#TaxmannPPT | Practical Aspects of Law & Practice of International Taxation with Case Studies

• Basic rules of taxation in India

• Explaining through case study : Facts

• Identify taxable transactions

• Examine eligibility of NR to DTAA

• Whether there is risk of GAAR & failure of principal purpose test leading to loss of DTAA benefits

• Characterisation of income

• Determination of withholding tax rate

• Application of Section 90 – DTAA vs ITAct

• Examine exposure to BC & PE including PE through presence of employee

• Determine the amount of salary of secondee taxable in India

• Exposure to capital gains tax for indirect transfer of Indian asset

• Determine residence of secondee and application of tie breaker rule

Basic Rules of Taxation in India

• Residence based & Source Based

• Indian Residents taxed on world wide income

• NRs taxed on income sourced in India

• Wide source rule under the ITAct:

• S.9 (1)(i) :All income which accrues or arises directly or indirectly through or from

• Abusiness connection in India

• Any property in India

• Any asset or source of income in India Or

• Through the transfer of a capital asset situated in India

• S.5 (2) Income of NR is taxable in India if it

• Is received or is deemed to be received in India

• Accrues or arises or is deemed to accrue or arise in India

• Other categories of income : Salary, interest, dividend, interest, royalty, FTS, Property received for consideration <FMV or without it, all fall within taxable income.

Briefly the Source Rule for various categories of income of NR & Taxability under ITAct

Section 9(1) Lists the categories of income and source rules :

(i) Indirect transfer of assets in India. Detailed provisions

(ii) Salary when earned for services rendered in India or for leave or rest period preceding or succeeding such services, forming part of the employment contract

(iii) Dividend paid by an Indian company to a NR

(iv) Interest, when paid by the govt, a resident or a non-resident for use of the debt in business in India

(v) Royalty paid by the govt, a resident or by a NR for use of any property in business in India excluding for certain types of payments in relation to Computer SW

(vi) FTS paid by a resident or a NR for use for business in India

(vii)A payment by a resident to a NR, of sum of money or transfer of property without consideration or for a consideration less than FMV, i.e. other income under S. 56(2)(x).

(viii) Any income of NR from house property

Determining taxable income in each category

1. Income from Business / Profession : Computed as per the provisions of the IT Act under Ss 28 to 44DB (includes special provisions for certain royalty income on net basis)

2. Salary : To be determined as per the provisions applicable to individuals, including giving benefit of deduction for investments and rebates. New regime, no deductions but rebates available

3. Dividend : On gross basis

4. Interest : on gross basis

5. Royalty & FTS : on gross basis except where the IT Act provides net basis under 44D & 44DA

6. Capital gains : to be computed as per the provisions of Ss. 45 to 55A

7. Income from house property : to be computed under Ss 22- 27 of the ITAct

8. Other income : to be determined and computed as per the provisions of Ss 56 to 59

It is important to note that even where the provisions of DTAA apply, the computation mechanism will be as per ITAct.

Other important points to Note

 The following provisions of the ITAct would apply to NR even where DTAA applies :

• Rules of residence in India

• Anti –avoidance rules including SpecificAnti-Avoidance Rules & GAAR

• Tax compliance

• Appeals & assessment provisions

• Levy of interest and penalty

• All the procedural rules

• Transfer pricing rules and determination ofALP or entering intoAPA

Where does the DTAAoffer benefits over IT provisions?

• Characterisation of income & its source, e.g. in case of royalty or FTS and dividend

• PE as opposed to BC is much narrower for business income and hence more beneficial

• Whether a particular income is taxable in India or home country : capital gains, shipping income, tuition fees, salary, income from profession etc

• Rates of taxation in certain cases, especially where taxed on gross basis, interest etc.

PRACTICAL APPLICATION OF THE PRINCIPLES THROUGH A

We are given the following facts : An LLP – “Know How LLP”, registered in the UK, sets up a Joint venture company in India - JV Co Pvt Ltd., with an Indian partner,Adventure Pvt Co Ltd in 2017.

