SUBJECT: TAXATION LAW-I

Project topic:

TAXATION OF FOREIGN NATIONALS

Submitted By
SHAILJA
Roll no. 1231
th th
4 Year , 7 Semester, BBA.LL.B(Hons.)

Submitted to
Prof. G.P PANDEY
Faculty of TAXATION LAW-I

Chanakya national Law University, Patna

November, 2017

TABLE OF CONTENTS
1. Introduction………………………………………………………….………………...

2. Indian Taxation of Foreign Nationals: An Overview.....................................................

3. Basic Residency Test………………………………….………………………...

4. Scope of Income………………………………………………………………...….

5. Double Tax Avoidance………………………………………………

6. Nature Of Incom………………………………………………………………….

7. Business So Arranged As to Diminish Resident’s profit……………………………….

8. Conclusion……………………………………………………………………….

9. Bibliography…………………………………………………………………………
 ACKNOWLEDGEMENT

I am grateful to the Almighty to provide me strength and health to

complete this project work. Above all I would like to express my
sincere gratitude to Prof. G.P Pandey without whose valuable advices
and supervision this project would not have been completed.
This project is outcome of efforts, time and skills. I would like to take
this opportunity to thank all those who have helped me towards
completion of this project.
I highly acknowledge the topic given to me by our Taxation Law
professor, Professor G.P Pandey, for the given project. This project
was a great learning experience for me as it helped me to understand
and study the provisions relating to the taxation of foreign nationals,
and I thank my subject teacher for the same.
At last I would like to pay my gratitude to my family and friends who
have supported me throughout in doing this project and special thanks
to Dr.Shivani and Mr.Amrit Mishra for helping me in gathering the
information for this project.
RESEARCH METHODOLOGY

The researcher has adopted a purely doctrinal method of research. The researcher has made
Extensive use of the available resources at library of the Chanakya National Law University
and also the internet sources.

Aims and Objectives

The aim of the project is to present an overview of various aspects relating to the taxation of
foreign nationals under Indian Law.

Scope and Limitations

Though the current topic is an immense project and pages can be written over the topic but
due to certain restrictions and limitations the researcher has not been able to deal with the
topic in great detail.
INTRODUCTION
The Income Tax Act, 1961 (hereinafter referred to as the Act) is an Act to consolidate and
amend the law relating to income-tax and super-tax. However, not everyone is liable to pay
taxes on income under the Act. The Act makes certain exceptions and exempts certain kind
and extent of income from taxation. Those who are liable to pay tax and whose incomes are
assessed under the Act are known as “Assessees”.

An expatriate is a person temporarily residing and employed in another country while still
remaining citizen of his home country.

In instances where a person is resident in one country and derives income from another
country, there are chances of that person getting taxed in both countries. In other words, there
can be ‘double taxation’ of the same income. There are two cases as regards an expatriate in
which double taxation can arise:
 He/she is a resident of two countries and each state seeks to tax the individual on
worldwide income;
 He/she is a resident of one country deriving income from another country.

Any person who is not a citizen of India, is a foreign national. Any person of Indian origin
who has settled abroad and granted citizenship of foreign country, also known as NRIs'. A
person is said to be of Indian origin if he, or either of his parents or any of his grandparents,
was born in undivided India.

Any foreign citizen who is employed or is working in India is culpable to pay income tax as
per Indian taxation rules. All income acquired by an expatriate within India is taxable by law,
regardless of the individual’s status of residence, citizenship or intention of stay. This income
may be deducted at source, although the individual would be entitled to a refund after filing
tax returns in India if he or she earns less than the minimum exempted amount.

Foreign nationals could also be liable to pay tax on capital gains should they sell any capital
assets within India.

The first thing that needs to be kept in mind is that the residential status is determined with
respect to the previous financial year - hence, an assessee may be a resident in one year and a
non-resident in the next year. Attention needs to be brought to Section 6 of the Act .However,
the basis for determination is not the same for all kinds of assessees. While it is the number
of days spent in India for an individual, for an HUF, firm or other association of persons, the
determination is made on the basis of its control and management. If the control and
management of such assesses was outside India in a financial year, then it was not resident in
India for that year, otherwise it was.

