Residential Status, Scope of income and deemed to accrue or arise Flashcards
Scope of Total Income for residents
All four types of income are taxable, which is recieved in indie, arises in india, accrues outside india, accrues outside india from a business controlled in india
Scope of income for resident but not ordinarily residents
All four are taxable, except the third one (income accruing outside india) (dad doesn’t pay income tax)
Scope of income for non-residents
only first and second types are taxable.
Resident v non-resident
Different tax rates and exemptions are applicable. Residents are taxed on their worldwide income, while non-residents are taxed on income earned or accrued in india.
Broad categories to determine residential status
Natural
Physical Stay
Citizenship
Artificial
Place of incorporation
Control and management/place of effective management
time periods need not be continuous!
Case for HUF management and residence
VVRNM Subbaya Chettiar v. CIT
VVRNM Subbaya Chettiar v. CIT
A HUF’s karta, domiciled and mainly doing business in Ceylon, visited British India for 101 days. While there, he started firms, handled legal matters, and attended tax proceedings for the family’s Indian properties and investments. The Supreme Court ruled that even though the facts did not establish the existence of the family’s affairs in India, because he failed to prove that the control of these Indian affairs remained in Ceylon, he was deemed a resident of British India for that year under Section 4A(b) of the tax law. The court stressed that actual (“de facto”) control, not just the family’s main location, determines residency.
Company Residence factors - What if it is a company incorporate outside India?
It is presumed that the company is a non-resident. In order to rebut the presumption, the department needs to establish that the place of effective management and substantial control (not complete) is in India. Control and management means the head and brain.
Who is head and brain of the company
Fundamentally, it is the board of directors. The place of meeting of the board decides the residential status, but today the de facto power tends to be in the hands of the CEO. in such a case the ceo’s place of residence determines the company’s residential status.
Actual v Constructive income
Actual refers to when the money is credited to account of the assessee or physically received. Constructive receipt is when the income is received by an agent of the assessee.
Place where the income has been recieved in the case of cheques
In Ogla Glass Works v CIT, SC held that if the parties intended to send the cheque by post, then the posting of the cheque in India constitutes payment in India. This was reaffirmed in Kirloskar Bros v. CIT. Also reaffirmed in CIT v. Patney & Co. However, in Azamjahi Mills Ltd. v CIT, the court held that if there was no agreement or request to send the cheque by post, then the mere posting of the cheque did not constitute delivery of the cheque to the creditor.
Basically, if the creditor authorises the debtor to send the cheque by post, then the property in the cheque passes to the creditor as soon as it is posted.
Effect of encashing the cheque
Not relevant for the purpose of income tax. An assessee cannot defer tax by not encashing a cheque.
If sender posted the cheque without any request from the assessee?
Then the post office is the sender’s agent and the place of delivery is the place of receipt.
Why does significant economic presence matter?
Presence of an IP address within India for example renders the transaction taxable in india, and the government mandates that cloud data must be stored within the country’s borders. To resolve this, significant economic presence is proposed.
Vodafone case facts
HEL An Indian company operating in the telecom sector.
CGP A company registered in the Cayman Islands held the controlling stake in HEL.
HTIL (Hong Kong): A Hong Kong-based company that owned CGP.
Vodafone International Holdings (Netherlands): A Dutch company.
The Transaction: HTIL (the seller, based in Hong Kong) agreed to sell its entire shareholding in CGP (the Cayman Islands company) to Vodafone (the buyer, based in the Netherlands) for approximately $11 billion. This sale took place entirely outside of India.
Indian Tax Authorities’ Claim: The Indian Income Tax authorities argued that Vodafone was liable to pay $2.2 billion in taxes in India on this acquisition. Their reasoning was that by acquiring CGP, Vodafone had effectively acquired control and ownership of HEL (the Indian telecom company). Therefore, they argued that the transaction had a “business connection” in India and amounted to an indirect transfer of assets situated in India. They claimed Vodafone should have withheld taxes (TDS - Tax Deducted at Source) on the payment made to HTIL.
Court’s reasoning in Vodafone
The Supreme Court ruled that India did not have the jurisdiction under the existing tax law to tax the offshore transfer of shares of a Cayman Islands company (CGP) between Vodafone (Netherlands) and HTIL (Hong Kong), even though CGP indirectly held the Indian telecom company, HEL. The court reasoned that the transaction occurred entirely outside India between two non-resident entities and that the then-current law (Section 9) only taxed the direct transfer of assets situated in India, not indirect transfers through the sale of a foreign holding company’s shares. Therefore, Vodafone was not liable for taxes in India on this transaction.
When is a share or interest derive its value mainly from assets located in India
the value of such assets must exceed Rs. 10 Crores on a specified date and must represent at least 50% of the value of all assets owned by the company or entity. Then the share or interest will be deemed to derive its value from assets located in india. In other words: if a company’s assets in India are significant enough to represent atleast half of the company’s total assets, then the company’s share or interest is deemed to derive its value from assets located in India.