Know How LLP manufactures speciality chemicals, used in various industries which it sells worldwide.

 There are two partners of Know How LLP : 60% held by UK Resident 1 and 40% held by UK Resident 2. The plan was to start in India the manufacture of one of the speciality chemicals which the JV Co will manufacture and sell to Know How LLP and later ramp it up to manufacture the entire speciality product that is currently manufactured in the UK.

 The chemical produced by the JV Co forms one of the components for the manufacturing activity of Know How LLP in the UK. JV Co is owned 50:50 between the Indian co and the Know How LLP.

 In addition to the investment by way of equity, Know How LLP also gives an interest bearing loan to JV Co, in UK pound sterling.

 Know How LLP owns the know-how (“IP”) for the chemical component which it licences to JV Co to use for manufacturing the same in India. JV Co pays royalty to Know How LLP for this licence.

 Under a separate agreement, Know How LLP also provides technical services to JV Co so that the latter is able to use the IP correctly.

 Under this technical services agreement, it is also agreed that Know How LLP will second one of its technical persons to JV Co. The seconded person would be located in India, will become the employee of the JV Co while he is in India and will be answerable to the JV Co for his work. However, JV Co negotiates that it will only pay 60% of the salary of the seconded technical expert with the balance salary being paid by Know How LLP in the UK. The secondee is a resident of the Netherlands. His secondment ends in May 2021 when he leaves India to return to his home country. He has spent the following times in India during his secondment:

FY 2018-19 120 days

FY 2019-20 365 days

FY 2020-21 340 days

FY 2021-22 85 days

 The JV Co sells its production entirely to Know How LLP. Know How LLP has its nominee on the Board of JV Co and the shareholder’s agreement gives Know How LLP certain negative veto powers.

 UK resident 2, the second partner of the Know How LLP transfers its interest in Know How LLP in April 2021 to another of its subsidiary resident of the Netherlands, as part of its internal restructuring.

NOTE : UK does not tax LLP as a taxable unit. Income of the LLP is taxed in the hands of the partners of the LLP.

1. Determine the eligibility of the Know How LLP to the India-UK DTAA(“The DTAA”)

2. Does JV Co constitute a BC and PE of Know How LLP?

3. Taxability of the Secondee in India – what amount will be taxable in India? Who will be liable to withhold taxes under Section 192?

4. Will the secondee be required to file Tax return in India?

5. How will the licence fee under RoyaltyAgreement be taxed in India?

6. How will the technical services fees be taxed in India?

7. Will the salary of the secondee form part of the Technical Services Fees?

8. Taxation of interest payable to Know How LLP.

9. Applicability of TP regulations to all the transactions between Know How LLP and JV Co.

10.Whether the transfer of interest in Know-How LLP by the UK Resident 2 to its Netherlands subsidiary would attract any capital gains tax in India.

11.What is the residential status of the secondee in India in all the years that he has been seconded to the JV Co?

ANALYSIS OF ACTS AND APPLICATION OF LAW TO RESPOND TO QUERIES

 The Know How LLP is registered in the UK, the transactions are all cross border, therefore important to determine whether the LLP is eligible to the DTAAbetween India and the UK.

 If it is eligible to DTAA, the taxability of payments that it receives and determination of its character and tax rate in India will be under the DTAAor the ITAct, whichever is more beneficial .

