1. Thc Indian Income T a x Act 1961 and
Foreign C o l l a b o r a t i o n in Industry in I n d i a

2. CHAPTER V 1 /
The lndian lncome Tax Act 1 6 and Foreign
91
Collaboration in Industry in India
Income Tax and Foreign Collaboration
The question 01 taxation invariably figures in
cvcry casc oi foreign collaboration. 'I'his i quite natural
s
as a i'oreign pal'ty is ultimately concerned with the net
rake home amount after paying Indian taxes and not the
gross amount. Taxation acquires significance also because
the corporate rate o f income-tax in case of foreign compan-
ies engaged in business is as high as 65 per cent. 1
'l'he Indian income-tax law contains several pro-
visions, particularly while dealing with foreigner's
income, which, tt~ough extra-territorial in a strict sense,
ar? justified because there is sufficient connection
between the foreigner and his income chargeable under
the Indian ~ a w . Income o f I~idian party to collaboration
Agrrelllenr is tax;lbIc 1 i k e any other Indian Company or
oLller forms of business enterprise as the case may be,
while taxability of foreign collaborator is dependent
upon the nature of inconles 01 the foreign collaborator
and Iris residenLial sLaLus in accordance with the provisions
I. 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. of Income Tax Act 1961. Proper understanding of tax
implications of a Foreign Collaboration Agreement have
significance to both the parties to the Collaboration
Agreement. 3
1.iberal isat ion of lricome 'Tax Law
It has brrr~ decided by the Government of Indin
CI
that the Income 'Tax Act will be liberalised and rtionalised
4
with other two 'important laws i.e. FERA and Company Law.
'rhe 'Tax Liability
The tax liability of a foreign investor on his
income from a tect~nical/financial collaboration agreement
in India will depend upon whether the foreign party is a
company or an individual. ' I tax liability will also
depend on the nature o f income. A foreign investor is
concerned with not only his own tax liability but also
tne liability of the joint venture company. In all foreign
collaboration agreements, i t i necessary for the cor.ce?ned
s
parties to indicate as to how the tax liability in respect
of tilt. various categories o f income i proposed
s to be
met and by whom. 'The Indian Income 'Tax Law charges the
tax on the total income received by or accrued to a person,
including the income earned by a foreigner or a foreign
3. see Nabhi's, 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. 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 tax
net 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 y
be attributed to operatlons carrled out in lndla. A
foreigner i s liable to pay income-tax in India on all
the income wliicli he receives in India or which accrues
or arises to him in India or which i s deemed t o accrue
or a r i s e i n I n d i a .
The tax liability willalso depend on the nature
of the income, w h i c t ~ may consist of one o r more of the
following 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 his
own tax liability hut also the. liability of the joint
v e n t u r e company.

5. 5
'l'axeson Payments for Technical Collaboration
'Taxes leviable on income derived from technical
collaboration are as below:
Class of Con~uanv arid nature of lncome Hate o f Income
Tax
Foreign companies, i.e. companies which
have not made the prescribed agreements
for the declaration and payment o f divi-
dends within lndia so as to be classlfied
as 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 Income
'rax 1961, frequent amendments made therein, vast judlcial
rulings involving interpretations o f the relevant provisions
ar~d issues r.cx1ating to foreign collaboration agreements,
tne large nu~nbe~. f Double Taxation Avoidance Agreements
o
entered into by the Government with various countries
5. 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. of the world and the relevant circulars issued by the
Central 8oard of Direct 'Taxes, from time to time has made
this aspect very complex. Relevant provisions of Indian
lnrolrle Tax l c
it 1961 in respect of Foreign Collaboration
having special significance are contained in a number
7
of sections.
-
'Tax Implications of ForeignCollaboration Agreements
The tax implications of foreign collaboration
agreements involve the consideration of the following
two 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 foreign
co1laborators. tnc foreign collaboration agreements can
bc 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. (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 Income
I ' Act provides Tor charging o f royalty to Indian income-
tax by creatlrig a fiction that when royalty i paid
s to
a nun-resident it is deemed to accrue or arise in lndia
and hence, ct~arged to tax in India. The proviso to section
Y(i )(vi) contains an importarlt provision regarding the
taxability of the initial lumpsum paid to a foreign parti-
c i panr under the col laborat io11 agreement made before
1st April 1976. In case where the agreement between
tl~e parties were entered into before 1st April 1976 but
because of Government's requirement supplementary agreement
was executed after 1t
s April, 1976, it was held that
the provisions of Income-'l'ax Act prior to amendments
c.1 tc~ctive l o l 1st April
rlr 1976 will be applicable. 8
n. mereo or Satellite L.td. v . I.'I'.O. (1980) 121 1'rR
311 (Guj).

