JJ Limited, an Australian company, has signed a deal with KK Limited, an Indian company, to provide technical assistance to the latter in the establishment of a fertiliser factory in Orissa. According to the agreement, JJ Limited provided KK Limited with both off-shore and on-shore services for a charge of 1 crore and 1.5 crore, respectively. JJ Limited is of the view that it is not liable to tax in India in respect of fee of ₹ 1 crore as it is for rendering services outside India. Discuss the correctness of the view of JJ Limited. 4. Discuss briefly about the remuneration received for services rendered in India by a Foreign National employed by foreign enterprise. 5. Briefly discuss about the remuneration received by Foreign Government employees during their stay in India for specified training in the context of Section 10(6)(xi) of the Income Tax Act, 1961. Long Questions 1. Elaborately discuss about income of a non-resident through transfer of a capital asset in India. 2. Examine with reasons whether the following transactions attract income-tax in India, in the hands of recipients under section 9 of Income-tax Act, 1961: a. An agreement was signed for the execution of electrical work in India by a non- resident German company that did not have a permanent establishment in India. Payments for drawings and designs, referred to as \"Engineering Fee,\" were made separately. The assessee argued that such business income should be taxed in Germany because there is no business connection under section 9(1)(i) of the Income-tax Act of 1961. b. A law firm in Mumbai hired a barrister from the United Kingdom to argue a matter before the Supreme Court of India. According to the terms of the professional contract, a payment of 5000 pounds was made. c. Amount paid by the Indian government for the use of a patent developed by Mr. A, a non-resident. d. Sai Engineering, a non-resident foreign company, entered into a collaboration agreement with an Indian company on June 25, 2020, and was paid interest on 8% debentures for Rs. 20 lakhs issued by the Indian company in exchange for 100 CU IDOL SELF LEARNING MATERIAL (SLM)
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