 Line of examination proceeds as follows :

i. Does a valid DTAAexist between India and UK (“The DTAA”)?

ii. Check whether the anti-abuse provisions either under the LOB or the PPT under the MLI or GAAR would deter the Know How LLP from claiming The DTAA

iii. Does the LLP qualify as a person who can benefit from The DTAA?

iv. Does the LLP have a PE in India? If PE exists, then the relationship of other payments to PE needs to be examined and taxability to be determined accordingly.

v. If no PE, determine the character of each payment to the Know How LLP independently

vi. Is that income taxable under the ITAct?

vii. What is more beneficial? DTAAor ITAct? – S. 90(2) of the ITAct. GAAR would anyway apply

viii. Payer required to withhold tax at appropriate rate when making payment u/s 195

NOTE : Compliance for taxation in India as applicable to Know How LLP would be the same as it applies to any resident + they have to produce Tax Residency Certificate (“TRC”)and file form 10F online to be eligible to DTAA, as per S. 90(4) &(5), Rule 21AB (1) to (2A)

Now proceed with the examination and analyse the law to respond to each of the queries raised

Query 1 : Eligibility of the Know How LLPto the India-UK DTAA- I

1) There is a valid DTAAbetween India & the UK. It became effective in India on 11 February 1994, was amended through Notification dated 10 February 2014. Not terminated as per the TerminationArticle 31

(a) As perArticle 1, The DTAAapplies to persons who are residents of one or both the Contracting States.

(b) Person is defined in Article 3 to include an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States.

(c) LLP is not a taxable unit in the UK. But Article 4 which defines ‘resident’ at Para 1(b), provides as follows regarding partnership or non-taxable unit:

“in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. ” since both partners of the LLP are UK residents and are taxable in the UK, the benefit of the DTAA will apply vis-vis each of the partners of the Know How LLP.

In April 2021 when the UK Resident 2 transfers its 40% partnership to its NL Sub, then, that partner will no longer be eligible to UK- India DTAA. If the NL Sub is eligible to India-NL DTAA, that DTAA will apply to the extent of the income relatable to the NL partner .

Whether NL DTAA will be available to NL is not a query. In any case more facts about the NL sub would be required to determine that.

Query 1 : Eligibility of the Know How LLPto the India-UK

(d) LOB and Protocols for MFN

Article 28C of the DTAA deals with LOB and PPT and it states as follows : “Benefits of this Convention shall not be available to a resident of a Contracting State, or with respect to any transaction undertaken by such a resident, if the main purpose or one of the main purposes of the creation or existence of such a resident or of the transaction undertaken by him, was to obtain benefits under this Convention.”

The facts given do not suggest that the above is attracted. In real life, this investigation must be made to ensure that thisArticle 28C is not attracted. The purpose of the Know How LLP to set up the JV Co seems to be commercial, i.e. to shift the manufacturing activities to India. The purpose of the Know How LLP in the UK seems legitimate as it has manufacturing activities there.

There is no MFN Clause in the protocol exchanged between India and the UK, hence the provisions of the Articles as set out in the DTAA would apply.

Result of the Examination on Qn 1 :

Based on the facts given, Know How LLP would be eligible to the DTAA benefits fully till Resident 2 transfers its shares in JV Co to its NL Sub.

India? -I

NOTE : Since the entire income of the LLP is eligible to UK DTAA, and other than for tax purposes, UK treats LLP as entity, the exposure examined is that of the LLP as a whole and not that of the individual LLPs. In 2021 when Resident 2 transfers its interest, it will be different

BC Under Section 9(1)(i) Read with principles laid down by judicial precedents :

 There is certainly a relation between the business of the Know How LLP which yields profits or gains to it and the activity carried out in India by the JV Co. It does contribute to the earning of profits or gains of LLP.

 The relationship between the Know How LLP and the JV Co is close, real, and intimate. Also, there is commonness of interest between the two

 There is continuity of activity or operations between the Know How LLP and the JV Co as the JV Co uses the IP of the Know How LLP to manufacture the product which is sold entirely to Know How LLP and the said product is one of the components for the Know How LLP to manufacture its products in the UK.

 The Know How LLP holds 50% equity in JV Co and shares profits of the JV Co. It also has some negative veto powers; this may be held to show that it has control over the finances of the JV Co.

