Tax Treatment of Income from Business of Non-residents

As for other income, the business income in the hands of a non-resident is chargeable to tax only when the same is either received in India or it accrues in India. The question as to where the income from business accrues or arises is a question of fact to be determined in individual cases. However, certain guiding principles are laid down in Section 9 of the Income Tax Act for determining the question of accrual of business income in India.

10.1.1 Income from business operations is construed as accrued in India if the same accrues or arises, whether directly or indirectly, through or from any business connection in India. The expression 'business connection' admits of no precise definition. A business connection involves the concept of a control, supervision or an activity of continuous nature. It necessitates a nexus between the activity and the business. A stray transaction or business activity does not, therefore, generally establish such nexus. 'Business' is a word of wide import and means activities carried on continuously and systematically by a person by the application of his labour and skill with a view to earning an Income. Unless there is something to establish a relationship between the activity and such continuous and systematic carrying on of activities, the requisite nexus will be lacking. An idea of the import of this expression can be had from the following illustrative instances of a non-resident having business connection in India. These instances are contained in Board's Circular No. 23 of 1969:-

1. Maintaining a branch office in India for the purchase or sale of goods or transacting other business.
2. Appointing an agent in India for the systematic and regular purchase of raw material or other commodities  or for sale of the goods or for other business purposes.
3. Erecting a factory in India where the raw material purchased locally is worked into a form suitable for export outside.
4. Forming  a  local  subsidiary company to sell the products of the non-resident parent company.
5. Having financial association between resident and a non-resident company.

10.1.2  A non-resident will not be liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident has an office or an agency in India for this purpose.

10.1.3  Where a non-resident has an agent in India but makes sales directly to Indian customers, there will be no 'business connection^' even if he pays to his agent an over-riding commission on such sales to India provided

1. the making of these sales can in no way be attributed to the existence of the agency or to any trading advantage or benefit accruing to the principal from the agency
2. the contracts to sell are made outside India and 
3. the sales are made on a principal to principal basis.

10.2 The bilateral double tax avoidance agreements require the presence of somewhat permanent nature of the non-resident in India to be able to exercise the jurisdiction of taxing the business income. Such presence is established through the existence of fixed place of business or relationship technically known as 'permanent establishments'.
Following are some of the instances of permanent establishments:-

1. a place of management, 
2. a branch, 
3. an office 
4. a factory, 
5. a workshop, 
6. a mine, oil well or other place of extraction of natural resources,
7. a building site or construction or assembly project which exist for an agreed period, and
8. provision of supervisory activities for a minimum agreed period on a building site or construction or assembly project.

The term 'permanent establishment' in generality of such agreements does not include-

1. The use of facility solely for the purpose of storage or display of goods or mechandise belonging to the enterprise.
2. The maintenance of stock of goods or merchandise solely for the purpose of storage or display.
3. The maintenance of stock of goods or merchandise solely for the purpose of processing by another enterprise, 
4. The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the enterprise, and

1. The maintenance of stock of a fixed place of business solely for the purpose of advertising of similar activities which have a preparatory or auxiliary character for the enterprise.

10.3 Computation of business income

The law does not seek to bring into the tax net the profits which cannot reasonably be attributed to operations carried out in India. Even if there is a 'business connection¹ in India or a 'permanent establishment^' exists only that part of the profits which can be attribued to activities through such 'business connection' or 'permanent establishment¹ can be the subject matter of tax in India.

10.3.1 The net income from such business activities is worked out on the basis of general principles governing the computation of business income (refer para 4.4 to 4.4.9 of Chapter IV). A non­resident is also entitled to deduct out of gross business income that part of the head office expenses which can be attributed to the Indian operations through 'business connection' or 'perma­nent establishment'. The law lays down the ceiling on the Head Office expenses that can be allowed as deduction in computing the business income. It is laid down that the deduction of actual amount of head office expenses attributable to the business or profession in India shall not exceed 5% of the adjusted total income which means the total income before taking account of depreciation, carried forward losses etc. or deductions under Chapter VI-A of the Income Tax Act mentioned in Chapter V of this guide.

10.4   Exemption from business income

The income of the following persons is not subjected to tax as it is not considered as accruing or arising in India :-

1. Income of a non-resident engaged in the business of running a news agency or of publishing newspapers, magazine or journals arising from activities which are confined to the colfecttion of news and views in India for transmission out of India.
2. Income of a non-resident who is also not a citizen of India, or, of a firm in which no partner is resident or Indian citizen, or, of a company in which no shareholder is a resident or Indian citizen if such income arises from operations which are confined to the shooting of any cinematography film in India.

