A new sub-section (4) to section 90 has been
inserted by the Finance Act, 2012
w.e.f. 01.04.2013 wherein a non-resident assessee who claims any relief under
Double Taxation Avoidance Agreement [DTAA] is required to obtain a Tax Residency
Certificate [TRC] from the
Government of that country of which he is resident.
Section 195 of the Income tax Act, 1961 makes it
obligatory on the part any person who is required to pay to non-resident any sum
which is chargeable under the provisions
of this Act to deduct income tax
thereon at the rates in force.
Chargeability of Income tax is
governed by the provisions of section 4 of the Income tax Act, 1961.
As per Section 4, the income tax shall be charged
for any assessment year in respect of the total income of the previous year of any person.
Section 5 of the Income tax Act, 1961 deals with the scope of total income of
any previous year of a person.
As per sub-section (2) of section 5 in case of
non-residents the total income includes all income
from whatever source derived which –
(a) Is received or is deemed to be received in
India; or
(b) Accrues or arises or is deemed to accrue or
arises in India
Section
7 of the Income tax Act, 1961 deals with the Income deemed to be received
in India and Section 9 deals with the Income deemed to accrue or arise in
India.
As per section 7 of the
Income tax Act, 1961 only the annual accretion, transferred balance in recognized provident fund and certain contribution to pension scheme
would be deemed to be income received in India.
As per section 9 of the Income tax Act, 1961 the
following income shall be deemed to be earned in India –
(i) All incomes accruing or
arising, whether directly or indirectly, through or from any business connection
in India, or through or from any property in India, or through or from any asset
or source of income in India or through the transfer of a capital asset situate
in India;
As per explanation 2 of section 9(1)(i) business connection generally
includes dependent agent in India who acts on behalf of non-resident
Property can be movable or immovable, tangible or
intangible. Intangible property may cover “any asset or source of income”
(ii) Salary income if it is earned
in India;
(iii) Salary income payable by
Central Govt to citizen of India;
(iv) Dividend paid by an Indian
company;
(v) Interest, Royalty and fees for
technical services paid by certain persons;
From the study of the provisions of law stated
above Import of Machines is not covered under deeming provisions i.e. neither
under section 7 nor under section 9 of the Income tax
Act, 1961.
Import of Machine may be covered under section 5
of the Income tax Act, 1961 if the profits on sale of machines are received,
accrued or arouse in India. As a general rule, in case of sale of goods,
profits arise at the place where the contract of sale are made or
sales are effected [66 ITR 159 (SC), 21 ITR 375, 31 ITR 760, 135
ITR 762]. Further, a contract is said to be made at a place where the
offer is accepted [28 ITR 184 (SC), 18 ITR 333].
Illustration
1. ABC Ltd, an Indian Company resident in
India enters into an agreement for import of machine with XYZ LLC a US based
company and which is resident of USA. As per the agreement ABC Ltd. gives offer
for purchase of machinery by signing the agreement in India and which is
accepted by XYZ LLC by signing the agreement at USA. In such a case since the
offer is accepted at USA the contract is said to be made at USA and accordingly
the profits will arise in USA. Hence not chargeable to tax in India;
2. In the above illustration if the offer
for purchase of machinery is accepted by XYZ LLC when one of its directors
visited in India and signed the agreement in India then the contract would be
said to be made in India. In such a case the profit will arise in India and
hence chargeable to tax in India;
3. Further, in case of illustration 1 above
if the sale is effected in India i.e. ownership in goods is transferred in India
then also profit will arise in India and hence
chargeable to tax in India
Conclusion
Now in case if the profits on import of machine
arise in India and chargeable to tax in India then as
per Section 195 tax is required to be deducted at source in India. However, in
case if the non-resident is a resident of that country with which India has DTAA
and mostly under DTAA business profits are taxable in the country of which it is
resident then in that case no tax is required to be deducted at source. However,
in such a case for giving benefit of DTAA, non-resident is required to give TRC
issued by the Govt of that country.
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