Residence and Scope of Total Income: After Studying This Chapter, You Would Be Able To

2
RESIDENCE AND SCOPE

OF TOTAL INCOME
LEARNING OUTCOMES
After studying this chapter, you would be able to -

 determine the residential status of Individuals, HUFs, AOPs/BOIs, Firms
& Companies.
 determine the residential status of foreign companies applying the Place
of Effective Management (POEM) Guidelines.
 examine the scope of income chargeable to tax in respect of different
persons, after ascertaining their residential status.
 appreciate how the residential status of a person determines the income
includible in his total income and consequently impacts his income-tax
liability.
 examine when income arising in the hands of non-resident from a
transaction is deemed to accrue or arise in India.
 appreciate the circumstances when the presence of eligible fund
manager in India would not constitute business connection in India for an
eligible investment fund.
© The Institute of Chartered Accountants of India

2.2 DIRECT TAX LAWS
2.1 RESIDENTIAL STATUS [SECTION 6]

The incidence of tax on any assessee depends upon his residential status under the Act. For
all purposes of income-tax, taxpayers are classified into three broad categories on the basis of
their residential status viz.
(1) Resident and ordinarily resident
(2) Resident but not ordinarily resident
(3) Non-resident
Resident and
ordinarily resident
Resident
Resident but not

Individuals/HUFs ordinarily resident
Non-resident
Residential
Status
(Section 6)
Resident
Firms/AOPs/Local
Authorities/Companies etc.
Non-resident
The residential status of an assessee must be ascertained with reference to each previous
year. A person who is resident and ordinarily resident in one year may become non-resident
or resident but not ordinarily resident in another year or vice versa.
The provisions for determining the residential status of assessees are:

RESIDENCE AND SCOPE OF TOTAL INCOME 2.3
(1) Residential status of Individuals

Under section 6(1), an individual is said to be resident in India in any previous year, if he
satisfies any one of the following conditions:
(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total
period of 365 days or more and has been in India for at least 60 days in the previous year.
If the individual satisfies any one of the conditions mentioned above, he is a resident. If both
the above conditions are not satisfied, the individual is a non-resident.
Notes:
(a) The term “stay in India” includes stay in the territorial waters of India (i.e. 12 nautical miles
into the sea from the Indian coastline). Even the stay in a ship or boat moored in the
territorial waters of India would be sufficient to make the individual resident in India.
(b) It is not necessary that the period of stay must be continuous or active nor is it essential
that the stay should be at the usual place of residence, business or employment of the
individual.
(c) For the purpose of counting the number of days stayed in India, both the date of departure
as well as the date of arrival are considered to be in India.
(d) The residence of an individual for income-tax purpose has nothing to do with citizenship,
place of birth or domicile. An individual can, therefore, be resident in more countries than
one even though he can have only one domicile.
Exceptions:
The following categories of individuals will be treated as residents only if the period of their
stay during the relevant previous year amounts to 182 days. In other words even if such
persons were in India for 365 days during the 4 preceding years and 60 days in the relevant
previous year, they will not be treated as resident.
(i) Indian citizens, who leave India in any previous year as a member of the crew of an Indian
ship or for purposes of employment outside India, or
(ii) Indian citizen or person of Indian origin 1 engaged outside India in an employment or a
business or profession or in any other vocation, who comes on a visit to India in any
previous year
1A person is said to be of Indian origin if he or either of his parents or either of his grandparents were born in undivided
India.

2.4 DIRECT TAX LAWS
How to determine period of stay in India for an Indian citizen, being a crew member?
In case of foreign bound ships where the destination of the voyage is outside India, there was
uncertainty regarding the manner and the basis of determining the period of stay in India for
an Indian citizen, being a crew member.
To remove this uncertainty, Explanation 2 has been inserted in section 6(1) to provide that in
the case of an Individual, being a citizen of India and a member of the crew of a foreign bound
ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be
determined in the prescribed manner and subject to the prescribed conditions.
Accordingly, the CBDT has vide, Notification No. 70/2015 dated 17.8.2015, inserted Rule 126
in the Income-tax Rules, 1962 to compute the period of stay in such cases.
According to Rule 126, for the purposes of section 6(1), in case of an individual, being a
citizen of India and a member of the crew of a ship, the period or periods of stay in India shall,
in respect of an eligible voyage, not include the following period:
Period to be excluded
Period commencing from Period ending on
the date entered into the Continuous and the date entered into the Continuous
Discharge Certificate in respect of joining Discharge Certificate in respect of signing
the ship by the said individual for the off by that individual from the ship in
eligible voyage respect of such voyage.
Meaning of certain terms:
Terms Meaning
(a) Continuous This term has the meaning assigned to it in the Merchant Shipping
Discharge (Continuous Discharge Certificate-cum Seafarer’s Identity Document)
Certificate Rules, 2001 made under the Merchant Shipping Act, 1958.
(b) Eligible A voyage undertaken by a ship engaged in the carriage of passengers or

voyage freight in international traffic where –
(i) for the voyage having originated from any port in India, has as its
destination any port outside India; and
(ii) for the voyage having originated from any port outside India, has as
its destination any port in India.’.
Illustration 1
Mr. Anand is an Indian citizen and a member of the crew of a Singapore bound Indian ship
engaged in carriage of passengers in international traffic departing from Chennai port on 6 th June,

2017. From the following details for the P.Y.2017-18, determine the residential status of Mr.
Anand for A.Y.2018-19, assuming that his stay in India in the last 4 previous years (preceding
P.Y.2017-18) is 400 days and last seven previous years (preceding P.Y.2017-18) is 750 days:
Particulars Date
Date entered into the Continuous Discharge Certificate in respect of 6th June, 2017
joining the ship by Mr. Anand
Date entered into the Continuous Discharge Certificate in respect of 9th December, 2017
signing off the ship by Mr. Anand
Solution
In this case, the voyage is undertaken by an Indian ship engaged in the carriage of
passengers in international traffic, originating from a port in India (i.e., the Chennai port) and
having its destination at a port outside India (i.e., the Singapore port). Hence, the voyage is
an eligible voyage for the purposes of section 6(1).
Therefore, the period beginning from 6 th June, 2017 and ending on 9 th December, 2017, being
the dates entered into the Continuous Discharge Certificate in respect of joining the ship and
signing off from the ship by Mr. Anand, an Indian citizen who is a member of the crew of the
ship, has to be excluded for computing the period of his stay in India. Accordingly, 187 days
[25+31+31+30+31+30+9] have to be excluded from the period of his stay in India.
Consequently, Mr. Anand’s period of stay in India during the P.Y.2017-18 would be 178 days
[i.e., 365 days – 187 days]. Since his period of stay in India during the P.Y.2017-18 is less
than 182 days, he is a non-resident for A.Y.2018-19.
Note - Since the residential status of Mr. Anand is “non-resident” for A.Y.2018-19 consequent
to his number of days of stay in P.Y.2017-18 being less than 182 days, his period of stay in
the earlier previous years become irrelevant.
Resident and ordinarily resident/Resident but not ordinarily resident
Only individuals and HUFs can be resident but not ordinarily resident in India. All other
classes of assessees can be either a resident or non-resident. A not-ordinarily resident person
is one who satisfies any one of the conditions specified under section 6(6).
(i) If such individual has been non-resident in India in any 9 out of the 10 previous years
preceding the relevant previous year, or
(ii) If such individual has during the 7 previous years preceding the relevant previous year
been in India for a period of 729 days or less.
Note: In simpler terms, an individual is said to be a resident and ordinarily resident if he
satisfies both the following conditions:
(i) He is a resident in any 2 out of the last 10 years preceding the relevant previous year, and

2.6 DIRECT TAX LAWS
(ii) His total stay in India in the last 7 years preceding the relevant previous year is 730 days or
more.
If the individual satisfies both the conditions mentioned above, he is a resident and ordinarily
resident but if only one or none of the conditions are satisfied, the individual is a resident but
not ordinarily resident.
Illustration 2
Brett Lee, an Australian cricket player visits India for 100 days in every financial year. This has
been his practice for the past 10 financial years. Find out his residential status for the assessment
year 2018-19.
Solution
Determination of Residential Status of Mr. Brett Lee for the A.Y. 2018-19:-
Period of stay during previous year 2017-18 = 100 days
Calculation of period of stay during 4 preceding previous years (100 x 4=400 days)
2016-17 100 days
2015-16 100 days
2014-15 100 days
2013-14 100 days
Total 400 days
Mr. Brett Lee has been in India for a period more than 60 days during previous year 2017-18
and for a period of more than 365 days during the 4 immediately preceding previous years.
Therefore, since he satisfies one of the basic conditions under section 6(1), he is a resident
for the assessment year 2018-19.
Computation of period of stay during 7 preceding previous years = 100 x 7=700 days
2016-17 100 days
2015-16 100 days
2014-15 100 days
2013-14 100 days
2012-13 100 days
2011-12 100 days
2010-11 100 days
Total 700 days

Since his period of stay in India during the past 7 previous years is less than 730 days, he is a
not-ordinarily resident during the assessment year 2018-19. (See Note below)
Therefore, Mr. Brett Lee is a resident but not ordinarily resident during the previous year
2017-18 relevant to the assessment year 2018-19.
Note: A not-ordinarily resident person is one who satisfies any one of the conditions specified
under section 6(6), i.e.,
(i) If such individual has been non-resident in India in any 9 out of the 10 previous years
preceding the relevant previous year, or
(ii) If such individual has during the 7 previous years preceding the relevant previous year
been in India for a period of 729 days or less.
In this case, since Mr. Brett Lee satisfies condition (ii), he is a not-ordinary resident for the
A.Y. 2018-19.
Residential Status of an Individual
Stay in India for 182 days or more

during the PY
YES NO
Resident in India in any 2 PYs out of 10 PYs

preceding the relevant PY
Stay in India for 60 days or
+ more during the PY + Stay in
Stay in India for 730 days or more during the 7 India for 365 days or more
PYs preceding the relevant PY during 4 immediately
preceding previous years
YES NO
YES NO
ROR RNOR Non

Resident

2.8 DIRECT TAX LAWS
(2) Residential status of HUFs

Resident: A HUF would be resident in India if the control and management of its affairs is
situated wholly or partly in India.
Non-resident: If the control and management of the affairs is situated wholly outside India it
would become a non-resident.
Meaning of the term “control and management”
• The expression ‘control and management’ referred to under section 6 refers to the central
control and management and not to the carrying on of day-to-day business by servants,
employees or agents.
• The business may be done from outside India and yet its control and management may be
wholly within India. Therefore, control and management of a business is said to be situated at
a place where the head and brain of the adventure is situated.
• The place of control may be different from the usual place of running the business and
sometimes even the registered office of the assessee. This is because the control and
management of a business need not necessarily be done from the place of business or from
the registered office of the assessee.
• But control and management do imply the functioning of the controlling and directing power at
a particular place with some degree of permanence.
Resident and ordinarily resident/Resident but not ordinarily resident
If the HUF is resident, then the status of the Karta determines whether it is resident and
ordinarily resident or resident but not ordinarily resident.
• If the karta is resident and ordinarily resident, then the HUF is resident and ordinarily
resident.
• If the karta is resident but not ordinarily resident, then HUF is resident but not ordinarily
resident.
Illustration 3
The business of a HUF is transacted from Australia and all the policy decisions are taken there.
Mr. E, the karta of the HUF, who was born in Kolkata, visits India during the P.Y.2017-18 after 15
years. He comes to India on 1.4.2017 and leaves for Australia on 1.12.2017. Determine the
residential status of Mr. E and the HUF for A.Y. 2018-19.
Solution
(a) During the P.Y.2017-18, Mr. E has stayed in India for 245 days (i.e. 30+31+30+31+31+
30+31+30+1 days). Therefore, he is a resident. However, since he has come to India after 15
years, he does not satisfy any of the conditions for being ordinarily resident.