8. A combined reading of section 9(1)(Iv) and the
proviso to that section clarifies that no income shall
be deemed to accrue or arise in India by way of royalty
as consists of a lumpsum consideration for the transfer
outside India of, or imparting of information outside India
in 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 before
1st April, 1976 and the agreement is approved by the
Central t.
tiovernme~~ Prior to introduction of Sect ion
9(l)(iv) by the plnance Act 1976 there was no specific
~~.ovision
under ti
le Indian Income Tax Act dealing with
t11e tax liability of l'oreign participants in collaboration
agreenlents. 'l'lierefore, the normal law used to prevail
where under a n agreement all services were rendered outside
India, and there was no business connection and payment
was recrlved outside
India, fees for technical knowhow
9
were held as non taxable in India.
(b) Iloyal t y and 'l'echnical Fees - In Section
t)(l)(vi) along with the proviso and the explanation to i t
the meaning o f royalty has been explained. Similarly fee
for technical services is defined in Explanation 2 to
9. 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. Srct ion Y ( 1 ) ( vi i ) . 'I'hcse dcf ini t ions have been introduced
I'ron~I S L
~ n t oincome-'l';lx Act will1 c . T f c c ~ June 1976.
Regarding taxability of royalty, if the foreign
participants are involved in some activities in lndia,
royalty will be taxed on Lhe basis of accrual of income
in India. But in a case where no services whatsoever
are performed by the foreign participants in India and
the payment is also received by them outside lndia, royalty
would not be taxed in India. 10
As far a s i'c,cs for technical services are concerned
it is important to note that the deeming provisions under
section 9 does not apply in case the agreement for such
s e r v ~ c e s was made before 1st A p r i l , 1976. Therefore, in
order to tax fees for technical services payable in pursu-
ance of an agreement made before 1st April 1976, the said
fees 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
lie
thereof accrues or arises, directly or indirectly, though
or from any buslness connection in lndia. Broadly speaking
such fees shall not be taxable in lndia i f the services
10. See VDO 'l'ackometer 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. 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 to
the levy of tax., in respect o f supply o f machinery and
other equipment by a foreign participant under a collabora-
tion agreement, between the case of an agreement entered
into befor(> 1 t April
s 1976 and the case of an agreement
entered into after that date. l'hus, prof 1 ts relating
to the supply o f any machinery or equipment in India shall
be taxable in lndla only if there i a business connection
s
between 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, the
supply o t marhlnfry 1s made in such a manner that a b u s ~ n e s s
conr~ect
ion is established and. for that reason, profit
out of such supply is taxable in India, the foreign parti-
cipant shall be liable to pay tax on the profit made by him
on the supply of equipment to India. I t may be noted here
that the entire amount of profit will not be taxable
in India. 'The income of the non-resident shall be only
such part of the income as is reasonably attributed t the
o
12. see UDO 'I'actlometer 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. 14
overations carried out in India.
(d) Dividend on shares Allotted to Foreign Participants
either ~ r i lieu of 'l'echnical know-how services or
Otherwise:
Prior to the amendment introduced in the Income
'I'ax Act by Finance Act 1976, by inserting a new section
115-A, the law was that a foreign company which received
dividend from an Indian company was entitled to deduction
of 6 5 per cent of the dividend under section 8 - ! 5 o f the
0b1
Income 'I'ax Act. The foreign company paid tax on the
dividend only on the balance amount of the dividend i.e.
35 per cent of the gross amount of the dividend received
by it. The rate of tax was 73.5 per cent, thus, a foreign
company would pay tax at the rate of 73.5 per cent on 35
per cent of the dividend received oy it. 'The effective
rate of tax was 25.725 per cent. I t may be further men-
tioned that the foreign company was also entitled to
deduct any reasonable sums paid by i t for earning the money
borrowed to purchase shares. l6 The Finance Act 1976
has introduced a nrw section 115-11 effective from 1st June
1976. 'I'he new PI-ovision prescribes a flat rate of 25
14. Agrawal, i 1 . P . p. 121
15. 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 '1'11 329 o m . ; hlotimed Ghouse v. C. 1 .T. ( 1963)
'19 I ' I I . 127 (Mad. ) .

12. per cent o i the gross amount of dividend without allowing
r
any other deduction from dividend income.
(e) Allotment of Shares against Technical Know-how:
Where shares in Indian companies are allotted
i n consideration for the plant and machinery, the income
embedded in the payments would be recceived in India as the
shares in I Indian colnpanies are located in India and
would accordinglyattract liability to income-tax as
I 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 in
pursuance or agrc,clncnts made on or aftel- 1st Apri I , 1976 are
dc7;lltli witti i n lhc3 following paras:
(I) Initial lumpsum:
The term initial ' lumpsum' has not been defined
in the lncome 'l'ax Act a s such. however, while defining
the term 'royalty' (Expianation 2 to Section 9(1)(vi), it
has been speci f lcal ly provided that royalty includes
any l umpsum collsiderat ion. Therefore, i t can be inferred
tll:~
t the lumpsurn considerat ion is only' a form of royalty,
the only difference being that whereas royalty is generally
a recurrent feature based on production or sales, lump

13. sum payment is a predetermined amount payable by the
Indian counterparl under a collaboration agreement, irres-
pect ive of product ion or sale. Sect ion 115-A prescribes
the rates of income-tax in cases of foreign companies
and in respect o f agreements made after 31st March 1976
and approved by the Central Government. In case the
foreign participant in tne agreement i not
s a company
(Corporate body), Section 115-A does not apply and rate
of tax will be normal rate of tax in India. Whereas prior
to 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 from
1st Jurle 1976 placing a ceiling on head-of f ice expenses.
'l'here i rlo cei I ing on the claim of other expenses which
s
do not fall under the category of head-office expenses.
(b) Supply of Drawings and Designs:
'I'axability of foreign parties who supply drawings
and designs will be primarily governed ~y the provisions
of section 9 of the Indian Income 'Sax Act 1961. A a
s
general Legal proposition, the foreign companies are
liable to pay income tax @ 30% (w.e.f. Assessment Year
1387-88) o f the gross lump sum amount received bythem for
supplying the said drawings and designs. Where the foreign
party outrightly sells drawings. and designs outside India
without keeping any business connection in India, no
tax can be charged on such transaction in India, provided

14. i ~ i o~ t r ~ Is ~:arr.ied our by the foreign party in
I r ~ d ~ and both thc property in goods sold and the payment
a
lor the same take place outside India.
(c) Royalty:
The term 'royalty' is defined in Explanation
2 to Section 9(l)(vi) of the lncome Tax Act. I t clarifies
that it includes a l
ly lump sum consideration but excludes
a n y consideration wt1ic11 would be the incorne of the recei-
p~erl chargeable
t under the head 'capital gains' Sect ion
115-A o f the Income Tax Act prescribes the rate of income-
tax in r s ) . : of royalty.
clcrt 'I'he rate of tax in case of
foreign 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 by
trlem without the deduction of any expenses. The rate
of 30% is applicable only i n rcspect of such collaboration
agreements which have been entered into after 31st March
1976 and are approved by the Central Government of India.
But with effect from 1st June 1976, a new section Section
44-C has been introduced placing a ceiling of 5 per cent
on the claim of llead Office Expenses. There is no restric-
1Y
tion ol other cx(1ellses.
i
- - -
18. 1'revlously rhc rate was 40% on the gross amount
ol 1~1IynIty.
13. Agrawal 1i.P. pp. 111-112.