Since Know How LLP is eligible to DTAA, it is necessary to examine whether it has PE in India before proceeding to determine its taxability. If no PE, then its taxability is determined accordingly. Next slide for determination of PE

Query 2. Does the JV Co constitute the BC and PE of Know How LLPin India? -II

Determination of PE is based on law and facts. Hence detailed facts of the operations of the JV Co and the involvement of the Know-How LLP would need to be examined. In essence, the analysis would be carried out, using the following parameters under the PEArticle:

(a) Is the JV Co a fixed place of business of the Know-How LLP in India and does the Know-How LLP carry on its core business activity in India through such fixed place of business ?

Subject to detailed investigation of the functioning and facts, on facts given, it cannot be said that the JV Co and its premises are used by Know-How LLP for its business in India. As such, facts suggest that Know How LLP carries out none of its core business activity in India.

(a) Is the seconded employee fixed place of business of the LLP ?

Since he is employee of JV Co, prima facie he is not the fixed place of business of LLP

However, as 40% of his salary is paid by LLP, his lien on employment with LLP is retained.

The SC in Morgan Stanley 292ITR 416 (SC) [2007] held such employees to be PE of foreign co in India. However, if the employee does not carry out any core business activity of LLP in India, then no income can be attributed to him as a PE. The facts suggest this.

(c) The JV Co is not the office or branch of the Know How LLP.

(d) Based on facts, the JV Co, is not an agent of the Know How LLP in India.

(e) Sub of a resident in another state by itself is not a PE if it does not constitute a PE under the other provisions of the PE article.

2. Does the Know How LLP have service PE in India?

(f) The relevant language of the Service PE clause,Article 5 (2)(k) of the DTAAis : The furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within a Contracting State by an enterprise through employees or other personnel, but only if:

(i) Activities of that nature continue within that State for a period aggregating more than 90 days within any 12 month period ; OR

(ii)Services are performed within that State for an enterprise within the meaning of paragraph (1) of Article 10 (Associated enterprise) and continue for a period aggregating more than 30 days within any 12 month period

Therefore, we need to examine whether the services furnished by LLP under agreement are within the meaning of FTS underArticle 13

If the services are ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalty is paid by JV Co to LLP, then the payment for services falls within Article 13.

Based on facts, this seems to be the case. Hence fees will be taxable underArticle 13.

Therefore, the furnishing of services to JV Co does not expose LLP to service PE in India. Basis the above, Know How LLP does not have PE in India. Taxability of the payments by the JV Co to the LLP can be determined on the basis of the nature of those payments and their taxation under the relevant articles of The DTAAunless the provisions of the ITAct are more favourable.

Query 3 (a) Taxability of the Secondee in India

1) Secondee is resident of NL. Obtain his TRC to determine he is eligible to India- NL DTAA

2) His taxability in India to be determined under Article 15 of the India-NL DTAA – Dependent Personal Services, unless ITAct provisions are more beneficial.

3) Under the IT Act, u/s 5(1), his salary accrues and arises to him in India because he renders services to JV Co in India and is their employee.

S. 10(vi) of the IT Act provides a limited exemption to foreign citizen, if his stay in India did not exceed 90 days and his salary is not deductible expense for his employer. On facts, he is not eligible to this exemption. Even when he is NR as per the rules of residence in India, he is still liable to tax on his salary in India under ITAct, as per above.

4) Under DTAA,Article 15(2) Salary would not be taxed in India if he were present in India < 183 days and his salary is NOT paid by a resident of India. He does not satisfy this, therefore under DTAA also, taxable on salary in India even in the very first year when presence in India is less than 90 days

Query 3 (b) What amount of Salary taxable in India

Under the ITAct :

• Under Section 9(1)(ii), salary payable for his services rendered in India are deemed to accrue or arise in India and hence taxable in India.

• No distinction between who pays or bears the salary of the employee.

Therefore, under the ITAct, his entire salary should be subject to tax in India.