With respect to Companies, the very fact that a company is an Indian company is enough to
establish residency in India. Even in case of foreign companies not incorporated in India, if
the control and management of its affairs is wholly situated in India, the said Company is
deemed to be resident in India.

Another concept that needs clarification before we proceed to discuss the implications of the
residential status under the Act is “not ordinarily resident in India”. However, the Finance
Act 2003 had the effect of restricting the benefit of status of “not ordinarily resident” in the
case of a non-resident Indian coming back to India or foreign citizens working in India to
only a period of two years as against the earlier benefit of nine years. Hence, non-residents
coming back to India will have to pay tax on their global income after a period of two years.
Similarly, foreign citizens working in India will be required to pay tax on their global income
if they continue to be resident in India beyond a period of 2 years. The intention of the
amendment may be principally to prevent tax avoidance by persons who arrange their affairs
in such a manner as to artificially become eligible for NOR status. However, they also note
that this move could cause a lot of hardship to a large number of people coming to India for
permanent settlement and will have a negative impact on the inflow of funds through the
medium of non-residents.

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: Any income accruing or arising to an assessee in any place outside India whether
directly or indirectly, through or from any business connection in India, through or from any
property in India, through or from any asset or source of income in India or through the
transfer of a capital asset situated in India. Income, which falls under the head “Salaries”, if it
is earned in India. 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. Income from
“Salaries” which is payable by the Government to a citizen of India for services rendered
outside India. However, allowances and perquisites paid outside India by the Government are
exempt. Dividend paid by an Indian company outside India, Interest Royalty, Fees for
technical services.

INDIAN TAXATION OF FOREIGN NATIONALS : AN

OVERVIEW

As a foreign national seconded to work in India you will, in general, become liable to Indian
income tax. You may also become liable for capital gains tax on disposal of capital assets in
India. While many employers tax equalise seconded employees, the primary tax liability
under the tax laws remains with employees.

Taxation in India is based on the residential status of a person and not on citizenship.
Residential status under Indian tax laws is determined solely based on his or her physical
presence in India regardless of the purpose of stay.
Incomes Exempt from Tax

(1) Remuneration of officials of embassies, high commission, etc.

(2) Remuneration received from a foreign enterprise for services rendered in India, provided
his stay in India does not exceed 90 days during a previous year.

(3) Remuneration of an employee on a foreign ship where his stay in India does not exceed
90 days in a previous year.

(4) Remuneration of employees of a Foreign Government, on training in certain

establishments in India. [Sec.

(5) Income of a Consultant under a Technical Assistance Grant Agreement. [Sec.10(8A)]

Tax Liability of Foreign Nationals

Foreign nationals resident in India are liable to pay tax on the taxable income as in case of
other resident assessees.

Foreign nationals who are non-residents are liable to pay tax as under:

(i) at special rates on income from dividends (not subjected to additional income-tax
u/s 115-a), interest and capital gain from units of mutual funds/UTI, bonds,
Global Depository Receipts and shares, royalty or fees for technical services.
[Sec.115A]
(ii) at special rate of 10% in respect of gross receipts 0 sportsman for his participation
in India in a game or sports from advertisement or contribution of articles, and
income sports association. [Sec.115 BBA]
(iii) at normal rates on other incomes.

Besides, if they have investment income or long-term capital gains from any foreign
exchange asset they shall be eligible to a the special provisions of Chapter XII-A.

How is an expatriate's income taxed when they become a Resident in India?

Taxability of income in India depends upon residential status. For a Resident entire income
earned anywhere on the globe is taxable in India. This includes income that may have been
earned in the country of citizenship and may also have been taxed there.

If the expatriate is a NRI or a Resident but not ordinarily resident (RNOR) only the income
which is earned in India is taxable in India. Therefore, the first step is to find out the
residential status. As per the residential status rules of the Indian Income Tax Act, for the first
2 years after your arrival in India you will enjoy RNOR status and will pay tax only on the
income which is earned by you in India.
Source of Income of Foreign nationals

Salary
Taxable compensation includes salary, wages, allowances (such as reimbursement for
personal expenses like housing, transportation, and education payments), and other cash
compensation for services rendered in India, regardless of whether salary is received in India
or whether the employer is outside India. Taxable compensation also includes income tax
paid by the employer on behalf of the employee and certain perquisites such as a car and
driver provided by the employer.

