Chapter 64: Rise of American Accounts, "Hollywood ".
Such incomes which are not actually received by a person, but law considers them as receipt or incomes, are called incomes deemed to be received in India. The term ' Statutory receipts ' can be easily used to cover this term. Following are the instances of incomes deemed to be received :
1. Tax deducted at source is income deemed to be received by a person even though he never receives such income ( u/s 198 )
2. Section 7 considers the following incomes as deemed to be received by an assessee :
(a). Employer's contribution to Recognised provident fund in excess of 12% of salary of employee [ Section 7(1) ]
(b). Interest accrued on recognised provident fund balance in excess of 9.5% p. a, [ Section 7(2) ].
(c). Taxable portion transferred balance of URPF to RPF [ Section 7(2) .]
(d). The contribution made, by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD [ Section 7(3) ].
3. Transfer of income without transfer of assets is deemed to be the income of transferor u/s 60 and 61 .
4. Under section 8, the dividend distributed or deemed to be distributed u/s 2(22) will be deemed to be distributed in the previous year.
5.Income from undisclosed sources [ Section 68,69,69A,69B,69C and 69D ] .
(C). Income which ' Accrues ' or 'Arises' in India.
Income can be held to accrue or arise to an assessee only when the assessee obtains a right to receive that income. No amount can be said to accrue unless it is actually due.
Accrue means " to fall as natural growth or increment, to come as an accretion or advantage " and arise means " to spring up, to come into existence " according to Oxford dictionary. It has been held that these two expressions - accrue and arise - are for all purposes synonymous. Jiwan Dads v. Commissioner of Income Tax, Lahore [ A. I. R, (1929) LAH 609 ].
Income accrues or arises at a place where the origin or source of growth of income is situated. As regards salaries, income accrues or arises in India if it is earned in India.
1. Income accrues or arises to a person, who is entitled to demand and receive the income.
2. Income accrues or arises at a time or date when it ripens into a debt, i.e., at that moment when assessee acquires a right to receive it.
3. In the case of salaried employees, the salary is earned in India if the person renders services in India. Income earned in India obviously arises in India.
4. In case of dealer of goods, if the purchases and sales of goods take place in India, the profits out of such sales arise in India.
5. Profit from such transaction where goods are manufactured outside India but are sold in India will be split up into manufacturing profits and only mercantile profits, i.e.,accruing from sale transaction will be income arising in India.
(D). Income deemed to Accrue or Arise in India.
Under section 9(1) of the Indian Income-tax Act, the following incomes are deemed to accrue or arise in India :
(D-1) Income arising from business connection in India [ Section 9(1)(1) ]
Any income accuring or arising outside India due to a business connection in India is deemed to accrue or arise in India and shall be taxable in case of all assessees irrespective of their residential status.
The term " Business Connection " shall include any business activity carried out through a person who, acting on behalf of the non-resident :
(a). has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident : or
(b). has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers good, or merchandise on behalf of the non-resident : or
(c). habitually secures orders in India mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident :
.Cases where income is not deemed to accure or arise from business connection.
(a). Business activity carried out through specified persons: The term business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business. However, where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-residents ( to be referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interests in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.
(b) Purchase of goods in India for export [ Exp, (b) to section 9(1)(1) ]. In the case of non-residents, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export.
No income is deemed to accrue in India to a non-resident through or from operations confined to the purchase of goods in India for export even if the purchase are made through a regular agency established in India for that purpose.
(c). Business of a news agency / publishing newspapers, etc. In the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspaper, magazines or journals, no income shall be deemed to accrue or arise in India to him from activities, which are confined to the collection of news and views in India for transmission outside India.
(d). Income from shooting of any picture in India [ Explanation (d) to section 9(1)(1) ]. In the case of a non-resident, being :
1. an individual who is not a citizen of India : or
2. a firm which does not have any partner who is a citizen of India or who is resident in India : or
3. a company which does not have any shareholder who is a citizen of India or who is resident in India.
no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India.
(D-2). Income from any property held in India and assets or sources of income located in India.
The word property includes both movable and immovable but does not include intangible assets. Intangible property like a debt is not property under the provisions of this section. A debt due to a foreigner cannot be called as asset or source of income in India, hence interest on such debt cannot be deemed to accrue or arise in India. ( C. I. T, v. Saurashtra Cement & Chemical Industries Ltd. 101 I. T. R. 502 ).
In case a company carries on business in India and pays dividend out of profits made in India and taxed in India, the dividend arises directly from a source of income in India and as such dividend income of a non-resident may be deemed to accrue or arise in India [ Caltex ( India) Ltd. v. C. I. T. 21 I. T. R. 278 ] .
(D-3) Income from transfer of capital assets situated in India.
Any gain arising from a capital asset whether movable or immovable shall be deemed to accrue in India in case the capital asset is situated in India at the time of transfer. It is immaterial that agreement is entered outside India or consideration is paid outside India.
.Appropriation of profits[ Explanation (d) to section 9(1)(1) ]
In the case of a business of which all the operations are not carried in India, only that part of income shall be deemed to accrue or arise in India which is reasonably attributable to the operations carried on in India.
