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Pdf income tax

  1. 1. Thc Indian Income T a x Act 1961 andForeign C o l l a b o r a t i o n in Industry in I n d i a
  2. 2. CHAPTER V 1 /The lndian lncome Tax Act 1 6 and Foreign 91Collaboration in Industry in IndiaIncome Tax and Foreign Collaboration The question 01 taxation invariably figures incvcry casc oi foreign collaboration. Ihis i quite natural sas a ioreign palty is ultimately concerned with the netrake home amount after paying Indian taxes and not thegross amount. Taxation acquires significance also becausethe corporate rate o f income-tax in case of foreign compan-ies engaged in business is as high as 65 per cent. 1 lhe Indian income-tax law contains several pro-visions, particularly while dealing with foreignersincome, which, tt~ough extra-territorial in a strict sense,ar? justified because there is sufficient connectionbetween the foreigner and his income chargeable underthe Indian ~ a w . Income o f I~idian party to collaborationAgrrelllenr is tax;lbIc 1 i k e any other Indian Company oroLller forms of business enterprise as the case may be,while taxability of foreign collaborator is dependentupon the nature of inconles 01 the foreign collaboratorand Iris residenLial sLaLus in accordance with the provisionsI. see i ( u . j p u 1 Foreign Id. I... e Finance Bil 1 Eifect o 1 Collaborntlons, new Delni, r Econon~ic Times - A p r r l 7 , 1988.2. see Agrawal, 1 i . M . . p. 1 1 0
  3. 3. of Income Tax Act 1961. Proper understanding of taximplications of a Foreign Collaboration Agreement havesignificance to both the parties to the CollaborationAgreement. 31.iberal isat ion of lricome Tax Law It has brrr~ decided by the Government of Indin CIthat the Income Tax Act will be liberalised and rtionalised 4with other two important laws i.e. FERA and Company Law.rhe Tax Liability The tax liability of a foreign investor on hisincome from a tect~nical/financial collaboration agreementin India will depend upon whether the foreign party is acompany or an individual. I tax liability will alsodepend on the nature o f income. A foreign investor isconcerned with not only his own tax liability but alsotne liability of the joint venture company. In all foreigncollaboration agreements, i t i necessary for the cor.ce?ned sparties to indicate as to how the tax liability in respectof tilt. various categories o f income i proposed s to bemet and by whom. The Indian Income Tax Law charges thetax on the total income received by or accrued to a person,including the income earned by a foreigner or a foreign3. see Nabhis, p.465.4. see National Herald, dew Deliii, November 1 , 1 9 91 :;tatement rnade by Minister for State for Finance, Mr. Harliesiiwar rilakur.
  4. 4. enterprlse during the year of income 1.e. prevlOU8 year.I I shou I d IJC~ ~ l t l ( ~ r s t o o dh e r e u c Ic!url y thaL the incornc-tax law in lndia does not seek to brlng into the taxnet the profits of a non r e s i d e n t w h i c h c a n n o t r e a s o n a b l ybe attributed to operatlons carrled out in lndla. Aforeigner i s liable to pay income-tax in India on allthe income wliicli he receives in India or which accruesor arises to him in India or which i s deemed t o accrueor a r i s e i n I n d i a . The tax liability willalso depend on the natureof the income, w h i c t ~ may consist of one o r more of thefollowing categories:( i ) diviilend on equity capital held in the joint v e n t u r e company;( i i ) fees for technical services rendered;(ii1) royalties for the use of patellts, copyrights, t r a d e marks, p r o c e s s o r f o r n ~ u l a ee t c . ;(iv) amounts received for assignment of patents, trade marks or for tne sale of technical know-how;(v) interest on loans advanced to an Indian enter- p r i s e ; and(vi) profit on sale of plant and machinery supplies. A forfig11 irivestor i s concerned with not only hisown tax liability hut also the. liability of the jointv e n t u r e company.
  5. 5. 5laxeson Payments for Technical Collaboration Taxes leviable on income derived from technicalcollaboration are as below:Class of Con~uanv arid nature of lncome Hate o f Income TaxForeign companies, i.e. companies whichhave not made the prescribed agreementsfor the declaration and payment o f divi-dends within lndia so as to be classlfiedas domestic companies.a) Income received from an Indian concern on account o f royalties and technical service fees:- . Payments received in a lumpsum 30 per cent tor the transfer outside India o f , or the imparting of information outside India in respect o f any data, arawing, specification, patent etc. All other royalities and 30 per cent technical service fees Dividends, received from a 25 per cent domes t i c Indian Company.b) Any other income 65 per cent The relevant provisions of the Indian Incomerax 1961, frequent amendments made therein, vast judlcialrulings involving interpretations o f the relevant provisionsar~d issues r.cx1ating to foreign collaboration agreements,tne large nu~nbe~. f Double Taxation Avoidance Agreements oentered into by the Government with various countries5. ASSOCI~AM (August, 1989) M i 1 ieu for Investment in lndia, New Delhi, Associated Cnambers o f Conimc~rce and 1ndustr.y o f lndia.
  6. 6. of the world and the relevant circulars issued by theCentral 8oard of Direct Taxes, from time to time has madethis aspect very complex. Relevant provisions of Indianlnrolrle Tax l c it 1961 in respect of Foreign Collaborationhaving special significance are contained in a number 7of sections. -Tax Implications of ForeignCollaboration Agreements The tax implications of foreign collaborationagreements involve the consideration of the followingtwo main aspects:-(i) ascertaining the tax l i a b i l i t y of the non-resldent collaborator; and(ii) ascertaining the deductibility or otherwise of the payments made to tne forelgn collaborator by the Indian party, i n the hands of the Indian party. In ordtrr to ascertain the Lax liability of foreignco1laborators. tnc foreign collaboration agreements canbc broadly diviaed into the following three categories:-6. Institute of Company Secretaries of India (1986) Foreign Collaboration Policy and Procedures. p.292.7. Sections of tne Indian Income Tax 1901 : Sections 3 ; lI)(Ci)(vi); IO(o)(viia); lO(6)A; 35A; 35AB; 352; 42; ,1311; 44C; 44D; Y O ; Y l ; 115A; 115B; 115BB; 115111112;1 1 5 E ; 195, 2931.
  7. 7. (i) ~ollaborilionagreements made before 1 t April 1976 s i.e. upto 31st March 1976(ii) Collaboration agreements made on or after 1st April 1976(iii) Collaboration agreements maue on or after 1st April 1976, wl~rre thc agreement is made in accordance wi rh proposals approved by the Central tiovernmen~ betore that date.(i) Collaboration agreement made before 1st April 1976: (a) Initial lumpsum - Section Y(1) of the IncomeI Act provides Tor charging o f royalty to Indian income-tax by creatlrig a fiction that when royalty i paid s toa nun-resident it is deemed to accrue or arise in lndiaand hence, ct~arged to tax in India. The proviso to sectionY(i )(vi) contains an importarlt provision regarding thetaxability of the initial lumpsum paid to a foreign parti-c i panr under the col laborat io11 agreement made before1st April 1976. In case where the agreement betweentl~e parties were entered into before 1st April 1976 butbecause of Governments requirement supplementary agreementwas executed after 1t s April, 1976, it was held thatthe provisions of Income-lax Act prior to amendmentsc.1 tc~ctive l o l 1st April rlr 1976 will be applicable. 8n. mereo or Satellite L.td. v . I.I.O. (1980) 121 1rR 311 (Guj).
