Residence & Scope of Total Income: Notes - CA Intermediate PDF Download

Chapter Overview

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.

• Resident and ordinarily resident 
• Resident but not ordinarily resident 
• 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:

Residential Status of Individuals

1. Residential status on the basis of number of days of stay in India - 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:

• He has been in India during the previous year for a total period of 182 days or more, or
• 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 relevant previous year.

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 resident in India only if the period of their stay during the relevant previous year amounts to 182 days or more. In other words, even if such persons were in India for 60 days or more (but less than 182 days) in the relevant previous year, they will not be treated as resident due to the reason that their stay in India was for 365 days or more during the 4 immediately preceding years.

• Indian citizen, who leaves India during the relevant previous year as a member of the crew of an Indian ship or for purposes of employment outside India, or 
• Indian citizen or person of Indian origin 1 who, being outside India comes on a visit to India during the relevant previous year.

However, such person having total income, other than the income from foreign sources [i.e., income which accrues or arises outside India (except income from a business controlled from or profession set up in India) and which is not deemed to accrue or arise in India], exceeding ₹ 15 lakhs during the previous year will be treated as resident in India if -

• The period of his stay during the relevant previous year amounts to 182 days or more, or
• 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 120 days in the previous year.

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 is 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 to section 6(1) provides 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

Meaning of certain terms


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 6th June, 2020. From the following details for the P.Y. 2020-21, determine the residential status of Mr. Anand for A.Y. 2021-22, assuming that his stay in India in the last 4 previous years (preceding P.Y. 2020-21) is 400 days:

Solution: In this case, since Mr. Anand is an Indian citizen and leaving India during P.Y. 2020-21 as a member of the crew of the Indian ship, he would be resident in India if he stayed in India for 182 days or more.
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 6th June, 2020 and ending on 9th December, 2020, 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. 2020-21 would be 178 days [i.e., 365 days – 187 days]. Since his period of stay in India during the P.Y. 2020-21 is less than 182 days, he is a non-resident for A.Y. 2021-22.
2. Deemed resident [Section 6(1A)]– 
An individual, being an Indian citizen, having total income, other than the income from foreign sources [i.e., income which accrues or arises outside India (except income from a business controlled from or profession set up in India) and which is not deemed to accrue or arise in India], exceeding ₹ 15 lakhs during the previous year would be deemed to be resident in India in that previous year, if he is not liable to pay tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. However, this provision will not apply in case of an individual who is a resident of India in the previous year as per section 6(1).
Resident and ordinarily resident/Resident but not ordinarily resident
Only individuals and HUF 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 u/s 6(6).

• If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the relevant previous year, or 
• 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, or 
• If such individual is an Indian citizen or person of Indian origin (who, being outside India, comes on a visit to India in any previous year) having total income, other than the income from foreign sources [i.e., income which accrues or arises outside India (other than income derived from a business controlled in or profession set up in India) and which is not deemed to accrue or arise in India], exceeding ₹15 lakhs during the previous year, who has been in India for 120 days or more but less than 182 days during that previous year, or 
• If such individual is an Indian citizen who is deemed to be resident in India under section 6(1A) [It may be noted that a deemed resident will always be 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. 
(a) Find out his residential status for the assessment year 2021-22. 
(b) Would your answer change if the above facts relate to Srinath, an Indian citizen who resides in Australia and represents the Australian cricket team? 
(c) What would be your answer if Srinath had visited India for 120 days instead of 100 days every year, including P.Y.2020-21?
Solution: (a) Determination of Residential Status of Mr. Brett Lee for the A.Y. 2021-22:-
Period of stay during previous year 2020 - 21 = 100 days
Calculation of period of stay during 4 preceding previous years (100 × 4 = 400 days)

Mr. Brett Lee has been in India for a period more than 60 days during previous year 2020-21 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 2021 - 22.
Computation of period of stay during 7 preceding previous years = 100 × 7 = 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 2021-22. (See Note below)
Therefore, Mr. Brett Lee is a resident but not ordinarily resident during the previous year 2020-21 relevant to the assessment year 2021-22.
Note: An individual, not being an Indian citizen, would be not-ordinarily resident person if he satisfies any one of the conditions specified under section 6(6), i.e.,

• If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the relevant previous year, or
• 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-ordinarily resident for the A.Y. 2021-22.