15. (d) Fees for Technical Services
I defi~l~tion
of 'fees for technical services'
has 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 for
srrvices in (:onnrction with construction, assembly,minining
or llke projccr, such conslderat~on is excluded from
the! definitio!~of 'fees for technical services'. Where the
foreign participant in the agreement receives the fees for
suctl technical services outside India and in pursuance
of a contract executed outside India, there will be no
charge to tax provided no business connection i established
s
1 1 e scope of the term 'fees for technical services' is
very wide and almost every service rendered by foreigners,
whether in India or outside India is caught in the tax
net. Section 115-A of the Income Tax Act prescribes
the rate of the tax in respect of the technical fees
received 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 are
entered into with an arangement for sharing profits.
In the case of companies, sharing may be by way of acquiring
shares in the Indian Company. Shares are also allotted in
consideration of equipment supplied by a foreign participant

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. l't~e dividend is chargeable to tax at the rate
o f 25 per vent o f the gross amount of dividend i f the
non-resident is a corporate body. But if the non-resident
is not a corporate body, the tax chargeable would be
according 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 'I'ax Law does not contain any specific
pl.ovisivn for. taxing the payment received by a forelgn
par.ticipant o f supply of machinery and/or other equipments
to the lndlan concerns. Therefore, for such payments
normal law prevai 1s. The normal law, broadly speaking
is that a non-resident is taxable in India for the income
received in lndia of which accrues or arises to him in
India. 'Therefore, where the supply of machinery etc.
is made in a manrler that no income i received, or no
s
incorne accrues or arises in India, no tax will be charged
in lndia. Ilowevcr, as per the provisions o f section 9,
I I' I he non-resident has any 'business connect ion ' in
lndia. he will be liable to pay tax in lndia on the profit
earned by him related to the supply of equipment in India.
'l'l~c. rate of tax payable in lndia on the income from sale
01' equipment vtc. would be at thc rate of 6 5 per cent

17. (w.e. f . assessment year 1987-88)20 in case non-resident is
a corporate body. In other ccases, the tax payable would
be as per rates prescribed by Income Tax Act. A solitary
transaction of purchase of cap1 tal goods cannot amount
to a business connection between the assessee and a forelgn
cornpa ny . 2 1
(g) interest:
I ' law relaling to taxing interest paid to a
non-resident has undergone a substantial change w i t h effect
from 1st June 1976 after t r amendment of section 9 by
ie
the Finance Act 1976. The taw prior to the amendment
i .c. upto 3 1 s ~ May 1676 was that interest was deemed to
accrue or arise in India if it represented an income
through or from any money lent at interest and brought
into India in cash or k i n d . 'I'hus, the interest ws subject
to tax if the principal amount was brought into India
in cash or k i n d . I'his provision must be construed to
mean the bringing of money on interest outside India and
Its brlnglng into lndia should be integral part of one
Composite transaction or arrangement.2 2
20. 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 '1'H 1018 (Kar.)
1
22. 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 1'TR 1 3 4 ( ! 3 5
1a-- Grindlays Bank Ltd. (1969) 72
1'l.n 1 2 1 tcat-4.

18. 'I'he law has gone a substantial change with effect
from 1 t June
s 1976. Section 9(l)(v) now provides that
income by way of interest would be deemed to accrue or
arise in lndia if it is payable by the Government or
a 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 in
section 2 of the Income 'I'ax Act for defining interest.
In section Y(l)(i) the words "through o r from any money
but o n interest brought into India in cash o r kind" have
been deleted with effect from 1 t J u n e 1976.
s T h e effect
of these changes is that interest received by a non-
resident beccomes taxable in lndia (except where money
IS used I 11 II<.SSu u ~ s i d 111(lia
I~usi ~~ ) i 1' tllr same i pa id
s
by thc company 01'by a pri'son who is a resident in lndia
ir,~.espective of the fact whether the moneys have been
brought into lndia o r used irl India o r not. 'I'he implica-
lions o f the amendment are far reaching andy they have
substantially widened the tax net to cover interest payable
o r a1 l moneys borrowed outside lndia. General exempt iolls
from tax a!-c howevr*r avai table under Section 10(4). 10(4A),
lO(4b) and 10(15)(1v) of the Income 'I'ax Act against income
from 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 the
tiovcrnlncnt of India bcforr 1 t April
s 1976 but the actual

19. agreement is c'ntercd into on or. after 1st April 1976.
In such ccnscs, the proposal for the agreement would
have beer1 prevai ling upto 31st March 1976. Therefore. i t
will not be proper to apply the provisions o f income-
tax law, in such cases, which have come into force after
31st March 1976. Keeping thls matter in view, the Govern-
rncnt of India at tile time o f maklng the amendment in
the law by means of Finance Act 1976 have clarified
that wherever the agreement has been entered into on
or after 1t
s April 1976 and it is in accordance with
the proposals approved by the Central Government before
that date, thc law which came into force after 31st March
1976 will not be imposed upon the foreign collaborator. In
this type of situation, the foreign collaborator has
a option to make; i f the collaborator s o selects, he can
exercise a choice by furnishing a declaration in writing
to the lncorrre 'I'ax Officer that the agreement may be regar-
ded as an agreement made before 1 t April
s 1976. Such
a declaration has been supposed to be made before the
expiry o f time allowed for f,iling tne return of income for
the assessment year 1977-78, or the assessment year in
respect of whlch such income first becomes chargeable
to tax whichever assessment year is later. Where no
such 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
:~l'tc:r.