Therefore, the residential status of Mr. E for the P.Y.2017-18 is resident but not ordinarily
resident.
(b) Since the business of the HUF is transacted from Australia and nothing is mentioned
regarding its control and management, it is assumed that the control and management is also
wholly outside India. Therefore, the HUF is a non-resident for the P.Y.2017-18.
Residential Status of a HUF
Is the control and management of its affairs situated

wholly or partly in India?
YES NO
Is Karta a ROR? Non-Resident
YES NO
HUF is ROR HUF is RNOR
(3) Residential status of firms and association of persons

Resident: A firm and an AOP would be resident in India if the control and management of its
affairs is situated wholly or partly in India.
Non-resident: Where the control and management of the affairs is situated wholly outside
India, the firm and AOP would become a non-resident.
(4) Residential status of companies
With effect from Assessment year 2017-18, a company would be resident in India in any
previous year, if-
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.

2.10 DIRECT TAX LAWS
“Place of effective management” to mean a place where key management and commercial
decisions that are necessary for the conduct of the business of an entity as a whole are, in
substance made [Explanation to section 6(3)]
Determination of residential status of a company

Is the company an No Whether POEM of the No The company is a
Indian company? company is in India in the non-resident for
relevant P.Y. the relevant P.Y.
Yes Yes
The company is
a resident in
India for the
relevant P.Y.
Guiding principles for determination of Place of Effective Management (POEM) of a

company, other than an Indian company – [Circular No. 6/2017, dated 24.01.2017 & Circular
No. 8/2017, dated 23-02-2017]
‘Place of effective management' (POEM) is an internationally recognised test for determination of
residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into
by India recognises the concept of 'place of effective management' for determination of residence
of a company as a tie-breaker rule for avoidance of double taxation.
The CBDT has laid down the following guiding principles to be followed for determination of
POEM.
Concept of Substance over form
Any determination of the POEM will depend upon the facts and circumstances of a given case.
The POEM concept is one of substance over form. It may be noted that an entity may have
more than one place of management, but it can have only one place of effective management
at any point of time. Since “residence” is to be determined for each year, POEM will also be
required to be determined on year to year basis.
Whether the company is engaged in active business outside India? - An important
criterion for determination of POEM
The process of determination of POEM would be primarily based on the fact as to whether or

not the company is engaged in active business outside India.

A company shall be said to be engaged in “active business outside India”
- if the passive income is not more than 50% of its total income; and
- less than 50% of its total assets are situated in India; and
- less than 50% of total number of employees are situated in India or are resident in India;
and
- the payroll expenses incurred on such employees is less than 50% of its total payroll
expenditure.
Term Meaning
Income (a) As computed for tax purpose in accordance with the laws of the
country of incorporation; or
(b) As per books of account, where the laws of the country of
incorporation does not require such a computation.
Value of (a) In case of an individually The average of its value for tax
assets depreciable asset purposes in the country of
incorporation of the company at the
beginning and at end of the
previous year; and
(b) In case of pool of fixed The average of its value for tax
asset, being treated as a purposes in the country of
block for depreciation incorporation of the company at the
beginning and at end of the year;
(c) In case of any other asset Value as per books of account
Number of The average of the number of employees as at the beginning and at the
employees end of the year. It shall include persons, who though not employed directly
by the company, perform tasks similar to those performed by the
employees.

Pay roll This term includes the cost of salaries, wages, bonus and all other
employee compensation including related pension and social costs borne
by the employer.
Passive It is the aggregate of, -

income (i) income from the transactions where both the purchase and sale of
goods is from/to its associated enterprises; and
(ii) income by way of royalty, dividend, capital gains, interest or rental
income;
However, any income by way of interest shall not be considered to be
passive income in case of a company which is engaged in the business of
banking or is a public financial institution, and its activities are regulated as
such under the applicable laws of the country of incorporation.
Place of Effective Management:
(i) In case of companies engaged in active business outside India
POEM of a company engaged in active business shall be presumed to be outside India if the
majority of the board meetings are held outside India.
However, in case the Board is not exercising its powers of management and such powers are
being exercised by either the holding company or any other person, resident in India, then
POEM shall be considered to be in India.
For this purpose, merely because the Board of Directors (BOD) follows general and objective
principles of global policy of the group laid down by the parent entity which may be in the field
of Pay roll functions, Accounting, Human resource (HR) functions, IT infrastructure and
network platforms, Supply chain functions, Routine banking operational procedures, and not
being specific to any entity or group of entities per se; would not constitute a case of BoD of
companies standing aside.
For the purpose of determining whether the company is engaged in active business outside
India, the average of the data of the previous year and two years prior to that shall be taken
into account. In case the company has been in existence for a shorter period, then, data of
such period shall be considered. Where the accounting year for tax purposes, in accordance
with laws of country of incorporation of the company, is different from the previous year, then,
data of the accounting year that ends during the relevant previous year and two accounting
years preceding it shall be considered.
(ii) In case of companies not engaged in active business outside India
The guidelines provide a two-stage process for determination of POEM in case of companies
not engaged in active business.

(a) First stage: Identifying the person(s) who actually make the key management and
commercial decisions for the conduct of the company as a whole.
(b) Second stage: Determining the place where these decisions are, in fact, being made.
The place where these management decisions are taken would be more important than
the place where such decisions are implemented. For the purpose of determination of
POEM, it is the substance which would be conclusive rather than the form.
Some of the guiding principles which may be taken into account for determining the
POEM are as follows:
(a) The location where a company’s Board regularly meets and makes decisions may be
the company’s place of effective management provided, the Board-
(i) retains and exercises its authority to govern the company; and
(ii) does, in substance, make the key management and commercial decisions necessary for
the conduct of the company’s business as a whole.
It may be mentioned that mere formal holding of board meetings at a place would by itself
not be conclusive for determination of POEM being located at that place. If the key
decisions by the directors are in fact being taken in a place other than the place where the
formal meetings are held then such other place would be relevant for POEM.
As an example, there may be a case where the board meetings are held in a location
distinct from the place where head office of the company is located or such location is
unconnected with the place where the predominant activity of the company is being carried
out.
If a board has de facto delegated the authority to make the key management and
commercial decisions for the company to the senior management or any other person
including a shareholder, promoter, strategic or legal or financial advisor etc. and does
nothing more than routinely ratifying the decisions that have been made, the company’s
place of effective management will ordinarily be the place where these senior managers or
the other person make those decisions.
“Senior Management” in respect of a company means the person or persons who are
generally responsible for developing and formulating key strategies and policies for the
company and for ensuring or overseeing the execution and implementation of those
strategies on a regular and on-going basis. While designation may vary, these persons may
include:
(i) Managing Director or Chief Executive Officer;
(ii) Financial Director or Chief Financial Officer;

(iii) Chief Operating Officer; and

(iv) The heads of various divisions or departments (for example, Chief Information or
Technology Officer, Director for Sales or Marketing).
(b) Location of executive committee, in case powers are delegated by the board: A
company’s board may delegate some or all of its authority to one or more committees such
as an executive committee consisting of key members of senior management. In these
situations, the location where the members of the Executive Committee are based and
where that committee develops and formulates the key strategies and policies for mere
formal approval by the full board will often be considered to be the company’s place of
effective management.
The delegation of authority may be either de jure (by means of a formal resolution or
Shareholder Agreement) or de facto (based upon the actual conduct of the board and the
executive committee).
(c) Location of head office: The location of a company’s head office will be a very important
factor in the determination of the company’s place of effective management because it
often represents the place where key company decisions are made. The following points
need to be considered for determining the location of the head office of the company:-
If the company’s senior management and their support staff are based in a single location
and that location is held out to the public as the company’s principal place of business or
headquarters, then, that location is the place where head office is located.
If the company is more decentralized (for example, where various members of senior
management may operate, from time to time, at offices located in the various countries)
then, the company’s head office would be the location where these senior managers,-
(i) are primarily or predominantly based; or
(ii) normally return to following travel to other locations; or
(iii) meet when formulating or deciding key strategies and policies for the company as a
whole.
Members of the senior management may operate from different locations on a more or less
permanent basis and the members may participate in various meetings via telephone or
video conferencing rather than by being physically present at meetings in a particular
location. In such situation the head office would normally be the location, if any, where the
highest level of management (for example, the Managing Director and Financial Director)
and their direct support staff are located.
In situations where the senior management is so decentralised that it is not possible to
determine the company’s head office with a reasonable degree of certainty, the location of

a company’s head office would not be of much relevance in determining that company’s
place of effective management.
“Head Office” of a company would be the place where the company's senior
management and their direct support staff are located or, if they are located at more than
one location, the place where they are primarily or predominantly located. A company’s
head office is not necessarily the same as the place where the majority of its employees
work or where its board typically meets.
(d) Use of modern technology: The use of modern technology impacts the place of effective
management in many ways. It is no longer necessary for the persons taking decision to be
physically present at a particular location. Therefore physical location of board meeting or
executive committee meeting or meeting of senior management may not be where the key
decisions are in substance being made. In such cases the place where the directors or the
persons taking the decisions or majority of them usually reside may also be a relevant
factor.
(e) Decision via circular resolution or round robin voting: In case of circular resolution or
round robin voting the factors like, the frequency with which it is used, the type of decisions
made in that manner and where the parties involved in those decisions are located etc. are
to be considered. It cannot be said that proposer of decision alone would be relevant but
based on past practices and general conduct; it would be required to determine the person
who has the authority and who exercises the authority to take decisions. The place of
location of such person would be more important.
(f) Decisions made by Shareholders are not relevant factor in determination of POEM: The
decisions made by shareholder on matters which are reserved for shareholder decision
under the company laws are not relevant for determination of a company’s place of
effective management. Such decisions may include sale of all or substantially all of the
company’s assets, the dissolution, liquidation or deregistration of the company, the
modification of the rights attaching to various classes of shares or the issue of a new class
of shares etc. These decisions typically affect the existence of the company itself or the
rights of the shareholders as such, rather than the conduct of the company’s business from
a management or commercial perspective and are therefore, generally not relevant for the
determination of a company’s place of effective management.
However, the shareholder’s involvement can, in certain situations, turn into that of effective
management. This may happen through a formal arrangement by way of shareholder
agreement etc. or may also happen by way of actual conduct. As an example if the
shareholders limit the authority of board and senior managers of a company and thereby
remove the company’s real authority to make decision then the shareholder guidance