Under the DTAA

• Under Article 15(2), in all the years where he is present in India 183 days or less, the 40% salary which is borne by the foreign employer – Know How LLP, should not be taxable in India

CAUTION : As per the Morgan Stanley ruling, secondee is himself a PE of the Know How LLP. However, his salary is not borne by the said PE since no income is attributed to that PE, if the LLP receives FTS in accordance with TP regulations onALP basis

• In the years where he is present in India > 183 days, regardless of who bears the salary, he is taxable in India.

• Therefore, in 2018-19 & 2021-22, when he is present in India only for <183 days, he should not be taxed in India on the 40% of salary borne by Know How LLP. In 2021-22, his eligibility to DTAA will also need to be examined, based on the determination of his country of residence.

Query 3 (c) Who is liable to deduct tax under S. 192

Query 4 : Is Secondee liable to file tax return in India?

Both these are procedural and compliance related questions and hence only the provisions of the IT Act apply.

Query 3(c) : The salary is paid for exercise of employment in India. Hence, where the entire salary is taxable in India, Section 192 of the ITAct provides as follows :

“

1) Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. ”

This means, both JV Co and the LLP would be liable to withhold tax U. S. 192 and deposit with the tax department in compliance with the TDS provisions. Practically, the parties can agree for entire withholding tax to be deducted by JV Co.

Query 4

Yes, if his taxable income in India exceeds the minimum amount taxable in India as per S. 139(1) (b)

Query 5: Taxability of Licence fee under Royalty Agreement

• Know How LLP is eligible to DTAAbenefits.

• It does not have PE other than the limited exposure to the secondee being regarded as PE due to employment retainer.

• License fee is not connected with the employee PE, if it is held to be PE.

• Hence, eligible to provisions ofArticle 13 of the DTAAif more beneficial than ITAct provisions

• Tax rate will be rates in force as per S. 195 i.e. under the FinanceAct or DTAA, whichever is lower.

1) Under the ITAct

i. U/S 9(1)(vi)(b), royalty payable by a resident is taxable in India unless it is paid for the use of the IP in a business of the resident outside India.

Based on facts, it is NOT for JV Co’s business outside India. Hence taxable in India.

ii. Explanation 2(iii) of S. 9(1)(vi) provides that a payment for the use of any patent, invention, model, design, secret formula or process or trade mark or similar property is royalty.

2) Under the DTAA

(i) Article 13(1) permits India to levy tax on a payment characterised as royalty

(ii) Article 13(3) defines royalty and the payment to Know How LLP would fall under para 3(a) of Article 13 : payments ….received as a consideration for the use of, or the right to use,… any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.

(iii) Article 13(2)(a)(ii) provides 15% tax rate. This is lower than 20% prescribed under IT Act from 1 April 2023. Hence this rate will apply going forward. Till then 10% +surcharge & Cess as per IT Act , since lower than under the DTAA

Query 6:Taxability of Fees for Technical services

• Know How LLP is eligible to DTAA benefits.

• It does not have PE other than the limited exposure to the secondee being regarded as PE due to employment retainer.

• FTS is not connected with the employee PE, if it is held to be PE.

• Hence, eligible to provisions ofArticle 13 of the DTAA if more beneficial than ITAct provisions

• Tax rate will be rates in force as per S. 195 i.e. under the FinanceAct or DTAA, whichever is lower.

(1) Under the ITAct

i. U/S 9(1)(vii)(b), FTS payable by a resident is taxable in India unless it is paid for the use of the services in a business of the resident outside India. Based on facts, services are NOT for JV Co’s business outside India. Hence taxable in India.

ii. Explanation 2 to S. 9(1)(vii) provides that any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including for providing technical or other personnel) excluding for construction, assembly, mining or like project or if the consideration is chargeable as "Salaries“ is FTS under the ITAct

(2) Under the DTAA

While examining service PE of Know How LLP , we concluded that under the DTAA, it is FTS since it is for services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalty is paid by JV Co to LLP,

(3) Rate of tax : Under IT Act, 10% + surcharge & cess till FY 2022-23, thereafter 20% +surcharge & cess

Under DTAA, 15%. Therefore, apply rate under ITAct till FY 2022-23 and under the DTAAthereafter.

