Non resident Presumptive taxation & Taxation under Chapter XIIA

Non resident Presumptive taxation & Taxation under Chapter XIIA 29 Mukesh Kumar M Partner, Mukesh Manish & Kalpesh +91 98844 61718 mukesh@m2k.co.in

Part I Presumptive taxation

Basics

Basics Following section deals with presumptive taxation in the hands of non residents: Section Applicability Presumptive rate 44B 44BB 44BBA 44BBB Non residents engaged in the business of operation of ships Non residents engaged in the business of providing services or facilities in connection with or supplying plant and machinery on hire used, or to be used, in the prospecting for or extraction or production of mineral oils Non residents engaged in the business of operation of aircraft Foreign company engaged in the business of civil construction or business of erection of plant or machinery or testing or commissioning thereof, in connection with turnkey power project approved by Central Government. 7.5 percent 10 percent 5 percent 10 percent 4 M2K

Section 44B Shipping business

Provisions of the Act 44B. (1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". (2) The amounts referred to in sub-section (1) shall be the following, namely : (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and (ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India. Explanation. For the purposes of this sub-section, the amount referred to in clause (i) or clause (ii) shall include the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature. 6 M2K

Issues # 1 Whether the provisions of section 44B is mandatory or can the assessee pay tax in accordance in section 28 to 43 of the Act? 7 M2K

Issues # 1(a) Whether the answer to issue 1 remains same if the shipping business has a fixed place PE in India? 8 M2K

Issues # 2 Whether the company shall still be liable to pay tax if it proves that it has incurred losses on account of India business? 9 M2K

Issues # 3 Whether the following income should be included in the gross receipts? a) A from Srilanka sends goods to B in UAE. However, the shipping company offloads the goods in India and reloads the same and delivers the goods to B in UAE. Whether the income received from A should be attributable to tax in India? b) Will the answer to A change if the shipping offloads the goods in Chennai and another shipping company carries the same and delivers it to B in UAE? 10 M2K

Issues # 4 Whether service tax is includible in the gross receipts for determining the presumptive profit? 11 M2K

Issues # 5 Whether demurrage charges or handling charges liable to tax in the hands of non resident even if the said charges were payable for offloading at the destination point? For eg: A from India supplies goods to B in Singapore which is transported through the ships. B does not take the delivery of goods and A is charged for the same. Whether the income earned by the shipping company in respect of demurrage charges is chargeable to tax in India? Demurrage means - Penalty assessed against a consignor, consignee, or other such party responsible for delay in loading or unloading of a shipping vessel or for undue detention (usually over 48 hours) of the transportation equipment. Also called detention charge. 12 M2K

Issues # 6 Whether the shipping entity can claim treaty benefit? 13 M2K

Issues # 6 INDIA USA DTAA - ARTICLE 8 - Shipping and air transport 1. Profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State. 2. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived by an enterprise described in paragraph 1 from the transportation by sea or air respectively of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of ships or aircraft including (a) (b) (c) the sale of tickets for such transportation on behalf of other enterprises; other activity directly connected with such transportation ; and the rental of ships or aircraft incidental to any activity directly connected with such transportation. 3. Profits of an enterprise of a Contracting State described in paragraph 1 from the use, maintenance, or rental of containers (including trailers, barges, and related equipment for the transport of containers) used in connection with the operation of ships or aircraft in international traffic shall be taxable only in that State. 4. The provisions of paragraphs 1 and 3 shall also apply to profits from participation in a pool, a joint business, or an international operating agency. 14 M2K

Issues # 6 INDIA SINGAPORE DTAA - ARTICLE 8 - Shipping and air transport 1. Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State. 2. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships or aircraft. 3. Interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 shall not apply in relation to such interest. 4. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean profits derived from the transportation by sea or air of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of the ships or aircraft, including profits from : (a) (b) (c) (d) the sale of tickets for such transportation on behalf of other enterprises; the incidental lease of ships or aircraft used in such transportation; the use, maintenance or rental or containers (including trailers and related equipment for the transport of containers) in connection with such transportation; and any other activity directly connected with such transportation. 15 M2K