transforms into usurpation and such undue influence may result in effective management
being exercised by the shareholder.
Therefore, whether the shareholder involvement is crossing the line into that of effective
management is one of fact and has to be determined on case-to-case basis only.
(g) Day to day routine operational decisions are not relevant for determination of POEM:
It may be clarified that day to day routine operational decisions undertaken by junior and
middle management shall not be relevant for the purpose of determination of POEM. The
operational decisions relate to the oversight of the day-to-day business operations and
activities of a company whereas the key management and commercial decision are
concerned with broader strategic and policy decision. For example, a decision to open a
major new manufacturing facility or to discontinue a major product line would be examples
of key commercial decisions affecting the company’s business as a whole. By contrast,
decisions by the plant manager appointed by senior management to run that facility,
concerning repairs and maintenance, the implementation of company-wide quality controls
and human resources policies, would be examples of routine operational decisions. In
certain situations it may happen that person responsible for operational decision is the
same person who is responsible for the key management and commercial decision. In such
cases it will be necessary to distinguish the two type of decisions and thereafter assess the
location where the key management and commercial decisions are taken.
If the above factors do not lead to clear identification of POEM then the final guidelines
provide that following secondary factors may be considered:
• Place where main and substantial activity of the company is carried out; or
• Place where the accounting records of the company are kept.
It needs to be emphasized that the determination of POEM is to be based on all relevant
facts related to the management and control of the company, and is not to be determined
on the basis of isolated facts that by itself do not establish effective management, as
illustrated by the following examples:
(i) The fact that a foreign company is completely owned by an Indian company will not be
conclusive evidence that the conditions for establishing POEM in India have been
satisfied.
(ii) The fact that there exists a Permanent Establishment of a foreign entity in India would
itself not be conclusive evidence that the conditions for establishing POEM in India have
been satisfied.
(iii) The fact that one or some of the Directors of a foreign company reside in India will not be
conclusive evidence that the conditions for establishing POEM in India have been
satisfied.

(iv) The fact of, local management being situated in India in respect of activities carried out by
a foreign company in India will not, by itself, be conclusive evidence that the conditions
for establishing POEM have been satisfied.
(v) The existence in India of support functions that are preparatory and auxiliary in
character will not be conclusive evidence that the conditions for establishing POEM in
India have been satisfied.
It is reiterated that the above principles for determining the POEM are for guidance only. No
single principle will be decisive in itself. The above principles are not to be seen with
reference to any particular moment in time rather activities performed over a period of time,
during the previous year, need to be considered.
In other words a “snapshot” approach is not to be adopted. Further, based on the facts and
circumstances if it is determined that during the previous year the POEM is in India and also
outside India then POEM shall be presumed to be in India if it has been mainly /predominantly
in India
The CBDT also clarified that the Assessing Officer (AO) shall, before initiating any
proceedings for holding a company incorporated outside India, on the basis of its POEM, as
being resident in India, seek prior approval of the Principal Commissioner or the
Commissioner, as the case may be.
Further, in case the AO proposes to hold a company incorporated outside India, on the basis
of its POEM, as being resident in India then any such finding shall be given by the AO after
seeking prior approval of the collegium of three members consisting of the Principal
Commissioners or the Commissioners, as the case may be, to be constituted by the Principal
Chief Commissioner of the region concerned, in this regard. The collegium so constituted shall
provide an opportunity of being heard to the company before issuing any directions in the
matter.
Example 1: Company A Co. is a sourcing entity, for an Indian multinational group,
incorporated in country X and is 100% subsidiary of Indian company (B Co.). The warehouses
and stock in them are the only assets of the company and are located in country X. All the
employees of the company are also in country X. The average income wise breakup of the
company’s total income for three years is, -
(i) 30% of income is from transaction where purchases are made from parties which are non-
associated enterprises and sold to associated enterprises;
(ii) 30% of income is from transaction where purchases are made from associated enterprises
and sold to associated enterprises;

(iii) 30% of income is from transaction where purchases are made from associated enterprises
and sold to non-associated enterprises; and
(iv) 10% of the income is by way of interest.
Interpretation: In this case passive income is 40% of the total income of the company. The
passive income consists of, -
(i) 30% income from the transaction where both purchase and sale is from/to associated
enterprises; and
(ii) 10% income from interest.
The A Co. satisfies the first requirement of the test of active business outside India. Since no
assets or employees of A Co. are in India the other requirements of the test is also satisfied.
Therefore, company is engaged in active business outside India.
Example 2: The other facts remain same as that in Example 1 with the variation that A Co.
has a total of 50 employees. 47 employees, managing the warehouse, storekeeping and
accounts of the company, are located in country X. The Managing Director (MD), Chief
Executive Officer (CEO) and sales head are resident in India. The total annual payroll
expenditure on these 50 employees is of ` 5 crore. The annual payroll expenditure in respect
of MD, CEO and sales head is of ` 3 crore.
Interpretation: Although the first limb of active business test is satisfied by A Co. as only 40% of
its total income is passive in nature. Further, more than 50% of the employees are also situated
outside India. All the assets are situated outside India. However, the payroll expenditure in respect
of the MD, the CEO and the sales head being employees resident in India exceeds 50% of the
total payroll expenditure. Therefore, A Co. is not engaged in active business outside India.
Example 3: The basic facts are same as in Example 1. Further facts are that all the directors of
the A Co. are Indian residents. During the relevant previous year 5 meetings of the Board of
Directors is held of which two were held in India and 3 outside India with two in country X and one
in country Y.
Interpretation: The A Co. is engaged in active business outside India as the facts indicated in
Example 1 establish. The majority of board meetings have been held outside India. Therefore, the
POEM of A Co. shall be presumed to be outside India.
Example 4: The facts are same as in Example 3 but it is established by the Assessing Officer that
although A Co.’s senior management team signs all the contracts, for all the contracts above ` 10
lakh the A Co. must submit its recommendation to B Co. and B Co. makes the decision whether or
not the contract may be accepted. It is also seen that during the previous year more than 99% of
the contracts are above ` 10 lakh and over past years also the same trend in respect of value
contribution of contracts above ` 10 lakh is seen.

Interpretation: These facts suggest that the effective management of the A Co. may have been
usurped by the parent company B Co. Therefore, POEM of A Co. may in such cases be not
presumed to be outside India even though A Co. is engaged in active business outside India and
majority of board meeting are held outside India.
Example 5: An Indian multinational group has a local holding company A Co. in country X. The A
Co. also has 100% downstream subsidiaries B Co. and C Co. in country X and D Co. in country Y.
The A Co. has income only by way of dividend and interest from investments made in its
subsidiaries. The Place of Effective Management of A Co. is in India and is exercised by ultimate
parent company of the group. The subsidiaries B, C and D are engaged in active business outside
India. The meetings of Board of Director of B Co., C Co. and D Co. are held in country X and Y
respectively.
Interpretation: Merely because the POEM of an intermediate holding company is in India, the
POEM of its subsidiaries shall not be taken to be in India. Each subsidiary has to be examined
separately. As indicated in the facts since companies B Co., C Co., and D Co. are independently
engaged in active business outside India and majority of Board meetings of these companies are
also held outside India. The POEM of B Co., C Co., and D Co. shall be presumed to be outside
India.
Further, the CBDT vide Circular no. 8/2017 dated 23.02.2017 also clarified that POEM
guidelines shall not apply to a company having turnover or gross receipts of ` 50 crores or
less in a financial year.
Illustration 4
ABC Inc., a Swedish company headquartered at Stockholm, not having a permanent establishment
in India, has set up a liaison office in Mumbai in April, 2017 in compliance with RBI guidelines to
look after its day to day business operations in India, spread awareness about the company’s
products and explore further opportunities. The liaison office takes decisions relating to day to day
routine operations and performs support functions that are preparatory and auxiliary in nature.
The significant management and commercial decisions are, however, in substance made by the
Board of Directors at Sweden. Determine the residential status of ABC Inc. for A.Y. 2018-19.
Solution
Section 6(3) provide that a company would be resident in India in any previous year, if-
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India .
In this case, ABC Inc. is a foreign company. Therefore, it would be resident in India for P.Y.2017-
18 only if its place of effective management, in that year, is in India.

Explanation to section 6(3) defines “place of effective management” to mean a place where key
management and commercial decisions that are necessary for the conduct of the business of an
entity as a whole are, in substance made. In the case of ABC Inc., its place of effective
management for P.Y.2017-18 is not in India, since the significant management and commercial
decisions are, in substance, made by the Board of Directors outside India in Sweden.
ABC Inc. has only a liaison office in India through which it looks after its routine day to day
business operations in India. The place where decisions relating to day to day routine operations
are taken and support functions that are preparatory or auxiliary in nature are performed are not
relevant in determining the place of effective management.
Hence, ABC Inc., being a foreign company is a non-resident for A.Y.2018-19, since its place of
effective management is outside India in the P.Y.2017-18.
Transition Mechanism for a company incorporated outside India and has not been assessed
to tax earlier [Chapter XII-BC – Section 115JH]
A transition mechanism for a company which is incorporated outside India, which has not been
assessed to tax in India earlier and has become resident in India for the first time in A.Y.
2017-18 due to application of POEM, has been provided in Chapter XII-BC comprising of
section 115JH.
(a) Accordingly, the Central Government is empowered to notify exception, modification and
adaptation subject to which, the provisions of the Act relating to computation of income,
treatment of unabsorbed depreciation, set-off or carry forward and set off of losses, special
provision relating to avoidance of tax and the collection and recovery of taxes shall apply in
a case where a foreign company is said to be resident in India due to its POEM being in
India for the first time and the said company has never been resident in India before.
(b) In a case where the determination regarding foreign company to be resident in India has
been made in the assessment proceedings relevant to any previous year, then, these
transition provisions would also cover any subsequent previous year, if the foreign
company is resident in India in that previous year and the previous year ends on or before
the date on which such assessment proceeding is completed. In effect, the transition
provisions would also cover any subsequent amendment upto the date of determination of
POEM in an assessment proceeding. However, once the transition is complete, then,
normal provisions of the Act would apply.
(c) In the notification issued by the Central Government, certain conditions including
procedural conditions subject to which these adaptations shall apply can be provided for
and in case of failure to comply with the conditions, the benefit of such notification would
not be available to the foreign company.