• If the above facts relate to Mr. Srinath, an Indian citizen, who residing in Australia, comes on a visit to India, he would be treated as non-resident in India, irrespective of his total income (excluding income from foreign sources), since his stay in India in the current financial year is, in any case, less than 120 days.
• In this case, if Srinath’s total income (excluding income from foreign sources) exceeds ₹ 15 lakh, he would be treated as resident but not ordinarily resident in India for P.Y.2020-21, since his stay in India is 120 days in the P.Y.2020-21 and 480 days (i.e., 120 days × 4 years) in the immediately four preceding previous years.
  If his total income (excluding income from foreign sources) does not exceed ₹ 15 lakh, he would be treated as non-resident in India for the P.Y.2020-21, since his stay in India is less than 182 days in the P.Y.2020-21.

Illustration 3: Mr. B, a Canadian citizen, comes to India for the first time during the P.Y. 2016-17. During the financial years 2016-17, 2017-18, 2018-19 2019-20 and 2020-21, he was in India for 55 days, 60 days, 90 days, 150 days and 70 days, respectively. Determine his residential status for the A.Y. 2021-22.
Solution: During the previous year 2020-21, Mr. B was in India for 70 days and during the 4 years preceding the previous year 2020-21, he was in India for 355 days (i.e. 55+ 60+ 90+ 150 days).
Thus, he does not satisfy section 6(1). Therefore, he is a non-resident for the previous year 2020-21.

Residential status of HUF

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 Karta of resident HUF satisfies both the following additional conditions (as applicable in case of individual) then, resident HUF will be Resident and ordinarily resident, otherwise it will be Resident but not ordinarily resident.

• Karta of resident HUF should be resident in at least 2 previous years out of 10 previous years immediately preceding relevant previous year. 
• Stay of Karta during 7 previous years immediately preceding relevant previous year should be 730 days or more.

Illustration 4: 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. 2020-21 after 15 years. He comes to India on 1.4.2020 and leaves for Australia on 1.12.2020. Determine the residential status of Mr. E and the HUF for A.Y. 2021-22.
Solution: (a) During the P.Y. 2020-21, 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 the condition for being ordinarily resident.
Therefore, the residential status of Mr. E for the P.Y. 2020-21 is resident but not ordinarily resident.
(b) Since the business of the HUF is transacted from Australia and policy decisions are taken there, it is assumed that the control and management is in Australia i.e., the control and management is wholly outside India. Therefore, the HUF is a non-resident for the P.Y. 2020-21.

Residential status of firms, AoPs and BoIs

Resident: A firm, AoP and BoI 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, AoP and BoI would become a non-resident.

Residential status of companies

A company would be resident in India in any previous year, if- 

• it is an Indian company; or 
• its place of effective management, in that year, is in India

“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

Note – The guidelines issued by CBDT for determination of POEM of a foreign company and 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 due to application of POEM, has been provided in Chapter XIIBC. The same will be dealt with at the Final level.

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.

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:

• The residential status of the assessee; 
• The place of accrual or receipt of income, whether actual or deemed; and 
• 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:

• income received or deemed to be received in India during the previous year; 
• income which accrues or arises or is deemed to accrue or arise in India during the previous year; and 
• 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 during the relevant previous year.

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 in 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:

• Income received or deemed to be received in India in the previous year; and 
• 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 a resident alone (resident and ordinarily resident in the case of individuals and HUFs) are also chargeable to tax in respect of income which accrues or arises outside India.

Clarification regarding liability to income-tax in India of a non-resident seafarer receiving remuneration in NRE (Non-Resident External) account maintained with an Indian Bank [Circular No.13/2017, dated 11.04.2017 and Circular No.17/2017, dated 26.04.2017]
Income by way of salary, received by non-resident seafarers, for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) and received into the NRE bank account maintained with an Indian bank shall not be included in the total income.
Residential Status and Scope of Total Income: Whether the following incomes are to be included in Total Income?


Illustration 5: From the following particulars of income furnished by Mr. Anirudh pertaining to the year ended 31.3.2021, compute the total income for the assessment year 2021-22, if he is:
(i) Resident and ordinary resident;
(ii) Resident but not ordinarily resident;
(iii) Non-resident

Solution: Computation of total income of Mr. Anirudh for the A.Y. 2021-22

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.

