Which income is deemed to accrue or arise in india as per the tax laws?

As per section 9(1), income accruing or arising outside India, directly or indirectly through or from any business connection in India, will be deemed to accrue or arise in the country. It should be noted that there is a difference between business connection in India and business connection with India. If the transacting party is from India, it does not mean that there will be a business connection in India.

How is the income of a non-resident in India who does not have a place of business in the country but is dealing through an agent here be taxed?

If a non-resident has appointed an agent in India who habitually procures order on his behalf, then the income arising to non-resident person through that transaction will be taxed in India.

What happens if this agent is operating in an independent capacity?

There is a specific clarification in this regard that business connection will not be established in case where any non-resident assessee is carrying business through a broker, general commission agent or any other agent having an independent status, and if such a person is acting in the ordinary course of his business.

What happens if a business connection is established?

If a business connection is being established, then only the income which is attributable to a transaction which has business connection in India will be taxed in the country.

Will the provision of section 9 be applicable on transfer of shares outside India to a person residing outside India?

It has been prescribed that if there is transfer of shares of a company, which is incorporated in a foreign country but derives substantial value of its shares from assets located in India, then income from transfer of such shares will be taxable in India even though the transfer took place outside India.

However, there is an exception to this rule if the seller of such stake is not holding any right of management or control in relation to the foreign company or entity in the preceding 12 months and does not exceed 5% of the total voting power or total share capital or total interest of the company. Then, such transfer of shares will be not be taxed in India.

Let’s understand this with an example, A is located in Dubai. He holds 2% stake in a foreign company XYZ Ltd. XYZ derives its substantial value from assets located in India. A does not participate in managerial work nor does he control the operation of XYZ. A decides to transfer all his shares to C;. In such a case, is the transfer of shares be taxable in India?

As A does not hold any right of management relation to the foreign company or entity in the preceding 12 months; and his voting power or share capital or interest is not exceeding 5% of the total voting power or total share capital or total interest of the said foreign company, the transfer of such shares will not be taxable in India.

What happens if A is holding 6% stake in XYZ?

In this case, A is not resident in India; the transfer pertains to shares of the company located outside India; and the transfer took place outside India. Yet, income from such transfer will be taxed in India (i.e., the portion which is attributable to Indian assets)

How is dividend taxed in the hands of a non-resident in India?

As per one of the clauses of Section 9(1); the dividend paid by an Indian company outside India is deemed to accrue or arise in India and would be taxable in India in the hands of non-resident shareholders.

Can a non-resident in India accept cash gifts?

According to recent judgement by Ahmedabad tribunal, a person who is non-resident in India is not prohibited from accepting cash gifts from relatives.

The provision prescribed under Section 9 of the Act are wide and tries to cover various transactions whereby though income is not received or accrued in India, it will be taxed in India.

Jigar Mansatta is proprietor, Jigar Mansatta & Associates.