Accordingly, where in a previous year, any benefit, exemption or relief has been claimed and
granted to the foreign company in accordance with the notification, and subsequently, there is
failure to comply with any of the conditions specified therein, then –
(i) the benefit, exemption or relief shall be deemed to have been wrongly allowed;
(ii) the Assessing Officer may re-compute the total income of the assessee for the said
previous year and make the necessary amendment as if the exceptions, modifications
and adaptations as per the notification does not apply; and
(iii) the provisions of section 154 shall, so far as may be, apply thereto and the period of four
years for rectification of mistake apparent from the record has to be reckoned from the
end of the previous year in which the failure to comply with the condition stipulated in
the notification takes place.
(d) Every notification issued in exercise of this power by the Central Government shall be laid
before each house of the Parliament.
(5) Residential status of local authorities and artificial juridical persons
Resident: Local authorities and artificial juridical persons would be resident in India if the
control and management of its affairs is situated wholly or partly in India.
Non-resident: Where the control and management of the affairs is situated wholly outside
India, they would become non-residents.
2.2 SCOPE OF TOTAL INCOME

Section 5 provides the scope of total income in terms of the residential status of the assessee
because the incidence of tax on any person depends upon his residential status. The scope of
total income of an assessee depends upon the following three important considerations:
(i) the residential status of the assessee;
(ii) the place of accrual or receipt of income, whether actual or deemed; and
(iii) the point of time at which the income had accrued to or was received by or on behalf of the
assessee.
The ambit of total income of the three classes of assessees would be as follows:
(1) Resident and ordinarily resident
The total income of a resident assessee would, under section 5(1), consist of:
(i) income received or deemed to be received in India during the previous year;

(ii) income which accrues or arises or is deemed to accrue or arise in India during the previous
year; and
(iii) income which accrues or arises outside India even if it is not received or brought into India
during the previous year.
In simpler terms, a resident and ordinarily resident has to pay tax on the total income accrued
or deemed to accrue, received or deemed to be received in or outside India.
(2) Resident but not ordinarily resident
Under section 5(1), the computation of total income of resident but not ordinarily resident is
the same as in the case of resident and ordinarily resident stated above except for the fact
that the income accruing or arising to him outside India is not to be included in his total
income.
However, where such income is derived from a business controlled from or profession set up
in India, then it must be included in his total income even though it accrues or arises outside
India.
(3) Non-resident
A non-resident’s total income under section 5(2) includes:
(i) income received or deemed to be received in India in the previous year; and
(ii) income which accrues or arises or is deemed to accrue or arise in India during the previous year.
Note: All assessees, whether resident or not, are chargeable to tax in respect of their income
accrued, arisen, received or deemed to accrue, arise or to be received in India whereas
residents alone are chargeable to tax in respect of income which accrues or arises outside India.
Residential Status and Scope of Total Income
Scope of total Income Resident and Resident but not Non-Resident

Ordinarily Ordinarily
Resident Resident
Income received or deemed Yes Yes Yes

to be received in India during
the previous year
Income accruing or arising or Yes Yes Yes

deeming to accrue or arise in
India during the previous year

Income accruing or arising Yes, even if such Yes, if income is No

outside India income is not derived from a
received or business controlled
brought into India from or profession
during the previous set up in India;
year Otherwise, No.
Illustration 5
From the following particulars of income furnished by Mr. Anirudh pertaining to the year ended
31.3.2018, compute the total income for the assessment year 2018-19, if he is:
(i) Resident and ordinary resident;
(ii) Resident but not ordinarily resident;
(iii) Non-resident
Particulars `
(a) Short term capital gain on sale of shares in Indian Company received in 15,000
Germany
(b) Dividend from a Japanese Company received in Japan 10,000
(c) Rent from property in London deposited in a bank in London, later on 75,000
remitted to India through approved banking channels
(d) Dividend from RP Ltd., an Indian Company 6,000
(e) Agricultural income from lands in Gujarat 25,000
Solution
Computation of total income of Mr. Anirudh for the A.Y. 2018-19
Particulars Resident Resident Non-

& but not Resident
ordinarily ordinarily (`)
resident resident
(`) (`)
1) Short term capital gain on sale of shares of 15,000 15,000 15,000
an Indian company, received in Germany

2) Dividend from a Japanese company, 10,000 - -

received in Japan
3) Rent from property in London deposited in a 52,500 - -
bank in London [See Note (i) below]
4) Dividend from RP Ltd., an Indian Company - - -
[See Note (ii) below]
5) Agricultural income from land in Gujarat [See
Note (iii) below] - - -
Total Income 77,500 15,000 15,000
Notes:
(i) It has been assumed that the rental income is the gross annual value of the property. Therefore,
deduction @30% under section 24, has been provided and the net income so computed is taken
into account for determining the total income of a resident and ordinarily resident.
Particulars `
Rent received (assumed as gross annual value) 75,000
Less: Deduction under section 24 (30% of `75,000) 22,500
Income from house property 52,500
(ii) Dividend from Indian company is exempt under section 10(34).

(iii) Agricultural income is exempt under section 10(1).
(4) Meaning of “Income received or deemed to be received”
All assessees are liable to tax in respect of the income received or deemed to be received by
them in India during the previous year irrespective of -
(i) their residential status, and
(ii) the place of its accrual.
Income is to be included in the total income of the assessee immediately on its actual or
deemed receipt. The receipt of income refers to only the first occasion when the recipient gets
the money under his control. Therefore, when once an amount is received as income,
remittance or transmission of that amount from one place or person to another does not
constitute receipt of income in the hands of the subsequent recipient or at the place of
subsequent receipt.

Income deemed to be
received in India
[Section 7]
Contribution in excess Contribution by the CG Amount transferred from

of 12% of salary to or other employer under unrecognised provident
Recognised provident a pension scheme fund to recognised
fund or interest credited referred u/s 80CCD provident fund (being
in excess of 9.5% p.a the employer's
(Annual accretion to the contribution and interest
credit of RPF) thereon)
(5) Meaning of income ‘accruing’ and ‘arising’

Accrue refers to the right to receive income, whereas due refers to the right to enforce
payment of the same. For e.g. salary for work done in December will accrue throughout the
month, day to day, but will become due on the salary bill being passed on 31 st December or
1 stJanuary.
Similarly, on Government securities, interest payable on specified dates arise during the period
of holding, day to day, but will become due for payment on the specified dates.
Example: Interest on Government securities is usually payable on specified dates, say on 1st
January and 1st July. In all such cases, the interest would be said to accrue from 1st July to
31st December and on 1st January, it will fall due for payment.
It must be noted that income which has been taxed on accrual basis cannot be assessed again
on receipt basis, as it will amount to double taxation.
With a view to removing difficulties and clarifying doubts in the taxation of income,
Explanation 1 to section 5 specifically provides that an item of income accruing or arising
outside India shall not be deemed to be received in India merely because it is taken into
account in a balance sheet prepared in India.
Further, Explanation 2 to section 5 makes it clear that once an item of income is included in
the assessee’s total income and subjected to tax on the ground of its accrual/deemed accrual
or receipt, it cannot again be included in the person’s total income and subjected to tax either
in the same or in a subsequent year on the ground of its receipt - whether actual or deemed.
(6) Income deemed to accrue or arise in India [Section 9]
Certain types of income are deemed to accrue or arise in India even though they may actually

accrue or arise outside India.

The categories of income which are deemed to accrue or arise in India are:
(i) Any income accruing or arising to an assessee in any place outside India whether
directly or indirectly
(a) through or from any business connection in India,
(b) through or from any property in India,
(c) through or from any asset or source of income in India or
(d) through the transfer of a capital asset situated in India
would be deemed to accrue or arise in India.[Section 9(1)(i)]
(a) What is Business Connection?
‘Business connection’ shall include any business activity carried out through a person acting on
behalf of the non-resident [Explanation 2 to section 9(1)(i)]
For a business connection to be established, the person acting on behalf of the non-resident –
(i) must have an authority which is habitually exercised to conclude contracts on behalf of the
non-resident or;
However, if his activities are limited to the purchase of goods or merchandise for the non-
resident, this provision will not apply.
(ii) In a case, where he has no such authority, but habitually maintains in India a stock of goods
or merchandise from which he regularly delivers goods or merchandise on behalf of the non-
resident, or
(iii) habitually secures orders in India, mainly or wholly for the non-resident.
Further, there may be situations when the person acting on behalf of the non-resident secure
order for other non-residents. In such situation, business connection for other non-residents
is established if,
(a) such other non-resident controls the non-resident or
(b) such other non-resident is controlled by the non-resident or
(c) such other non-resident is subject to same control as that of non-resident.
In all the three situations, business connection is established, where a person habitually
secures orders in India, mainly or wholly for such non-residents.

Mr. A acting on behalf of Mr.

X, non-resident
Secures order for
Mr. X, non-resident Mr. Y, (non-resident)
Business connection
Business connection directly established, if
established
(i) Mr. X is controlled by Mr. Y or
(ii) Mr. Y is controlled by Mr. X or
(iii) Commonly controlled by Mr. Z, being
the person who controls Mr. X as well as
Mr. Y.
Agents having independent status are not included in Business Connection: Business
connection, however, shall not be established, where the non-resident carries on business
through a broker, general commission agent or any other agent having an independent
status, if such a person is acting in the ordinary course of his business.
A broker, general commission agent or any other agent shall be deemed to have an
independent status where he does not work mainly or wholly for the non-resident.
He will, however, not be considered to have an independent status in the three situations
explained above, where he is employed by such a non-resident.
Where a business is carried on in India through a person referred to in (i), (ii) or (iii) of (a) above,
only so much of income as is attributable to the operations carried out in India shall be deemed to
accrue or arise in India [Explanation 3 to section 9(1)(i)]
In the case of a Non-resident the following shall not, however, be treated as business
connection in India [Explanation 1 to section 9(1)(i)]:
(i) In the case of a business, in respect of which all the operations are not carried out in
India [Explanation 1(a) to section 9(1)(i)]: In the case of a business of which all the
operations are not carried out in India, the income of the business deemed to accrue or
arise in India shall be only such part of income as is reasonably attributable to the
operations carried out in India. Therefore, it follows that such part of income which cannot

be reasonably attributed to the operations in India, is not deemed to accrue or arise in