1. Character & taxability under ITAct

i. Is the payment to the secondee characterised as salary under the ITAct?

ii. If yes, is it taxable in India and whether the tax due on it is to be paid to the Indian tax authorities?

iii. This has already been analysed earlier. Answer to (i) is YES and also, it is subjected to withholding tax U/s 192.

2. Character & taxability under the DTAA

i. In analysis of Query 4, it is concluded that under DTAAalso, it is salary and is taxable in India

ii. paragraph 5 (e) of Article 13 of the DTAA specifically exempts payment made to an employee from the meaning of FTS

Hence it should not be FTS, when already subjected to payroll tax in India.

1. Judicial support : Plethora of tribunal rulings support this. Recently the Bangalore ITAT in the case of Toyota Boshoku Automotive India Private Ltd [2022] 138 taxmann.com 166 (Bangalore -

Trib.) ruled that where the employee is, in fact and law, the employee of the Indian company and the salary paid to him has been subjected to tax in India under Section 15 of the IT Act and withholding of tax has been done under Section 192 and the employee has filed the income tax return in India, the same cannot be taxed as FTS

1. Under the ITAct

i. Is the interest payable to the Know How LLP its income within the scope of its total income chargeable to tax in India under the ITAct. ?

ii. Yes, if u/s 5 of the ITAct, it accrues or arises in India

iii. S. 9(1)(v) provides that interest payable by a resident or NR, for debt incurred for use in India, except for debt incurred for the purposes of a business or profession of a resident outside India is deemed to accrue or arise in India and is taxable in India

Hence taxable under the ITAct

2. Under the DTAA

i. Under Article 12 of the DTAA, if the interest is paid by a resident of India, then it arises in India and is taxable in India. Hence taxable under the DTAA

3. At what rate of Tax ?

i. Debt is designated in GBP, i.e. foreign currency, so as per IT Act, the rate is 20% plus applicable surcharge and cess. Inquiry should be made to see if this interest is eligible to the lower withholding tax rate of 5% under section 194LC of the ITAct.

ii. Check if interest is owned beneficially by UK LLP. If yes, the tax rate is 15%. No surcharge & cess.

4. The DTAAtax rate is lower and can be applied if int. beneficially owned by LLP

Query9 : Will TPregulations apply to transactions between Know How LLPand JV Co ?

i. U/S 92(1), any income arising from an international transaction should be computed on arm's length basis

ii. S. 92B defines international transaction, i.e. transaction between associated enterprises both or one of which is NR

iii. Therefore, under the IT Act, all transactions between the Know How LLP and the JV Co would be regarded International Transactions and the income from them should be computed on arm’s length basis. TP regulations under the ITAct would apply under the ITAct.

i. Article 10 of the DTAA defines associated enterprises and provides that if transactions between them are not on the same terms as between independent parties, then the benefits of DTAA would be restricted to the profit derived if transactions were on the same terms as between independent parties.

ii. Under DTAA also, TP applies.

3. Conclusion: TP Regulations under the IT Act apply to all the transactions between JV Co and Know How LLP

1. Under the ITAct

2. Under the DTAA

Query10 : Taxability of Indirect transfer of Indian asset on transfer of interest in UK LLP

NOTE : Under Indian laws no concept of transfer of partnership interest from one to another partner. It is withdrawal by one partner and entry of new partner, vis-à-vis partnership i.e. reconstitution.

1. Under the ITAct

• S. 9B deals with transfer of asset by the LLP to the retiring partner, NOT with transfer of interest by the retiring partner. So it is dealing with taxation of LLP on retirement of partner.

