guidebook on taxation for oi

8/3/2019 Guidebook on Taxation for OI

1/78


2/78

Guide Book for Overseas Indianson

Taxation and Other Important Matters


3/78

DISCLAIMER

This Guide Book has been compiled/summarised from information available in ofcial documents/

circulars/websites of the Govt. of India, RBI and other reliable sources. Every possible care has been

taken to provide current and authentic information. This Guide Book for Overseas Indians is intended

to serve as a guide to them and does not purport to be a legal document. In case of any variation be-

tween what has been stated in this Guide Book and the relevant Act, Rules, Regulations, Policy State-

ments etc., the latter shall prevail.

Price: 500.00 (INR)


4/78

Overseas Indian Facilitation CentreThe Indian Diaspora is the largest in the world to day after China and has roots in every countryin the globe. The Diaspora contribution to their state of origin has been made in various ways,through remittances, foreign direct investment (FDI), transfer of knowledge and entrepreneurialnetworks.

In order to expand the entrepreneurial ties and engage them as partners in Indias progress, anOverseas Indian Facilitation Centre, a not for prot public private initiative of Ministry of OverseasIndian Affairs (MOIA) and Confederation of Indian Industry (CII), was launched on 28th May2007.

With a strong intention to facilitate and bridge the gap between the Overseas Indians and India,OIFC has a mandate to cover broad areas: investment facilitation, knowledge networking andensuring business-to-business partnerships in focus sectors like real estate, wealth management,taxation, legal, healthcare, education and infrastructure.

The key objectives of OIFC are:

Promote overseas Indian investment into India and facilitate business partnership by givingauthentic & real time information

Establish and maintain a Diaspora Knowledge Network by creating a database of OverseasIndians

Function as a clearing house for all investment related information Assist States to project and promote investment opportunities to overseas Indians in key

focus sectors.

In line with the above objectives, OIFC provides the following services: To appraise the Indian Diaspora with the up-to-date investment opportunities existing in

India provide hand-holding services via its knowledge partners To provide customized services in the form of nding sector and state specic investmentprojects, preparing feasibility reports and organizing and assisting in overseas road shows toattract FDI

To assist in effective business-to-business partnerships To maintain a strong Diaspora Knowledge Network To provide consular services in the long run


5/78


6/78

CONTENTS

PART - I : TAXATION

1. Residential Status for Tax Purposes 9

2. Special Provisions Relating to Certain Income of NRIs 18

3. Tax Exemptions from Income Tax, Wealth Tax and Gift Tax 20

4. Presumptive Tax Provisions 23

5. Tax Incentives for Industries 25

6. Authority for Advance Rulings 27

7. Transfer Pricing 31

8. Double Tax Avoidance Agreements 38

PART-II : OTHER IMPORTANT MATTERS & OVERSEAS INDIANS

9. Overseas Citizenship of India (OCI) 41

10. PIO Card 53

11. Foreign Contribution Regulation Act, 1976 56

12. Special Economic Zones 70

13. List of Important Websites 75

14. Contact Details 77


7/78


8/78

PART - ITAXATION


9/78


10/78

9

RESIDENTIAL STATUS FORTAX PURPOSES

In India, as in many other countries, the chargeof income tax and the scope of taxable income varies with the factor of residence. Thereare two categories of taxable entities viz. (1)residents and (2) non-residents. Residents arefurther classied into two sub-categories (i)resident and ordinarily resident and (ii) residentbut not ordinarily resident. The law prescribestwo alternative technical tests of residence forindividual taxpayers. Each of the two testsrelate to the physical presence of the taxpayerin India in the course of the previous yearwhich would be the twelve months from April1 to March 31.

A person is said to be resident in India in anyprevious year if he

(a) is in India in that year for an aggregateperiod of 182 days or more; or

(b) having within the four years precedingthat year been in India for a period of365 days or more, is in India in that yearfor an aggregate period of 60 days ormore.

The above provisions are applicable to allindividuals irrespective of their nationality.However, as a special concession for Indiancitizens and foreign citizens of Indian origin,the period of 60 days referred to in Clause

(b) above, will be extended to 182 days intwo cases: (i) where an Indian citizenleaves India in any year for employmentoutside India; and (ii) where an Indiancitizen or a foreign citizen of Indianorigin (NRI), who is outside India,comes on a visit to India.

In the above context, an individual visiting Indiaseveral times during the relevant previousyear should note that judicial authorities inIndia have held that both the days of entry andexit are counted while calculating the numberof days stay in India, irrespective of howevershort the time spent in India on those two daysmay be.

A non-resident is merely dened as a personwho is not a resident i.e. one who does notsatisfy either of the two prescribed tests ofresidence.

An individual, who is dened as Resident in agiven nancial year is said to be not ordinarilyresident in any previous year if he has been anon-resident in India 9 out of the 10 precedingprevious years or he has during the 7 preceding

previous years been in India for a period of, orperiods amounting in all to, 729 days or less.

Till 31st March 2003, not ordinarily residentwas dened as a person who has not been residentin India in 9 out of 10 preceding previous yearsor he has not during the 7 preceding previousyears been in India for a period of, or periodsamounting in all to, 730 days or more.

Section 6 of the Income-tax Act, 1961, prescribes

the tests for determining the residential statusof a person. Section 6, as amended, reads asfollows:

For the purposes of this Act,(1) An individual is said to be resident in

India in any previous year, if he-


11/78

Guide Book for Overseas Indians on Taxation and Other Important Matters

10

a) is in India in that year for a periodor periods amounting in all to onehundred and eighty-two days ormore; or

b) [* * *]c) having within the four years

preceding that year been in Indiafor a period or periods amountingin all to three hundred and sixty vedays or more, is in India for a periodor periods amounting in all to sixtydays or more in that year.

Explanation.- In the case of an individual,(a) being a citizen of India, who leaves

India in any previous year [as amember of the crew of an Indianship as dened in clause (18) ofsection 3 of the Merchant ShippingAct, 1958 (44 of 1958), or] for thepurpose of employment outsideIndia, the provisions of sub-clause(c) shall apply in relation to thatyear as if for the words sixty days,occurring therein, the words one

hundred and eighty-two days hadbeen substituted(b) being a citizen of India, or a person

of Indian origin within the meaningof Explanation to clause (e) ofsection 115C, who, being outsideIndia, comes on a visit to India inany previous year, the provisions ofsub-clause

(c) shall apply in relation to that yearas if for the words sixty days,

occurring therein, the words onehundred and eighty-two days hadbeen substituted.

(2) A Hindu undivided family, rm orother association of persons is said tobe resident in India in any previous yearin every case except where during that

year the control and management of itsaffairs is situated wholly outside India.

(3) A company is said to be resident in Indiain any previous year, if(a) it is an Indian company; or(b) during that year, the control and

management of its affairs is situatedwholly in India.

(4) Every other person is said to be residentin India in any previous year in everycase, except where during that year thecontrol and management of his affairsis situated wholly outside India.

(5) If a person is resident in India in aprevious year relevant to an assessmentyear in respect of any source of income,he shall be deemed to be resident inIndia in the previous year relevant to theassessment year in respect of each ofhis other sources of income.

(6) A person is said to be not ordinarilyresident in India in any previous year ifsuch person is(a) an individual who has not been a

non-resident in India in nine outof the ten previous years precedingthat year, or has not during theseven previous years preceding thatyear been in India for a period of,or periods amounting in all to, sevenhundred and twenty-nine days orless; or

(b) a Hindu undivided family whose


12/78

11

Residential Status for Tax PurposesResidential Status for Tax Purposes


13/78


12


14/78

13

Residential Status for Tax Purposes

manager has not been non-residentin India in nine out of the tenprevious years preceding that year,or has not during the seven previousyears preceding that year been inIndia for a period of, or periodsamounting in all to, seven hundredand twenty-nine days or less.

An analysis of the above provisions wouldindicate that -

1. To become a non-resident forincome- tax purposes, an Indian citizenleaving India for the rst time to take upemployment abroad should be out ofthe country latest by 28th Septemberand should not return to India before1st April of the next year. However, incase of a person leaving India for takingup a business or profession, the criteriaof 60 days will apply, as dened earlier.

2. An NRI individual, whose total stayin India in 4 preceding years exceeds364 days, will not lose his non-resident

status in the following year(s) if his totalstay in India in that year (from April 1 toMarch 31) does not exceed-(a) 181 days, if he is on a visit to

India; or(b) 59 days, if he comes to India on

transfer of residence.3. An NRI who has returned to India for

settlement, whose total stay in India for4 preceding years does not exceed 364days will not lose his non-resident status

in the following year(s) if his total stayin India in such year(s) (from April 1 toMarch 31) does not exceed 181 days.