20. Liability of Foreign Participant
Normally the foreign collaborator will be a non-
resident for tax purposes.. The scope of total income of
such non-resident is determined by tne provisions of
section 5(2). I t will include all income from whatever
source derived which is received or is deemed to be received
in lndia in the relevant previous year or on behalf of
such person and/or which accrues or arises or i deemed
s
to accrue or arise to him in India during such year.
' ' e explanalion
Ih 1 to section 5(2) makes it clear that
income accruing or arising outside India shall not be
deemed to be received in lndia for this purpose, mereIy
by reason of the fact that it i taken into account
s in
a balance sheet prepared in India. The type of income
that are deemed to accrue or arise in India are specified
in Sec tion 9.
It i important
s to state here that prior to the
1976 amendment in the Income Tax Act in sec tion 9 that
was no specific provision under the Income Tax Act, dealing
with the tax liability o f foreign participants in colla-
boration agreement. 'I'hehrefore, the normal law used
to be applied.2 4 As per the normal provisions of section 9
the income of non-residents could be taxed in India only if
24. Institute of Company Secretaries of India (1986)
Foreign collaboration policy and procedures p.296-7

21. the same comes out of a business connection 111 Indla.
The qui n~ essent ial element to establ lsh a buslness
connection is the element of contlnulty between the buslness
of non-resident and the activity in India and the relation
between the two must constitute to the earning of income.25
Capital Receipt - Revenue Receipt
- and
One pertinent aspect which is relevant is deter-
mination of the foreign participant's liability to see
whether the amount received for the supply of technical
know-how is a receipt on capital account or revenue account
'l'he answer of ~llis will certainly depend on the facts
of the case. 'Tie nature of the outgoing in the hands
of the Indian participant will not always be determinatlve
01' the
nature of the receipt in the hands of the foreign
party..26
Amortlsation of lumpsum conslderatlon paid
Section 35AB, inserted in tl
ie Income-Tax Act by
the Finance Act 1985, with effect from 1st April 18
96
(assessment year 1986-87) provides for amort isation of
any lumpsum consideration paid by a tax-paper for acquiring
any know-how for use for the purpose of business over
25. 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
&
1'I'H 20(SC); Ulue Star. Urlgii&ering Co. (Bom.)(P)Ltd.
v.. 1 (11369)73 1'I'R 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. a period of six years. In respect of such acquisition from
approved laboratory. University or Institution, the amorti-
sation will be permitted within a period of three years.
Fur tlr is purpose ' know-l~ow'means any industrial informa-
tion or technique likely to assist in the manufacture or
processing of goods or in thhe working of a mine, oil well
or other sources of mineral deposits (including the search
for, discovery or testing of deposits or the winning of
access thereto).
Tax Incentives and concessions on Investment in lndia"'
Under Indian Income-Tax Act 1 6 some incentives
91
have been given for encouraging investment in India.
Incentives for New Industries and Hotels:
There are special provisions under the Income
'Tax Act 1961 for special relief or deduction for the
develoyrnent of new industry or hotel business in India..
'I'hese are as follows:-
(a) Under Section 80 1) deductions are allowed out
of profit and gains in respect of new industrial undertak-
ing and hotel business. In case of a company 30 per
cent of profit will be allowed as deduction for 1 years
0
in case of Industrial Undertaking not engaged in the
manufacture o f low priority items (Eleventh Schedule) or
27. (January 1991) I. I C . Tax incentives for Investment
in India p.28-37.

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 percentage
of deduction will be 2 5 per cent. In c a s e o f Hotel business
if it is inter alia owned and carried o n by a company
registered in India with a paid up capital o f not less
than five hundred thousand rupees. 30 per cent o f profit
will be allowed a s deduction for a period of ten years
in the c a s e o f a company and in c a s e o f non-company 25
per cent o f profit will be allowed a s deduction. In c a s e
of busirless of rcpai rs to occarl going vessels o r other'
powcrcd c r a f t s Lllr perccnlagc o f deduciion allowed is 2 0
per cent both i r i casr o f comparly and non-company assessee
arld 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:
'I'wenty per ccrlr of Llie profits from an industrial
undertaking o r from b u s ~ n e s s o f hotel in backward a r e a , is
allowed deduction for ten assessment years, provided the
industrial undertaking has begun manufacturing, and the
hotel business, started functioning before 1st April 1890
(Sec. 80 H H ) .

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 company
or of a resident assessee derived from the business of
execution of a foreign project is allowed deduction,
p r o v ~ d e d the consideration for execution of work is payable
in convertible foreign exchange (Sec. 80 HHB).
(e) Profits and gains from the business of poultry
farming:
'I'hirty three, and one-third per cent o f profits
and gains derived from business of poultry farming is
allowed deduction (Sec. 80 JJ).
Export Incentives
Certain benefits are available under the Income-Tax
Act for undertaking a c t i v l t ~ e s which are export-oriented,
or one earning foreign exchange..
(a) Industries in Free 'l'rade Zones or are Export
or' I P I 1 t i.>(l:
('oml)I~:r(, "I'ax Ilol~day" IS provided to industrial

25. facturing, assembling or processing of goods or recording
of programmes on any disc, tape, perforated media or other
information storage device, for a period of 5 successive
years w i t h i n a fran~ework of 8 years in which production or
manufacture have started (Sec. 1 A).
0
Similar benefit is provided for newly established
100% tixport-Oriented undertakings, outside the Free-Trade
Zones. (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 of
goods in India for the purpose o f export. 2 8
(c) Profits and gains from export business:
An Indian company or a resident asaessee who
is engaged in the business of export of Indian goods
or merchandise (other than mineral oil, and minerals
and ores) and softwares is allowed deduction of the entire
profits derived from the export of such goods or merchandise
or softwares; provided the sale proceeds are received in
convertible foreign excchange. Convertible foreign exchange
includes amount reeived in non-convertible rupees from
bilateral aountlng ountries and reeipts in Indian rupees
under Government to tioverrimen t credi t . However. i t does
28. Explanation ( b ) of Se.9 (i) ( i ) o f the Indian
Income Tax Act 1961.