Income that is received or accrued in India may also be subject to income tax. Additionally,
income that arises outside India is subject to income tax for individuals who are ROR in
India. 

Non-employment Income
Foreign nationals are permitted to maintain foreign currency accounts outside India and
receive their entire salary outside India as long as full taxes are paid on any salary accrued in
India. Foreign nationals may also open bank accounts in India, and funds can be moved into
those accounts from sources outside India. However, individuals must use care when making
transactions involving non-employment income and their Indian bank accounts. If non-
employment income is earned on investments outside India and is subsequently transferred to
an Indian bank account, it will not be taxable in India. If the non-employment income is
directly remitted to an Indian account, it is likely to become taxable in India. 

Other types of non-employment income taxable in India include long and short-term capital
gains earned on the disposal of capital assets situated in India, royalties payable by an Indian
concern, and payments of interest on Indian infrastructure debt funds.

BASIC RESIDENCY TEST

The foremost step is to determine whether the assessee is a resident in India or not.
Accordingly, we will be able to understand the scope of taxable income depending on the
residential status. [Section 6]

Determining residential status as per Income Tax Act, 1961-India has three levels of
residency for tax purposes:
1. Non-resident
2. Resident but not ordinarily resident (RNOR)
3. Resident and ordinary resident (ROR)

Non-Resident

Non-residents for income tax purposes are taxed only on India-sourced income.  In order to
qualify as a non-resident, the individual must have spent less than 182 days in India during
the tax year.  Additionally, the individual cannot have been present in India for more than
365 days during the last four years preceding the relevant tax year.

Example A - If you come to India after 2 October, you will be treated as non-resident for that
tax year as your stay in India will be less than 182 days, provided you were not in India for
an aggregate of 365 days or more in the four tax years preceding the relevant tax year.

Example B - If you come to India after 1 February, you will be treated as a non-resident for
that tax year since you were present in India for less than 60 days.

Resident

Residents pay income tax based on whether they meet the qualification for RNOR or ROR. 
The distinction between RNOR and ROR is an important one because RORs are taxed in
India on their worldwide income, while RNORs are taxed only on their India-sourced
income. 

In general, if an individual spends 182 days or more during the tax year in India, that person
will be considered an Indian resident for tax purposes.  Additionally, a foreign national who
has been present in India for at least 60 days but less than 182 days in the relevant tax
year, and has been present in India the last four tax years preceding the relevant tax year for
an aggregate of 365 days or more, will be considered a resident for Indian tax purposes
during the relevant tax year.  Since the Indian tax year runs from April 1 to March 31, a
foreign national who comes to India on or before September 30 will be a resident for that tax
year, since that individual will be in India for 182 days during the tax year.

Example A - If you come to India on or before 30 September, you will be treated as resident
for that tax year.

Example B - If you come to India on or before 31 January and have stayed in the country for
365 days or more during the four tax years preceding the relevant tax year, you will be
treated as resident for that tax year.

Resident but not Ordinarily Resident

A person who qualifies as a resident for any tax year is treated as a RNOR if the following
two conditions are met:

1. the individual has been a non-resident in India for nine of the past 10 tax years; and,
2. the individual has during the 7 tax years preceding the relevant tax year been in India
for a total of 729 days or less. 

An individual who has RNOR status is taxed only on India-sourced income.

Resident and Ordinary Resident

Any resident who fails to meet both conditions for RNOR is considered a resident and
ordinary resident for the relevant tax year and is taxed on world-wide income.
Foreign nationals should use careful tax planning to avoid becoming a ROR in India in order
to avoid paying taxes on worldwide income.

Example - If an expatriate stays in India for say 300 days for each of the three tax years, then
he or she will not qualify as RNOR in the fourth year because of the following reasons: • He
or she is not a non-resident in 9 out of 10 tax years; and • His or her physical presence in
India exceeds 729 days in the preceding 7 tax years.