  8. 8. A combined reading of section 9(1)(Iv) and theproviso to that section clarifies that no income shallbe deemed to accrue or arise in India by way of royaltyas consists of a lumpsum consideration for the transferoutside India of, or imparting of information outside Indiain respect of any data, documentation, drawing or speci-fication relating to any patent, innovation, model, design,secret formula or process or trademark or similar property,if such income is payable under an agreement made before1st April, 1976 and the agreement is approved by theCentral t. tiovernme~~ Prior to introduction of Sect ion9(l)(iv) by the plnance Act 1976 there was no specific~~.ovision under ti le Indian Income Tax Act dealing witht11e tax liability of loreign participants in collaborationagreenlents. llierefore, the normal law used to prevailwhere under a n agreement all services were rendered outsideIndia, and there was no business connection and paymentwas recrlved outside India, fees for technical knowhow 9were held as non taxable in India. (b) Iloyal t y and lechnical Fees - In Sectiont)(l)(vi) along with the proviso and the explanation to i tthe meaning o f royalty has been explained. Similarly feefor technical services is defined in Explanation 2 to9. see India Almunium Co.Ltd. v . C.I.T. (1983) 140 ITR 114(Cal.) and also Carborndum Co. v. C.I.T. (1977) 108 1 TR 355(SC) - also refer to the publlc c~rcular No.21 of 1969 issued by the Central Board ol Direct Taxes, F.No.7-A/140/68/1T(A- 1 1 ) date J u l y 9 , 1969.
  9. 9. Srct ion Y ( 1 ) ( vi i ) . Ihcse dcf ini t ions have been introduced Iron~I S L~ n t oincome-l;lx Act will1 c . T f c c ~ June 1976. Regarding taxability of royalty, if the foreignparticipants are involved in some activities in lndia,royalty will be taxed on Lhe basis of accrual of incomein India. But in a case where no services whatsoeverare performed by the foreign participants in India andthe payment is also received by them outside lndia, royaltywould not be taxed in India. 10 As far a s ic,cs for technical services are concernedit is important to note that the deeming provisions undersection 9 does not apply in case the agreement for suchs e r v ~ c e s was made before 1st A p r i l , 1976. Therefore, inorder to tax fees for technical services payable in pursu-ance of an agreement made before 1st April 1976, the saidfees should accrue or arise in lndia by virtue of a provi-slof~other than section 9(l)(vii) of the Income Tax Act. 1 1 l fees shall be taxable only if income in respect liethereof accrues or arises, directly or indirectly, thoughor from any buslness connection in lndia. Broadly speakingsuch fees shall not be taxable in lndia i f the services10. See VDO lackometer Works v . C I . . 9 (1977) 117 1 S 804 (<at-.) Usha dactin Blalck (wire Ropes) Ltd. (1984) 1 TR 2 3 6 (al.) ana also Performing Rights Society ~ t d . v . C.1.1. (1977) 1 6 1 TR 0 11(S.C) see Agrawal H . P . p.120
  10. 10. relating to such fees are rendered wholly outside India. 12(c) Payments for supply of machinery and other Equip-=- There 1s no distinction in the law relating tothe levy of tax., in respect o f supply o f machinery andother equipment by a foreign participant under a collabora-tion agreement, between the case of an agreement enteredinto befor(> 1 t April s 1976 and the case of an agreemententered into after that date. lhus, prof 1 ts relatingto the supply o f any machinery or equipment in India shallbe taxable in lndla only if there i a business connection sbetween the foreign participant and the Indian counterpart.A provision of technical personnel in Ir~dia for the erec-tion of the equipment would not be of much consequence in~stablislling any business <:onne~tlon. l3 Where, however, thesupply o t marhlnfry 1s made in such a manner that a b u s ~ n e s sconr~ect ion is established and. for that reason, profitout of such supply is taxable in India, the foreign parti-cipant shall be liable to pay tax on the profit made by himon the supply of equipment to India. I t may be noted herethat the entire amount of profit will not be taxablein India. The income of the non-resident shall be onlysuch part of the income as is reasonably attributed t the o12. see UDO Iactlometer Works v. C. 1.T. (1977) 117 1 T.R. 804 (Kar), Indian Aluminium Co. Ltd. v. C.I.l. (1983) 140 1 I . . 114 ( C a l . ) .13. CC.I.1. v . Hlndustan Shlpyard Ltd. (1977) ID9 I l l 158(Al), Carborandum Co. v . C.1.1. (1Y77) I08 IT11 355(S.C. ) ; Amco Flnancce Contracts Ltd. v . C.I.T.( 1979) 1 6 ITR 868(Cal. ) , C . I.T. v. Fried 1 Krupp lndustrles (1981)I28 ITR 27 (Mad.)
  11. 11. 14overations carried out in India.(d) Dividend on shares Allotted to Foreign Participants either ~ r i lieu of lechnical know-how services or Otherwise: Prior to the amendment introduced in the IncomeIax Act by Finance Act 1976, by inserting a new section115-A, the law was that a foreign company which receiveddividend from an Indian company was entitled to deductionof 6 5 per cent of the dividend under section 8 - ! 5 o f the 0b1Income Iax Act. The foreign company paid tax on thedividend only on the balance amount of the dividend i.e.35 per cent of the gross amount of the dividend receivedby it. The rate of tax was 73.5 per cent, thus, a foreigncompany would pay tax at the rate of 73.5 per cent on 35per cent of the dividend received oy it. The effectiverate of tax was 25.725 per cent. I t may be further men-tioned that the foreign company was also entitled todeduct any reasonable sums paid by i t for earning the moneyborrowed to purchase shares. l6 The Finance Act 1976has introduced a nrw section 115-11 effective from 1st June1976. Ihe new PI-ovision prescribes a flat rate of 2514. Agrawal, i 1 . P . p. 12115. Since deleted by the i2iliance Act 1976, with effect from assessment year 1977-78.16. Ormerods (India) Pvt.Ltd. v. C.1.T. (1959) 36 1 111 329 o m . ; hlotimed Ghouse v. C. 1 .T. ( 1963) 19 I I I . 127 (Mad. ) .
  12. 12. per cent o i the gross amount of dividend without allowing rany other deduction from dividend income.(e) Allotment of Shares against Technical Know-how: Where shares in Indian companies are allottedi n consideration for the plant and machinery, the incomeembedded in the payments would be recceived in India as theshares in I Indian colnpanies are located in India andwould accordinglyattract liability to income-tax asI come received in lnd i a. 17(ii) Collaboration Agreements made on or after 1t s April 1976: lie tax-1 iabi l i t y of foreign participants inpursuance or agrc,clncnts made on or aftel- 1st Apri I , 1976 aredc7;lltli witti i n lhc3 following paras:(I) Initial lumpsum: The term initial lumpsum has not been definedin the lncome lax Act a s such. however, while definingthe term royalty (Expianation 2 to Section 9(1)(vi), ithas been speci f lcal ly provided that royalty includesany l umpsum collsiderat ion. Therefore, i t can be inferredtll:~ t the lumpsurn considerat ion is only a form of royalty,the only difference being that whereas royalty is generallya recurrent feature based on production or sales, lump
  13. 13. sum payment is a predetermined amount payable by theIndian counterparl under a collaboration agreement, irres-pect ive of product ion or sale. Sect ion 115-A prescribesthe rates of income-tax in cases of foreign companiesand in respect o f agreements made after 31st March 1976and approved by the Central Government. In case theforeign participant in tne agreement i not s a company(Corporate body), Section 115-A does not apply and rateof tax will be normal rate of tax in India. Whereas priorto June 1976 there was no limit on the quantum of expendi-turewhich was claimable against the lump sum consideration,a new section 44-C has been introduced with effect from1st Jurle 1976 placing a ceiling on head-of f ice expenses.lhere i rlo cei I ing on the claim of other expenses which sdo not fall under the category of head-office expenses.(b) Supply of Drawings and Designs: Iaxability of foreign parties who supply drawingsand designs will be primarily governed ~y the provisionsof section 9 of the Indian Income Sax Act 1961. A a sgeneral Legal proposition, the foreign companies areliable to pay income tax @ 30% (w.e.f. Assessment Year1387-88) o f the gross lump sum amount received bythem forsupplying the said drawings and designs. Where the foreignparty outrightly sells drawings. and designs outside Indiawithout keeping any business connection in India, notax can be charged on such transaction in India, provided
  14. 14. i ~ i o~ t r ~ Is ~:arr.ied our by the foreign party inI r ~ d ~ and both thc property in goods sold and the payment alor the same take place outside India.(c) Royalty: The term royalty is defined in Explanation2 to Section 9(l)(vi) of the lncome Tax Act. I t clarifiesthat it includes a l ly lump sum consideration but excludesa n y consideration wt1ic11 would be the incorne of the recei-p~erl chargeable t under the head capital gains Sect ion115-A o f the Income Tax Act prescribes the rate of income-tax in r s ) . : of royalty. clcrt Ihe rate of tax in case offoreign companies is 30%18 (w.e.f. assessment year 1987-88)on the gross amount of royalty. Thus the forelgn parti-cipants who r.eceive royalty are liable to pay an income-tax of 30% on the amount of gross royalty received bytrlem without the deduction of any expenses. The rateof 30% is applicable only i n rcspect of such collaborationagreements which have been entered into after 31st March1976 and are approved by the Central Government of India.But with effect from 1st June 1976, a new section Section44-C has been introduced placing a ceiling of 5 per centon the claim of llead Office Expenses. There is no restric- 1Ytion ol other cx(1ellses. i- - -18. 1revlously rhc rate was 40% on the gross amount ol 1~1IynIty.13. Agrawal 1i.P. pp. 111-112.