26. 29
not 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 cent
of profit which is derived by an Indian company or a
resident 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/CL3D'I' circular rio.575 dated August
31. 1990.

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 the
profits out of the remaining profits as is debited in
the proflts and loss account and credited to reserve
account to be utllised for the purpose o f business, derived
by the assessee engaged in hotel business or in the business
of tour operator or of a travel agent from the services
provided to foreign tourists. The benefit is available If
tne services are rendered to foreign tourists and amount is
received in foreign exchange or is brought in India in
convertible foreign exchange. (Sec.80 HHD).
(f) lioyalties and Fees etc. from Foreign Parties:
Fifty per cent of the income received in or brought
into India by an lndian company is allowed deduction, i f i t
is received as income by way o f royalty, commission, fee or
any other similar payment from foreign Government or enter-
prise. The agreement for tee, commission etc. must be
approved by the Chief Commissioner of the Director General.
The amount must be received in convertible foreign exchange
or is brought into India, within six months from the end of
the relevant year. (Sec.80 0 ) .
(P) Kemuneratlon from Foreign Sources in Case of
and 'Teachers:
1'1~ofesso1's
i
!
I I'ty pcr c.c,llr o f rhc renlunerat Ion received o u t s ~ d e

28. India or seventy five per cent of the remuneration as is
brought into India whichever is higher by a Professor,
Teacher or Research Worker who is a citizen of India
from foreign University/lnstitution.(Sec.80 R).
(h) Professional Income from Foreign Sources:
Fifty per cent of income derived by an lndlvldual
resident in I , or s ~ v e n t y per cent thereof as is
brought into lndia whichever is higher, derived from
the exercise of profession as an author, playright, artist
from 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 irl
foreign currencies for services rendered outside India
or seventy five per cent of such remuneration as is brougt
into India, whichever is highher is allowed deduction
if:
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. Tax on the Income of Non-resideot Assessees:
There are certain exceptions from the normal
procedure of the computation of business income in the
case of non-resident assessees. l'hhese are:
a Double 'I'axat~onA~reement:
In case o f the resident o f the country with which
India has double taxation agreement, the computation is to
be done in accordance with the provision of that agreement.
b) Shipping Business:
Only seven and a half per cent of the amount
paid/payable to a n d received by the assessee for carriage
of passengers, livestock, mail or goods etc. shipped i n and
outside India, is deemed to be profits and gains from the
shipping 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 r'ecclved by rile assesser on account of
carriage of passangers, livestock, lli 1 or goods from any
ra
place in and outside India, is deemed to be the profits
and 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. payable to and received by the assessee on account of
the provision o f services and facilities in ConfleCtion
witti or supply of plant and machinery to be used in pros-
pecting for or extraction of mineral oils in or outside
India, is deemed to be profits and gains of such business.
(Sec.44 DB).
e ) nusincss of Ci vi 1 Cor~struc ionf'l'urnkey
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 limited
to 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 income
as computed without giving effect to the brought forward
depreciation allowance, or losses, or deduct ion by way of
investment allowance or deductions under Chapter VI of the
lncome Tax Act.
Head Office expenditure means executive and general
administration expenditure ~ncurretl by thhe assessee out-
side India Including expenses, on rents, rates and taxes,
~nsul'ance on business premises, salary, wages, commission
etc. to s t a f f , travelling etc. (Sec.44 C).

31. g) Income by way of Royalties, Technical Fees:
No deduction of expenses i allowed
s in respect
of 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. interest
h ) Incomc of Non-resldent Sportsman or Sports
Association
lr~comc tux 1s charged at the rate of 10% of the
income of n non-resident and non-citizen sportsman or
sports assoclarion, earned in Lndia for participation in
any 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. Company Non-Company No.of Years
for which
deduction
is allowed
Industrial under- 30% o f 25% o f 1 years
0
taking not engaged profit prof i t
in the manufacture
or productions of
low priority items
(Eleventh Schedule),
or the undertaking
is a small scale
industrial under-
taking, or ship.
Hotel business, i f 30% of 25% of 1 years
0
it is inter alia, profit prof 1 t
owned and carried on
by a company regis-
tered in India
with a paid up
capital of IIO~
less than five
hundred thousand
rupees.
Business of repairs 20% of 20% of 5 years
to ocean golng profit prof ~t
vessels or other
powered 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 industrial
undertaking o r from the business of hotel in backward area,
is a1 lowed deduct ion f o r ten assessment years, provided
the industrial undertaking has begun manufacturing, and
tnc hotel business, started funct loning before the 1st
April, 1990. (Sec.80 t i l l ) .