Where the goods are manufactured in India and were sold out side India, the profit will be apportioned in two parts - one for manufacturing operations and another for selling operations. The profits which could be reasonably attributed to selling operations will not be deemed to accrue in India. ( C. I. T. v. Ahmedbhai Umerbhai 18 I. T. R. 472 ).
In cases where the income attributable to operations carried out in India cannot be ascertained, Rule 10 of Income - tax Rules 1962 provides :
(a). such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable having regard to the facts and circumstances of the case :or
(b). any amount which bears the same proportion to the total profits and gains of the business of the assessee computed in accordance with the provisions of the Act as the receipts so accruing or arising bear to the total receipts of the business : or
(c) in such other manner as the Assessing Officer may deem suitable.
.AMENDMENTS IN SECTION 9.
.Meaning of substantial value of share or interest in a foreign entity [ Insertion of Explanation 6 to Section 9(1)(1) ] [ w. e. f. A. Y. 2016-2017 ]
The share or interest of a foreign entity shall be deemed to derive it's value substantially from the assets ( whether tangible or intangible) located in India, if, on the specified date, the value of such assets : (a). Exceeds ten crore rupees, and, (b) represents at least fifty percent of the value of all the assets owned by the company or entity, as the case may be.
Thus, where the value of Indian assets are below Rs 10 crores or 50% of value of total assets of the foreign company or entity, transfer of shares of such company or interest in such entity should not be chargeable to tax in India.
.Circumstances when income shall not accrue or arise to a non-resident on transfer of any share or interest in a foreign entity [ Insertion of Explanation 6 to Section 6(1)(1) [ w. e. f. A. Y. 2016 -2017 ]
(a). The non- resident transferor ( individually or alongwith it's associated enterprises) neither holds the right of management or control of such company or entity nor holds share capital or voting power exceeding 5% of the total share capital or voting power of the foreign company or entity owning shares of Indian company.
(b). The non-resident transferor ( individually or alongwith it's associated enterprises) neither holds the right of management or control of such foreign company or entity nor holds share capital or voting power exceeding 5% of the total share capital or voting power of the company that owns shares of Indian company.
Thus, where the non-resident transferor of shares does not have right in the management or control of the foreign company or entity whose shares are being transferred and does not hold shares exceeding 5% of total share capital of the direct holding company owning shares of Indian company, no income arising on such transfer should be taxable in India.
(D-4). Salaries earned in India [ Section 9(1)(2) ].
This explanation provides an artificial place of accrual for income taxable under the head ' Salaries ' . According to it the incomes chargeable to tax as salaries shall be deemed to accrue or arise in India if they are earned in India. The place of receipt and actual accrual of the salary is immaterial. Any income payable for
(a) service rendered in India, and
(b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India.
(D-5) Salaries for Government service outside India [ Section 9(1)(3) ]
In the case of citizen of India who is employed by the Government, income chargeable under the head ' Salaries ' which is payable outside India for the services rendered outside India is deemed to accrue or arise in India and hence is taxable but allowances and perquisites paid or allowed by Government outside India are exempted under section 10(7).
(D-6) Dividend paid abroad by Indian Company [ Section 9(1)(4) ]
Any dividend paid by an Indian company outside India is deemed to accrue or arise in India. A dividend declared abroad and payable abroad would not accrue in India even though the company may be Indian company but such a dividend declared by an Indian company but payable outside India would be deemed to accrue or arise in India.
(D-7) Income by way of interest [ Section 9(1)(5) ]
Any interest payable by
(a) the Government : or
(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any Income from any source outside India : or
(c). a person who is a non-resident, where the interest is payable in respect of any debt incurred or moneys borrowed and used for the purposes of a business or profession carried on by such person in India.
(D-8) Income by way of royalty [ Section 9(1)(6) ]
Any royalty payable by
(a) the Government : or
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source in India : or
(c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.
.Important Points.
(1). This clause shall not apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976 , and the agreement is approved by the Central Government.
(2) This clause shall not apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights ( including the granting of a license) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.
(3). For the purposes of the point given at (1) above, an agreement made on or after the 1st day of April, 1976 , shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date : so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub - section. (1) or sub-section (2) of section 139 ( whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing declaration in writing to the Assessing Officer ( such option being final for that furnishing declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976.
(4). The term "royalty " means consideration ( including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head " Capital gains " for :
(a) the transfer of all or any rights ( including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property :
(b) the imparting of any information concerning the working of or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property :
(c) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property :
(d) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill :
(e) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB :
(f) the transfer of all or any rights ( including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films : or
(g) the rendering of any services in connection with the activities referred to in sub-clause (1) to (5) .
(5) The term ' computer software ' shall mean any computer programme recorded on disc, tape, perforated media, or other information storage device and includes any such programme or any customised electronic data.
(D-9) Income by way of fees for technical services [ Section 9(1)(7) ]
Any fee for technical services payable by
(a) the Government : or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India :or
(c) a person who is non resident, where the fees are payable in respect of services utilised in business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.
.Important Points.
(1) This provision shall not apply in relation to any income by why of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1977 and approved by the Central Government .
(2) For the purposes of such income, an agreement made on or after the 1st day of April 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
(3) The terms " fees for technical services " means any consideration ( including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services ( including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head " Salaries " )
(4) Any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court of a High Court within the meaning of the Government of India Act, 1935 continues to serve on or after the commencement of the Constitution as a Judge in India.
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