India.
(ii) Purchase of goods in India for export [Explanation 1(b) to section 9(1)(i)]: In the case
of a non-resident, 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.
(iii) Collection of news and views in India for transmission out of India [Explanation 1(c)
to section 9(1)(i)]: In the case of a non-resident, being a person engaged in the business
of running a news agency or of publishing newspapers, magazines or journals, no income
shall be deemed to accrue or arise in India to him through or from activities which are
confined to the collection of news and views in India for transmission out of India.
(iv) Shooting of cinematograph films in India [Explanation 1(d) to section 9(1)(i)]: In the
case of a non-resident, no income shall be deemed to accrue or arise in India through or
from operations which are confined to the shooting of any cinematograph film in India, if
such non-resident is :
• an individual, who is not a citizen of India or
• a firm which does not have any partner who is a citizen of India or who is resident in
India; or
• a company which does not have any shareholder who is a citizen of India or who is
resident in India.
(v) Activities confined to display of rough diamonds in SNZs [Explanation 1(e) to section
9(1)(i)]: In order to facilitate the foreign mining companies to undertake activity of display of
uncut diamond (without any sorting or sale) in a Special Notified Zone (SNZ), clause (e) has
been inserted in Explanation 1 to section 9(1)(i) to provide that in the case of a foreign
company engaged in the business of mining of diamonds, no income shall be deemed to
accrue or arise in India to it through or from the activities which are confined to display of
uncut and unassorted diamonds in any special zone notified by the Central Government in
the Official Gazette in this behalf.
(b) & (c) Income from property, asset or source of income in India
Any income which arises from any property (movable, immovable, tangible and intangible
property) would be deemed to accrue or arise in India.
Examples:
• Hire charges or rent paid outside India for the use of the machinery or buildings situated in
India,

• deposits with an Indian company for which interest is received outside India etc.
(d) Income through transfer of a capital asset situated in India
Capital gains arising through or from the transfer of a capital asset situated in India would be
deemed to accrue or arise in India in all cases irrespective of the fact whether
• the capital asset is movable or immovable, tangible or intangible;
• the place of registration of the document of transfer etc., is in India or outside; and
• the place of payment of the consideration for the transfer is within India or outside.
Accordingly, the expression “through” shall mean and include and shall be deemed to have
always meant and included “by means of”, “in consequence of” or “by reason of”.[Explanation
4 to section 9(1)(i)]
Further, an asset or a capital asset being any share or interest in a company or entity
registered or incorporated outside India shall be deemed to be and shall always be deemed to
have been situated in India, if the share or interest derives, directly or indirectly, its value
substantially from the assets located in India.[Explanation 5 to section 9(1)(i)]
However, the following shall not be deemed to be or deemed to have been situated in
India [Proviso to Explanation 5 to section 9(1)(i)]
• any asset or capital asset being investment held by non-resident, directly or indirectly, in a
Foreign Institutional Investor, as referred to in clause (a) of the Explanation to section 115AD
for any assessment year commencing on or after 1st April 2012 but before 1st April 2015.
• an asset or capital asset, which is held by a non-resident by way of investment, directly or
indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and
Exchange Board of India (Foreign Portfolio Investors)Regulations, 2014, made under the
Securities and Exchange Board of India Act, 1992.
Declaration of dividend by a foreign company outside India does not have the effect of transfer
of any underlying assets located in India. Circular No. 4/2015, dated 26-03-2015, therefore,
clarifies that the dividends declared and paid by a foreign company outside India in respect of
shares which derive their value substantially from assets situated in India would NOT be deemed
to be income accruing or arising in India by virtue of the provisions of section 9(1)(i).
Explanation 6 to section 9(1)(i) provides that the share or interest in a company or entity
registered or incorporated outside India, shall be deemed to derive its value substantially from
the assets (whether tangible or intangible) located in India, if on the specified date, the value of
Indian assets, -
• exceeds the amount of ` 10 crore; and

• represents at least 50% of the value of all the assets owned by the company or entity, as the
case may be;
Term Meaning
Value of an The fair market value as on the specified date, of such asset without
asset reduction of liabilities, if any, in respect of the asset, determined in
prescribed manner
Specified The date on which the accounting period of the company or, as the case
date may be, the entity ends preceding the date of transfer of a share or an
interest.
However, the date of transfer shall be the specified date of valuation, in a
case where the book value of the assets of the company or entity on the
date of transfer exceeds by at least 15%, the book value of the assets as
on the last balance sheet date preceding the date of transfer.
Accounting Each period of 12 months ending with 31st March.
period However, where a company or an entity, referred to in Explanation 5,
regularly adopts a period of 12 months ending on a day other than 31st
March for the purpose of—
(a) complying with the provisions of the tax laws of the territory, of which it
is a resident, for tax purposes; or
(b) reporting to persons holding the share or interest,
then, the period of twelve months ending with the other day shall be the
accounting period of the company or, as the case may be, the entity:
First First accounting period of the company or, as the case may be, the entity
Accounting shall begin from the date of its registration or incorporation and end
Period with the 31st March or such other day, as the case may be, following the
date of such registration or incorporation.
Later Later accounting period shall be the successive periods of twelve
accounting months
period
Accounting If the company or the entity ceases to exist before the end of accounting
period of an period, as aforesaid, then, the accounting period shall end immediately
entity which before the company or, as the case may be, the entity, ceases to exist.
ceases to
exist

Explanation 7 to section 9(1)(i) provides that no income shall be deemed to accrue or arise
to a non-resident from transfer, outside India, of any share of, or interest in, a company or an
entity, registered or incorporated outside India, in the following cases;
(1) Foreign company AND the transferor (whether individually or along with its
or entity directly associated enterprises), at any time in the twelve
owns the assets months preceding the date of transfer, does not
situated in India hold
• the right of management or control in relation to
foreign company or entity; or
• the voting power or share capital or interest
exceeding 5% of the total voting power or total
share capital or total interest, as the case may
be, of the foreign company or entity; or
(2) Foreign company AND the transferor (whether individually or along with its
or entity indirectly associated enterprises), at any time in the twelve
owns the assets months preceding the date of transfer, does not
situated in India hold
• the right of management or control in relation to
foreign company or entity; or
• any right in, or in relation to, foreign company
or entity which would entitle him to the right of
management or control in the company or entity
that directly owns the assets situated in India;
or
• such percentage of voting power or share
capital or interest in foreign company or entity
which results in holding of (either individually or
along with associated enterprises) a voting
power or share capital or interest exceeding 5%
of the total voting power or total share capital or
total interest, as the case may be, of the
company or entity that directly owns the assets
situated in India;
In effect, the exemption shall be available to the transferor of a share of, or interest in, a
foreign entity if he along with its associated enterprises, -
• neither holds the right of control or management,

• nor holds voting power or share capital or interest exceeding 5% of the total voting power or
total share capital or total interest,
in the foreign company or entity directly holding the Indian assets (direct holding company).
In case the transfer is of shares or interest in a foreign entity which does not hold the Indian
assets directly then the exemption shall be available to the transferor if he along with its
associated enterprises,-
• neither holds the right of management or control in relation to such company or the entity,
• nor holds any rights in such company which would entitle it to either exercise control or
management of the direct holding company or entity or entitle it to voting power or share
capital or total interest exceeding 5% in the direct holding company or entity.
Further, where all the assets owned, directly or indirectly, by a company or, as the case may be,
an entity registered or incorporated outside India, are not located in India, the income of the
non-resident transferor, from transfer outside India of a share of, or interest in the foreign
company or entity, deemed to accrue or arise in India under this clause, shall be only such part
of the income as is reasonably attributable to assets located in India and determined in the
prescribed manner.
“Associated enterprise”, in relation to another enterprise, means an enterprise—
• which participates, directly or indirectly, or through one or more intermediaries, in the
management or control or capital of the other enterprise; or
• in respect of which one or more persons who participate, directly or indirectly, or through one
or more intermediaries, in its management or control or capital, are the same persons who
participate, directly or indirectly, or through one or more intermediaries, in the management
or control or capital of the other enterprise.
(ii) Income from salaries earned in India [Section 9(1)(ii)]
Income, which falls under the head “Salaries”, deemed to accrue or arise in India, if it is
earned in India. Salary payable for service rendered in India would be treated as earned in
India.
Further, any income under the head “Salaries” payable for 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.
(iii) Income from salaries payable by the Government for services rendered outside India
[Section 9(1)(iii)].
Income from ‘Salaries’ which is payable by the Government to a citizen of India for services
rendered outside India would be deemed to accrue or arise in India.

However, allowances and perquisites paid outside India by the Government is exempt, by
virtue of section 10(7).
Exception under section 9(2):
Pension payable outside India by the Government to its officials and judges who permanently
reside outside India shall not be deemed to accrue or arise in India.
Illustration 6
J, a citizen of India, employed in the Indian Embassy at Tokyo, Japan. He received salary and
allowances at Tokyo from the Government of India for the year ended 31.3.2018 for services
rendered by him in Tokyo. Besides, he was allowed perquisites by the Government. He is a non-
resident for the assessment year 2018-19. Examine the taxability of salary, allowances and
perquisites in the hands of J for the assessment year 2018-19.
Solution
As per section 9(1)(iii), salaries payable by the Government to a citizen of India for services
rendered outside India shall be deemed to accrue or arise in India. As such, salary received by J is
chargeable to tax, even though he was a non-resident for A.Y. 2018-19.
As per section 10(7), all allowances or perquisites paid or allowed as such outside India by the
Government to a citizen of India for rendering services outside India is exempt from tax. Therefore,
the allowances and perquisites received by J are exempt as per section 10(7).
(iv) Dividend paid by a Indian company outside India [Section 9(1)(iv)].
All dividends paid by an Indian company must be deemed to accrue or arise in
India.(Taxability of dividend is discussed in Chapter 8 in more detail).Under section 10(34),
income from dividends referred to in section 115-O is exempt from tax in the hands of the
shareholder. It may be noted that dividend distribution tax under section 115-O does not apply
to deemed dividend under section 2(22)(e), which is chargeable in the previous year in which
such dividend is distributed or paid.
(v) Interest [Section 9(1)(v)]
Under section 9(1)(v), an interest is deemed to accrue or arise in India if it is payable by -
(a) the Government;
(b) a person resident in India;
Exception: Where it is payable in respect of any money borrowed and used for the
purposes of a business or profession carried on by him outside India or for the purposes of
making or earning any income from any source outside India, it will not be deemed to
accrue or arise in India.