(ii) Agricultural income is exempt under section 10(1).

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 -

• Their residential status, and 
• 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.

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 31st December or 1st January.
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 1: 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, 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.

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:
1. 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

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 –

• must have an authority, which is habitually exercised in India, to conclude contracts on behalf of the non-resident or habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and such contracts should be
  (i) in the name of the non-resident; or
  (ii) for the transfer of the ownership of, or for the  granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or
  (iii) for the provision of services by that non-resident, or
• 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 
• 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 nonresident secures order for other non-residents. In such situation, business connection for other non-residents is established if,
  (i) such other non-resident controls the non-resident or
  (ii) such other non-resident is controlled by the non-resident or
  (iii) 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.

Agents having independent status are not included in Business Connection:
Business connection, however, shall not be established, where the non-resident carries on business activity 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 nonresident.
He will, however, not be considered to have an independent status in the three situations explained above, where he works mainly or wholly on behalf of 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.
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)]

• 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.
  

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• 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.
• 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.
• 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:
  (i) an individual, who is not a citizen of India or
  (ii) a firm which does not have any partner who is a citizen of India or who is resident in India; or
  (iii) a company which does not have any shareholder who is a citizen of India or who is resident in India.
• 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 (FMCs) 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: 
2. Hire charges or rent paid outside India for the use of the machinery or buildings situated in India,
3. 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 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 include “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)]

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).

2. 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.

3. 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 or allowed outside India by the Government to an Indian citizen for services rendered outside India is exempt, by virtue of section 10(7).

Illustration 6: Mr. David, an Indian citizen aged 40 years, a Government employee serving in the Ministry of External Affairs, left India for the first time on 31.03.2020 due to his transfer to High Commission of Canada. He did not visit India any time during the previous year 2020-21. He has received the following income for the Financial Year 2020-21:

Compute his Gross Total Income for Assessment Year 2021-22.
Solution: As per section 6(1), Mr. David is a non-resident for the A.Y. 2021-22, since he was not present in India at any time during the previous year 2020-21.
As per section 5(2), a non-resident is chargeable to tax in India only in respect of following incomes:

• Income received or deemed to be received in India; and 
• Income accruing or arising or deemed to accrue or arise in India.

In view of the above provisions, income from agriculture in Nepal and income from house property in Nepal would not be chargeable to tax in the hands of David, assuming that the same were received in Nepal. 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.
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) in the hands of Mr. David.
Gross Total Income of Mr. David for A.Y. 2021-22

4. Dividend paid by an Indian company outside India [Section 9(1)(iv)]
Dividends paid by an Indian company outside India is deemed to be accrue or arise in India and would be taxable in the hands of shareholders at normal slab rates.
5. 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 -

• The Government; 
• A person who is resident in India;  
  Exception: Where it is payable in respect of any debt incurred or 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. 
• A person who is 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 moneys borrowed by the non-resident for any purpose in India other than a business or profession, will not be deemed to accrue or arise in India.

Example 4: 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.

6. Royalty [Section 9(1)(vi)]
Royalty will be deemed to accrue or arise in India when it is payable by -

• The Government;
• A person who is a resident in India
  Exception: where it is payable in respect for the transfer of any right or the use of any property or information used 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 
• A person who is 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:

• 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.
• Meaning of Royalty: The term ‘royalty’ means consideration (including any lumpsum consideration 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 equipment2;
  (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.
  Consideration for sale, distribution or exhibition of cinematographic films is covered within the scope of royalty w.e.f. A.Y.2021-22.
  (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 definition specially excludes income which should be chargeable to tax under the head ‘capital gains’.
• Consideration for use or right to use of computer software is royalty within the meaning of section 9(1)(vi) 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.
• Consideration in respect of any right, property or information – Is it royalty? Royalty includes and has always included consideration in respect of any right, property or information, whether or not,
  (i) The possession or control of such right, property or information is with the payer;
  (ii) Such right, property or information is used directly by the payer;
  (iii) The location of such right, property or information is in India.
• Meaning of Process: The term “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.