Previous year = Financial year in which income is earned, from 1st April – 31st March

SCOPE OF INCOME

Section 5 of the Act has been explained in table format given below:

Nature of Income Taxability in case of

ROR RBNOR NR
Income received or deemed to be received in Yes Yes Yes
India.
Income accruing or deemed to be accrued in Yes Yes Yes
India
Income from a business controlled from India Yes Yes No
or from a profession set up in India but not
received or accrued in India
Income not received or not deemed to be Yes No No
received in India
Income not accruing or not deemed to be Yes No No
accrued in India

DOUBLE TAX AVOIDANCE

In order to prevent double taxation, the Central Government of India is empowered by
Section 90 of the Income Tax Act, 1961 to engage with other countries to form Double
Taxation Avoidance Agreements/ Tax Treaties (DTAA). There are two types of DTAA’s:
Comprehensive DTAA, which cover all income flows & Limited DTAA that cover only
shipping and/ or air transport income. So far, India has formed comprehensive DTAA’s with
over 90 other countries. These can be referred to here:
http://law.incometaxindia.gov.in/DIT/intDtaa.aspx.

Most current agreements lay down various tests to determine in which of the two countries an
individual is resident for treaty purposes. Most agreements contain clauses, which exempt a
resident of one country from tax on employment income in India if he or she is present in
India for less than 183 days in a tax year, and some other conditions regarding the salary
charge back and payment of salary by a non resident are satisfied. In order to claim the
beneficial provisions of double taxation agreements, the individual claiming the benefit is
required to submit the tax residency certificate of his or her home country and maintain
prescribed particulars in a prescribed form as notified by the Indian tax authorities.

The most common methodology for avoidance of double taxation used in Indian tax treaties
are:
 Exemption method — under this method, the country of Residence does not tax the
income, which according to DTAA may be taxed in the country of Source of income.
Alternatively, the Country of source limits its right to tax income from sources in its
country.
 Credit method — under this method, country of Residence includes income from
country of Source in the taxable total income of the tax payer and calculates its tax on
the basis of such taxpayer’s total income (including income from country of Source).
It then allows a deduction from its own taxes for taxes paid in Country of Source with
respect to income earned there.

NATURE OF INCOME

As per the provisions of Section 14 of Income Tax Act, 1956, there are 5 heads of Income
under which the income of a person can be classified. These are:
(A) Salary
(B) Income from House Property
(C) Income from Business and Profession
(D) Capital Gains
(E) Income from Other sources

Analysis of income under each head for expatriates has been done with respect to the
domestic tax laws and provisions given in the Double Tax Avoidance Agreements of India
with other countries.

A. SALARY

Salary income of expatriates would be taxable in India under the provisions of the Income
Tax Act, in case the same is either received or deemed to be received in India or in case it
accrues or is deemed to be accrued in India.
 SALARY ROR RBNOR NR
Salary received in Yes Yes Yes
India
Salary received Yes Yes Yes
outside India for
services rendered in
India
Salary received Yes No No
outside India for
services rendered
outside India

The taxability of income from salary for expatriates is discussed in detail below:
Salary components
1. Basic Salary and allowances Taxable salary is within the scope of Section
17(1) of the Act.
2. Perquisites Perquisites taxable are as per Section 17(2) of the Act.

Provident fund as applicable to Expats:

It is mandatory for international workers i.e. non-Indian passport holders working in India
and Indian employee going for work in a foreign country with which India has entered into a
Social Security Agreement (SSA), who are employed with an establishment to which the
provisions of the Provident Fund Act apply, to contribute to Provident Fund in India. An
international worker, who is contributing to a social security programme of his/her country of
origin, either as a citizen or resident, with whom India has entered into a social security
agreement on reciprocity basis and enjoying the status of detached worker for the period and
terms as specified in such agreement are excluded from contributing to Indian social security
schemes. Countries with which India has Social Security Agreements can be found here:
http://www.moia.gov.in/services.aspx?ID1=285&id=m4&idp=81&mainid=73 The balance
held in the provident fund (i.e., employer’s contribution plus employee’s contribution plus
accrued interest thereon) can only be withdrawn on retirement or after the expatriate reaches
58 years of age or on incapacity to work and not at the time of repatriation to home country.
Further, the claim for withdrawal of Pension is possible only if India has entered into SSA
with the country of residence of the expatriate or he/she has completed 10 years of
contributory service to Family Pension Scheme.

