RESIDENTIAL STATUS
Illustration 1:
Determination of Residential status : Mr. X, an indian citizen, is employed in XYZ Ltd. He was sent on deputation is US on 15-07-2022.
Determine his residential status for assessment year 2023-24.
Solution 1:
In the given case – Mr. X was sent on deputation to US during the previous year 2022-23 i.e. he is leaving India for employment outside India. It is irrelevant that he is employed in India before leaving India for employment outside India. For him basic condition number 2 is not applicable. His total stay in India during the previous year = 30 + 31 + 30 + 15 = 106 days.
Since Mr. X does not satisfy the first basic condition applicable to him, therefore he is a non-resident for the Assessment Year 2023-24.
Illustration 2:
Determination of Residential Status : In the year 2022-23 previous year, a sailor has remained on a ship for a private company owning ocean-going ships as follows :
Outside the territorial waters of India for 182 days;
Inside the territorial waters of India for 183 days;
Is he considered to be a resident for the assessment year 2023-24?
Solution 2:
An individual is an Indian resident if he is in India for period of 182 days or more during the previous year. India includes territorial waters of India. Since the sailor remained inside the territorial waters of India for 183 days, he is regarded as resident in India for the assessment year 2023-24.
Illustration 3:
Determination of Residential Status : Mr. Ram an Indian citizen left India on 22-09-2022 for the first time to work as an officer of a company in Germany. Determine the residential status of Ram for the assessment year 2023-24 and explain the conditions to be fulfilled for the same under the Income- tax Act, 1961.
Solution 3:
Mr. ram is an Indian Citizen who left India during the previous year for employment outside India. For him basic condition no. 2 is not applicable. Hence, for being resident in India, he should be in India for 182 days or more during the previous year. In this case, Mr. Ram was in India only for 175 days during the previous year (01-04-2022 to 22-09-2022 = 30 + 31 + 30 + 31 + 31 + 22 = 175 days). Since he does not satisfy the minimum criteria of residence of 182 days during the previous year, hence, he is a non- resident for assessment year 2023-24.
Illustration 7:
Determination of Residential status : Ms. Bindu, a non-resident, residing in New York since 1991, came back to India on 19-02-2021 for permanent settlement in India. Explain her residential status of Ms. Bindu for the Assessment Year 2023-24 in accordance with the various provision of Indian Income-tax Act.
Solution 7:
Ms. Bindu is a resident in assessment year 2023-24 since she has stayed in India for a period of 365 days (more than 182 days) during the Previous Year 2022-23, respectively.
As per section 6(6), a person will be “Not ordinarily Resident” in India in any previous year, if such person :
(i) has been a non-resident in 9 out of 10 previous years preceding the relevant previous year, or
(ii) has during the 7 previous years immediately preceding the relevant previous year been in India for 729 days or less.
(iii) A citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding Rs. 15 lakh during the previous year, and he comes to India for the purpose of visit to India during the relevant previous year and he has been in India for a period or periods amounting in all to 120 days or more but less than 182 days; or
(iv) a citizen of India who is deemed to be resident in India under section 6(1A).
If he does not satisfy either of these conditions, he would be a resident and ordinarily resident.
In the instant case, applying the above provision, the status of Ms. Bindu for the previous year 2022- 23 (A.Y. 2023-24) would be Resident but not ordinarily resident since she was non-resident in 9 out of 10 previous years immediately preceding the previous year and also had stayed for less than 729 days in 7 previous years immediately preceding the previous year.
Therefore her status for A.Y. 2023-24 – “Resident but not ordinarily resident”.
Illustration 9:
Determination of Residential status : Mr. X, Karta of HUF, claims that the HUF is non-resident as the business of HUF is transacted from UK and all the policy decisions are taken there.
Solution 9:
True since the business of the HUF is transacted from UK and policy decisions are taken there, therefore, the ‘Control and Management’ of its affairs is wholly situated outside India.
Illustration 10:
Determination of Residential status : XYZ Inc. is incorporated in Cayman Island. Its key management and commercial decisions are taken in Board meetings held in Mumbai during financial year 2022- 23. Determine its residential status for assessment year 2023-24.
Solution 10:
As per section 6(3), A company is said to be resident in India in any previous year, if its place of effective management, in that year, is in India. In this case though the company is incorporated outside India, it will be regarded as resident in India as its place of effective management during the relevant financial year is in India since its key management and commercial decisions are taken in its board meetings held in Mumbai.
Illustration 11:
Determination of Residential status : Lotus Inc., a US company headquartered at NewYork, not having a permanent establishment in India, has set up a liaison office in Delhi in April, 2022 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 Director at NewYork. Determine the residential status of Lotus Inc. for A.Y. 2023-24.
Solution 11:
In the case of Lotus Inc., its place of effective management for P.Y. 2022-23 is not in India, since the significant management and commercial decisions are, in substance, made by the Board of Directors outside India in NewYork.
Lotus 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, Lotus Inc., being a foreign company is non-resident for A.Y. 2023-24, since its place of effective management is outside India in the P.Y. 2022-23.
Illustration 12:
Taxability of interest income : Mr. A, a citizen of India, left for USA for the purposes of employment on 01.05.2022. 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 Rs. 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.
Solution 12:
In this case:-
(a) Mr. A and Mr. B are non-resident in India during the previous year 2022-23.
(b) The purpose of borrowal by Mr. A is not ‘carrying on of any business of profession in India’
but for the purpose of investment in India i.e. earning any source of income in India.
Hence, the provisions of section 9(1)(v) relating to deeming fiction of accrual is not applicable in this case. Accordingly the interest does not accrue of arise in India and is, therefore, not taxable in India.
Illustration 13:
Taxability of fees for technical services : 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 Colomba Mr. Kulasekhara is a non-resident. The consultancy 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 13:
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”.
According to explanation to section 9, income by way of, 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.
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 20:
Determination of residential status and scope of total income : DAISY Ltd., a foreign company, incorporated in USA and engaged in the manufacturing and distribution of diamonds, set up a branch office in India in June 2022. The branch office was required to purchase uncut and un- assorted diamonds from dealers of Mumbai and export them to USA. During the Previous Year 2022- 23, profit from such export amounted to Rs. 75 lakhs.
Out of 20 shareholders of DAISY Ltd., 12 shareholders are non-resident in India. All the major decisions were taken through Board Meetings held at USA.
(i) Determine the residential status of DAISY Ltd. for the Assessment Year 2023-24.
(ii) Discuss the tax treatment of profit from export business.
Solution 20:
(i) Residential Status of Daisy Ltd. : According to Section 6(3) of the Income tax Act, 1961, a foreign company is said to be resident in India in any previous year, if its place of effective management, in that year, is in India.
“Place of effective management” means 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.
Since in case of Daisy Ltd., all the major decisions were taken through Board Meetings held
at USA, hence it will be non resident in India.
(ii) According to 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. Thus export profits of Rs. 75 lakhs shall not be taxable in India in hands of DAISY Ltd.