(c) a non-resident when it is payable in respect of any debt incurred or moneys borrowed and
used for the purpose of a business or profession carried on in India by him.
Exception: Interest on money borrowed by the non-resident for any purpose other than a
business or profession, will not be deemed to accrue or arise in India.
Example: If a non-resident ‘A’ borrows money from a non-resident ‘B’ and invests the same
in shares of an Indian company, interest payable by ‘A’ to ‘B’ will not be deemed to accrue
or arise in India.
Taxability of interest payable by the Permanent Establishment of a non-resident
engaged in banking business to the head office
In order to provide clarity and certainty, on the issue of taxability of interest payable by the
PE of a non-resident engaged in banking business to the head office, an Explanation has
been inserted in section 9(1)(v). Accordingly, in the case of a non-resident, being a
person engaged in the business of banking, any interest payable by the PE in India of
such non-resident to the head office or any PE or any other part of such non-resident
outside India, shall be deemed to accrue or arise in India.
Such interest shall be chargeable to tax in addition to any income attributable to the PE in
India.
Further, the PE in India shall be deemed to be a person separate and independent of the
non-resident person of which it is a PE and the provisions of the Act relating to
computation of total income, determination of tax and collection and recovery would apply
accordingly.
Also, the PE in India has to deduct tax at source on any interest payable to either the head
office or any other branch or PE, etc. of the non-resident outside India. Non-deduction
would result in disallowance of interest claimed as expenditure by the PE and may also
attract levy of interest and penalty in accordance with relevant provisions of the Act.
Permanent establishment includes a fixed place of business through which the business
of the enterprise is wholly or partly carried on.
(vi) Royalty [Section 9(1)(vi)]
Royalty will be deemed to accrue or arise in India when it is payable by -
(a) the Government;
(b) a person who is a resident in India
Exception: Where it is payable for the transfer of any right or the use of any property or
information or for the utilization of services 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 non-resident only when the royalty is payable in respect of any right, property or
information used or services utilised for purposes of a business or profession carried on in
India or for the purposes of making or earning any income from any source in India.
Important points:
1. Lumpsum royalty not deemed to accrue arise in India: Lumpsum royalty payments
made by a resident for the transfer of all or any rights (including the granting of a licence)
in respect of computer software supplied by a non-resident manufacturer along with
computer hardware under any scheme approved by the Government under the Policy on
Computer Software Export, Software Development and Training, 1986 shall not be deemed
to accrue or arise in India.
2. Meaning of Computer software: “Computer software” means any computer programme
recorded on any disc, tape, perforated media or other information storage device and
includes any such programme or any customised electronic data.
3. Meaning of Royalty: The term ‘royalty’ means consideration (including any lumpsum con-
sideration but excluding any consideration which would be the income of the recipient
chargeable under the head ‘Capital gains’) for:
(i) the transfer of all or any rights (including the granting of licence) in respect of a patent,
invention, model, design, secret formula or process or trade mark or similar property;
(ii) 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;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark
or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific
knowledge, experience or skill;
(v) the use or right to use any industrial, commercial or scientific equipment but not
including the amounts referred to in section 44BB;
(vi) the transfer of all or any rights (including the granting of licence) 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;
(vii) the rendering of any service in connection with the activities listed above.
The definition of ‘royalty’ for this purpose is wide enough to cover both industrial royalties
as well as copyright royalties. The deduction specially excludes income which should be
chargeable to tax under the head ‘capital gains’.

4. Consideration for use or right to use of computer software is royalty within the
meaning of section 9(1)(vi)
Explanation 4 provides that the consideration for use or right to use of computer software
is royalty by clarifying that, transfer of all or any rights in respect of any right, property or
information includes and has always included transfer of all or any right for use or right to
use a computer software (including granting of a licence) irrespective of the medium
through which such right is transferred.
Consequently, the provisions of tax deduction at source under section 194J and
section 195 would be attracted in respect of consideration for use or right to use computer
software since the same falls within the definition of royalty.
Note - The Central Government has, vide Notification No. 21/2012 dated 13.6.2012 to be
effective from 1st July, 2012, exempted certain software payments from the applicability of tax
deduction under section 194J. Accordingly, where payment is made by the transferee for
acquisition of software from a resident-transferor, the provisions of section 194J would not be
attracted if –
(1) the software is acquired in a subsequent transfer without any modification by the
transferor;
(2) tax has been deducted either under section 194J or under section 195 on payment
for any previous transfer of such software; and
(3) the transferee obtains a declaration from the transferor that tax has been so deducted
along with the PAN of the transferor.
5. Consideration in respect of any right, property or information – Is it royalty?
Explanation 5 provides that Royalty includes and has always included consideration in
respect of any right, property or information, whether or not,
(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.
6. Meaning of Process
Explanation 6 provides that the term “process” includes and shall be deemed to have
always included transmission by satellite (including up-linking, amplification, conversion for
down-linking of any signal), cable, optic fibre or by any other similar technology, whether or
not such process is secret.

Illustration 7
Mr. Soham, an Indian Citizen, left India on 20-04-2015 for the first time to setup a software firm in
Singapore. On 10-04-2017, he entered into an agreement with LK Limited, an Indian Company, for
the transfer of technical documents and designs to setup an automobile factory in Faridabad. He
reached India along with his team to render the requisite services on 15-05-2017 and was able to
complete his assignment on 20-08-2017. He left for Singapore on 21-08-2017. He charged ` 50
lakhs for his services from LK Limited.
Determine the residential status of Mr. Soham for the Assessment Year 2018-19 and examine
whether the fees charged from LK Limited would be chargeable to tax as per the Income-tax Act,
1961.
Solution
Determination of residential status of Mr. Soham
As per section 6(1), an individual is said to be resident in India in any previous year if he satisfies
the conditions:-
(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total
period of 365 days or more and has been in India for at least 60 days in the previous year.
In the case of an Indian citizen leaving India for the purposes of employment outside India
during the previous year or an Indian citizen, who being outside India, comes on a visit to
India in any previous year, the period of stay during the previous year in condition (ii) above,
to qualify as a resident, would be 182 days instead of 60 days.
In this case, Mr. Soham is an Indian citizen who left India to set up a software firm in Singapore on
20.04.2015. Therefore, he is an Indian citizen living in Singapore, who comes on a visit to India
during the P.Y.2017-18. His stay in India during the period of his visit is only 99 days (i.e.,
17+30+31+21 days). Since his stay in India during the previous year 2017-18 is only 99 days, he
does not satisfy the minimum criterion of 182 days stay in India for being a resident. Hence, his
residential status for A.Y.2018-19 is Non-Resident.
Taxability of income
As per section 5(2), in case of a non-resident, only income which accrues or arises or which is
deemed to accrue or arise to him in India or which is received or deemed to be received in
India in the relevant previous year is taxable in India.
In this case, Mr. Soham, a non-resident, charges fees from LK Ltd., an Indian company, for
transfer of technical documents and designs to set up an automobile factory in Faridabad. He
renders the requisite services in India for which he stays in India for 99 days during the

P.Y.2017-18.
Section 9(1)(vi) defines “royalty” to mean consideration for transfer of all or any rights in
respect of, inter alia, a design and also for the rendering of services in connection with such
activity. Transfer of rights in the above definition includes transfer of right for use or right to
use a computer software also. Therefore, the fees received by Mr. Soham for transfer of
technical documents and designs and rendering of requisite services in relation thereto would
fall within the meaning of “royalty”.
As per section 9(1)(vi), income by way of royalty payable by a person who is a resident (in this
case, LK Limited, an Indian company) would be deemed to accrue or arise in India in the
hands of the non-resident (Mr. Soham, in this case), except where such royalty is payable in
respect of any right or property or information used or for services utilized for the purpose of a
business carried on by such person outside India or for the purposes of making or earning
income from any source outside India.
In this case, since the royalty is payable by an Indian company to Mr. Soham, a non-resident, in
respect of services utilized for a business in India (namely, for setting up an automobile factory in
Faridabad), the same is deemed to accrue or arise in India and is hence, taxable in India in the
hands of Mr. Soham, a non-resident for the A.Y. 2018-19.
(vii) Fees for technical services [Section 9(1)(vii)]
Any fees for technical services will be deemed to accrue or arise in India if they are payable
by -
(a) the Government.
(b) a person who is resident in India
Exception: Where the fees is payable in respect of technical services utilised in a
business or profession carried on by such person outside India or for the purpose of
making or earning any income from any source outside India.
(c) a person who is a non-resident, only where the fees are payable in respect of services
utilised in a business or profession carried on by the non-resident in India or where such
services are utilised for the purpose of making or earning any income from any source in
India.
Fees for technical services mean any consideration (including any lumpsum consideration)
for the rendering of any managerial, technical or consultancy services (including providing the
services of technical or other personnel). However, it 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’.

Income deemed to accrue or arise in India to a non-resident by way of interest, royalty

and fee for technical services to be taxed irrespective of territorial nexus (Explanation
to section 9)
Income by way of interest, royalty or fee for technical services which is deemed to accrue or
arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be included in the total
income of the non-resident, whether or not –
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.
In effect, the income by way of fee for technical services, interest or royalty, from services
utilized in India would be deemed to accrue or arise in India in case of a non-resident and be
included in his total income, whether or not such services were rendered in India.
Illustration 8
Miss Vivitha paid a sum of 5000 USD to Mr. Kulasekhara, a management consultant practising in
Colombo, specializing in project financing. The payment was made in Colombo.
Mr. Kulasekhara is a non-resident. The consultancy is related to a project in India with possible
Ceylonese collaboration. Is this payment chargeable to tax in India in the hands of Mr.
Kulasekhara, since the services were used in India?
Solution
A non-resident is chargeable to tax in respect of income received outside India only if such
income accrues or arises or is deemed to accrue or arise to him in India.
The income deemed to accrue or arise in India under section 9 comprises, inter alia, income
by way of fees for technical services, which includes any consideration for rendering of any
managerial, technical or consultancy services. Therefore, payment to a management
consultant relating to project financing is covered within the scope of “fees for technical
services”.
The Explanation below section 9(2) clarifies that income by way of, inter alia, fees for
technical services, from services utilized in India would be deemed to accrue or arise in India
in case of a non-resident and be included in his total income, whether or not such services
were rendered in India or whether or not the non-resident has a residence or place of
business or business connection in India.
In the instant case, since the services were utilized in India, the payment received by
Mr. Kulasekhara, a non-resident, in Colombo is chargeable to tax in his hands in India, as it is
deemed to accrue or arise in India.