  15. 15. (d) Fees for Technical Services I defi~l~tion of fees for technical serviceshas been given in Explanation 2 to the proviso to sub-clause ( v i i ) o f section 9(1) of the lncome Tax Act 1961.It would D? ~~otedthat where the payment i made s forsrrvices in (:onnrction with construction, assembly,mininingor llke projccr, such conslderat~on is excluded fromthe! definitio!~of fees for technical services. Where theforeign participant in the agreement receives the fees forsuctl technical services outside India and in pursuanceof a contract executed outside India, there will be nocharge to tax provided no business connection i established s1 1 e scope of the term fees for technical services isvery wide and almost every service rendered by foreigners,whether in India or outside India is caught in the taxnet. Section 115-A of the Income Tax Act prescribesthe rate of the tax in respect of the technical feesreceived by a foreign company as 30 per cent (w.e.f.assessment year 1987-88).(e) Dividend/share of profit: In some cases, the collaboration agreements areentered into with an arangement for sharing profits.In the case of companies, sharing may be by way of acquiringshares in the Indian Company. Shares are also allotted inconsideration of equipment supplied by a foreign participant
  16. 16. or for supplying technical know-how. In the case of non-corporate bodies, the non-resident may become a parti-cipant irr tt~e Indian business by entering into a partner-ship. lt~e dividend is chargeable to tax at the rateo f 25 per vent o f the gross amount of dividend i f thenon-resident is a corporate body. But if the non-resident is not a corporate body, the tax chargeable would beaccording to the provisions o f Income Tax Act. (f) w m e n t for supply of d a c h ~ n e r yand Other Equipment The Income Iax Law does not contain any specificpl.ovisivn for. taxing the payment received by a forelgnpar.ticipant o f supply of machinery and/or other equipments to the lndlan concerns. Therefore, for such paymentsnormal law prevai 1s. The normal law, broadly speaking is that a non-resident is taxable in India for the incomereceived in lndia of which accrues or arises to him inIndia. Therefore, where the supply of machinery etc.is made in a manrler that no income i received, or no sincorne accrues or arises in India, no tax will be chargedin lndia. Ilowevcr, as per the provisions o f section 9,I I I he non-resident has any business connect ion inlndia. he will be liable to pay tax in lndia on the profitearned by him related to the supply of equipment in India.ll~c. rate of tax payable in lndia on the income from sale01 equipment vtc. would be at thc rate of 6 5 per cent
  17. 17. (w.e. f . assessment year 1987-88)20 in case non-resident isa corporate body. In other ccases, the tax payable wouldbe as per rates prescribed by Income Tax Act. A solitarytransaction of purchase of cap1 tal goods cannot amountto a business connection between the assessee and a forelgncornpa ny . 2 1(g) interest: I law relaling to taxing interest paid to anon-resident has undergone a substantial change w i t h effectfrom 1st June 1976 after t r amendment of section 9 by iethe Finance Act 1976. The taw prior to the amendmenti .c. upto 3 1 s ~ May 1676 was that interest was deemed toaccrue or arise in India if it represented an incomethrough or from any money lent at interest and broughtinto India in cash or k i n d . Ihus, the interest ws subjectto tax if the principal amount was brought into Indiain cash or k i n d . Ihis provision must be construed tomean the bringing of money on interest outside India andIts brlnglng into lndia should be integral part of oneComposite transaction or arrangement.2 220. Previously 1 t was 68.25 per cent in case of non- resident is a ccorporate body. I t has been reduced to 65 per cent w.e.f 1st A p r i l 1987(Assessment Year 1987-RR) vide finance Bill 1986.21. A d d l . C. I .I. v . bllarat Pr.itz Werner Pvt.Ltd.( 1979) 1 8 1 1H 1018 (Kar.) 122. A.ll.Wadiya v . C.l.r.(1949) 17 1 R 63; C.I..T.V. Sri Meenakslli Mi 11s Ltd.( 1967)63 1TR 609(SC)Por- bandar State Hank v. C. I.T.(1950) 18 1TR 1 3 4 ( ! 3 5 1a-- Grindlays Bank Ltd. (1969) 72 1l.n 1 2 1 tcat-4.
  18. 18. Ihe law has gone a substantial change with effectfrom 1 t June s 1976. Section 9(l)(v) now provides thatincome by way of interest would be deemed to accrue orarise in lndia if it is payable by the Government ora person w h o is rrsident o r a person w h o is a non-resident.A n e w c l a u s e , namely, clause 28-A h a s been inserted insection 2 of the Income Iax Act for defining interest.In section Y(l)(i) the words "through o r from any moneybut o n interest brought into India in cash o r kind" havebeen deleted with effect from 1 t J u n e 1976. s T h e effectof these changes is that interest received by a non-resident beccomes taxable in lndia (except where moneyIS used I 11 II<.SSu u ~ s i d 111(lia I~usi ~~ ) i 1 tllr same i pa id sby thc company 01by a prison who is a resident in lndiair,~.espective of the fact whether the moneys have beenbrought into lndia o r used irl India o r not. Ihe implica-lions o f the amendment are far reaching andy they havesubstantially widened the tax net to cover interest payableo r a1 l moneys borrowed outside lndia. General exempt iollsfrom tax a!-c howevr*r avai table under Section 10(4). 10(4A),lO(4b) and 10(15)(1v) of the Income Iax Act against incomefrom interest.(i i i ) Agreement made o1 o r after 1st April 1976 in r accordal~ce with the proposals approved by tne Central (;overnment before, that date: In 111any c a s e s i l 1s p o s s ~ b l e tilat the proposal for;I ioreigrl agI.eelflelll 1s (~oII;~t)ol.alio~~ submitted to thetiovcrnlncnt of India bcforr 1 t April s 1976 but the actual
  19. 19. agreement is cntercd into on or. after 1st April 1976.In such ccnscs, the proposal for the agreement wouldhave beer1 prevai ling upto 31st March 1976. Therefore. i twill not be proper to apply the provisions o f income-tax law, in such cases, which have come into force after31st March 1976. Keeping thls matter in view, the Govern-rncnt of India at tile time o f maklng the amendment inthe law by means of Finance Act 1976 have clarifiedthat wherever the agreement has been entered into onor after 1t s April 1976 and it is in accordance withthe proposals approved by the Central Government beforethat date, thc law which came into force after 31st March1976 will not be imposed upon the foreign collaborator. Inthis type of situation, the foreign collaborator hasa option to make; i f the collaborator s o selects, he canexercise a choice by furnishing a declaration in writingto the lncorrre Iax Officer that the agreement may be regar-ded as an agreement made before 1 t April s 1976. Sucha declaration has been supposed to be made before theexpiry o f time allowed for f,iling tne return of income forthe assessment year 1977-78, or the assessment year inrespect of whlch such income first becomes chargeableto tax whichever assessment year is later. Where nosuch opt ion is exercised, by I foreign collaborator,tI1c7 aiccll.r g . r ( rt slla 1 I be Lakcrl as llave been made on or 1st Apri I . 1976.2 3:~ltc:r.