Issues # 6 INDIA BANGLADESH DTAA - ARTICLE 8 - Shipping and air transport 1. Profits of an enterprise of a Contracting State derived from the other Contracting State from the operation of ships in international traffic may be taxed in that other Contracting State, but the tax chargeable in that other Contracting State on such income shall be reduced by an amount equal to fifty per cent of such tax. 2. The provisions of paragraph (1) shall also apply to profits derived from the participation in a pool, a joint business or an international operating agency. 16 M2K

Section 172 - Shipping business of non-residents. 172. (1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India. (2) Where such a ship carries passengers, livestock, mail or goods shipped at a port in India, seven and a half per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the owner or charterer on account of such carriage. (3) Before the departure from any port in India of any such ship, the master of the ship shall prepare and furnish to the Assessing Officer a return of the full amount paid or payable to the owner or charterer or any person on his behalf, on account of the carriage of all passengers, livestock, mail or goods shipped at that port since the last arrival of the ship thereat: Provided that where the Assessing Officer is satisfied that it is not possible for the master of the ship to furnish the return required by this sub-section before the departure of the ship from the port and provided the master of the ship has made satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf, the Assessing Officer may, if the return is filed within thirty days of the departure of the ship, deem the filing of the return by the person so authorised by the master as sufficient compliance with this sub-section.. 17 M2K

Section 44BBA Aircrafts business

Section 44BBA 44BBA. (1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to five per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". (2) The amounts referred to in sub-section (1) shall be the following, namely : (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods from any place in India; and (b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods from any place outside India. 19 M2K

Issues # 1 Section 172 governs taxation of shipping business and provides procedure for recovery of taxes before the ship leaves the port. There is no similar provisions relating to aircrafts. 20 M2K

Issues # 2 A from Srilanka books a ticket from Srilanka to UAE. The aircraft lands in India and certain people gets down. The same flight goes to UAE and A gets dropped in UAE. Whether the income received from A should be attributable to tax in India? What if A from Srilanka books a ticket from Srilanka to UAE. The aircraft lands in India and drops A who then gets into a connecting flight to reach UAE which drops him in UAE. Whether the income received from A should be attributable to tax in India? 21 M2K

Section 44BB Exploration of mineral oil

Section 44BB 44BB. (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a nonresident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in subsection (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" : Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 44DA or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections. (2) The amounts referred to in sub-section (1) shall be the following, namely : (a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India; and 23 M2K

Section 44BB (b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India. (3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that subsection, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee. Explanation. For the purposes of this section, (i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business; (ii) "mineral oil" includes petroleum and natural gas. 24 M2K

Issues # 1 Whether the provisions of section 44BB is mandatory or can the assessee pay tax in accordance in section 28 to 43 of the Act? 25 M2K

Issues # 2 Whether the provisions of section 44BB can be claimed in respect of services such as consultancy or technical services? 26 M2K

Issues # 3 Whether the provisions of section 44BB can be claimed in respect of equipment given on lease? 27 M2K

Section 44BBB Turnkey Power Projects

Section 44BBB 44BBB (1) Notwithstanding anything to the contrary contained in sections 28 to 44AA, in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf, a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". (2) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that subsection, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee. 29 M2K

Issues # 1 X, an individual resident of UAE, performing erecting services to the Indian company which is into turnkey power project (as approved by CG)? 30 M2K

Part II Taxation under Chapter XIIA

Relevant provisions of the Act Section 115C defines the following: "foreign exchange asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange; "investment income" means any income derived other than dividends referred to in section 115- O from a foreign exchange asset; "long-term capital gains" means income chargeable under the head "Capital gains" relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset; "specified asset" means any of the following assets, namely : (i) shares in an Indian company; (ii) debentures issued by an Indian company which is not a private company45 as defined in the Companies Act, 1956 (1 of 1956); (iii) deposits with an Indian company which is not a private company45 as defined in the Companies Act, 1956 (1 of 1956); (iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944); (v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette. 32 M2K