10.5   Profits of Non-residents from occassional Shipping business (Sec. 172)

Before the departure from any port in India of any such ship, the master of the ship is required under the law to 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 such carriage since the last arrival of the ship at that port. The assessing officer may in his discretion allow tie ship to depart without furnishing the said return if satisfactory arrangement for filing of return and payment of taxes are made. In such a case, the return should be field within 30 days of the departure of the ship. On receipt of the return, the assessing officer will assess the income at 7₂% of the amount stated above, and determine the tax at the rate applicable to a foreign company and such sum shall be payable by the master of the ship. A port clearance is not granted to the ship until the tax has been paid or satisfactory arrangements have been made for the payment thereof. It is open to the non-resident to seek a regular tax assessment! of such income by furnishing a return of his total income in India before the expiry of the assessment year immediately following the financial year in which the ship departed from an Indian port. In such a case the tax already paid during the said financial year, if any, is treated as an advance payment of income tax for the relevant assessment year and is credited to the tax payer against his final tax liability determined on assessment.

Income computed by application of a flat rate on gross receipts

In order to facilitate assessment and avoid difficulties involved in adducing evidence to the satisfaction of assessing officer, taxable business profits of the following persons are computed not on actual basis but by applying a prescribed rate on gross receipts.

10.5.1  Profit and gains of shipping business (Sec. 44B)

Profit of non-resident from shipping business is deter­mined by applying a flat rate of  7 1/2% on the following amounts:-

1. the amount payable (whether in or out of India) to the asessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; including amount by way of demurrage or handling charges or amount of similar nature;
2. the amount received or considered as 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, including amount by way of demurrage or handling charges or any other amount of similar nature.

10.5.2  Profits and Gains of Business of Exploration etc. of Mineral Oils [Sec. 44BB]

The income of a non-resident assessee from the business of providing services or facilities in connection with, or supplying plant and machinery or hire for use in, the business of prospecting for, or extraction or production of mineral oils in India is computed at a sum, equal to 10% of the following receipts :-

1. Amount paid or payable (in or out of India) on account of services and facilities provided to or on account of supply of plant and machinery on hire to be used in such business; and
2. Amount of the nature described in (i) above received or receivable in India.

10.5.3  Profits and Gains of the Business of operation of Aircraft [Sec. 44BBA]

The income of a non-resident from business of operation of aircraft is computed at a sum equal to 5% of the aggregate of the amounts paid or payable to him whether in India or outside India on account of the carriage or passengers, livestock, mail or goods from any place in India.

10.5.4 Profits and Gains of foreign Companies engaged in the Business of Civil Construction etc. in certain Turnkey Power Projects [Sec. 44BBB]

The income of a foreign company from the business of civil construction or of erection of plant and machinery or testing or commissioning thereof in connection with turnkey power project is computed at 10% of the amount paid or payable to it on account of such civil construction, erection, testing or commissioning. This is subject to the following conditions :-

1. the project is approved by the Central Government in this behalf;
2. it is financed under any international aid program.

10.5.5 Profit of foreign telecasting companies [Circular No. 742]

The income of foreign telecasting companies which are not having any branch office or permanent establishment in India or are not maintaining country-wise accounts is to be computed, in respect of their operations in India, by adopting presumptive profit rate of 10% of the gross receipts meant for remittance abroad or the income returned by them, whichever is higher.

10.6   Income of Non-Resident Sportsman or Sports Association [Sec. 115BBA]

Instead of determining the income of such persons at a flat rate and computing tax thereon at normal rate, the law lays down a flat rate of tax of 10% to be applied on the gross receipts of a non-resident sportsman who is not a citizen of India in respect of his participation in India in any game or sports (other than horse races) or from advertisement or from contribution of articles relating to game or sport in any newspapers, magazines or journals. Similarly, a non-resident sports association or institution is liable to tax at the rate of 10% on the guaranteed amount paio or payable to it in relation to any game (other than horse races) or sport played in India.

10.7   Special provisions in respect of business of prospecting for or extraction of mineral oils [Sec. 293A]

Central Government has been authorised to grant by notification special exemption, reduction in rate or other modifica­tions in respect of income tax in favour of the following class of persons :-

1. persons with whom Central Government has entered into agreements for participation in any business consisting of the prospecting for or extraction or production of mineral oils;
2. persons providing any service or facilities or supplying any ship, aircraft, machinery or plant (by way of sale or hire) in connection with any business consisting of the prospecting for or extraction or production of mineral oils carried on by the government or any person specified by the Government;
3. employees of persons referred to in (a) and (b) above.

In exercise of such power the Central Government reduced the rate of tax in respect of income of a foreign company or other non-corporate on-resident of the nature mentioned at (a) above to 50% (as against the general rate of 65% applicable to foreign companies upto the assessment year 1994-95). This rate was raised to 55% as increased by a Union surcharge @  2.5 % by notification dated 31.03.93. With reduction in normal tax rates applicable to foreign companies these notifications do not result in reduction in rate.

The Central Government is also empowered to make a notification in regard to the status in which the aforesaid class of person are to be assessed.

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