4. A new-comer to India would be treatedas not ordinarily resident for the rsttwo years of his stay in India or if treatedas Non Resident in the year of arrival

then for the second and third year ofhis stay in India. An individual (whetherIndian or foreign citizen) who has leftIndia and remains non-resident for atleast nine years preceding his return toIndia or whose stay in 7 years precedingthe year of return has not exceeded 729days would, upon his return, be treatedas non-resident or not ordinarilyresident depending upon the numberof days stay in India in the year ofreturn. The status of not ordinarilyresident will remain effective for 2years including or following the year ofreturn as the case may be.

Important Points to be Borne in Mind while Determining the ResidentialStatus of an Individual

(a) Residential status is always determinedfor the Previous Year because theassessee has to determine the totalincome of the Previous Year only. In

other words, as the tax is on the incomeof a particular Previous Year, the enquiryand determination of the residencequalication must conne to the factsobtaining in that Previous Year.

(b) If a person is resident in India in aPrevious Year in respect of any sourceof income, he shall be deemed to beresident in India in the Previous Yearrelevant to the Assessment Year inrespect of each of his other sources of

Income. [Section 6(5)](c) Relevant Previous Year means, thePrevious Year for which residentialstatus is to be determined

(d) It is not necessary that the stay shouldbe for a continuous period.

(e) It is not necessary that the stay should



15/78


14

be at one place in India.(f) Both the day of entry and the day of

departure should be treated as the dayof stay in India [Petition No.7 of 1995225 ITR 462 (AAR)]

(g) Presence in territorial waters in Indiawould also be regarded as stay in India.

(h) A person is said to be of Indian Originif he or either of his parents or any ofhis grand parents was born in undividedIndia [Section 115C]

(i) Ofcial tours abroad in connectionwith employment in India shall not beregarded as employment outside India.

(j) A person may be resident of more thanone country for any Previous Year.

(k) Citizenship of a country and residentialstatus of that country are two separateconcepts. A person may be an Indiannational/Citizen but may not be aresident in India and vice versa.

Points to be Considered by NRIs

Previous Year is period of 12 months

from 1st April to 31st March. Numberof days stay in India is to be countedduring this period.

Both the Day of Arrival into India andthe Day of Departure from India arecounted as the days of stay in India (i.e.2 days stay in India).

Dates stamped on Passport are normallyconsidered as proof of dates ofdeparture from and arrival in India.

It is advisable to keep several

photocopies of the relevant passportpages for present and future use. Ensure that date stamped on the

passport is legible. Keep track of no. of days in India

from year to year and check the samebefore making the next trip to India.

It is advisable to maintain a chart forthe number of days stay in the currentand in the preceding seven (7) previousyears.

In the 1st year of leaving India foremployment outside India, ensurethat you leave before 29th September.Otherwise total income of the nancialyear (including the foreign income) willbe taxable in India if it exceeds the basicexemption limit.

During the last year of stay abroad, ontransfer of residence to India, ensureto come back on or after Feb 1st (orFeb 2nd in case of a leap year). Sincearrival before this date will result in stayin India exceeding 59 days. However, aperson whose stay in India in precedingfour (4) previous years does not exceed365 days, he may return after September30th of the relevant year without loss ofnon-resident status.

Implications of Residential Status forNRIs/PIOs

The complexities of determining the residentialstatus for individual NRI/PIO under variousstatutes and regulations will be obvious from theprovisions outlined above and in this context itwould be important to note the following:

1 The concepts and rules for determiningthe residential status income-tax lawsand FEMA are quite different and itwould be possible to be a resident underone law and non-resident under the

other.2 For exemption of income tax in respectof NRE and FCNR deposits investorshould be non-resident under FEMA.

3 The special tax rate concessions onincome and long-term capital gains onspecied assets, purchased in convertible


16/78

15


foreign exchange are available to non-residents under the Income-tax Act.

CHARGEABLE INCOMESection 5 of the Income-tax Act lays down thescope of total income of any previous year ofany person. The Section reads as follows:

(1) Subject to the provisions of this Act,the total income of any previous year ofa person who is a resident includes allincome from whatever source derivedwhich-(a) is received or is deemed to be

received in India in such year by oron behalf of such person ;or

(b) accrues or arises or is deemed toaccrue or arise to him in India duringsuch year; or

(c) accrues or arises to him outside Indiaduring such year:Provided that, in the case of a personnot ordinarily resident in India within the meaning of sub-section(6) of Section 6, the income which

accrues or arises to him outside Indiashall not be so included unless it isderived from a business controlledin or a profession set up in India.

(2) Subject to the provisions of this Act,the total income of any previous year ofa person who is a non-resident includesall income from whatever source derivedwhich(a) is received or is deemed to be

received in India in such year by or

on behalf of such person; or

(b) accrues or arises or is deemed toaccrue or arise to him in India duringsuch year.

Explanation I.-Income accruing or arisingoutside India shall not be deemed to be receivedin India within the meaning of this section byreason only of the fact that it is taken intoaccount in a balance sheet prepared in India.

Explanation 2.-For the removal of doubts, itis hereby declared that income which has beenincluded in the total income of a person on thebasis that it has accrued or arisen or is deemedto have accrued or arisen to him shall not againbe so included on the basis that it is received ordeemed to be received by him in India.

Thus, it is clear from the above that the incidenceof tax depends upon a persons ResidentialStatus and also upon the place and time ofaccrual and receipt of income.

As stated earlier, the charge of income tax varies

with the factor of residence in the previous yearand the general position with regard to the threecategories of taxpayers can be summarised asfollows:

1. Taxpayers in all categories are chargeableon income, from whatever sourcederived, which is received or is deemedto be received in India by or on behalfof them or which accrues or arises oris deemed to accrue or arise to themin India other than income specied as

exempt income.



17/78


16

Sources of Income R & OR R & NOR NR

Indian Income

Income received or deemed tobe received in India during thecurrent nancial year.

Taxable in India Taxable in India Taxable in India

Income accruing or arising or

deemed to accrue or arise inIndia during the currentnancial year.

Taxable in India Taxable in IndiaTaxable in India

Income accruing or arising ordeemed to accrue or arise out-side India, but rst receipt

is in India during the current

nancial year

Taxable in India Taxable in IndiaTaxable in India

Foreign Income

Income accruing or arisingor deemed to accrue or ariseoutside India and recieved

outside India, during the currentnancial year.

Taxable in India Taxable in IndiaNot Taxable inIndia

Income accruing or arising oroutside India from a Business/profession controlled in/from

India during the current

nancial year.

Taxable in India Taxable in IndiaNot Taxable inIndia

Income accruing or arising out-side India from any sourceother than Business Profession

controlled from India

Taxable in India Taxable in IndiaNot Taxable inIndia.

In the above context, it may be notedthat the receipt of income refers to therst occasion when the recipient gets the

money under his own control and it isthe rst receipt that determines the yearand place of receipt for the purposesof taxation. If the income is alreadyreceived outside India, no tax liabilitywill arise when the whole or any part ofsuch income is remitted to India.

In tabular form, the above may be stated as under:

2. A resident and ordinarily resident paystax in India on his entire world income,wherever accrued or received.

3. A non-resident pays tax only on histaxable Indian income and his foreignincome (earned and received outsideIndia) is totally exempt from Indiantaxes.

4. A not ordinarily resident pays taxon taxable Indian income and on


18/78

17


foreign income derived from a businesscontrolled in or a profession set up inIndia

5. An individual upon acquiring the statusof not ordinarily resident would notpay tax, for a period of two years, on theinterest on :a) the continued Foreign Currency

Non-Resident (FCNR) account;

(b) the Resident Foreign Currency(RFC) account; and

(c) on income earned from foreignsources unless such income isdirectly received in India or is earnedfrom a business controlled in or aprofession set up in India.



19/78

18

SPECIAL PROVISIONS RELATING TOCERTAIN INCOME OF NRIsSome of the special tax concessions for NRIs/PIO investing in India were introduced in theFinance Act, 1983, which became effective onJune 1, 1983. The tax provisions were furtherliberalised by subsequent Finance Acts andother amending laws.

Special Concessions

Investment income from foreign exchangeassets comprising shares and debenture ofand deposits with Indian companies andcentral government securities, subscribed toor purchased in convertible foreign exchange,is charged to income tax at a at rate of 20%.No deductions are, however, allowed and tax islevied on gross income. The basic exemption,below which income is not taxed in India, is alsonot allowed.

Under these special concessions a reduced rate

of 10% is applied to the long-term capital gainson transfer of any foreign exchange asset heldby the NRI/PIO. In order to qualify for long-term capital gains, the minimum holding periodfor shares held in a company or any othersecurity listed in a recognised Stock Exchangein India or units of Unit Trust of India or ofa specied Mutual Fund is 12 months and forother assets it is 36 months. Long-term capitalgains on foreign exchange assets are, however,exempted from tax if the net proceeds realized

on transfer are re-invested, within six months ofsuch transfer, in any specied securities and thenew assets are retained for at least three years.