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 allowed
deduction in ten assessment yyears provided it has begun
manufacturing 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 or
of a resident asscssee derived from thhe business of
cxccution from of a foreign project is allowed deduction,
provided the consideration for execution o f work is payable
in convertible foreign excange. (Sec.80 HHB).
(e Profits and gains from the business of poultry
farming:
l'hlrty three and one-third per cent of the profits
and galns derlved from business of poultry farming 1s
allowed deduction. (Sec.80 JJ).
Incentlves for Non-Resident Indians (NRls):
'To a Non-Resident Indian, who i a
s cltlzen of
India or a person of lndian origin who is not "realdent"
In India, there are certain tax benefits available a s per
Chapter XII-A of tne Indian Income 'Tax 1961. Chapter
X I - of the Act contains special provisions relating
to certain income of non-residenls. It, inter alia,
provides that tax on income arising from investment in

34. the following assets, or earned by way o f capital gains
(long term) on the sale of these assets, is to be calculated
at 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 rate
o f tax are that the Investment should be by a Non-Resident
and investment should have been made in convertible foreign
exchange (Sec.ll5E). As per Sec.ll5D the concessional rate
is to be applied to thhe gross income. No deduction in
respect 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 provisions
o f the Act i.e., if the expenditure incurred by him in
earning such income is allowed deduction, together with
all deductions available to him, i t would be more bene-
facial to him to do so in terms o f payment of tax than
by pnylng tax at te rate of 20 per cent, the assessee
can elect not to be governed by the provisions relating to
te concessional rate benefits (20%). His income will
then be computed in accordance with the otner provisions
o f tile Act, viz. he would be allowed all deductions and
allowance, wnich are available under the Act for the

35. computation of his income. (Src.115 1 ) . Every year is
an independent year and the option is exercisable every
year According to Sec. 1 1511 of Indian Income Tax Act 1961,
tllr b e n e f ~ of concessional
t rate would be available even
aftcr the assesscc ccased to be non-resident Indian on his
option excepting in respect of the income arising from
holding of shares in an Indian company. The benefit under
Sec.ll5H will be available t i l l thhe assessee holds such
assets and he has not transferred or converted them into
money According to Sec. 115G the assessee who elects
to have the benefit of te concession is not required
to file Lhhe Income 'I'ax return if the orliy source of
income is as mentioned in Sec.115E and the tax has been
deducted at source where i t i so deductible.
s The long
term capital gain will not be chargeable to tax i f the
assessee has within a period of six months of the transfer,
invested or deposited the wnole of the net consideration
received in any of those assets mentioned under section
115E or in any saving certificates as noticed by the
Government. If, however, the net consideration would
not thus be invested or deposited but only a portion
thereof could be done, the exemption would be calculated
proportionately. In case the new asset is transferred
or converted into money within a period of three years
from the date of its acquisition, the benefit of exemption
is forfeited (Sec. 115 F ) . Long term capita1 asset means
ar~ asset held by the assessee on the date of transfer

36. for more than thirty-six months. In case of share held in
a company, the period of holding should be more than twelve
months. (Sec. Z(29A) and Z(42A)). Net consideration
is the amount of full consideration recelved or acruing
as a result o f transfer minus the expenditure incurred
30
in connection with the transfer.
Need of Substantial Tax Effort:
- -
A developing country needs a substantial tax
effort I 1 s o :I substunt ial inflow of foreign investment
in (lie couillry. ' ' l two neeus should be harmonised as far
lle
as desirable and feasible. Foreign investors are interested
in post-tax rates o f return on capital. Taxatlon affects
foreign investment at all levels. Personal tax rates,
tax rate on royalties etc. are all relevant from the polnt
of view of f o r e ~ g n investors.. 'Tax rates in the host
country are to b e compared withh the tax rates of the
developed countries and other developing countries which
are trying to attract foreign capital.. Not only the
tax burden, but frequent charges in the level and structure
of taxation also adversely affect the long-term stability
o f the tax situation, and, therefore, investment prospects.
In one particular year a tax is brought in, the next
year the tax is abolished; and perhaps in the following
30. Explanation ( i i ) of Sec. 115F

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 may
r be granted.
(iii) 'I'he 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. concerned may be profitably granted for encouraging the
ploughing back of profit.
(v) In some specific cases of foreign investment
o f vital nature, some incentive may be provided to the
intending i n v e s ~ o r s oy assuring them of a stable fiscal
system for a specified period o f time, which should not
normally exceed five years. Such stable fiscal system
would entitle the approved enterprise for the specified
period 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 agreement
with investing countries for the purpose of avoiding
double taxation o f the investors.
Tax %stem - when efficient
A tax system can be said Lo be efficient only
when i t 1s s o construed as to assist in the attainment of
natlonal objectives of development and otherwise by
encouraging economic efficiency and a fast rate of growth
with stability, and at the same time maintaining an accept-
able balance betwecn economic and social aims. Indian

39. tax-structure, as i t has been developed after independence,
has been morc o ' a patcllwork to add to the tax-list what-
l
ever possible measures could be thought of. Pol i tical
considerations have always found favour over economic
justification and feasibility. Hardly any mode o r type
o f taxation k ~ ~ o w to any part of the world has been left
n
which has not been tried on the Indian scene. 32 The Indian
taxation policy and its e f f e c t s o n both domestic and
foreign investment has generated more heated discussions,
publicly, and research than other Indian Policies affecting
private investment. Indian taxation pollcy i very complex
s
in nature. 3 3 A majority o f thhe executives of ~ h e r i c a n ,
British and Indian companies interviewed felt that in
spite of many tax inventives, lndian taxes are too severe 34
India needs a substantial tax cffor-t, and also a substan-
tial flow of foreign invcstmctlt in the country. The
two needs should he nartnonised a s far a s desirable and
feasible. 35 The important questions regarding the tax
32. Prasad DN. ( 1972) External Resources in Economic
Development of India, New Delhi, Sterling Publish-
ing (p) p.388.
33. Negandhi, Anant H.. (1966) l'he Foreign Private-
Investment Climate in India, Rombayy, Vora &
C o . Publishers Pvt.Ltd. p.70.
34 Chatterjee P . K . (1971) p.83
35. - p. 180.
Ibid

40. structure in lndia, which arc o f direct interest to foreign
investors, 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 with
India's social a n d economic policies.36
Tax Planning for Foreign Collaboration in India
-
-
The foreign collaborator should plan in such
a way that whenever feasible, the income which accrues, or
arisvs outside lndia, and is not deemed to accrue or
arise in lndia, i not first received in India.
s I f the
income is received in lndia or is due to be received
in lndia whether it i received
s in cash or in kind would
attract tnc tax liability. Wherever the services of
36.. Kurian, K . Mathew ( 1966) Impact of Foreign Capital
on Indian Economy, New Delhi People's Publishing
Home. p . 3 2 1 .