Exemptions

1. [Section 10(6)(vi)] Short-stay exemption: In case of an individual who is not a citizen

of India. The remuneration received by him/ her as an employee of a foreign entity,
for services rendered by him/ her during his/ her stay in India is exempt from tax
subject to fulfillment of all the following conditions:
i. The foreign enterprise is not engaged in any trade or business in India;
 ii. His/her stay in India does not exceed in the aggregate a period of 90 daysin
such previous year; and
iii. Such remuneration is not deductible from the income of the employer
chargeable under the Act.
2. [Section 10(7)] Allowances and perquisites paid or provided abroad by the
Government to a citizen of India for rendering service outside India are fully exempt.
3. [Section 10(10CC)] Expatriates coming into India and working in various companies
are generally demand ‘tax equalization’ i.e., the tax payable in India on their salary
and perquisites is borne by the employer. This is to ensure that they remain tax neutral
in respect of their Indian assignment.
 The expatriate employees are assured net-of-tax salary income.
 The Indian taxes in respect of income from employment in India would be
borne by the employer and not by the employee.
4. [Section 10(14)] Daily allowances specifically granted by third party customer to the
expatriate, to meet necessary expenses exclusively incurred in the performance of the
duties of an office are exempt to the extent to which such expenses are actually
incurred for that purpose.

B. INCOME FROM HOUSE PROPERTY

(Sections 22 to 25) deal with Income from House Property under the domestic laws. The
scope of income covered depending on the residential status of an assessee is as under:

SITUATION ROR RBNOR NR

House property is Yes Yes YEs
situated in India,
income is received
in India
House property is Yes Yes Yes
situated in India,
income is received
outside India
House property is Yes Yes Yes
situated in foreign
country, income is
received in India
House property is Yes No No
situated in foreign
country, income is
received outside
India

Thus, if the house property is situated in a foreign country –

 1) A Resident assessee is taxable under section 22 in respect of the annual value of a
property situated in a foreign country. Its annual value will be computed as if the
property is situated in India.
2) 2) A RBNOR or NR is, however chargeable under section 22 in respect of income of
a house property situated abroad; if income is received in India during the previous
year.

Non-residents should be careful about taxation of deemed let out property. If they own more
than one residential house, and if either is not given on rent, one of them will be still be
taxable as deemed let out property. This condition applies to immoveable properties owned
globally. Say, if a self-occupied house was owned abroad, and the other house was in India,
the assessee would have to pay tax on deemed rent in India if it is not let out.

C. INCOME FROM BUSINESS OR PROFESSION

According to the domestic law, the taxation of business profits of non-residents in India is
kicked off with a business connection in India. The inference of business connection in India
as per the Income Tax Act is quite wide and would lead to deeming the Income ‘to accrue or
arise’ for the foreign enterprise in India.

1) Global Income is taxable for Residents.

2) For RBNOR and NR, taxability of Income from business or profession depends on
whether such business or profession is carried out via a “Permanent Establishment” (PE)
situated in India.

D. CAPITAL GAINS

Capital gains are taxable as per domestic law as follows:

SITUATION ROR RBNOR NR

Capital Asset is Yes Yes Yes
situated in India,
income is received in
India
Capital Asset is Yes Yes Yes
situated in India,
income is received
outside India
Capital Asset is Yes Yes Yes
situated in foreign
country, income is
received in India
Capital Asset is Yes No NO
situated in foreign
country, income is
received outside
India
Non Residents are subject to capital gains tax in India only in respect of capital gains
accruing or arising or received in India (including capital gains deemed to be accruing,
arising or received in India).