The Finance Act, 2003 has withdrawn thetaxing provision in respect of dividend receivedby the shareholders on shares held in Indian

companies. Accordingly, dividend received bythe shareholders of Indian companies will beexempt from tax. The income received fromunits of Unit Trust of India and of speciedmutual funds will also be exempt.

Finance Act 2004 has:(a) granted tax exemption as regards long

term capital gains arising from transferof equity shares in a company and/or units of equity oriented schemesof Mutual Funds, which are subject tosecurities transaction tax; and

(b) xed at 10% the tax on short-termcapital gains arising from such sharesand/or units.

The tax concessions in respect of investmentincome (and not long term capital gain) willcontinue to apply even after the NRI/PIO

returns to India but such exemption would beavailable only in respect of foreign exchangeassets other than shares in Indian companiesand the exemption will continue until such timeas the assets are transferred or converted intomoney. However, as dividend is exempt incomefrom 1st April 2003, exclusion of shares fromsaid provision is redundant.

In the circumstances where the income of NRI/PIO from such foreign exchange assets is below

the taxable limit or the average level of tax isbelow 20%, he may elect not to be governed bythe special tax concessions referred to above. Hewould then have to furnish a Return of Incomein the normal course together with a declarationof such election and he would be entitled toclaim a refund of the whole or a part of the tax

2


20/78

Special Provisions Relating to Certain Income of NRI

19

deducted at source, as may be appropriate.

As mentioned above, short-term capital gainsarising from transfer of equity shares and/orunits of equity-oriented schemes of MutualFunds, which are subject to securities transactiontax, are taxed at 10%. Other Short-term capitalgain is taxable at normal slab rates as applicableto residents, and the return of income has to beled by the NRI/ PIO making such gain.

Capital gain from transfer of shares or debenturesof Indian companies will be computed byconverting the cost of acquisition, expensesincurred in connection with such transferand the sale price of the capital asset into thesame foreign currency as was initially used in

the purchase of these assets and the capitalgain so computed in such foreign currencywill be reconverted into Indian currency. Thiscomputation effectively gives the NRI/PIOthe benet of claiming exchange loss, if any,on all capital gains arising from sale of sharesor debentures of Indian companies, whetherthese are long term or short term. It may benoted that the aforesaid benet is available onlyif the investment is made from convertibleforeign exchange. In respect of investmentmade from funds other than convertible foreignexchange, and if the asset is a long-term capitalasset benet of indexation can be availed.However, indexation is not available in respectof debentures.


21/78

20

TAX EXEMPTIONS FROM INCOME TAX,WEALTH TAX AND GIFT TAXTax exemptions from income tax

Income from the following investments made byNRIs/PIO out of convertible foreign exchangeis totally exempt from tax.

(a) Deposits in under mentioned bankaccounts :(i) Non Resident External Rupee

Account (NRE)(ii) Foreign Currency Non-resident

Account (FCNR)(b) Units of Unit Trust of India and

specied mutual funds, other specicsecurities, bonds and savings certicates(subject to conditions and prescribedlimits under the Income-tax laws andregulations).

(c) Dividend declared by Indian company.(d) Long term capital gains arising from

transfer of equity shares in a company

and/or equity oriented schemes ofMutual Funds, which are subject tosecurities transaction tax.

It should be noted that the tax exemptionsrelating to NRE bank deposits will ceaseimmediately upon the NRI/PIO becoming aresident in India whereas the interest on FCNRbank deposits will continue to be tax free as longas the NRI maintains the status of Residentbut Not Ordinarily Resident or until maturity,

whichever is earlier.

Tax exemptions from wealth tax

Where an NRI/PIO returns to India forpermanent residence, moneys and the value ofassets brought by him into India and the valueof assets acquired by him out of such moneys

within one year immediately preceding the dateof his return and at any time thereafter aretotally exempt from Wealth-tax for a period ofseven years after return to India.

The above exemption may not have muchrelevance now since the Finance Act 1992 hasconsiderably reduced the scope of Wealth-tax. With effect from 1st April, 1993, Wealth-taxis being levied only on non-productive assetslike urban land, buildings (except one houseproperty), jewellery, bullion and vehicles, cashover Rs.50,000- etc. The current rate of Wealth-tax is 1 % on the aggregate market value ofchargeable assets as on 31st March every year inexcess of Rs.1.5 million.

However, it may be noted that NRIs are alsoliable to pay wealth tax if the market value of

taxable assets as on 31st March exceeds Rs.l.5million.

Tax exemptions from gift tax

Gift Tax Act, 1958 has been repealed with effectfrom 1st October, 1998 and as such, Gift Tax isnot chargeable on any gifts made on or afterthat date.

With regard to gifts of foreign exchange orspecied assets made by NRIs to their relatives

in India, it should be noted that1 Gifts made by an NRI/PIO to his or herspouse, minor children or sons wife willinvolve clubbing of income and wealthin the hands of the donor-NRI/ PIO.

2 In the case of gifts to minor children theclubbing of income, as above, will ceaseupon such children attaining the age of

3


22/78

21

18 years.3. The clubbing provisions will apply,

in case of gift to spouse or sons wifein India, only to the rst-stage ofincome from the original gift. Second-stage income arising from investmentof the income from the original gift isnot clubbed and this will constitute theseparate wealth/income of the doneespouse.

Generally, the income of minor children, fromany source (including income from gifts fromparents) is clubbed with the income of the parentwhose total chargeable income is greater.

Other matters to be noted regarding gifts are1 All gifts received by residents from

NRIs/PIO may be subject to the taxauthorities requiring the recipient toprovide evidence as regards the identityand nancial capacity of the donor andgenuineness of the gift.

2 Under the Foreign Exchange

Management Act, 1999 no approvalfrom Reserve Bank of India (RBI) isnecessary for the resident donee tohold gifted immovable property outsideIndia provided the said property isgifted by a person resident outsideIndia. General permission, subject tocertain conditions, is granted by RBIfor the resident donees to hold foreignmoveable properties such as shares andsecurities gifted by NRI/PIO donors.

3 The Income Tax Act has provided thatany sum of money exceeding Rs.50,000received without consideration (i.e., gift)by an individual or Hindu undividedFamily from any person on or after1st April, 2006 the whole of such sumwill be chargeable to income-tax in the

assessment of recipient (i.e., donee)under that head Income from othersources for and from assessment year2007-08 and onwards. Any sum ofmoney exceeding Rs. 25,000 received without consideration (i.e. gift) by anindividual or Hindu undivided familyfrom any person on or after September1, 2004 but before April 1, 2006, the whole of sum will be chargeable toincome tax.

However, the above provisions will not apply toany sum of money /gift received:

(a) from any relative; or(b) on the occasion of the marriage of the

individual; or(c) under a will or by way of inheritance;

or(d) in contemplation of death of the payer;

or(e) from a local authority; or(f) from any fund, foundation, university,

other educational institution, hospital,

medical institution, any trust orinstitution referred to in section 10(23C); or

(g) from a charitable institute registeredunder section 12AA.

The term relative is dened as:(1) spouse of the individual;(2) brother or sister of the individual;(3) brother or sister of the spouse of the

individual;

(4) brother or sister of either of the parentsof the individual;(5) any lineal ascendant or descendant of

the individual;(6) any lineal ascendant or descendant of

the spouse of the individual; and(7) spouse of the person referred to in (2)

to (6).

Tax Exemptions From Income Tax, Wealth Tax and Gift Tax


23/78


22

Scope of Receiptsl As per plain reading of the provision,

any receipt without consideration, saveexclusions, whether capital or otherwise,may be considered as income. l

l Similar receipts by any person (such as, apartnership rm, a company, and AOPetc.), other than an individual or a Hinduundivided Family, would not constituteincome in its hands.

l The provision would apply to anindividual irrespective of his residentialstatus. Accordingly, any receipt in Indiaby a non-resident of the nature discussedabove would be considered as income inhis hands.

l Gifts on occasion other than marriage,for example, birthday, marriageanniversary and other social occasions,religious ceremonies etc., would betaxable as income. Gifts received onthe occasion of the marriage of theindividual, irrespective of any limit,(but within reasonable limits) would notconstitute income.

l The receipts should be in the form ofmoney. Accordingly, any gift in kindwould not be taxable.

l The receipts must be withoutconsideration, implying in the nature ofgift.


24/78

23

PRESUMPTIVE TAX PROVISIONS

Certain provisions have been incorporated inthe Income-tax Act whereby the total incomeof certain non-resident assessee is computed onthe basis of certain percentage of their grosstotal receipts. This estimated income approachis expected to reduce areas of uncertainty andresultant tax litigation. However, a non-residentassessee has the option to maintain books ofaccount and get his books of account auditedu/s 44AB (Tax Audit) and offer lower protsand gains for taxation in India than the protsand gains estimated under Sections 44BB and44BBB on presumptive basis.