41. foreign technicians are to be provided to the Indlan
q - 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. 'I'he 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. and tax incidence to the extent possible, consistent
with the tax regulations.
(ii) 'l'ax liability of non-resident arising in respect
of income through collaboration agreement can be consider-
ably reduced if sufficient care is taken both before
entering into agreement as we11 a s during the period of
life 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 ising
collaboration agreements 'There are various tax Incentives
available which should be kept in view, so that the maximum
advantage can be taken of by following the relevant pro-
cedures strictly.
(iv) Whlle posting Indian employees abroad, it may
be so done that they acquire the status or non-resident
during the period of service outside India so that they can
a v a ~ lthe benefic o f exemption from tax in India.
( V) Section Y(i)(i) of the Income Tax Act stipulates
that "in the case of a non-rcsident, no lncome shall
be deemed to accrue or arise in lndia to him through
or from operations which are confined to purchase of
goods in India for purposes of export". It would be
beneficial from ttihe taxation point of view of the goods
to be exported under a joint vcnture are purchased for
export by thhc non-resident. In view of above a foreign

43. collaborator should arrange its affairs in such a way
that the income received or ascruing or. arising in India
i kept to t h e m i n ~ m u m .
s
( v i ) 'The most important factor affecting taxability
o f income of a foreign collaborator i his residential
s
h ~ a ~ u in
s India under the lnco[lle 'Tax Act. Thus. if a
l'o~.eigncoI1abora101~is a business enterprise, i t should
be seer) as capital receipt and it would not bc liable
LO Lax in l n d ~ a .
(vii) As the provisions of Sec.44D regarding disallowance
of expenses contained in Sec.28 to 44C are applicable to
I'orvign cornp;iny only and the nor1 corporate foreign colla-
borators are allowed deduction of expenses incurred for
earning royalty of fee for technical services, it is
advantageous if Lhese services are rendered through a
body which is non-corporate.
(vi i i ) The foreign collaboraLion agreement should prefer-
ably be made with a country with whlch India has made
'Double 'Tax Avoidance agree men^' and terms of agreement
sl~ould be drafted in accordance with the Double Taxatlon
Agreement. I t should be clear here that the Double Taxa-
tion Avoidance Agreement will have over-riding effect
over the provisions of Income 'fax Act in determining
the taxabi 1 i ty of Income.

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 permanent
basis because in this case i t will be treated as capital
asset and eligible for depreciation alongwith cost of
related assets while i f i t i treated a s revenue expendi-
s
ture, i t would be allowed as deduction in the year it
is 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 any
inter.est payable on unpaid purchase price is not allowed
as tleduction as business expcnditure in the assessment of
lndian concern while the same is taxable in the hands
of foreign collaborator as interest income accruing or
arising in India.
International Double Taxation
---
Intcrr~a~ional
Double 'Taxation means levy of taxes
iri ~ w oor more vountries 1n respect of the same tax-
payer on the same income or capital and for identical