1. [Section 48]

In case of shares or debentures of an Indian company acquired in foreign currency by

non residents, the cost of acquisition, expenditure incurred wholly and exclusively in
connection with the transfer and full value of consideration are converted back into
foreign currency and gains are calculated and taxed at a rate of 20%. Long term
capital gains arising from sale of shares and securities through a recognised stock
exchange are exempt from tax [Section 10(38)]

This provision intends to protect non-residents from fluctuation of rupee value against
foreign currency, in order that he pays tax only on the actual capital gains in foreign
currency and not on the gains computed in rupees. However, the benefit of cost
indexation is not available to non resident Indians who claim special tax rate of 10%
and to other non residents where capital gains on the transfer of shares in, and
debentures of, Indian companies are determined in foreign currency.

2. [Section 112]

The amount of income-tax calculated on long-term capital gains arising to non-

residents will be calculated at the rate of 20%. From 01.04.2013, the amount of
income-tax on long-term capital gains arising from the transfer of a capital asset,
being unlisted securities, will be calculated at the rate of 10% on the capital gains in
respect of such asset as computed without giving effect to the first and second proviso
to Section 48.

3. [Sec. 115AC]

Special Rate of Tax on Income and Capital gains from Euro Issues/ Global
Depository Receipts.

4. [Sections 115C to 115I]

The Non Resident Indians are offered special provisions under the Income-tax Act,
1961 whereby they are -
 Offered procedural simplification
 Fixed rate of taxation.
 Tax on real income i.e. income is computed in Foreign Exchange (so that rupee
depreciation do not increase taxes)
 Deduction of tax at source the amount at which he is liable for taxation.
NRIs have been offered a separate concessional tax regime in respect of certain types of
income under Chapter XIIA comprising section 115C to 115I. The said chapter has been
introduced in the Income tax Act with a view to encouraging and inviting Non-residents
Indian to invest their foreign earnings in India.

Specified assets are defined under Section 115C (f) as:

i. Shares in an Indian company.

ii. Debentures and deposits in an Indian company (which is not a private company).
iii. Any security of the Central Government.
iv. Any other notified asset (no asset has been notified as yet).

However, if an NRI opts for the concessional tax treatment, he is taxed at a flat rate and he is
denied [As per Section 115D] -

 Any deduction in respect of any expenditure or allowance under any provisions of this
Act (like interest on over draft, Bank charges for collection).
 Deduction under Chapter VIA (like section 80L).
 Benefit of cost indexation for capital gains

E. INCOME FROM OTHER SOURCES

1) Income from other sources includes interests, dividends (excluding exempt dividend u/s
10), fees for technical services, etc not covered under the other heads of income.

2) As per the domestic tax law, they are taxable as provided under Section 56 of the Act.

3) Income of Non-residents will be taxable if it arises in India.

Exemptions

Exemptions that can be availed by non-residents are:

1) [Section 10(4)(ii)]

Interest on Non-resident (external) account maintained in accordance with the Foreign

Exchange Management Act in the hands of individual non resident is exempt.

2) [Section 10(15)(iv)(fa)]
Interest on approved foreign currency (FCNR) deposits is exempt in the hands of
individual who are non-resident or resident but not ordinarily resident.

3) [Section 10(15)(viii)]
Interest received by a non-resident or resident but not ordinarily resident from deposit
made in an Offshore Banking Unit. Offshore banking unit (OBU) is the branch of an
 Indian bank located in a special economic zone (SEZ), which undertakes international
banking business aimed at facilitating exports from the region.

BUSINESS SO ARRANGED AS TO DIMINISH RESIDENT’S

PROFIT

The Finance Act 2001 has substituted the old s 92 with effect from 1 April 2002 and has
inserted new sec 92 to 92F as it was felt that this provision was of a general nature and
limited in scope. The section did not allow adjustment of income in the case of non-residents.
It referred to a ‘close connection’ which was undefined and vague. It provided for adjustment
of profits rather than adjustment of prices, and the rule prescribed for estimating profits was
not scientific. It also did not apply to individual transactions such as payment of royalty, etc,
which are not part of a regular business carried on between a resident and a non-resident.
There were also no detailed rules prescribing the documentation required to be maintained.
Therefore, the new ss 92 to 92F, along with the rules framed thereunder, which provide a
detailed statutory framework that can lead to the computation of reasonable, fair and
equitable profits and tax in India, in the case of multinational enterprises, are now enacted.