Special provisions applicable to non-residentsfor computing their income under the headBusiness Income

Shipping Business (Sections 44B & 172)

Section 44B contains special provisions forcomputing prots and gains of shippingbusiness of a non-resident assessee. In the case

of non-residents, such prots and gains will betaken at an amount equal to 7.5% (seven and ahalf per cent) of the amount paid or payableto the non-resident or to any other personon his behalf on account of the carriage ofpassengers, livestock, mail or goods shipped atany Indian port as also of the amount receivedor deemed to be received in India on accountof the carriage of passengers, livestock, mail orgoods shipped at any port outside India.

Section 172, which is a complete code in itself,contains provisions for taxation of occasionalshipping business of non-residents in respectof prots made by them from carriage ofpassengers, livestock, mail or goods shipped ata port in India.

Business of Providing Services and

Facilities in Connection with Explorationetc. of Mineral Oils (Section 44BB)

Section 44BB contains special provisions forcomputation of taxable income of a non-resident assessee engaged in the business ofproviding services or facilities in connection with, or supplying plant and machinery onhire, used or to be used, in the prospecting for,or extraction or production of, mineral oils.It provides that 10% of the amount paid orpayable to, or the amount received or receivableby, the assessee for provision of such servicesor facilities or supply of plant and machineryshall be deemed to be the taxable income ofsuch non-resident assessee.

Business of Operation of Aircraft(Section 44BBA)

Section 44BBA contains special provisions forcomputing prots and gains of the businessof operation of aircraft of non-residents. It

provides for determination of the income ofnon-resident taxpayers on presumptive basisat a at rate of 5% of the amount received orreceivable for carriage of persons, livestock,mail or goods from any place in India or theamount received or deemed to be receivedwithin India on account of such carriage fromany place outside India.

Prots and Gains of Foreign CompaniesEngaged in the Business of CivilConstruction or Erection of Plant andMachinery or Testing or Commissioningthereof, in Connection with certain

Turnkey Power Projects (Section44BBB)

Section 44BBB provides that, notwithstandinganything to the contrary contained in Sections


25/78


24

28 to 44AA of the Income-tax Act, the incomeof foreign companies who are engaged in thebusiness of civil construction or erection ortesting or commissioning of plant or machineryin connection with a turnkey power project shallbe deemed at 10 per cent of the amount paid orpayable to such assessee or to any person onhis behalf, whether in or out of India. For thispurpose, the turnkey power project should beapproved by the Central Government. It hasalso been claried that erection of plant ormachinery or testing or commissioning thereof will include lying of transmission lines andsystems.

Taxation of Non-Residents RoyaltyIncome or Fees for Technical Services(Section 44DA)

Royalties and fees for Technical Servicesreceived from the Government or an Indianconcern by a Non-Resident or a foreigncompany in pursuance of an agreement enteredinto after 31-3-2003 shall be computed underthe head Business Income in accordance

with the provisions of the Income Tax Act i.e.after allowing deduction for various permissibleexpenses and allowances.

Section 44DA does not Permit Deductionof following Expenses

(i) expenditure which is not wholly andexclusively incurred for the business ofsuch permanent establishment or xedplace of profession in India, and

(ii) amounts reimbursed by permanentestablishment to its head ofce or toany of its other ofces (Other than,reimbursement of actual expenses).

Restriction on Deduction of Head OfceExpenses (Section 44C)

Section 44C is intended to be made applicableonly in the cases of those non-residents whocarry on business in India through theirbranches.

The deduction in respect of head ofce expenseswill be limited to:

a) An amount equal to 5 per cent of the

adjusted total income for the relevantyear: orb) The actual amount of head ofce

expenditure attributable to the businessin India, whichever is least.


26/78

25

TAX INCENTIVES FOR INDUSTRIES

Tax holidays in the form of deductions areavailable for private sectors and incentives toindustries located in special area/regions arelisted below:

Infrastructure Sectors (Section 80-IA)

Deduction of 100% of the prots from businessfor a period of 10 years for:

(a) Development or operation andmaintenance of ports, airports, roads,highways, bridges, rail systems, inlandwater ways, inland port or navigationalchannel in sea, water supply projects, water treatment systems, irrigationprojects, sanitation and sewage projects,and solid waste management systems.

(b) Generation and distribution of powerthat commence before March 31, 2010

(c) Laying and operating a cross countrynatural gas distribution network.

Mineral Oil (Section 80-IB)

Deduction of 100% of prots from theBusiness of Rening Mineral Oil for a periodof 10 Years for:

a. Undertaking wholly owned by a publicsector Company or any other companyin which Public Sector Company holdForty Nine Percent of voting rights.

b. Undertaking starts Rening on or beforeMarch 31, 2012.

Hospital (Section 80-IB)

Deduction of 100% of prots from businessof operating and maintaining Hospital for aperiod of 5 years for:

a. Hospital is constructed and has startedor starts functioning at any time duringApril 1, 2008 & March 31, 2013.

b. Hospital has at least one hundred beds

for patients.c. Hospital is located anywhere in India

other than excluded area.

Hotels and Convention Centre in NCR(Sec 80-ID)

Deduction of 100% of the prots from businessof hotels and convention centres for a periodof 5 years for

a. Hotel and Convention Centre locatedin National Capital Territory ofDelhi and the districts of Faridabad,Gurgaon, Gautam Budh Nagar andGhaziabad.Hotel is constructed and has started orstarts functioning at any time duringApril 1, 2007 and March 31, 2010.Likewise, the Convention Centre isconstructed at any time during April1, 2007 and March 31, 2010.

b. Hotel located in the specied districthaving a World Heritage site. Hotel is

constructed and has started or startsfunctioning at any time during April 1,2008 and March 31, 2013.

Undertakings in North Eastern States(Sec 80-IE)

Deduction of 100% of the prots from businessfor a period of 10 years for:

a. Manufacture or production of goods orundertakes substantial expansion during April 1, 2007 and March 31, 2017.

Providing eligible services during April1, 2007 and March 31, 2017.b. Deduction is not available in respect of

manufacture or production of tobacco,pan masala, plastic carry bag of lessthan 20 microns or goods produced bypetroleum and gas reneries.


27/78


26

c. Eligible services are hotel (2 star or above),nursing home(25 beds or more), old agehomes, vocational training institutes forhotel management, catering and foodcrafts, entrepreneurship development,nursing and paramedical, civil aviationrelated training, fashion designing andindustrial training, IT related trainingcentres, IT hardware manufacture unitsand bio-technology.

d. The aforesaid activity takes place in anyNorth-Eastern States(i.e., ArunachalPradesh, Assam, Manipur, Meghalaya,Mizoram, Nagaland, Sikkim andTripura).

Tax Exemptions

Following tax exemptions are available indifferent sectors:

Deduction of 100% of the Prot fromBusiness of

(a) Development or operation andmaintenance of ports, airports, roads,

highways, bridges etc. (Sec 80-IA).(b) Generation, distribution andtransmission of power (Sec 80-IA).

(c) Development, operation andmaintenance of an Industrial Park orSEZ (Sec 80-IAB).

(d) By undertakings set up in certainnotied areas or in certain thrust sectorindustries in the North Eastern statesand Sikkim (Sec 80-IC).

(e) By undertakings set up in certainnotied areas or in certain thrust sectorindustries in Uttaranchal and HimachalPradesh (Sec 80-IC).

(f) Derived from export of articles orsoftware by undertakings in FTZ,EHTP/STP (Sec 10A).

(g) Derived from export of articles orsoftware by undertakings in SEZ(Sec 10AA).

(h) Derived from export of articles orsoftware by 100% EOU (Sec 10B).

(i) An offshore banking unit situated inSEZ from business activities with unitslocated in the SEZ (Sec 80LA).

(j) Derived by undertakings engaged inBusiness of operating and maintainingHospital located anywhere in Indiaother than excluded area. (Sec 80-IB)

(k) Derived by an undertaking engaged in

the integrated business of handling,storage and transportation of foodgrains (Sec 80-IB).

(l) Derived by an undertaking engaged inthe commercial production or reningof mineral oil (Sec 80-IB).

(m) Derived by an undertaking from exportof wood based handicraft (Sec 10BA).


28/78

27

AUTHORITY FOR ADVANCE RULINGSIntroduction

The scheme of advance rulings was introducedby the Finance Act, 1993, Chapter XIX-B ofthe Income-tax Act, which deals with advancerulings, came into force with effect from 1-6-1993. Under the scheme, the power of givingadvance rulings has been entrusted to anindependent adjudicatory body. Accordingly,a high level body headed by a retired judge ofthe Supreme Court has been set up. This isempowered to issue rulings, which are bindingboth on the Income-tax Department and theapplicant. The procedure prescribed is simple,inexpensive, expeditious and authoritative.