45. periods. 'I'he International Double Taxation has derogatory
effects on thc cxchange of goods and services and movement
o f capital arid people from one country to other countries.
In order to mitigage the hardships o f double taxation
and to improve the general investment climate by attempting
to quantify liability of taxation, and reducing the burden
of taxation. most of the countries in their scheme of
taxation provide bilateral and unilateral relief in respect
of doubly taxed income. 38 The Government of lndia has
entered into "comprehensive" agreements to avoid double
taxation with various countries providing bilateral relief.
Income accruing or arising to person is taxed in accordance
with the terms of those agreements. There are some other
agreements to avoid double taxation of income arising
from 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
s
fro111the lndian 11!come tax payable by a resident in India
of a sum calculated on the doubly taxed income at the
lndian rate of tax or the rate of tax of the concerned
country whichever 1 lower. 39
s
38. Mehra. BM. 'International Double Taxation-Relief
under lndian lncome Tax Act', Foreign Trade Review
Jan. March 1388 New Delhi. Indian Institute of
30 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. Section of the Income Tax Act 1961 empowers
the Central Government to enter into agreements with
foreign countries for the purpose of relief on double
taxation, avoidance of double taxat ion, for exchange
of information of prevention or avoidance of the tax
and I r.rcovri.v of tax in lndla and abroad. Whereas
clnusrs (a? ai~d ( b ) of Src.90 bolh provide relief from
double taxation, t'le two clauses cover two distinct circum-
stances. Clause (a) provides for relief in the case
wilere income-tax nis already been paId both In IndIa
and in forelgn country, on the same income. Clause (b) on
the 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, thernl'ore, in exercise o f the powers con-
I'rr.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. 'I'hus in thr case of clause (a) the tax has first to be
paid and only 1tic.n does the rigtit to relief arise. In the
c 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 evasion
and tax avoidance by resorting to unwarranged means b y the
tax payers. C l a u r (d) provides for the recovery o f tax.42
A consequential change has also been made in the provisions
of the lncome Tax Act, relatir~g to recovery of arrears
o f taxes, by itiserting a new section 228 A
' ' ~ companies (profits) Sur 'l'ax Act, Wealth 'Tax
Ite
Act 1957 and Gift 'Tax Act 1958 also contain similar pro-
visiorls enabling the Central Government to enter into
agreements with foreign countries for the avoidance of
double taxation with respect to taxes laid under these
Acts. The corresponding provisions in these Acts have
also brell br.o~~gI~tn
i 1 ine wi tlr tile provisions of the
'1 3
Iticotnr 'lax Ac[.
ill. See Shell Company of India Ltd. V.C.I.T. (1969)
5 1 1 'I'R 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. The another section of Indian Income 'Tax 1961
Scc:tion 91, providcs lor grant of unilateral relief by
the cjovernnlenl o f India in respect of income. which has
been taxed both in India and i n the country with which
no agreement for relief or avoidance of double taxation
exists. Where there is a reciprocal agreement, the relief
i s to be granted only under such agreement. In case
there is inconsistency between the provisions of the
Income Tax Act and the agreement, the specific provision
In the agreement would prevail over the general provisions
contained i n the Act. However. "where there i no specific
s
provision i n the agreement, i t is a basic law, i.e, income
'Tax Act that will govern the taxation of income". 4 4
The objective of Section 9 1 IS that the amount o f lndian
income-tax paid or the amount o f tax paid in the foreign
country, whichever i lower is allowed as a deduction from
s
the tdx payable under the Act on such double taxed income46
Relief under section YO of Indian Income Tax
Act 1 6 can be obtained
91 by way of abatement or refund.
'Cu get a refund an application can be filed under section
237 of the Act. This relief can be claimed only after tax
44. 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. has been actually paid in both the countries and the
claim is made within two years frorn the last date of the
assessment year, in which income was assessable. An
order under section 237 is an appealable order. 47 A
reference is also maintainable. 48 However, no appeal
lies against the order o f the Income Tax Officer rejecting
the claim for abatement. If the tax i over-paid
s in
49
another country refund cannot be claimed in India.
Ilowever, i f such over-paid tax is paid to the assessee
later on when the rate of currency exchange has altered to
Llle advan~age of the asscssee, the Department cannot
50
Lake iI as ~nconir in cornputirlg double taxation relief.
Hclicf under scction 91(1)
It1 order to 'lairn relief under section Y l ( 1 ) the following
rrquisites 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 of
47. See Section 246(i )(n) of the Indian Income 'I'ax
H C ~1961.
4 8. 26 I'I'R 24 1 Born. and 4 0 I'I'R 450 Mad.
50. I ' 538 'I'C. See also Foreign 'Trade Review, Jan.
March, 1988 p . 4 5 8 9. t .
ci
-

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 income
Tax payable by hlm, a sum calculated on such doubly taxed
income at the lndian rate o f tax or the rate of tax of
the said country wtllchever is lower.
Sec.Yl(2) and ( 3 ) allow relief only to residents
and non-resident partners o f a resident registered f i rm
respectively. An assessment allowing the relief under
sectlon 91 of the Act wi 1 1 be the regular assessment
under the provisions of the Act and hence the order is
appealable 5 2 and hence reference to 11igh Court is also
maintainable. 5 3
51. 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.-'i'ax Act will govern the taxation of
such i ncomc.
52. Sectlurl 2 4 6 ( 1 ) (c) of the Income 'Tax Act 1961
53. see o r e 'I'rade Journal. January March 1988,
p.462, 9. .
G

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 Korea
3. Canada 15. Kenya 2 7 . Sri Lanka
4. Czechoslovakia 1 Libya 28 Syria
5. Denmark 17. Malaysla 29. Sweden
6. France 18. 14auritius 30. Tanzania
7. F.1t.G. IY. Nepal 31, l'halland
8. Flnland 20. Newzeaiand 32. U.A.H.
9 . Greece 21. Netherlands 3 3 . U.S.A
10. G.D.R. 22. Norway 3 4 . U.K.
11. llungary 23. Poland 3 5 . U.S.S.H
12. lndoncsia 24 Romanla 36. Zambia
uhow
- of countries with lndia has signed 'limited' agreement
List
- 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.
Ibid
55. -

52. 'l'llc s ~ g l i~ ri a n t
i i c : ~ t u r c s of these aggrements/
t r e a t i e s a r e a s follows:-
(a) 'l'he policy of ttle Government appears to be in
f a v o u r of avoidance of double taxation rather than
relief from t l o u b l c t : ~ x a t i o n .
(b) 'l'l~c a g r c e n l r ~ l t s a p p l y to prrsons resident in India
o r t h e o t h e r c o n t r a c t i n g countries.
(c) 1 the uurpose of taxat ion business profits are
taxed i n t h e c o u n t r y , where permanent e s t a b l i s h m e n t
is s i t u a t e d .
(d In rspect of aircraft profits, exemption to air-
craft PI-oiitsand interest in iunds connected wlth
l l ~ cshare uf aircraft i n t h e c o u n t r y of source i s
g i v e n on t h e b a s i s o f ! . e c i p r o c i t y .
(e) ' 1 ' 1 1 ~ n g l . c c n l c r l t s p r o v i d c f o r rllaximum r a t e o f tax that
c a n b e l c v i c d by a c o u n t r y o f s o u r c e .
'I'tie cuf-x ol the double tax rellef i s not the
i d e n t i t y of tlie i n c o m e from I n d i a n a n d ~ o p i g ns o u r c e w h i c h
11:1s s j i ~ C f e i - d t a x at both &rids; tire only and the primary
t I u e s t i o 1 1 ill g i v i ~ l g t t ~ i s !'elif i s to examine wl~cthcr any
part of t i t o ~ a l income changed to Indian income-tax
has also suffered Lax under forign jul.isdiction by deduc-
56
tion or otherwise.
56. see l . o r c 1 g 1 1 '1'1,ad R e v i - w ,
-
e New DeLhi 1 . I . F.'l'. .Inn-
h l 3 1 . ~ 1 1 1988. I > .,159.