Relevant provisions of the Act 115D. (1) No deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the investment income of a non-resident Indian. (2) Where in the case of an assessee, being a non-resident Indian, (a) the gross total income consists only of investment income or income by way of long-term capital gains or both, no deduction shall be allowed to the assessee under Chapter VI-A and nothing contained in the provisions of the second proviso to section 48 shall apply to income chargeable under the head "Capital gains"; (b) the gross total income includes any income referred to in clause (a), the gross total income shall be reduced by the amount of such income and the deductions under Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of the assessee. 33 M2K

Relevant provisions of the Act 115E. Where the total income of an assessee, being a non-resident Indian, includes (a) any income from investment or income from long-term capital gains of an asset other than a specified asset; (b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of (i) the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent; (ii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; and (iii) the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b). 34 M2K

Relevant provisions of the Act 115F. (1) Where, in the case of an assessee being a non-resident Indian, any longterm capital gains arise from the transfer of a foreign exchange asset (the asset so transferred being hereafter in this section referred to as the original asset), and the assessee has, within a period of six months after the date of such transfer, invested the whole or any part of the net consideration in any specified asset, or in any savings certificates referred to in clause (4B) of section 10 (such specified asset, or such savings certificates being hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45; (b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the new asset bears to the net consideration shall not be charged under section 45. 35 M2K

Issues # 1 X, an NRI, sells shares of an Indian company purchased by him in 2010 in foreign exchange. What would be tax rate under the normal provisions and under Chapter XII-A? 36 M2K

Issues # 2 X, an NRI, sells shares of an Indian company (A Co) purchased by him in April 2010 in foreign exchange and reinvests the said amount in purchasing the share of another Indian company (B Co) in April 2014 (in INR). In May 2017, X is proposing to sell the shares of B Co, What would be tax rate under the normal provisions and under Chapter XII-A? 37 M2K

Issues # 3 a) X, an NRI, sells shares of an Indian company purchased by him in 2010 in foreign exchange.? Lets assume that the capital gains arising therefrom is Rs 200,000. X has made investment in tax saving bonds which is eligible under section 80C for Rs 150,000. Whether X is eligible to claim benefit under section 80C? b) Would the answer change if X also has income from house property for Rs 24,000. c) Under the both the situation, whether X is eligible to claim the indexation benefit? 38 M2K

Other points Return of income not to be filed in certain cases. 115G. It shall not be necessary for a non-resident Indian to furnish under subsection (1) of section 139 a return of his income if (a) his total income in respect of which he is assessable under this Act during the previous year consisted only of investment income or income by way of longterm capital gains or both; and (b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income. 39 M2K

Other points Benefit under Chapter to be available in certain cases even after the assessee becomes resident. 115H. Where a person, who is a non-resident Indian in any previous year, becomes assessable as resident in India in respect of the total income of any subsequent year, he may furnish to the Assessing Officer a declaration in writing along with his return of income under section 139 for the assessment year for which he is so assessable, to the effect that the provisions of this Chapter shall continue to apply to him in relation to the investment income derived from any foreign exchange asset being an asset of the nature referred to in sub-clause (ii) or sub-clause (iii) or subclause (iv) or sub-clause (v) of clause (f) of section 115C; and if he does so, the provisions of this Chapter shall continue to apply to him in relation to such income for that assessment year and for every subsequent assessment year until the transfer or conversion (otherwise than by transfer) into money of such assets. 40 M2K

Other points Chapter not to apply if the assessee so chooses. 115-I. A non-resident Indian may elect not to be governed by the provisions of this Chapter for any assessment year by furnishing his return of income for that assessment year under section 139 declaring therein that the provisions of this Chapter shall not apply to him for that assessment year and if he does so, the provisions of this Chapter shall not apply to him for that assessment year and his total income for that assessment year shall be computed and tax on such total income shall be charged in accordance with the other provisions of this Act. 41 M2K

Thank You Disclaimer: The information contained in this presentation is intended for general guidance only and should not be considered as an advice or opinion. We do not accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this note. On any specific matter, reference should be made to the appropriate advisor. Mukesh Kumar M Partner, Mukesh Manish & Kalpesh +91 98844 61718 mukesh@m2k.co.in