Advance Ruling, means written opinionor authoritative decision by an Authorityempowered to render it with regard to the taxconsequences of a transaction or proposedtransaction or an assessment in regard thereto.It has been dened in section 245N(a) of theIncome-tax Act, 1961 as amended from time

to time. Under section 245N, a ruling can beobtained by an applicant (who may be either anon-resident or a resident having a transactionwith a non-resident) in respect of any questionof law or fact in relation to the tax liability ofthe non-resident arising out of a transactionundertaken or proposed to be undertaken.

Salient features:a. Available only for Income-tax:

The procedure of advance ruling isavailable only under the Income-taxAct, 1961.

b. Must relate to a transaction entered intoor proposed to be entered into by theapplicant: -

The advance ruling is to be given on questionsspecied in relation to such a transaction by theapplicant.

c. Questions on which ruling can besought:i. Even though the word used in the

denition is the word question,it is clear that the non-resident canraise more than one question in oneapplication. This has been madeamply clear by Column No. 8 of theform of application for obtaining anadvance ruling (Form No. 34C)

ii. Though the word question isunqualied, it is only proper to readit as a reference to questions of lawor fact, pertaining to the income taxliability of the non-resident qua thetransaction undertaken or proposedto be undertaken.

iii. The question may be on points of lawas well as on fact; therefore, mixed

questions of law and fact can alsobe included in the application. Thequestions should be so drafted thateach question is capable of a briefanswer. This may need breaking-upof complex question into two ormore simple questions.

iv. The questions should arise out ofthe statement of facts given with theapplication. No ruling will be givenon a purely hypothetical question.

No question not specied in theapplication can be urged. Normallya question is not allowed to beamended but in deserving cases theAuthority may allow amendment ofone or more questions.


29/78


28

v. Subject to the limitations to bepresently referred to, the questionmay relate to any aspect of thenon-residents liability includinginternational aspects and aspectsgoverned by double tax agreements. The questions may even coveraspects of allied laws that may havea bearing on tax liability such as thelaw of contracts, the law of trustsand the like, but the question musthave a direct bearing, on and nexuswith the interpretation of the IndianIncome-tax Act.

d. Time limit for ruling:The Authority shall pronounce it advanceruling within 6 months of receipt of theapplication.

e. Binding nature of advance ruling:The effect of the ruling is stated to belimited to the parties appear before theauthority and the transaction in relationto which the ruling was given. This isbecause the ruling was rendered on a set

of facts before the Authority and cannot be of general application.

Question precluded: Under section 245R,certain restrictions have been imposed on theadmissibility of an application, if the questionconcerned is pending before other authorities. According to it, the authority shall not allowan application where the question raised by thenon-resident applicant (or a resident applicanthaving transaction with a non-resident) is already

pending before any income-tax authority orappellate Tribunal or any court of law. Further,the authority shall not allow the applicationwhere the question raised in it:

i. involves determination of fair marketvalue of any property; or

ii. it relates to a transaction or issue which

is designed prima facie for the avoidanceof income-tax.

The Authority and Its Powers The authority is constituted by the CentralGovernment and is known as Authority forAdvance Ruling (AAR) [Section 245-O (1)].

AAR consist of three member, viz :l Chairman (who is a retired judge of the

Supreme Court)l An IRS ofcer (who is qualied to be a

member of CBDT); andl An ILS ofcer (who is qualied to be an

additional secretary to the Governmentof India) [Section 245-O(2)]

The AAR enjoys all powers of a Civil Courtunder the code of Civil Procedure, 1908, as arereferred to in Section 131 of the Income TaxAct, 1961 [Section 245U(1)]

The AAR also enjoys the status of a Civil Courtfor the purpose of section 195 of the Code of

Criminal Procedure, 1973. [Section 245U(2)].

Every proceedings before the AAR is deemedto be a judicial proceedings within the meaningof Sections 193 & 228 and for the purpose ofSection 196 of the Indian Penal Code,1860.

Meaning of Advance Ruling

The term Advance ruling is dened in Section245N(a) of the Act. Following are the mainfeatures of the denition:l

Advance ruling means the determinationof a question specied in the applicationby the applicant;

l Such question may be a question oflaw or a question of fact. Such questionmust be in relation to a transaction andcannot be a hypothetical or academicquestion;


30/78

29

l The transaction may be the one whichis already undertaken or the one whichis proposed to be undertaken by theapplicant;

l The determination of such question onsuch a transaction is to be done by theAAR.

This term also indicates the determination ordecision in respect of an issue pending before:

(i) An Income-tax Authority; or(ii) The Appellate Tribunal.

Such determination could be determination ona question of law or on a question of fact.

Who can Apply

An application for advance ruling can be madeby a NON-RESIDENT as also by a residentin respect of a transaction with a non-resident.Besides, a resident falling within a notied classor category may also make an application. Theclass or category so notied by the Governmenttill date are:l

Public Sector Company; andl A resident seeking advance ruling inrelation to the tax liability of a non-resident arising out of a transaction witha non-resident.

In case of resident applicants, no Income-tax Authority or the Appellate Tribunal shallproceed to decide any issue in respect of whichan application has been made.

Procedure for Making an Application

The application has to be made in followingforms:l By Non-Residents : Form 34Cl By resident in relation to transaction

with Non-Residents : Form 34D

l By residents notied by theGovernment : Form 34E

l Application must be made inquadruplicate.

l It should be presented by the applicant inperson or by an authorized representativeor may be sent by post;

l The AAR, at present, holds its sittings atits headquarters at Delhi.

l The application must be accompaniedby draft of Rs. 2500 drawn in favor ofAuthority of Advance Ruling payableat New Delhi.

l The secretary may send the applicationback to the applicant if it is defective inany manner for removing the defect.

The application must be signed as per theprovisions of Rule 44E (2) of the Income TaxRule, 1962.

Enclosures to the Application

l A statement listing question(s) in relationto the transaction on which the advance

ruling is required. This is optional. Thequestion(s) may be stated in theapplication form itself. If, however,space provided is insufcient, separateenclosure may be used for this purpose.

It may be noted that the question(s) raisedin the application should be exhaustivelydrafted covering all aspects of the issueinvolved and all alternative claims thatthe applicant may wish to make without

prejudice to each other. This is becauseif at a later stage the applicant desiresto raise any additional question which isnot set-forth in the application, he mayhave to obtain permission of the AAR.Granting of such permission is at thediscretion of the AAR.

Authority for Advance Rulings


31/78


30

l A statement of relevant facts having abearing on the question(s) on which theadvance ruling is required.

l A statement containing the applicantsinterpretation of law or facts, as thecase may be, in respect of thequestion(s) on which the advanceruling is required.

l Where the application is signed by anauthorized representative, the power ofattorney authorizing him to sign.

l Where the application is signed by anauthorized representative, an afdavitsetting out the unavoidable reasonswhich entitles him to sign.

l Separate enclosures may be used wherethe space provided for any of the itemsin the relevant forms is insufcient.

l In the covering letter, the applicant maymake a request for being heard beforepronouncing the ruling.

Procedure After Making of theAppliation

l On receipt of the application, the AAR will forward a copy to theCommissioner.

l Commissioner may be called upon tofurnish the relevant records.

l AAR shall examine the application andsuch records.

l After examination, an order shall bepassed u/s 245R(2) to either allow orreject the application

l A copy of order u/s 245R(2) is sent tothe applicant and to the commissioner.

l If the application is allowed vide orderu/s 245R(2), the AAR shall :(i) Examine such further material

as may be placed before it by theapplicant;

(ii) Examine such further material asmay be obtained by the Authoritysuo moto; and

(iii) Pronounce its advance ruling on thequestion specied in the application

within six months of the receipt ofthe application either with or withoutgiving the assessee a hearing.


32/78

31

TRANSFER PRICINGMeaning

Commercial transactions between the differentparts of the multinational groups may notbe subject to the same market forces shapingrelations between the two independent rms.One party transfers to another goods or services,for a price. That price is known as transferprice. This may be arbitrary and dictated, withno relation to cost and added value, divergefrom the market forces. Transfer price is, thus,a price which represents the value of goods; orservices between independently operating unitsof an organisation. But, the expression transferpricing generally refers to prices of transactionsbetween associated enterprises which may takeplace under conditions differing from thosetaking place between independent enterprises.It refers to the value attached to transfers ofgoods, services and technology between relatedentities. It also refers to the value attached totransfers between unrelated parties which arecontrolled by a common entity.

Suppose a company A purchases goods for 100rupees and sales it to its associated company Bin another country for 200 rupees, who in turnsells in the open market for 400 rupees. Had Asold it direct, it would have made a prot of 300rupees. But by routing it through B, it restrictedit to 100 rupees, permitting B to appropriatethe balance. The transaction between A and Bis arranged and not governed by market forces.The prot of 200 rupees is, thereby, shifted to

the country of B. The goods are transferredon a price (transfer price) which is arbitrary ordictated (200 hundred rupees), but not on themarket price (400 rupees).