The word non-resident' in this section includes a person who is not ordinarily resident [s
2(30)]. Business may be carried on between a resident and a person who is not resident or not
ordinarily resident in India, and owing to the close connection between them, the course of
business may be so arranged that the resident makes either no profits or less than the ordinary
profits in that business. Such an arrangement would deprive the Indian revenue of the tax
which would otherwise be payable by the resident. In such cases, the provisions of this
section are attracted and the resident may be charged in respect of the profits which he has
not in fact made but which he might reasonably be expected to have made had he done the
business on ordinary commercial terms1. Rule 11, read with r 10, prescribes the method of
determining the quantum of national profits in respect of which, the resident may be charged
under this section. Such notional profits should not be separately assessed but should be
added on to the other income of the resident2.

1
Cfs 80J(6C).
2
Mazagaon Dock v CIT34 ITR 368 (SC).
In Mazagaon Dock Ltd v CIT3 the Supreme Court held that the subject of charge under s
42(2) of the 1922 Act which corresponded to this section, was the business of the resident
and not the business of the non-resident. In that case, two non-resident companies, engaged
in the business of plying ships, had entered into an arrangement, with a resident company
which was their subsidiary and which was engaged in the business of ship repairing.
According to the arrangement the resident company was to repair the ships of the non-
resident companies without charging profits. The Supreme Court held that the dealings
between the parties formed, concerted and organized activities of a business character and the
non-resident companies carried on business with the resident company, and that the
provisions of the old s 42(2) were attracted. The fact that the dealings were such as to yield
no profit to the non-resident companies was held to be immaterial. That judgement of the
supreme court would apply to cases arising under this section, and its correctness, with
reference to the provisions of this section, would not be in doubt.

The Madras court held in Subramania Chetty v CIT4 that sub ss (1) and (2) of the 1922 Act
were mutually exclusive ; and in respect of transactions regarding which a resident was
already assessed under sub ss (2) which corresponded to s 92 of this act, he could not be
again assessed as the agent of the non-resident under sub s (1) which corresponded to ss
9(1),160 and 161 of this Act.

3
34 ITR 368.
4
46 ITR 724
 CONCLUSION

When a person is working in India or rendering services in India, the payment made outside
India for the services rendered in India is taxable in India.

When the expatriate employees status remains of "Non resident" or "Not ordinarily resident"
he will not be liable to pay tax in India. But when he becomes a resident he is liable to pay
Tax in India on foreign income also.

In order to enjoy tax benefits through non-resident status, individuals visiting India on a
business trip should not stay for more than 181 days during one previous business year and
their total stay in the previous four years should not exceed more than 364 days.

If individuals, having been in India for more than 365 days during four years preceding the
relevant previous year, which to stay for more than 60 days, they should plan their visit to
India in such a manner that their total stay in India falls under two previous years. Such
persons can come to India any time in the first week of February and stay till May 29.

An Indian citizen or a person of Indian origin can stay for a maximum period of 181 days on
a visit to India without losing his non-resident status.

An Indian citizen leaving India will not be treated as a resident unless he has been in India in
that year for more than 181 days.
BIBLIOGRAPHY

STATUES & RULES

1. Income Tax Act, 1961

2. Income Tax Rules

BOOKS & ARTICLES

1. N. Aiyar, Indian Tax Laws 2002, Vol. 1, Company Law Institute of India Pvt. Ltd.,
Chennai, 2002.
2. Amit Baargava (Processed), Taxman’s Income Tax Act, Taxman Publications Pvt.
Ltd., New Delhi, 2003.
3. R. N. Prasad, Dr., Assistance To Taxpayers Through Advance Rulings, 1996 Taxman
Vol. 87.
4. S. Rajaratnam, Advance Rulings, 1994 Taxman Vol. 76, p. 383.
5. Sanjeeva Narayan, Advance Rulings Under The Income Tax Act, 1961 – Some Issues,
1994 Taxman Vol. 76, p. 54.