  20. 20. Liability of Foreign Participant Normally the foreign collaborator will be a non-resident for tax purposes.. The scope of total income ofsuch non-resident is determined by tne provisions ofsection 5(2). I t will include all income from whateversource derived which is received or is deemed to be receivedin lndia in the relevant previous year or on behalf ofsuch person and/or which accrues or arises or i deemed sto accrue or arise to him in India during such year. e explanalion Ih 1 to section 5(2) makes it clear thatincome accruing or arising outside India shall not bedeemed to be received in lndia for this purpose, mereIyby reason of the fact that it i taken into account s ina balance sheet prepared in India. The type of incomethat are deemed to accrue or arise in India are specifiedin Sec tion 9. It i important s to state here that prior to the1976 amendment in the Income Tax Act in sec tion 9 thatwas no specific provision under the Income Tax Act, dealingwith the tax liability o f foreign participants in colla-boration agreement. Ihehrefore, the normal law usedto be applied.2 4 As per the normal provisions of section 9the income of non-residents could be taxed in India only if24. Institute of Company Secretaries of India (1986) Foreign collaboration policy and procedures p.296-7
  21. 21. the same comes out of a business connection 111 Indla. The qui n~ essent ial element to establ lsh a buslnessconnection is the element of contlnulty between the buslnessof non-resident and the activity in India and the relationbetween the two must constitute to the earning of income.25Capital Receipt - Revenue Receipt - and One pertinent aspect which is relevant is deter-mination of the foreign participants liability to seewhether the amount received for the supply of technicalknow-how is a receipt on capital account or revenue accountlhe answer of ~llis will certainly depend on the factsof the case. Tie nature of the outgoing in the handsof the Indian participant will not always be determinatlve01 the nature of the receipt in the hands of the foreignparty..26Amortlsation of lumpsum conslderatlon paid Section 35AB, inserted in tl ie Income-Tax Act bythe Finance Act 1985, with effect from 1st April 18 96(assessment year 1986-87) provides for amort isation ofany lumpsum consideration paid by a tax-paper for acquiringany know-how for use for the purpose of business over25. Carborandum Co. v . C. I .T. (1977) 1080 ITR 335(SC); C..1 .1. V. Ahmedabllai Umarbhai & Co. (1950)18 1 472(SC); I ; R.D. ~ggarwal Co. (1965) 56 & 1IH 20(SC); Ulue Star. Urlgii&ering Co. (Bom.)(P)Ltd. v.. 1 (11369)73 1IR 283(Bom. ) . CIT v . Fata Chemi- cals Ltd. (1974) 94 1 TH 85 (BOA.)26. institute Co. Secretaries of lndia (1986) Foreign Collaboration Policy and Procedures p.299.
  22. 22. a period of six years. In respect of such acquisition fromapproved laboratory. University or Institution, the amorti-sation will be permitted within a period of three years.Fur tlr is purpose know-l~owmeans any industrial informa-tion or technique likely to assist in the manufacture orprocessing of goods or in thhe working of a mine, oil wellor other sources of mineral deposits (including the searchfor, discovery or testing of deposits or the winning ofaccess thereto).Tax Incentives and concessions on Investment in lndia" Under Indian Income-Tax Act 1 6 some incentives 91have been given for encouraging investment in India.Incentives for New Industries and Hotels: There are special provisions under the IncomeTax Act 1961 for special relief or deduction for thedeveloyrnent of new industry or hotel business in India..Ihese are as follows:-(a) Under Section 80 1) deductions are allowed outof profit and gains in respect of new industrial undertak-ing and hotel business. In case of a company 30 percent of profit will be allowed as deduction for 1 years 0in case of Industrial Undertaking not engaged in themanufacture o f low priority items (Eleventh Schedule) or27. (January 1991) I. I C . Tax incentives for Investment in India p.28-37.
  23. 23. .,Lhe undertaking is a small s c a l e industrial undertaking,or ship. 111 tl~e c a s e of non-company assessee the percentageof deduction will be 2 5 per cent. In c a s e o f Hotel businessif it is inter alia owned and carried o n by a companyregistered in India with a paid up capital o f not lessthan five hundred thousand rupees. 30 per cent o f profitwill be allowed a s deduction for a period of ten yearsin the c a s e o f a company and in c a s e o f non-company 25per cent o f profit will be allowed a s deduction. In c a s eof busirless of rcpai rs to occarl going vessels o r otherpowcrcd c r a f t s Lllr perccnlagc o f deduciion allowed is 2 0per cent both i r i casr o f comparly and non-company assesseearld Ltic period 1 wl~icli 1 0 - deduction will be a1 lowed is(b) Profit and gains o f new lnduslrial Undertaking and Hotel Business in Backward Areas: Iwenty per ccrlr of Llie profits from an industrialundertaking o r from b u s ~ n e s s o f hotel in backward a r e a , isallowed deduction for ten assessment years, provided theindustrial undertaking has begun manufacturing, and thehotel business, started functioning before 1st April 1890(Sec. 80 H H ) .
  24. 24. Profits and gains from newly established small scalc -- industrial undertaking in certain areas: Twenty per cent of the profits from a small scale~ndustrial undertaking i n any rural area I S allowed deduc-Llon in ten assessment years provided i t has begun manu-f a c t u r ~ n gbefore the 1st A p r ~ l 1990 (Sec.80 HtiA).(d) profits and gains from Projects Outside India: Fiftyy per cent profits of an Indian companyor of a resident assessee derived from the business ofexecution of a foreign project is allowed deduction,p r o v ~ d e d the consideration for execution of work is payablein convertible foreign exchange (Sec. 80 HHB).(e) Profits and gains from the business of poultry farming: Ihirty three, and one-third per cent o f profitsand gains derived from business of poultry farming isallowed deduction (Sec. 80 JJ).Export Incentives Certain benefits are available under the Income-TaxAct for undertaking a c t i v l t ~ e s which are export-oriented,or one earning foreign exchange..(a) Industries in Free lrade Zones or are Export or I P I 1 t i.>(l: (oml)I~:r(, "Iax Ilol~day" IS provided to industrial
  25. 25. facturing, assembling or processing of goods or recordingof programmes on any disc, tape, perforated media or otherinformation storage device, for a period of 5 successiveyears w i t h i n a fran~ework of 8 years in which production ormanufacture have started (Sec. 1 A). 0 Similar benefit is provided for newly established100% tixport-Oriented undertakings, outside the Free-TradeZones. (Sec. 10B).(b) Goods purchased for Export: No income is deemed to accrue or arise to a non-resident from operations which are confined to purchase ofgoods in India for the purpose o f export. 2 8(c) Profits and gains from export business: An Indian company or a resident asaessee whois engaged in the business of export of Indian goodsor merchandise (other than mineral oil, and mineralsand ores) and softwares is allowed deduction of the entireprofits derived from the export of such goods or merchandiseor softwares; provided the sale proceeds are received inconvertible foreign excchange. Convertible foreign exchangeincludes amount reeived in non-convertible rupees frombilateral aountlng ountries and reeipts in Indian rupeesunder Government to tioverrimen t credi t . However. i t does28. Explanation ( b ) of Se.9 (i) ( i ) o f the Indian Income Tax Act 1961.