Thus, the effect of transfer pricing is that theparent company or a specic subsidiary tends to

produce insufcient taxable income or excessiveloss on a transaction. For instance, protsaccruing to the parent can be increased bysetting high transfer prices siphon prots fromsubsidiaries domiciled in high tax countries,and low transfer prices to move prots tosubsidiaries located in low tax jurisdiction. Asan example of this, a group which manufactureproducts in a high tax countries may decideto sell them at a low prot to its afliate salescompany based in a tax heaven country. Thatcompany would in turn sell the product at anarms length price and the resulting (inated)prot would be subject to little or no tax in thatcountry. The result is revenue loss and also adrain on foreign exchange reserves.

Transfer pricing Arms length price

92F(ii) Arms length price means a price which isapplied or proposed to be applied in a transactionbetween persons other than associatedenterprises, in uncontrolled conditions;

Enterprise

92F(iii) enterprises means a person (including apermanent establishment of such person) whois, or has been, or is proposed to be, engaged inany activity, relating to the production storage,supply, distribution, acquisition or controlof articles or goods, or know-how, patents,copyright, trademarks, licences, franchises or anyother business or commercial rights of similarnature, or any data, documentation, drawing or

specication relating to any patent, invention,model, design, secret formula or process, of which the other enterprise is the owner orin respect of which the other enterprise hasexclusive rights, or the provision of serviceof any kind, [or in carrying out any work inpursuance of a contract,] or in Investment, or


33/78


32

providing loan or in the business of acquiring,holding, underwriting or dealing with shares,debentures or other securities of any other bodycorporate, whether such activity or business iscarried on, directly or through one or more ofits units or divisions or subsidiaries, or whethersuch unit or division or subsidiary is located atthe same place where the enterprise is locatedor at a different place or places;

Permanent establishment

92F [(iiia) permanent establishment, referred toin clause (iii), includes a xed place of businessthrough which the business of the enterprise iswholly or partly carried on;

Transaction

92F (v) transaction includes an arrangement,understanding or action in concert,

(a) whether or not such arrangement,understanding or action is formal or inwriting; or

(b) Whether or not such arrangement,understanding or action is intended to

be enforceable by legal proceeding.Computation of arms length price.

92C. (1) The arms length price in relation to aninternational transaction shall be determined byany of the following methods, being the mostappropriate method, having regard to the natureof transaction or class of transaction or class ofassociated persons or functions performed bysuch persons or such other relevant factors asthe Board may prescribe, namely :

(a) comparable uncontrolled price method;(b) resale price method;(c) cost plus method;(d) prot split method;(e) transactional net margin method;(f) such other method as may be prescribed

by the Board.

(2) The most appropriate method referredto in sub-section (1) shall be applied, fordetermination of arms length price, inthe manner as may be prescribed :

Provided that where more than one price isdetermined by the most appropriate method,the arms length price shall be taken to be thearithmetical mean of such prices, or, at theoption of the assessee, a price which may varyfrom the arithmetical mean by an amount notexceeding ve per cent of such arithmeticalmean.

(3) Where during the course of anyproceeding for the assessment ofincome, the Assessing Ofcer is, onthe basis of material or informationor document in his possession, of theopinion that(a) the price charged or paid in an

international transaction has notbeen determined in accordance withsub-sections (1) and (2); or

(b) any information and document

relating to an internationaltransaction have not been keptand maintained by the assessee inaccordance with the provisionscontained in sub-section (1) ofsection 92D and the rules made inthis behalf; or

(c) the information or data used incomputation of the arms lengthprice is not reliable or correct; or

(d) the assessee has failed to furnish,

within the specied time, anyinformation or document whichhe was required to furnish by anotice issued under sub-section(3) of section 92D. the AssessingOfcer may proceed to determinethe arms length price in relation to


34/78

33

Transfer Pricing

the said international transaction inaccordance with sub-sections (1) and(2), on the basis of such material orinformation or document availablewith him:

Provided that an opportunity shall be given bythe Assessing Ofcer by serving a notice callingupon the assessee to show cause, on a date andtime to be specied in the notice, why the armslength price should not be so determined on thebasis of material or information or document inthe possession of the Assessing Ofcer.

(4) Where an arms length price isdetermined by the Assessing Ofcerunder sub-section (3), the AssessingOfcer may compute the total incomeof the assessee having regard to thearms length price so determined :

Provided that no deduction under section 10A[or section 10AA] or section 10B or underChapter VI-A shall be allowed in respect of theamount of income by which the total income

of the assessee is enhanced after computationof income under this sub-section :

Provided further that where the total income ofan associated enterprise is computed under thissub-section on determination of the arms lengthprice paid to another associated enterprise fromwhich tax has been deducted [or was deductible]under the provisions of Chapter XVIIB, theincome of the other associated enterpriseshall not be recomputed by reason of such

determination of arms length price in the caseof the rst mentioned enterprise.

Meaning of international transaction.

92B. (1) For the purposes of thissection and sections 92, 92C, 92D and92E, international transaction means

a transaction between two or moreassociated enterprises, either or both ofwhom are non-residents, in the natureof purchase, sale or lease of tangibleor intangible property, or provisionof services, or lending or borrowingmoney, or any other transaction havinga bearing on the prots, income,losses or assets of such enterprises,and shall include a mutual agreementor arrangement between two or moreassociated enterprises for the allocationor apportionment of, or any contributionto, any cost or expense incurred or to beincurred in connection with a benet,service or facility provided or to beprovided to any one or more of suchenterprises.(2) A transaction entered into by anenterprise with a person other thanan associated enterprise shall, for thepurposes of sub-section (1), be deemedto be a transaction entered into betweentwo associated enterprises, if there exists

a prior agreement in relation to therelevant transaction between such otherperson and the associated enterprise, orthe terms of the relevant transactionare determined in substance betweensuch other person and the associatedenterprise.

Meaning of associated enterprise.

92A. (1) For the purposes of this sectionand sections 92, 92B, 92C, 92D, 92E and

92F, associated enterprise, in relation toanother enterprise, means an enterprise(a) which participates, directly or indirectly,

or through one or more intermediaries,in the management or control or capitalof the other enterprise; or

(b) in respect of which one or more persons


35/78


34

who participate, directly or indirectly, orthrough one or more intermediaries, inits management or control or capital,are the same persons who participate,directly or indirectly, or through one ormore intermediaries, in the managementor control or capital of the otherenterprise.

(2) For the purposes of sub-section (1),two enterprises shall be deemed to beassociated enterprises if, at any timeduring the previous year,(a) one enterprise holds, directly or

indirectly, shares carrying not lessthan twenty-six per cent of thevoting power in the other enterprise;or

(b) any person or enterprise holds,directly or indirectly, shares carryingnot less than twenty-six per cent ofthe voting power in each of suchenterprises; or

(c) a loan advanced by one enterprise tothe other enterprise constitutes not

less than fty-one per cent of thebook value of the total assets of theother enterprise; or

(d) one enterprise guarantees notless than ten per cent of the totalborrowings of the other enterprise;or

(e) more than half of the boardof directors or members of thegoverning board, or one or moreexecutive directors or executive

members of the governing board ofone enterprise, are appointed by theother enterprise; or

(f) more than half of the directors ormembers of the governing board,or one or more of the executivedirectors or members of the

governing board, of each of thetwo enterprises are appointed by thesame person or persons; or

(g) the manufacture or processingof goods or articles or businesscarried out by one enterprise is wholly dependent on the use ofknow-how, patents, copyrights,trade-marks, licences, franchises orany other business or commercialrights of similar nature, or anydata, documentation, drawing orspecication relating to any patent,invention, model, design, secretformula or process, of which theother enterprise is the owner or inrespect of which the other enterprisehas exclusive rights; or

(h) ninety per cent or more of the rawmaterials and consumables requiredfor the manufacture or processing ofgoods or articles carried out by oneenterprise, are supplied by the otherenterprise, or by persons specied by

the other enterprise, and the pricesand other conditions relating to thesupply are inuenced by such otherenterprise; or

(i) the goods or articles manufactured orprocessed by one enterprise, are soldto the other enterprise or to personsspecied by the other enterprise,and the prices and other conditionsrelating thereto are inuenced bysuch other enterprise; or

(j) where one enterprise is controlledby an individual, the other enterpriseis also controlled by such individualor his relative or jointly by suchindividual and relative of suchindividual; or

(k) where one enterprise is controlled by


36/78

35

a Hindu undivided family, the otherenterprise is controlled by a memberof such Hindu undivided family orby a relative of a member of suchHindu undivided family or jointly bysuch member and his relative; or

(l) where one enterprise is a rm,association of persons or body ofindividuals, the other enterpriseholds not less than ten per centinterest in such rm, association ofpersons or body of individuals; or

(m) there exists between the twoenterprises, any relationshipof mutual interest, as may beprescribed.

Reference to Transfer Pricing Ofcer.