7. 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 -

• The Government,
• A person who is resident in India Exception: Where the fees are 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.
• 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 fees for technical services to be taxed irrespective of territorial nexus (Explanation to section 9) 
Income by way of interest, royalty or fees 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 fees 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 7: 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.

8. Any sum of money paid by a resident Indian to a non-corporate nonresident or foreign company [Section 9(1)(viii)]
Income arising outside India, being any sum of money paid without consideration, by a Indian resident person to a non-corporate non-resident or foreign company would be deemed to accrue or arise in India if the same is chargeable to tax under section 56(2)(x) i.e., if the aggregate of such sum received by a non-corporate nonresident or foreign company exceeds ₹ 50,000. You may refer to Unit 5 of Chapter 4 where chargeability of any sum of money received is discussed in detail.

Illustration 8: Compute the total income in the hands of an individual aged 35 years, being a resident and ordinarily resident, resident but not ordinarily resident, and non-resident for the A.Y. 2021-22 –



Solution: Computation of total income for the A.Y. 2021-22

Let's Revise

Section 6 [Residence in India]
(i) (a) Individuals [Resident and ordinarily resident/Resident but not ordinarily resident/non-resident]
The residential status of an individual is determined on the basis of the period of his stay in India.
Basic conditions: 

• He must be present in India for a period of 182 days or more during the previous year
  He must be present in India for a period of 60 days or more during the previous year and 365 days or more during the 4 years immediately preceding the previous year.

Cases where condition (ii) is not applicable:

• Where an Indian citizen who leaves India during the previous year for the purpose of employment outside India or as a member of the crew of an Indian ship; 
• Where an Indian citizen or a person of Indian origin who, being outside India, comes on a visit to India during the previous year [whose total income (excluding income from foreign sources) does not exceed ₹ 15 lakhs]. 

Additional condition:

• He is a resident in at least 2 out of 10 previous years preceding the relevant previous year; 
• His stay in India in the last 7 years preceding the relevant previous year is 730 days or more.

(b) An Indian citizen or a person of Indian origin who, being outside India, comes on a visit to India during the previous year (having total income, other than the income from foreign sources), exceeding ₹ 15 lakhs during the previous year would be resident if his period of stay is

• 182 days or more during the previous year [First condition]; or 
• 120 days or more during the previous year and 365 days or more during the 4 years immediately preceding the previous year [Second condition].

Such individual would, however, be resident but not ordinarily resident if he satisfies only the second condition mentioned above but not the first condition (i.e., the period of his stay in India during the relevant previous year is ≥ 120 days but < 182 days).
If he satisfies the first condition, he would be-

• Resident and ordinarily resident (ROR), if satisfies both the additional conditions [(1) & (2)] and 
• Resident but not ordinarily resident (RNOR) if satisfies one or none of the additional conditions [(1) or (2) or neither].

Note – “Income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India) and which is not deemed to accrue or arise in India.

(c) Deemed resident in India [Section 6(1A)] - An individual, being an Indian citizen, having total income, other than the income from foreign sources, exceeding ₹ 15 lakhs during the previous year would be deemed to be resident but not ordinarily resident in India in that previous year, if he is not liable to pay tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
This provision would not apply in case of an individual who is said to be resident in India in the previous year under section 6(1).

(ii) HUF [ROR/RNOR/non-resident]
A HUF would be resident in India if the control and management of its affairs is situated wholly or partly in India. If the control and management of the affairs is situated wholly outside India, it would become a non-resident. If the HUF is resident, then the satisfaction or otherwise of additional conditions by Karta would determine whether the HUF is ROR or RNOR. If Karta satisfies both the additional conditions [(1) & (2)] in (I) above, then the HUF would be ROR. Otherwise, the HUF would be RNOR.

(iii) Firms , AoPs and BoIs [Resident/Non-resident] 

• A firm, AoP or BoI would be resident in India if the control and management of its affairs is situated wholly or partly in India.
• If the control and management of the affairs is situated wholly outside India, they would become a non-resident.

(iv) Companies [Resident/Non-resident]

• A company would be resident in India in any previous year if it is an Indian company or its place of effective management (POEM) in that year is in India. 
• If the company is not an Indian Company and its POEM is also not in India in that year, it would become a non-resident for that year.

Section 5 [Scope of Total Income]