  26. 26. 29not incclude remittances from Nepal and Bhutan.(d) Deduct ion and Gains f r r Projects Outside Indla: on Deduction allowed at the rate of f i f t y per centof profit which is derived by an Indian company or aresident assessee from the business of - (i) execution of foreign project undertaklng in pursuance of the contract entered by him; or (ii) execution of any work undertaken by him and forming part of a foreign project undertaken by any other person.Deduction is permissible if: considcrat ion for L t ~ e executiorl ul the project is payable in convertible foreign exchange; fifty per cent of profits and gains is debited to profit and loss account and credited to reserve account to be utilised for business during the next five years; fifty per cent of prof1 ts and gains is brought in India in convertible foreign exchange, within six months from the end of the relevant year; the assessee maintains separate account for the foreign project (Sec.80 HIIR)29. SecLion 80 HIIC/CL3DI circular rio.575 dated August 31. 1990.
  27. 27. (e) Profits and Gains from Business of Hotel or o f a Tour Operator or o f Travel Agent: Deduction is allowed o f a sum equal to the aggre-gate of fifty per cent of the proflts and so much of theprofits out of the remaining profits as is debited inthe proflts and loss account and credited to reserveaccount to be utllised for the purpose o f business, derivedby the assessee engaged in hotel business or in the businessof tour operator or of a travel agent from the servicesprovided to foreign tourists. The benefit is available Iftne services are rendered to foreign tourists and amount isreceived in foreign exchange or is brought in India inconvertible foreign exchange. (Sec.80 HHD).(f) lioyalties and Fees etc. from Foreign Parties: Fifty per cent of the income received in or broughtinto India by an lndian company is allowed deduction, i f i tis received as income by way o f royalty, commission, fee orany other similar payment from foreign Government or enter-prise. The agreement for tee, commission etc. must beapproved by the Chief Commissioner of the Director General.The amount must be received in convertible foreign exchangeor is brought into India, within six months from the end ofthe relevant year. (Sec.80 0 ) .(P) Kemuneratlon from Foreign Sources in Case of and Teachers: 11~ofesso1s i ! I Ity pcr c.c,llr o f rhc renlunerat Ion received o u t s ~ d e
  28. 28. India or seventy five per cent of the remuneration as isbrought into India whichever is higher by a Professor,Teacher or Research Worker who is a citizen of Indiafrom foreign University/lnstitution.(Sec.80 R).(h) Professional Income from Foreign Sources: Fifty per cent of income derived by an lndlvldualresident in I , or s ~ v e n t y per cent thereof as isbrought into lndia whichever is higher, derived fromthe exercise of profession as an author, playright, artistfrom a foreign state or a person not resident in India,is allowed deduction. (Sec.80 H R ) .i1 Hcni1111e1.a t i~ 1 1 Iterei vcd from Services Rendered Outside India: - - Fifty per cent of te remuneration received irlforeign currencies for services rendered outside Indiaor seventy five per cent of such remuneration as is brougtinto India, whichever is highher is allowed deductionif: the assessee is a citizen o f India; he was in the employment of CentralIState Govern- ment immediately before undertaking such service only i f such service is sponsored by thhe Govern- ment of the prescribed authority.The deduction is allowed for a period of 36 months (Sec. 80 R R A ) .
  29. 29. Tax on the Income of Non-resideot Assessees: There are certain exceptions from the normalprocedure of the computation of business income in thecase of non-resident assessees. lhhese are:a Double Iaxat~onA~reement: In case o f the resident o f the country with whichIndia has double taxation agreement, the computation is tobe done in accordance with the provision of that agreement.b) Shipping Business: Only seven and a half per cent of the amountpaid/payable to a n d received by the assessee for carriageof passengers, livestock, mail or goods etc. shipped i n andoutside India, is deemed to be profits and gains from theshipping business.. (Sec.44B).(c) Business of Operation of Aircraft: A sum ~ q u a l t o five per cent of the amount paid/payable Lo 311d recclved by rile assesser on account ofcarriage of passangers, livestock, lli 1 or goods from any raplace in and outside India, is deemed to be the profitsand gains from the business of operation of aircraft.(Sec . .44 BBA) .d) Business of Exploration etc. Mineral Oils: A s r l equal ur to ten per cent of thhe amount paid/
  30. 30. payable to and received by the assessee on account ofthe provision o f services and facilities in ConfleCtionwitti or supply of plant and machinery to be used in pros-pecting for or extraction of mineral oils in or outsideIndia, is deemed to be profits and gains of such business.(Sec.44 DB).e ) nusincss of Ci vi 1 Cor~struc ionflurnkey t Power Projects: Expendi ture incurred by a non-resident assessee,being in the nature of head office expenses allowed deduc-tion in computing the profits and galns, as is limitedto the least of the following:(a) 5 per cent of the adjusted total income;(b) average head office expenditure;(c) expenditure as is attributable to the businese in India. Adjusted total income means the total incomeas computed without giving effect to the brought forwarddepreciation allowance, or losses, or deduct ion by way ofinvestment allowance or deductions under Chapter VI of thelncome Tax Act. Head Office expenditure means executive and generaladministration expenditure ~ncurretl by thhe assessee out-side India Including expenses, on rents, rates and taxes,~nsulance on business premises, salary, wages, commissionetc. to s t a f f , travelling etc. (Sec.44 C).
  31. 31. g) Income by way of Royalties, Technical Fees: No deduction of expenses i allowed s in respectof Income earned by a foreign company by way of royaltles,technical fee. The tax is withhheld at fixed rates as follows,unless modifled by a double taxation agreement:1. royal ties, tecllnical fees - 30%2. dividends - 25%3. interesth ) Incomc of Non-resldent Sportsman or Sports Association lr~comc tux 1s charged at the rate of 10% of theincome of n non-resident and non-citizen sportsman orsports assoclarion, earned in Lndia for participation inany game in india, advertisement or contribution of arti-cles on game or sports. (Sec.115 B B A ) .Incentives for New Industries ana .Hotels:- - - - -(a) Profit and gains in respect of new industrial business: undertaking and hotel - Deductions allowed are:-
  32. 32. Company Non-Company No.of Years for which deduction is allowedIndustrial under- 30% o f 25% o f 1 years 0taking not engaged profit prof i tin the manufactureor productions oflow priority items(Eleventh Schedule),or the undertakingis a small scaleindustrial under-taking, or ship.Hotel business, i f 30% of 25% of 1 years 0it is inter alia, profit prof 1 towned and carried onby a company regis-tered in Indiawith a paid upcapital of IIO~less than fivehundred thousandrupees.Business of repairs 20% of 20% of 5 yearsto ocean golng profit prof ~tvessels or otherpowered crafts.(b) Profits and g a i n s o f new industrial undertaking and hotel business in backward a r e a 8 1 Twenty per cent of the profits from an industrialundertaking o r from the business of hotel in backward area,is a1 lowed deduct ion f o r ten assessment years, providedthe industrial undertaking has begun manufacturing, andtnc hotel business, started funct loning before the 1stApril, 1990. (Sec.80 t i l l ) .