92CA. (1) Where any person, being theassessee, has entered into an internationaltransaction in any previous year, and theAssessing Ofcer considers it necessaryor expedient so to do, he may, with theprevious approval of the Commissioner,

refer the computation of the arms lengthprice in relation to the said internationaltransaction under section 92C to theTransfer Pricing Ofcer.

(2) Where a reference is made under sub-section (1), the Transfer Pricing Ofcershall serve a notice on the assesseerequiring him to produce or cause tobe produced on a date to be speciedtherein, any evidence on which theassessee may rely in support of the

computation made by him of thearms length price in relation to theinternational transaction referred to insub-section (1).

(3) On the date specied in the notice undersub-section (2), or as soon thereafter asmay be, after hearing such evidence asthe assessee may produce, including any

information or documents referred toin sub-section (3) of section 92D andafter considering such evidence as theTransfer Pricing Ofcer may require onany specied points and after taking intoaccount all relevant materials which hehas gathered, the Transfer Pricing Ofcershall, by order in writing, determinethe arms length price in relation to theinternational transaction in accordancewith sub-section (3) of section 92C andsend a copy of his order to the AssessingOfcer and to the assessee.

(3A) Where a reference was made under sub-section (1) before the 1st day of June,2007 but the order under sub-section(3) has not been made by the TransferPricing Ofcer before the said date, or areference under sub-section (1) is madeon or after the 1st day of June, 2007, anorder under sub-section (3) may be madeat any time before sixty days prior to thedate on which the period of limitationreferred to in section 153, or as the case

may be, in section 153B for making theorder of assessment or reassessment orrecomputation or fresh assessment, asthe case may be, expires.

(4) On receipt of the order under sub-section (3), the Assessing Ofcer shallproceed to compute the total incomeof the assessee under sub-section (4)of section 92C in conformity with thearms length price as so determined bythe Transfer Pricing Ofcer.

(5) With a view to rectifying any mistakeapparent from the record, the TransferPricing Ofcer may amend any orderpassed by him under sub-section (3),and the provisions of section 154 shall,so far as may be, apply accordingly.

(6) Where any amendment is made by the Transfer Pricing Ofcer under sub-

Transfer Pricing


37/78


36

section (5), he shall send a copy of hisorder to the Assessing Ofcer who shallthereafter proceed to amend the orderof assessment in conformity with suchorder of the Transfer Pricing Ofcer.

(7) The Transfer Pricing Ofcer may, for thepurposes of determining the arms lengthprice under this section, exercise all orany of the powers specied in clauses (a)to (d) of sub-section (1) of section 131or sub-section (6) of section 133.

Explanation.For the purposes of this section, Transfer Pricing Ofcer means a JointCommissioner or Deputy Commissioner or Assistant Commissioner authorised by theBoard85 to perform all or any of the functionsof an Assessing Ofcer specied in sections92C and 92D in respect of any person or classof persons.

Maintenance and keeping of informationand document by persons entering into aninternational transaction.

92D. (1) Every person who has enteredinto an international transaction shallkeep and maintain such information anddocument in respect thereof, as may beprescribed(2) Without prejudice to the provisionscontained in sub-section (1), the Boardmay prescribe the period for which theinformation and document shall be keptand maintained under that sub-section.(3) The Assessing Ofcer or the

Commissioner (Appeals) may, in thecourse of any proceeding under this Act,require any person who has entered intoan international transaction to furnishany information or document in respectthereof, as may be prescribed undersub-section (1), within a period of thirty

days from the date of receipt of a noticeissued in this regard :

Provided that the Assessing Ofcer or theCommissioner (Appeals) may, on an applicationmade by such person, extend the period ofthirty days by a further period not exceedingthirty days.

Report from an accountant to be furnished bypersons entering into international transaction.

92E. Every person who has enteredinto an international transaction duringa previous year shall obtain a reportfrom an accountant and furnish suchreport on or before the specied datein the prescribed form duly signed and veried in the prescribed manner bysuch accountant and setting forth suchparticulars as may be prescribed

Penalty for failure to keep and maintaininformation and document in respect ofinternational transaction.

271AA. Without prejudice to theprovisions of section 271, if any personfails to keep and maintain any suchinformation and document as requiredby sub-section (1) or sub-section (2) ofsection 92D, the Assessing Ofcer orCommissioner (Appeals) may direct thatsuch person shall pay, by way of penalty,a sum equal to two per cent of the valueof each international transaction enteredinto by such person.

Penalty for failure to furnish information ordocument under section 92D

271G. If any person who has enteredinto an international transaction failsto furnish any such information ordocument as required by sub-section (3)


38/78

37

of section 92D, the Assessing Ofcer orthe Commissioner (Appeals) may directthat such person shall pay, by way ofpenalty, a sum equal to two per cent ofthe value of the international transactionfor each such failure.]

Penalty for failure to furnish report undersection 92E.

271BA. If any person fails to furnish a

report from an accountant as requiredby section 92E, the Assessing Ofcermay direct that such person shall pay, byway of penalty, a sum of one hundredthousand rupees.

Time Limit for furnishing Form No. 3CEB

On or before 31st October of the relevantAssessment Year.

Transfer Pricing


39/78

38

DOUBLE TAX AVOIDANCEAGREEMENTS (DTAA) The Government of India has entered intodouble taxation avoidance agreements (taxtreaties) with several countries with the principalobjective of evolving a system for the respectivecountries to allocate the right to tax differenttypes of income on an equitable basis. Tax treatiesserve the purpose of providing full protectionto taxpayers against double taxation and alsoaim at preventing discrimination between thetaxpayers in the international eld. The NRIs/PIO would, therefore, be well advised to takeadvantage of such treaties in tax planning fortheir investments in India.

DTAA can be dened as an internationalagreement between two sovereign Statesreaching an understanding as to how theirresidents will be taxed in respect of cross ordertransactions in order to avoid double taxationon the same income.

In yet another way, DTAA can be dened asan agreement of compromise between two

contracting States whereby each country agreesto give up something in consideration ofthe other country giving up something in itsfavour.

It may sometime happen that owing to reductionin tax rates under the domestic law-taking placeafter coming into existence of the treaty, thedomestic rates become more favorable to theNRIs/PIO. Since the object of the tax treatiesis to benet the NRIs/PIO, they have, undersuch circumstances, the option to be assessedeither as per the provisions of the treaty or thedomestic law of the land.

In order to avoid any demand or refundconsequent to assessment and to facilitate theprocess of assessment, the concerned authoritiesin India have provided that tax shall be deductedat source out of payments to NRIs/PIO at the

prevailing rates at which the particular income ismade taxable under the tax treaties.

8


40/78

PART - II

OTHER IMPORTANT

MATTERS


41/78


42/78

41

OVERSEAS CITIZENSHIP OFINDIA (OCI)

OCI Scheme Is Operational From02.12.2005

The Constitution of India does not allowholding Indian citizenship and citizenship ofa foreign country simultaneously. Based on therecommendation of the High Level committeeon Indian Diaspora, the Government of Indiadecided to grant Overseas Citizenship OfIndia (OCI) commonly known as dualCitizenship. Persons of Indian Origin (PIOs)of certain category as has been specied inthe Brochure who migrated from India andacquired citizenship of a foreign country otherthan Pakistan and Bangladesh, are eligible forgrant of OCI as long as their home countriesallow dual citizenship in some form or the otherunder their local laws.

1. Application for registration as OCIcan be made online. Before ling theapplication, Instructions may be

perused so that there is no mistake insubmission of application. Further thedetails regarding Fee and ofces whereapplications have to be led may also beperused.

2. Persons registered as OCI have notbeen given any voting rights, electionto Lok Sabha / Rajya Sabha /Legislative Assembly / Council, holdingConstitutional posts such as President,Vice President, Judge of Supreme Court

/ High Court etc. Registered OCIs shallbe entitled to following benets:(i) Multiple entry, multi-purpose life

long visa to visit India;(ii) Exemption from reporting to Police

authorities for any length of stay inIndia; and

(iii) Parity with NRIs in nancial,economic and educational eldsexcept in the acquisition ofagricultural or plantationproperties.

3. Any further benets to OCIs will benotied by the Ministry of OverseasIndian affairs (MOIA) under section 7B(1) of the citizenship Act, 1955.

4. A person registered as OCI is eligibleto apply for grant of Indian citizenshipunder section 5(1) (g) of the citizenshipAct, 1955 if he/she is registered as OCIfor ve years and has been residing inIndia for one year out of the ve yearsbefore making the application.

Brochure on Overseas Citizenship ofIndia (OCI)

1. Eligibility Criteria

A foreign national, who was eligible to becomecitizen of India on 26.01.1950 or was a citizenof India on or at anytime after 26.01.1950 orbelonged to a territory that became part ofIndia after 15.08.1947 and his/her childrenand grand children, provided his/her countryof citizenship allows dual citizenship in someform or other under the local laws, is eligible forregistration as Overseas Citizenship Of India(OCI). Minor children of such person are also

eligible for OCI. However, if the applicant hadever been a citizen of Pakistan or Bangladesh,he/she will not be eligible for OCI.