Illustration 9
Compute the total income in the hands of an individual, being a resident and ordinarily
resident, resident but not ordinarily resident, and non-resident for the A.Y. 2018 -19:
Particulars Amount ( ` )
Interest on UK Development Bonds, 50% of interest received in India 10,000
Income from a business in Chennai (50% is received in India) 20,000
Profits on sale of shares of an Indian company received in London 20,000
Dividend from British company received in London 5,000
Profits on sale of plant at Germany 50% of profits are received in India 40,000
Income earned from business in Germany which is controlled from Delhi 70,000
( ` 40,000 is received in India)
Profits from a business in Delhi but managed entirely from London 15,000
Income from house property in London deposited in a Indian Bank at 50,000
London, brought to India (Computed)
Interest on debentures in an Indian company received in London. 12,000
Fees for technical services rendered in India but received in London 8,000
Profits from a business in Bombay managed from London 26,000
Pension for services rendered in India but received in Burma 4,000
Income from property situated in Pakistan received there 16,000
Past foreign untaxed income brought to India during the previous year 5,000
Income from agricultural land in Nepal received there and then brought to 18,000
India
Income from profession in Kenya which was set up in India, received there 5,000
but spent in India
Gift received on the occasion of his wedding 20,000
Interest on savings bank deposit in State Bank of India 12,000
Income from a business in Russia, controlled from Russia 20,000

Dividend from Reliance Petroleum Limited, an Indian Company 5,000

Agricultural income from a land in Rajasthan 15,000
Solution
Computation of total income for the A.Y. 2018-19
Particulars Resident Resident Non-

and but not resident
ordinarily ordinarily
resident resident `
` `
Interest on UK Development Bonds, 50% of 10,000 5,000 5,000

interest received in India
Income from a business in Chennai (50% is 20,000 20,000 20,000

received in India)
Profits on sale of shares of an Indian company 20,000 20,000 20,000

received in London (assuming that they are in the
nature of short-term capital gains)
Dividend from British company received in 5,000 - -

London
Profits on sale of plant at Germany, 50% of 40,000 20,000 20,000

profits are received in India
Income earned from business in Germany which 70,000 70,000 40,000

is controlled from Delhi, out of which ` 40,000 is
received in India
Profits from a business in Delhi but managed 15,000 15,000 15,000

entirely from London
Income from property in London deposited in a 50,000 - -

Bank at London, later on remitted to India
Interest on debentures in an Indian company 12,000 12,000 12,000

received in London

Fees for technical services rendered in India but 8,000 8,000 8,000
received in London
Profits from a business in Bombay managed from 26,000 26,000 26,000

London
Pension for services rendered in India but 4,000 4,000 4,000

received in Burma
Income from property situated in Pakistan received 16,000 - -

there
Past foreign untaxed income brought to India - - -

during the previous year
Income from agricultural land in Nepal received 18,000 - -

there and then brought to India
Income from profession in Kenya which was set 5,000 5,000 -

up in India, received there but spent in India
Gift received on the occasion of his wedding [not - - -

taxable]
Interest on savings bank deposit in State Bank of India 12,000 12,000 12,000
Income from a business in Russia, controlled from 20,000 - -

Russia
Dividend from Reliance Petroleum Limited, an - - -

Indian Company [Exempt under section 10(34)]
Agricultural income from a land in Rajasthan

[Exempt under section 10(1)] - - -
Gross Total Income 3,51,000 2,17,000 1,82,000
Less: Deduction under section 80TTA

[Interest on savings bank account subject to a
maximum of `10,000] 10,000 10,000 10,000
Total Income 3,41,000 2,07,000 1,72,000

2.3 PRESENCE OF ELIGIBLE FUND MANAGER IN INDIA

NOT TO CONSTITUTE BUSINESS CONNECTION IN
INDIA OF SUCH ELIGIBLE INVESTMENT FUND ON
BEHALF OF WHICH HE UNDERTAKES FUND
MANAGEMENT ACTIVITY [SECTION 9A]
(1) Under section 9A, a special regime has been provided in respect of offshore funds.
(2) Fund Management Activity through an eligible fund manager not to constitute business
connection: In the case of an eligible investment fund, the fund management activity carried
out through an eligible fund manager acting on behalf of such fund shall not constitute
business connection in India of the said fund, subject to fulfillment of certain conditions.
(3) Location of Fund Manager in India not to affect residential status of an eligible
investment fund: An eligible investment fund shall not be said to be resident in India merely
because the eligible fund manager undertaking fund management activities on its behalf is
located in India.
(4) Conditions to be fulfilled by an Eligible Investment Fund: The eligible investment fund
means a fund established or incorporated or registered outside India, which collects funds
from its members for investing it for their benefit. Further, it should fulfill the following
conditions:
(i) the fund should not be a person resident in India;
(ii) the fund should be a resident of a country or a specified territory with which an
agreement referred to in section 90(1) or section 90A(1) has been entered into or should
be established or incorporated or registered outside India in a country or a specified
territory notified by the Central Government in this behalf.;
(iii) the aggregate participation or investment in the fund, directly or indirectly, by persons
being resident in India should not exceed 5% of the corpus of the fund;
(iv) the fund and its activities should be subject to applicable investor protection regulations
in the country or specified territory where it is established or incorporated or is a
resident;
(v) the fund should have a minimum of 25 members who are, directly or indirectly, not
connected persons;
(vi) any member of the fund along with connected persons shall not have any participation
interest, directly or indirectly, in the fund exceeding 10%;

(vii) the aggregate participation interest, directly or indirectly, of ten or less members along
with their connected persons in the fund, shall be less than 50%;
(viii) the investment by the fund in any entity shall not exceed 20% of the corpus of the fund;
(ix) no investment shall be made by the fund in its associate entity;
(x) the monthly average of the corpus of the fund shall not be less than
` 100 crore. If the fund has been established or incorporated in the previous year, the
corpus of fund shall not be less than ` 100 crore rupees at the end of such previous
year;
However, this condition shall not be applicable to a fund which has been wound
up in the previous year.
(xi) the fund shall not carry on or control and manage, directly or indirectly, any business in
India;
(xii) the fund should neither be engaged in any activity which constitutes a business
connection in India nor should have any person acting on its behalf whose activities
constitute a business connection in India other than the activities undertaken by the
eligible fund manager on its behalf.
(xiii) the remuneration paid by the fund to an eligible fund manager in respect of fund
management activity undertaken on its behalf should not be less than the arm’s length
price of such activity.
(5) Certain conditions not to apply to investment fund set up by the Government or the
Central Bank of a foreign State or a Sovereign Fund: The following conditions would,
however, not be applicable in case of an investment fund set up by the Government or the
Central Bank of a foreign State or a sovereign fund or such other fund notified by the
Central Government:
(i) the fund should have a minimum of 25 members who are, directly or indirectly, not
connected persons;
(ii) any member of the fund along with connected persons shall not have any participation
interest, directly or indirectly, in the fund exceeding 10%;
(iii) the aggregate participation interest, directly or indirectly, of ten or less members along
with their connected persons in the fund, shall be less than 50%.
(6) Eligible Fund Manager [Section 9A(4)]: The eligible fund manager, in respect of an
eligible investment fund, means any person who is engaged in the activity of fund
management and fulfills the following conditions:

(i) the person should not be an employee of the eligible investment fund or a connected
person of the fund;
(ii) the person should be registered as a fund manager or investment advisor in accordance
with the specified regulations;
(iii) the person should be acting in the ordinary course of his business as a fund manager;
(iv) the person along with his connected persons shall not be entitled, directly or indirectly,
to more than 20% of the profits accruing or arising to the eligible investment fund from
the transactions carried out by the fund through such fund manager.
(7) Furnishing of Statement in prescribed form [Section 9A(5)]: Every eligible investment
fund shall, in respect of its activities in a financial year, furnish within 90 days from the end of
the financial year, a statement in the prescribed form to the prescribed income-tax authority.
The statement should contain information relating to –
(1) the fulfillment of the above conditions; and
(2) such other relevant information or document which may be prescribed.
(8) Non-applicability of special taxation regime under section 9A [Section 9A(6)]: This
special taxation regime would not have any impact on taxability of any income of the
eligible investment fund which would have been chargeable to tax irrespective of whether
the activity of the eligible fund manager constituted business connection in India of such
fund or not.
Further, the said regime shall not have any effect on the scope of total income or
determination of total income in the case of the eligible fund manager.
(9) CBDT to prescribe guidelines for the manner of application of the provisions of this section.
(10) Meaning of certain terms:
Term Meaning
Associate An entity in which a director or a trustee or a partner or a member or a

fund manager of the investment fund or a director or a trustee or a
partner or a member of the fund manager of such fund, holds, either
individually or collectively, share or interest, being more than 15% of its
share capital or interest, as the case may be.
Corpus The total amount of funds raised for the purpose of investment by the
eligible investment fund as on a particular date.

Connected Any person who is connected directly or indirectly to another person and
person includes,—
(a) any relative of the person, if such person is an individual;
(b) any director of the company or any relative of such director, if the
person is a company;
(c) any partner or member of a firm or association of persons or body of
individuals or any relative of such partner or member, if the person is
a firm or association of persons or body of individuals;
(d) any member of the Hindu undivided family or any relative of such
member, if the person is a Hindu undivided family;
(e) any individual who has a substantial interest in the business of the
person or any relative of such individual;
(f) a company, firm or an association of persons or a body of individuals,
whether incorporated or not, or a Hindu undivided family having a
substantial interest in the business of the person or any director,
partner, or member of the company, firm or association of persons or
body of individuals or family, or any relative of such director, partner
or member;
(g) a company, firm or association of persons or body of individuals,
whether incorporated or not, or a Hindu undivided family, whose
director, partner, or member has a substantial interest in the
business of the person, or family or any relative of such director,
partner or member;
(h) any other person who carries on a business, if -
(i) the person being an individual, or any relative of such person,
has a substantial interest in the business of that other person; or
(ii) the person being a company, firm, association of persons, body
of individuals, whether incorporated or not, or a Hindu undivided
family, or any director, partner or member of such company, firm
or association of persons or body of individuals or family, or any
relative of such director, partner or member, has a substantial
interest in the business of that other person;

EXERCISE
Question 1
Peeyush, returned to India on 12th June, 2017 for permanently residing in India after a stay of
about 20 years in U.K., provides the sources of his various income and seeks your opinion to know
about his liability to income tax thereon in India in assessment year 2018-19:
(i) Income of rent of the flat in London which was deposited in a bank there. The flat was
given on rent by him after his return to India since July, 2017.
(ii) Dividends on the shares of three German Companies which are being collected in a bank
account in London. He proposes to keep the dividend on shares in London with the
permission of the Reserve Bank of India.
(iii) He has got two sons, one of whom is of 12 years and other 19 years. Both his sons are
staying in London and not returning to India with him. Each of his sons is having income of
` 75,000 in U.K. in foreign currency (not received in India) and of ` 20,000 in India.
(iv) During the preceding accounting year when he was a non-resident, he had sold 1000
shares which were acquired by him in British Pound Sterling and the sale proceeds were
repatriated. The profit in terms of British Pound Sterling on sale of these 1000 shares was
175% of the cost at ` 37,500 while in terms of Indian Rupee it was
` 50,000.
Answer
Peeyush returned to India on 12 th June 2017 for permanently residing in India after staying in
UK for 20 years. During the P.Y.2017-18, he stays in India for 293 days. Since he has stayed
in India for a period of 182 days or more during the previous year 2017-18, he would be a
resident in India for the A.Y.2018-19. However, he would be a resident but not ordinarily
resident, assuming that he was a non-resident in nine out of ten previous years preceding
P.Y.2017-18 and his stay in India during the seven previous years is less than 730 days. The
residential status of Peeyush for A.Y.2018-19 is, therefore, Resident but Not Ordinarily
Resident.
As per section 5(1), only income which is received/deemed to be received/accrued or
arisen/deemed to accrue or arise in India is taxable in case of a Resident but not Ordinarily
Resident. Income which accrues or arises outside India shall not be included in his total
income, unless it is derived from a business controlled in, or a profession set up in, India.
(i) Rental income from a flat in London which was deposited in a bank there shall not be
taxable in the case of a resident but not ordinarily resident, since both the accrual and
receipt of income are outside India.