  33. 33. (c) Profits and gains from newly established small- scale industrial undertakings in certain areas: Twenty per cent of the profits from a small-scale industrial undertaking in any rural area is alloweddeduction in ten assessment yyears provided it has begunmanufacturing before 1st Apri 1 , 1990 (Sec .80 H H A )(d) Profits and gains from projects outside India: Fifty per cent profits of an Indian company orof a resident asscssee derived from thhe business ofcxccution from of a foreign project is allowed deduction,provided the consideration for execution o f work is payablein convertible foreign excange. (Sec.80 HHB).(e Profits and gains from the business of poultry farming: lhlrty three and one-third per cent of the profitsand galns derlved from business of poultry farming 1sallowed deduction. (Sec.80 JJ).Incentlves for Non-Resident Indians (NRls): To a Non-Resident Indian, who i a s cltlzen ofIndia or a person of lndian origin who is not "realdent"In India, there are certain tax benefits available a s perChapter XII-A of tne Indian Income Tax 1961. ChapterX I - of the Act contains special provisions relatingto certain income of non-residenls. It, inter alia,provides that tax on income arising from investment in
  34. 34. the following assets, or earned by way o f capital gains(long term) on the sale of these assets, is to be calculatedat concessional rate o f 20 per cent:- . Shares in an lndian company . Debentures issued byy, or deposits witn, an Indian Company which is not a private company. SecuriLies of the Central Government . Any olher assets as the Central Government may specify in this behalf by notification in the gazette (Sec.ll5E).The conditions for making a claim at concessional rateo f tax are that the Investment should be by a Non-Residentand investment should have been made in convertible foreignexchange (Sec.ll5E). As per Sec.ll5D the concessional rateis to be applied to thhe gross income. No deduction inrespect o f any expenditure or allowance i to be allowed. s When a nun-resident Indian finds that the computa-tion of nis income in accordance with the provisionso f the Act i.e., if the expenditure incurred by him inearning such income is allowed deduction, together withall deductions available to him, i t would be more bene-facial to him to do so in terms o f payment of tax thanby pnylng tax at te rate of 20 per cent, the assesseecan elect not to be governed by the provisions relating tote concessional rate benefits (20%). His income willthen be computed in accordance with the otner provisionso f tile Act, viz. he would be allowed all deductions andallowance, wnich are available under the Act for the
  35. 35. computation of his income. (Src.115 1 ) . Every year isan independent year and the option is exercisable everyyear According to Sec. 1 1511 of Indian Income Tax Act 1961,tllr b e n e f ~ of concessional t rate would be available evenaftcr the assesscc ccased to be non-resident Indian on hisoption excepting in respect of the income arising from holding of shares in an Indian company. The benefit underSec.ll5H will be available t i l l thhe assessee holds suchassets and he has not transferred or converted them intomoney According to Sec. 115G the assessee who electsto have the benefit of te concession is not requiredto file Lhhe Income Iax return if the orliy source ofincome is as mentioned in Sec.115E and the tax has beendeducted at source where i t i so deductible. s The longterm capital gain will not be chargeable to tax i f theassessee has within a period of six months of the transfer,invested or deposited the wnole of the net considerationreceived in any of those assets mentioned under section115E or in any saving certificates as noticed by theGovernment. If, however, the net consideration wouldnot thus be invested or deposited but only a portionthereof could be done, the exemption would be calculatedproportionately. In case the new asset is transferredor converted into money within a period of three yearsfrom the date of its acquisition, the benefit of exemptionis forfeited (Sec. 115 F ) . Long term capita1 asset meansar~ asset held by the assessee on the date of transfer
  36. 36. for more than thirty-six months. In case of share held ina company, the period of holding should be more than twelvemonths. (Sec. Z(29A) and Z(42A)). Net considerationis the amount of full consideration recelved or acruingas a result o f transfer minus the expenditure incurred 30in connection with the transfer.Need of Substantial Tax Effort:- - A developing country needs a substantial taxeffort I 1 s o :I substunt ial inflow of foreign investmentin (lie couillry. l two neeus should be harmonised as far lleas desirable and feasible. Foreign investors are interestedin post-tax rates o f return on capital. Taxatlon affectsforeign investment at all levels. Personal tax rates,tax rate on royalties etc. are all relevant from the polntof view of f o r e ~ g n investors.. Tax rates in the hostcountry are to b e compared withh the tax rates of thedeveloped countries and other developing countries whichare trying to attract foreign capital.. Not only thetax burden, but frequent charges in the level and structureof taxation also adversely affect the long-term stabilityo f the tax situation, and, therefore, investment prospects.In one particular year a tax is brought in, the nextyear the tax is abolished; and perhaps in the following30. Explanation ( i i ) of Sec. 115F
  37. 37. year the tax may be reintroduced. Such type of lnstablllty lowers the buslness confldence and trust. Tax concessions offered to foreign investors may broadly take three forms (i) relief from income tax; (ii) exemption from duties; and (iii) liberal depreciation allowances in the d suggestions about taxation in relation to foreign investment may be particularly emphasised. 3 1 ( i ) Foreign technical experts and foreign managerial experts should be treated equally in matters of tax con- cessions. (ill In sornc instances, tax incentives by way o f no duties or duties at concessionai rates on import of certaln specified raw materials, equipment or spare parts mayr be granted. (iii) Ihe grant of liberal depreciation allowances provides a good incentive. Depreclatlon allowances should also be extended to exempt expenditure earmarked for future expansion. This practice may induce foreign inves- tors to reinvest their prof1 t s . (iv) An investment allowance in proportion to the quantum of desired ~nvestment undertaken in the fiscal year 31. Chatterjec, .1 . K . ( 1977) Foreign Capital and Economic Development, Calcutta, Progressive Pub- lishers. pp.224-225.
  38. 38. concerned may be profitably granted for encouraging theploughing back of profit.(v) In some specific cases of foreign investmento f vital nature, some incentive may be provided to theintending i n v e s ~ o r s oy assuring them of a stable fiscalsystem for a specified period o f time, which should notnormally exceed five years. Such stable fiscal systemwould entitle the approved enterprise for the specifiedperiod to the following benefits:(a) stabilizaLion o f all tax rates at the level pre- vailing when the enterprise i approved; s(b) exemption from any modif icat ion in tax assessment and collect ion procedures during this period;(c) exemption from new taxes introduced during the period;(vi) The host country should enter into agreementwith investing countries for the purpose of avoidingdouble taxation o f the investors.Tax %stem - when efficient A tax system can be said Lo be efficient onlywhen i t 1s s o construed as to assist in the attainment ofnatlonal objectives of development and otherwise byencouraging economic efficiency and a fast rate of growthwith stability, and at the same time maintaining an accept-able balance betwecn economic and social aims. Indian
  39. 39. tax-structure, as i t has been developed after independence,has been morc o a patcllwork to add to the tax-list what- lever possible measures could be thought of. Pol i ticalconsiderations have always found favour over economicjustification and feasibility. Hardly any mode o r typeo f taxation k ~ ~ o w to any part of the world has been left nwhich has not been tried on the Indian scene. 32 The Indiantaxation policy and its e f f e c t s o n both domestic andforeign investment has generated more heated discussions,publicly, and research than other Indian Policies affectingprivate investment. Indian taxation pollcy i very complex sin nature. 3 3 A majority o f thhe executives of ~ h e r i c a n ,British and Indian companies interviewed felt that inspite of many tax inventives, lndian taxes are too severe 34India needs a substantial tax cffor-t, and also a substan-tial flow of foreign invcstmctlt in the country. Thetwo needs should he nartnonised a s far a s desirable andfeasible. 35 The important questions regarding the tax32. Prasad DN. ( 1972) External Resources in Economic Development of India, New Delhi, Sterling Publish- ing (p) p.388.33. Negandhi, Anant H.. (1966) lhe Foreign Private- Investment Climate in India, Rombayy, Vora & C o . Publishers Pvt.Ltd. p.70.34 Chatterjee P . K . (1971) p.8335. - p. 180. Ibid
  40. 40. structure in lndia, which arc o f direct interest to foreigninvestors, relatc to - (a) taxation of income of non-residents and corporations; (b) taxation of dividends (including inter- corporate dividends); (c) arrangements for double taxation relief; (d) other tax concessions and relief.Any change in tax policy vis-a-vis foreign investments,must consider two aspects, namely - (a) the possible loss of governmental revenue;and (b) the incentive effect on foreign investment.Moreover, any cllange i n tax policy has to f i t in withIndias social a n d economic policies.36Tax Planning for Foreign Collaboration in India-- The foreign collaborator should plan in sucha way that whenever feasible, the income which accrues, orarisvs outside lndia, and is not deemed to accrue orarise in lndia, i not first received in India. s I f theincome is received in lndia or is due to be receivedin lndia whether it i received s in cash or in kind wouldattract tnc tax liability. Wherever the services of36.. Kurian, K . Mathew ( 1966) Impact of Foreign Capital on Indian Economy, New Delhi Peoples Publishing Home. p . 3 2 1 .