2. Application Form and Procedure

A family consisting of spouses and upto twominor children can apply in the same form i.e.


43/78


42

Form XIX. The form can be led online ordownloaded from our website www.mha.nic.in.

The following documents shall be enclosed foreach application:

1 Proof of present citizenship.2 Evidence of self or parents or grand

parents,(a) Being eligible to become a citizen of

India at the time of commencementof the Constitution; or

(b) Belonging to a territory that becamepart of India after 15th August,1947; or

(c) Being citizen of India on or after26th January, 1950

These could be:(i) Copy of the passport: or(ii) Copy of the domicile certicate

issued by the Competent authority;or

(iii) Any other proof.1 Evidence of relationship as parent /

grand parent, if their Indian origin is

claimed as basis for grant of OCI.2 Application fee by way of DemandDraft (US $ 275 for each applicant orequivalent in local Currency; US $ 25or equivalent in local currency for eachPIO cardholder.)

3 PIO cardholders should submit a copyof his/her PIO card.

The application form completed in all respectsalong with enclosures should be submitted in

duplicate to the Indian Mission / Post of thecountry of applicants citizenship or where he/she is not in the country of citizenship to theIndian Mission / Post of the country in whichhe / she is ordinarily resident. If the applicantis in India, he / she can apply to the ForeignersRegional Registration Ofcer (FRRO) at

Delhi, Mumbai, Kolkata or Amritsar or ChiefImmigration Ofcer (CHIO) Chennai or to theUnder Secretary, OCI Cell, Citizenship Section,Foreigners Division, Ministry of Home Affairs(MHA), Jaisalmer House, 26 Mansingh Road,New Delhi 110011.

3. Procedure for Granting Registration

After Preliminary scrutiny, if there is no adverseinformation available against the applicant, theIndian Mission / Post shall register a person asOCI within 30 days of application and the caseshall be referred to MHA for post vericationof the antecedents of the applicant. If duringthe post verication, any adverse informationcomes to the knowledge of the MHA, theregistration as OCI already granted by theIndian Mission / Post shall be cancelled by anorder under section 7D of the Citizenship Act,1955.

After preliminary scrutiny, if there is anyadverse information against the applicant, priorapproval of MHA, shall be required before

grant of registration. MHA may approve orreject the grant of registration within 120 daysfrom the date of the receipt of the application.If the grant of registration as OCI is approvedby MHA, the Indian Mission / Post shall registerthe person as OCI.

If the application is led in India, registrationshall be granted by MHA by following the aboveprocedure.

After grant of registration, a registrationcerticate in the form of booklet will be issuedand a multiple entry, multipurpose life longOCI U visa sticker will be pasted on the foreignpassport of the applicant.


44/78

43

4. OCI for PIO Card Holders

PIO card holders who are otherwise eligiblefor registration as OCI may apply in the sameForm i.e. Form XIX and they will be consideredfor grant of registration in the same manner asother applicants. PIO card holders have to paya fee of US $ 25 or equivalent in local currencyinstead of US $ 275 for normal applicant. PIOcardholders will have to surrender his/herPIO card after knowledge of acceptance ofapplication.

5. OCI for Persons who have Appliedon the Earlier Prescribed Application

Form All such applications will be considered forgrant of OCI on the same line as in 3 abovewithout seeking fresh application and fees.

6. Cancellation of OCI Registration

If it has been found that the registration asan OCI was obtained by means of fraud,false representation or concealment of anymaterial fact or the registered OCI has shown

disaffection towards the Constitution of Indiaor comes under any of the provisions of section7D of the Citizenship Act, the registration ofsuch person will not only be cancelled forthwithbut he / she will also be blacklisted for visitingIndia.

7. Benets to OCI

Following benets will accrue to OCI:(i) A Multiple entry, multi purpose life long

visa for visiting India.

(ii) Exemption from registration with localpolice authority for any length of stay inIndia.

(iii) Parity with Non resident Indians (NRIs)in respect of economic, nancial and

educational elds except in relation toacquisition of agricultural or plantationproperties.

Any other benets to OCIs will be notiedby the Ministry of Overseas Indian Affairs(MOIA) under Section 7B(1) of the CitizenshipAct, 1955.

8. Benets to which OCI is Not Entitledto

The OCI is not entitled to vote, be a memberof Legislative Assembly or Legislative Councilor Parliament, cannot hold constitutional postssuch as President, Vice President, Judge ofSupreme Court or High Court etc. and he /she cannot normally hold employment in theGovernment.

9. Help Desk

For any clarication/query on the scheme,please visit our website www.mha.nic.in. or visitthe website of the local Indian Mission / Postor contact the Indian Mission / Post or OCI

Cell,Citizenship Section, Foreigners Division,Ministry of Home Affairs, Jaisalmer House, 26Mansingh Road, New Delhi 110011.

APPLICATION FEES

For application to be lled in India, anamount of Rs. 12,650 has to be paid for eachapplicant by demand Draft in Favour ofPayand Account Ofcer (Secretariat), Ministry

of Home Affairs payable at New Delhi. Incase of PIO Card holder, an amount of Rs

1,150 has to be paid.

In case of application to be lled outside

India, for the amount of fee to be paid inlocal currency, please visit the web site of therespective Indian Mission / Post.

Overseas Citizenship of India (OCI)


45/78


44

FREQUENTLY ASKED QUESTION

Q.1. Who is eligible to apply? A.1 A foreign national, who was eligible to

become citizen of India on 26.01.1950or was a citizen of India on or at anytime after 26.01.1950 or belonged to aterritory that become part of India after15.08.1947 and his/her children andgrand children, provided his/her countryof citizenship allows dual citizenship insome form or other under local laws,is eligible for registration as Overseascitizen of India (OCI). Minor childrenof such person are also eligible for OCI.However, if the applicant had ever beena citizen of Pakistan or Bangladesh, he/she will not be eligible for OCI.

Q.2 Who was eligible to become Citizenof India on 26.01.1950?

A.2 Any person who or either of whoseparents or grand-parents were born inIndia as dened in the Government ofIndia Act, 1935(as originally enacted),

and who was ordinarily residing in anycountry outside India was eligible tobecome citizen of India on 26.01.1950.

Q.3 Which territories became part ofIndia after 15.08.1947 and from whatdate?

A.3 The territories, which became part ofIndia after 15.08.1947 are:

(i) Sikkim 26.04.1975

(ii) Pondicherry 16.08.1962

(iii) Dadra & 11.08.1961Nagar Haveli

(iv) Goa, Daman and 20.12.1961Diu

Q.4 Can the spouse of the eligible personapply for OCI?

A.4 Yes, if he/she is eligible in his /her owncapacity.

Q.5 Can children of parents, wherein oneof the parents is eligible for OCI,apply for OCI?

A.5 Yes.

Q.6 In what form should a person applyfor OCI and where are the formsavailable?

A.6. A family consisting of spouses and uptotwo minor children can apply in the sameform i.e. Form XIX, which can be ledonline or downloaded from our websitewww.mha.nic.in./oci/oci-main.htm

Q.7 Can application form be lled and

submitted on line? A.7 Yes. Part A of the application form can

be led online. Upon submission of partA online, Part B is downloaded instantly

and it can be printed on computer orby hand in Block letters. Printed Part Aand Part B of the application form haveto be submitted to the Indian Mission/Post/Ofce.

Q.8 What documents have to be submittedwith the application?

A.8 The following documents shall beenclosed for each applicant:1. Proof of present citizenship

2. Evidence of self or parents or grandparents,(a) Being eligible to become a citizen of

India at the time of commencementof the Constitution; or

(b) Belonging to a territory that becamepart of India after 15th August,


46/78

45

1947; or(c) Being citizen of India on after 26th

January, 1950These could be:(i) Copy of the passport: or(ii) Copy of the domicile certicate issued

by the Competent authority; or(iii) Any other proof.3. Evidence of relationship as parent /

grand parent, if their Indian origin isclaimed as basis for grant of OCI.

4. Application fee by way of DemandDraft (US $ 275 for each applicant orequivalent in local currency; US $ 25or equivalent in local currency for eachPIO cardholder)

5. PIO cardholders should submit a copyof his/her PIO card.

Q.9. What documents would qualify forAny other proof for evidence ofself or parents or grand parents beingeligible for grant of OCI?

A.9. Any documentary evidence like a school

certicate, land ownership certicate,birth certicate, etc. which mayreasonably ascertain eligibility.

Q.10. How many copies of applicationhave to be submitted?

A.10. Application has to be submitted induplicate for each applicant.

Q.11. Whether applicant(s) have to go inperson to submit the application(s)?

A.11. No. Application(s) can be sent by post.Q.12. Whether the applicant(s) have to take

guidebook on taxation for oi

Documents