(ii) Dividends from shares of three German Companies, collected in a bank account in London,
would also not be taxable in the case of a resident but not ordinarily resident since both the
accrual and receipt of income are outside India.
(iii) As per section 64(1A), all income accruing or arising to a minor child is includible in the
hands of the parent, after providing for deduction of ` 1,500 per child under section 10(32).
Accordingly, income of ` 20,000 accruing to his minor son, aged 12 years, in India is
includible in the income of Peeyush, after providing deduction of ` 1,500. Therefore,
`18,500 is includible in the income of Peeyush. Income accruing to the minor child outside
India (which is also received outside India) is not includible in the income of Peeyush.
Since the other son is major, his income is not includible in the income of Peeyush.
(iv) Repatriation of sale proceeds of 1000 shares sold in the preceding accounting year, when
Peeyush was a non-resident, is not taxable in the A.Y.2018-19 since it is not the income of
the P.Y.2017-18.
Consequently, only the income includible under section 64(1A) would form part of the total
income of Mr. Peeyush for A.Y.2018-19. Since his total income(i.e., ` 18,500) is less than the
basic exemption limit, there would be no liability to income-tax for A.Y.2018-19.
Question 2
Mr. David, a Government employee serving in the Ministry of External Affairs, left India for the first
time on 31.03.2017 due to his transfer to High Commission of Canada. He did not visit India any
time during the previous year 2017-18. He has received the following income for the Financial
Year 2017-18:
S.No. Particulars `
(i) Salary 5,00,000
(ii) Foreign Allowance 4,00,000
(iii) Interest on fixed deposit from bank in India 1,00,000
(iv) Income from agriculture in Pakistan 2,00,000
(v) Income from house property in Pakistan 2,50,000
Compute his gross total income for Assessment Year 2018-19.

Answer
As per section 6(1), Mr. David is a non-resident for the A.Y. 2018-19, since he was not present in
India at any time during the previous year 2017-18.

As per section 5(2), a non-resident is chargeable to tax in India only in respect of following
incomes:
(i) Income received or deemed to be received in India; and
(ii) Income accruing or arising or deemed to accrue or arise in India.
In view of the above provisions, income from agriculture in Pakistan and income from house
property in Pakistan would not be chargeable to tax in the hands of David, assuming that the
same were received in Pakistan.
Income from ‘Salaries’ payable by the Government to a citizen of India for services rendered
outside India is deemed to accrue or arise in India as per section 9(1)(iii). Hence, such income
is taxable in the hands of Mr. David, even though he is a non-resident. It has been assumed
that Mr. David is a citizen of India.
However, allowances or perquisites paid or allowed as such outside India by the Government
to a citizen of India for rendering service outside India is exempt under section 10(7). Hence,
foreign allowance of ` 4,00,000 is exempt under section 10(7).
Gross Total Income of Mr. David for A.Y. 2018-19
Particulars `
Salaries 5,00,000
Income from other sources (Interest on fixed deposit in India) 1,00,000
Gross Total Income 6,00,000
Question 3
Mr. A, a citizen of India, left for USA for the purposes of employment on 1.5.2017. He has not
visited India thereafter. Mr. A borrows money from his friend Mr. B, who left India one week before
Mr. A's departure, to the extent of ` 10 lakhs and buys shares in X Ltd., an Indian company.
Discuss the taxability of the interest charged @10% in B's hands where the same has been
received in New York.
Answer
An individual is said to be resident in India in any previous year, if he -
(i) has been in India during that year for a total period of 182 days or more, or
(ii) has been in India during the four years immediately preceding that year for a total period of
365 days or more and has been in India for at least 60 days in that year.
In this case, A has been in India only from 1.4.2017 to 30.04.2017 i.e. for 30 days. Therefore,

he does not satisfy either of the conditions in (i) or (ii) and is, hence, a non-resident. B, who
left India one week before A’s departure, is also a non-resident for the same reasons.
Section 9(1)(v) provides that income by way of interest payable by a non-resident 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 shall be deemed to accrue or arise in India.
Therefore, interest payable by a non-resident in respect of any debt incurred, or moneys
borrowed and used, for the purpose of making or earning any income from any source other
than a business or profession carried on by him in India, shall not be deemed to accrue or
arise in India. Therefore, interest payable by A on money borrowed from B to invest in shares
of an Indian company shall not be deemed to accrue or arise in India and hence, is not
taxable in India in the hands of B.
Question 4
Poulomi, a chartered accountant, is presently working in a firm in India. She has received an offer
for the post of Chief Financial Officer from a company at Singapore. As per the offer letter, she
should join the company at any time between 1st September, 2017 and 31st October, 2017. She
approaches you for your advice on the following issues to mitigate her tax liability in India:
(i) Date by which she should leave India to join the company;
(ii) Direct credit of part of her salary to her bank account in Kolkata maintained jointly with her
mother to meet requirement of her family
(iii) Period for which she should stay in India when she comes on leave.
Answer
The following category of individuals will be treated as resident in India only if the period of their
stay in India during the relevant previous year is 182 days or more :-
(a) Indian citizens, who leave India in any previous year, inter alia, for purposes of employment
outside India, or
(b) Indian citizen or person of Indian origin engaged outside India, inter alia, in an employment,
who comes on a visit to India in any previous year.
(i) Since Poulomi is leaving India for the purpose of employment outside India, she will be
treated as resident only if the period of her stay during the previous year amounts to 182
days or more. Therefore, Poulomi should leave India on or before 28th September, 2017,
in which case, her stay in India during the previous year would be less than 182 days
and she would become non-resident for the purpose of taxability in India. In such a
case, only the income which accrues or arises in India or which is deemed to accrue or
arise in India or received or deemed to be received in India shall be taxable.

The income earned by her in Singapore would not be chargeable to tax in India for A.Y.
2018-19, if she leaves India on or before 28th September, 2017.
(ii) If any part of Poulomi’s salary will be credited directly to her bank account in Kolkata
then, that part of her salary would be considered as income received in India during the
previous year under section 5 and would be chargeable to tax under Income-tax Act,
1961, even if she is a non-resident. Therefore, Poulomi should receive her entire salary
in Singapore and then remit the required amount to her bank account in Kolkata in which
case, the salary earned by her in Singapore would not be subject to tax in India.
(iii) In case Poulomi visits India after taking up employment outside India, she would be
covered in the exception provided in (b) above and she will be treated as resident only
if the period of her stay during the relevant previous year amounts to 182 days or more.
Therefore, when Poulomi comes India on leave, she should stay in India for less than 182
days during the relevant previous year so that her status remains as a non-resident for the
relevant previous year. Moreover, she should not visit India again during the current previous
year i.e. P.Y. 2017-18.

SIGNIFICANT SELECT CASES

Can consideration for supply of software embedded in hardware tantamount to ‘royalty’
under section 9(1)(vi), where the software was no independent functional existence?
CIT v. Alcatel Lucent Canada (2015) 372 ITR 476 (Del)
Facts of the case: The assessee, a company incorporated in France, was engaged in
manufacture, trade and supply equipment and services for GSM Cellular Radio Telephones
Systems. It supplied hardware and software to various entities in India. Software licensed by the
assessee embodied the process which is required to control and manage the specific set of
activities involved in the business use of its customers, and also made available the process to its
customers, who used it to carry out their business activities. The Assessing Officer contended that
the consideration for supply of software embedded in hardware is ‘royalty’ under section 9(1)(vi).
Appellate Authorities’ Views: The Commissioner (Appeals) and Tribunal held that the
consideration for supply of embedded software (which is part of the hardware supplied to the
assessee customers) did not constitute royalty and therefore, section 9(1)(vi) was not attracted.
High Court’s Observations: The High Court, at the outset, noted that the Tribunal had relied
upon the precedent in the case of DIT v. Ericsson A.B. (2012) 343 ITR 470 (Del), where the High
Court observed that what was sold by the assessee to its Indian customers was a GSM which
consisted of both hardware and software. The High Court had also observed that -
(i) the software that was loaded on the hardware did not have any independent existence;
(ii) the software supply is an integral part of GSM mobile telephone system and is used by the
cellular operators for providing cellular services to its customers;
(iii) the software is embedded in the system and there could not be any independent use of such
software;
(iv) this software merely facilitates the functioning of the equipment and is an integral part of the
hardware.
Further, the High Court had also referred the decision of the Apex Court in Tata Consultancy
Services v. State of Andhra Pradesh (2004) 271 ITR 401, wherein it was held that software
incorporated on a media would be goods liable to sales tax.
High Court’s Decision: The High Court concurred with the decision of the Tribunal holding that
where payment is made for hardware in which the software is embedded and the software does
not have independent functional existence, no amount could be attributed as ‘royalty’ for software
in terms of section 9(1)(vi).

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2

RESIDENCE AND SCOPE

After studying this chapter, you would be able to -

© The Institute of Chartered Accountants of India

2.1 RESIDENTIAL STATUS [SECTION 6]

Resident but not

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(1) Residential status of Individuals

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Period commencing from Period ending on

Meaning of certain terms:

(b) Eligible A voyage undertaken by a ship engaged in the carriage of passengers or

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Residential Status of an Individual

Stay in India for 182 days or more

Resident in India in any 2 PYs out of 10 PYs

ROR RNOR Non

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(2) Residential status of HUFs

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Residential Status of a HUF

Is the control and management of its affairs situated

Is Karta a ROR? Non-Resident

HUF is ROR HUF is RNOR

(3) Residential status of firms and association of persons

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Determination of residential status of a company

Guiding principles for determination of Place of Effective Management (POEM) of a

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not the company is engaged in active business outside India.

(c) In case of any other asset Value as per books of account

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Passive It is the aggregate of, -

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(iii) Chief Operating Officer; and

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

2.2 SCOPE OF TOTAL INCOME

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Scope of total Income Resident and Resident but not Non-Resident

Income received or deemed Yes Yes Yes

Income accruing or arising or Yes Yes Yes

© The Institute of Chartered Accountants of India

Income accruing or arising Yes, even if such Yes, if income is No

(b) Dividend from a Japanese Company received in Japan 10,000

(d) Dividend from RP Ltd., an Indian Company 6,000

(e) Agricultural income from lands in Gujarat 25,000

Particulars Resident Resident Non-

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