  41. 41. foreign technicians are to be provided to the Indlanq - concern the agreement of foreign collaboration for long period of time, i t may be beneficial to send different technicians for shorter periods, to get the benefit o f taxation. In addition to this, the foreign technicians could also be appoi~~tedon the basis of the provisions i r ~ section 10(6) of the income Tax Act 1961. When a foreign collaboration agreement is executed by the Indian and foreign parties, the deallngs between them under the agreement will generally give rise to a business connection between them, resulting in the liabillty to tax in lndia, of the foreign party. A foreign company would be assessable to tax on dividends on shares of the Indian company. Eventhe dividend is actually paid or payable i f 37 oulside Irldla, i t is deemed oto have accrued in India. It i advisable that s tnc following factors must be considered with utmost care hefore an agreement of foreign collaboration i fina1ised:- s (i The technical and economic parameters governing tl~r new venture should bc studied carefully. Ihe techno- logy aspect and market potential aspect of the project should be seen and it should be s o planned s o that it should generate the maximum profits by reducing overheads 37. see Jain, Kajeev p.457.
  42. 42. and tax incidence to the extent possible, consistentwith the tax regulations.(ii) lax liability of non-resident arising in respectof income through collaboration agreement can be consider-ably reduced if sufficient care is taken both beforeentering into agreement as we11 a s during the period oflife of tne Agreement(iii) Certain provisions relating to taxation i n indus-trial col laborat ion agreement are of complex nature.The enterpreneurs should seek expert advice final isingcollaboration agreements There are various tax Incentivesavailable which should be kept in view, so that the maximumadvantage can be taken of by following the relevant pro-cedures strictly.(iv) Whlle posting Indian employees abroad, it maybe so done that they acquire the status or non-residentduring the period of service outside India so that they cana v a ~ lthe benefic o f exemption from tax in India.( V) Section Y(i)(i) of the Income Tax Act stipulatesthat "in the case of a non-rcsident, no lncome shallbe deemed to accrue or arise in lndia to him throughor from operations which are confined to purchase ofgoods in India for purposes of export". It would bebeneficial from ttihe taxation point of view of the goodsto be exported under a joint vcnture are purchased forexport by thhc non-resident. In view of above a foreign
  43. 43. collaborator should arrange its affairs in such a waythat the income received or ascruing or. arising in Indiai kept to t h e m i n ~ m u m . s( v i ) The most important factor affecting taxabilityo f income of a foreign collaborator i his residential sh ~ a ~ u in s India under the lnco[lle Tax Act. Thus. if alo~.eigncoI1abora101~is a business enterprise, i t shouldbe seer) as capital receipt and it would not bc liableLO Lax in l n d ~ a .(vii) As the provisions of Sec.44D regarding disallowanceof expenses contained in Sec.28 to 44C are applicable toIorvign cornp;iny only and the nor1 corporate foreign colla-borators are allowed deduction of expenses incurred forearning royalty of fee for technical services, it isadvantageous if Lhese services are rendered through abody which is non-corporate.(vi i i ) The foreign collaboraLion agreement should prefer-ably be made with a country with whlch India has madeDouble Tax Avoidance agree men^ and terms of agreementsl~ould be drafted in accordance with the Double TaxatlonAgreement. I t should be clear here that the Double Taxa-tion Avoidance Agreement will have over-riding effectover the provisions of Income fax Act in determiningthe taxabi 1 i ty of Income.
  44. 44. (ix) The Indian company should draft the foreign colla-borator agreement in such a way that any technical data,designs, documentalion etc. are not purchased on permanentbasis because in this case i t will be treated as capitalasset and eligible for depreciation alongwith cost ofrelated assets while i f i t i treated a s revenue expendi- sture, i t would be allowed as deduction in the year itis incurred.(x) As far as possible, the Indian concern should avoid to bear tax liability of foreign collaborator since this amount will be allowed as a deductible expense in assessment of lndian payers and it will also be grossed up wi t t ~ the amount of royalty or technical fees received by foreign collaborator for the purpose of determing tax liability arising on this income.(xi) The acquiring of any capital asset from any non-residenr should be on hire-purchase basis because anyinter.est payable on unpaid purchase price is not allowedas tleduction as business expcnditure in the assessment oflndian concern while the same is taxable in the handsof foreign collaborator as interest income accruing orarising in India.International Double Taxation--- Intcrr~a~ional Double Taxation means levy of taxesiri ~ w oor more vountries 1n respect of the same tax-payer on the same income or capital and for identical
  45. 45. periods. Ihe International Double Taxation has derogatoryeffects on thc cxchange of goods and services and movemento f capital arid people from one country to other countries.In order to mitigage the hardships o f double taxationand to improve the general investment climate by attemptingto quantify liability of taxation, and reducing the burdenof taxation. most of the countries in their scheme oftaxation provide bilateral and unilateral relief in respectof doubly taxed income. 38 The Government of lndia hasentered into "comprehensive" agreements to avoid doubletaxation with various countries providing bilateral relief.Income accruing or arising to person is taxed in accordancewith the terms of those agreements. There are some otheragreements to avoid double taxation of income arisingfrom the business in shipping and air craft transport.Unilateral Relief is available in India from double taxa-tion where there is no agreement. A deduction i allowed sfro111the lndian 11!come tax payable by a resident in Indiaof a sum calculated on the doubly taxed income at thelndian rate of tax or the rate of tax of the concernedcountry whichever 1 lower. 39 s38. Mehra. BM. International Double Taxation-Relief under lndian lncome Tax Act, Foreign Trade Review Jan. March 1388 New Delhi. Indian Institute of30 J n t i i a r ! Invc~stment Centre (Jan.1 9 9 1 ) Tax lnventives for Ir~vc~sI~ner~t India pp.5-6. See also Sec. . 9 1 in ol the lndian Income Tax Act 1961.
  46. 46. Section of the Income Tax Act 1961 empowersthe Central Government to enter into agreements withforeign countries for the purpose of relief on doubletaxation, avoidance of double taxat ion, for exchangeof information of prevention or avoidance of the taxand I r.rcovri.v of tax in lndla and abroad. Whereasclnusrs (a? ai~d ( b ) of Src.90 bolh provide relief fromdouble taxation, tle two clauses cover two distinct circum-stances. Clause (a) provides for relief in the casewilere income-tax nis already been paId both In IndIaand in forelgn country, on the same income. Clause (b) onthe other har~d,p r o v ~ d e s for avoidance of double taxat ion.40. Sec . 9 0 . igi.eerrlent with Foreign countries - The Central Government may enter into an agreement with the Government of any country outside India - (a) for thth granting of rellef in respect of income on which have been paid both Income-tax under this Act and income tax in that country, or ( b ) for the avoidance of double taxation of income under thls Acr and under the corresponding law in force i n that country; or (c) for exchange of information for the prevent ion or evasion or avoidance or income tax changeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance. or avoidance, or ( d ) for recovery of income-tax unaer this Act and under the corresponding law in force in that country. (Sec.49 A of the Income Tax Act 1922 (X1 of 1 9 2 2 ) corresponds to Sec.YO o f lncome Tax Act 1361 (XL111 of 1 9 6 1 ) . Ttle Notifications in respect of the Agreement State as follows: "Now, thernlore, in exercise o f the powers con- Irr.r~d by Section 90 o f the lncome ax Act 1961 (13 01 1061) and Sectlon 24 A of companies (profits surtax A r t 1964 ( 7 of 1961) the Central Govt. tlc~.eby direct that the provisions of the said agrecmt,nt sl~all be given e f f e c t in re Union of India").
  47. 47. Ihus in thr case of clause (a) the tax has first to bepaid and only 1tic.n does the rigtit to relief arise. In thec a w of clause ( b ) , tax shall not be paid in either country: ~ n d t i i double taxation i completely avoided.I lls s clause(c) provides for tackling the problem of tax evasionand tax avoidance by resorting to unwarranged means b y thetax payers. C l a u r (d) provides for the recovery o f tax.42A consequential change has also been made in the provisionsof the lncome Tax Act, relatir~g to recovery of arrearso f taxes, by itiserting a new section 228 A ~ companies (profits) Sur lax Act, Wealth Tax IteAct 1957 and Gift Tax Act 1958 also contain similar pro-visiorls enabling the Central Government to enter intoagreements with foreign countries for the avoidance ofdouble taxation with respect to taxes laid under theseActs. The corresponding provisions in these Acts havealso brell br.o~~gI~tn i 1 ine wi tlr tile provisions of the 1 3Iticotnr lax Ac[.ill. See Shell Company of India Ltd. V.C.I.T. (1969) 5 1 1 IR 6 m ~1 . o )42. Circular No.108 F.No.131 ( 9 ) 173 TPL dated 20th darch 1973 - Provision for enabling the Central Goverl~ment to enter into tax-treaties with foreign countries for exchange of information for prevent- ing evasion or avoidance of taxes and recovery thereof (Sec.YO was substltuted in the lncome Tax Act I961 by Finance Act 1972 with effect from 1st Apri1,1572. While clauses (a) and (b) more o r l e s s rernai tied tire same, clauses (c) and (d) wc:l-c? added tllerein, wnich provide for exchange of infortnat ion regard~ng evasion/avoidance and recovery of tax).
  48. 48. The another section of Indian Income Tax 1961Scc:tion 91, providcs lor grant of unilateral relief bythe cjovernnlenl o f India in respect of income. which hasbeen taxed both in India and i n the country with whichno agreement for relief or avoidance of double taxationexists. Where there is a reciprocal agreement, the reliefi s to be granted only under such agreement. In casethere is inconsistency between the provisions of theIncome Tax Act and the agreement, the specific provisionIn the agreement would prevail over the general provisionscontained i n the Act. However. "where there i no specific sprovision i n the agreement, i t is a basic law, i.e, incomeTax Act that will govern the taxation of income". 4 4The objective of Section 9 1 IS that the amount o f lndianincome-tax paid or the amount o f tax paid in the foreigncountry, whichever i lower is allowed as a deduction from sthe tdx payable under the Act on such double taxed income46 Relief under section YO of Indian Income TaxAct 1 6 can be obtained 91 by way of abatement or refund.Cu get a refund an application can be filed under section237 of the Act. This relief can be claimed only after tax44. Circular N o . 3 3 2 of Central Board of Direct Taxes dated April 2 . 1 9 8 2 .45. K.V.A.L.M. Ramanathan Chettiar V. C.I.T. ( 1 9 7 3 ) 88 Iern 169 ( S C ) p. 1 8 3 .16. C . V. Clive Insurance Co.Ltd. ( 1 9 7 8 ) 113 I T R 636 (S.C.)
  49. 49. has been actually paid in both the countries and theclaim is made within two years frorn the last date of theassessment year, in which income was assessable. Anorder under section 237 is an appealable order. 47 Areference is also maintainable. 48 However, no appeallies against the order o f the Income Tax Officer rejectingthe claim for abatement. If the tax i over-paid s in 49another country refund cannot be claimed in India.Ilowever, i f such over-paid tax is paid to the assesseelater on when the rate of currency exchange has altered toLlle advan~age of the asscssee, the Department cannot 50Lake iI as ~nconir in cornputirlg double taxation relief.Hclicf under scction 91(1)It1 order to lairn relief under section Y l ( 1 ) the followingrrquisites are a must:(a) that the I-csldent has been in India in the yyear in question ;(b) tire income in respect of which relief is claimed has accrued or arlsen to hlm in such a country with which there is no agreement for avoidance of47. See Section 246(i )(n) of the Indian Income Iax H C ~1961.4 8. 26 IIR 24 1 Born. and 4 0 IIR 450 Mad.50. I 538 IC. See also Foreign Trade Review, Jan. March, 1988 p . 4 5 8 9. t . ci -
  50. 50. 51 double taxation.(c) that he has paid in a country outside India income tax by deduction or otherwise under the law in force in that country. 1f the assessee sat isfies these requi rements,he will be entltled to deduction from the Indian incomeTax payable by hlm, a sum calculated on such doubly taxedincome at the lndian rate o f tax or the rate of tax ofthe said country wtllchever is lower. Sec.Yl(2) and ( 3 ) allow relief only to residentsand non-resident partners o f a resident registered f i rmrespectively. An assessment allowing the relief undersectlon 91 of the Act wi 1 1 be the regular assessmentunder the provisions of the Act and hence the order isappealable 5 2 and hence reference to 11igh Court is alsomaintainable. 5 351. or i f there is an agreement, there i no specific s provision in the agreement to cover such income and t h e r ~ f o r e , the basic law i.e. provisions o f 1ncomc.-iax Act will govern the taxation of such i ncomc.52. Sectlurl 2 4 6 ( 1 ) (c) of the Income Tax Act 196153. see o r e Irade Journal. January March 1988, p.462, 9. . G
  51. 51. List of countries with whom lndia has "comprehensive"agreement for thc avoidance of "double taxation - of 51 .income"--2. llrlgium 14. .Japan 26. South Korea3. Canada 15. Kenya 2 7 . Sri Lanka4. Czechoslovakia 1 Libya 28 Syria5. Denmark 17. Malaysla 29. Sweden6. France 18. 14auritius 30. Tanzania7. F.1t.G. IY. Nepal 31, lhalland8. Flnland 20. Newzeaiand 32. U.A.H.9 . Greece 21. Netherlands 3 3 . U.S.A10. G.D.R. 22. Norway 3 4 . U.K.11. llungary 23. Poland 3 5 . U.S.S.H12. lndoncsia 24 Romanla 36. Zambia uhow- of countries with lndia has signed limited agreementList - 7.(mainly covering shipping o r aircraft profits) 5 5 Afghal~istan (Aircraft) 10. Oman (Aircraft) Australia (Aircraft) 11. Poland (Shipping) U u l g a r ~ a (Shipping) 12. P.D.R.Y. Yemen(Aircraft) Czechoslovakia (Shipping) 13. S W Itzerland (Aircraft) Ethiopia (Alrcraf t) 14. U.S.S.R. (Shrpping) Iran (Aircraft) 15. U.S.A. (Aircraft) G.D.R. (Shipping) 16. Yemen Arab Hepublic (Aircraft Kuwait (Aircraft) U.K. ( E s ~ a t eduty) Labanon (Aircraft)54. lndia Investment Centre (Jan. 1991) Tax inceiirives for Investments In India. pp.5-6. Ibid55. -