• Interest in LLP qualifies as ‘right in property’& therefore a capital asst

• Giving up a capital asset is extinguishment of a right in the capital asset, and hence is ‘transfer’

• S.45(1) prescribes taxation of capital gains from transfer of capital asset unless specifically exempted under the ITAct. This transfer is not exempt anywhere!

• For S.45(1) to work, what is the computation mechanism for computing capital gains in this case?

• Section 45(4) deals with computation of capital gains of LLP when the retiring partner receives capital asset or cash from the LLP

• So, no mechanism to compute capital gains of the retiring partner. The SC, in case of Srinivasa Setty [1981]

5 Taxman 1 (SC) held that where no computation mechanism is provided, the legislature could not have intended to tax such a transfer of capital asset.

• Arguably, the retiring partner’s capital contribution could be his ‘cost of acquisition’. If the incoming partner pays him a consideration for his exit, that could be the ‘full value of consideration’to compute capital gainsOpen question.

NOTE : Residential status is determined as per the domestic law of each country. Where the NR becomes dual resident, the Tie breaker clause in the DTAA is applied to break the tie.

• Therefore, residence of Secondee in India is to be determined under the ITAct.

• Deemed residence does not apply to a foreign citizen including a PIO

• The relevant portions of Section 6 applicable to a foreign citizen (other than PIO) Are :

• S. 6(1) : he is resident in India in any FY if he

(a) is in India in the FY in aggregate for 182 days or more. OR

(c) Has been in India in the immediately 4 preceding years for an aggregate of 365 days or more and is in India for 60 days or more in the relevant FY.

• S. 6(6) NOR : NOR in a FY if, the individual

(

a) has been a NR in India in 9 out of 10 immediately preceding FYs, OR

(b) in the immediately preceding 7 years, has been present in India for 729 days or less

• Let us see the facts of the secondee in light of the above and determine the residential status

Query11 : Determination of residential status of secondee in India during the secondment period II

FY (AY) No of days’ in India Applicable provision of Section 6(1) or (6) R/NR/RNOR under the IT Act

Comment

2018-19(2019-20) 120 S. 6(1)(a) & (c) NR He is present in India for < 182 days and has not spent >365 days in India in the preceding 4 years

2019-20 (2020-21) 365 S.6(1)(a) RNOR As per Section 6(1)(a) read with Section 6(6)(a)

2020-21 (2021-22) 340 S. 6(1) (a) RNOR No need to examine clause (c) of S. 6(1)

2021-22 (2022-23) 85 S.6(1)(a) but need to examined (c) as well ROR In India for < 182 days but has been in India in the previous 4 years for >365 days and is in India in this year for >60 days He satisfies the definition of ROR under S.6(6)(a), has spent in all 825 days, i.e. >729 days in the previous 7 years, he is also ROR. See note below

• In 2021-22 he become resident as well as ordinarily resident in India.

• Therefore he would be subject to tax in India on his worldwide income in that year.

• Hence, determine if he is also resident in the Netherlands in 2021-22 from the NL adviser.

• If yes, he would be dual resident in 2021-22

• Calls for application of tie breaker clause inArticle 4(2) of the India-Netherlands DTAA : Where by reason of the provisions of paragraph 1 an individual is a resident of both States, then his status shall be determined as follows :

(a) he shall be deemed to be resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be resident of the State with which his personal and economic relations are closer (centre of vital interests) ;

(b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode ;

(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national ;

(d) if he is a national of both States or of neither of them, the competent authorities of the States shall settle the question by mutual agreement.”

• Applying the above read with rules of residence and the year for such determination in the NL, likely the secondee will be resident in the NL

Query11 : Determination of residential status of secondee in India during the secondment period IV

If in 2021-22 he becomes resident in the NL, he can claim the benefit of Article 15 on Dependent Personal Services.

(a) He is NOT present in India in aggregate > 183 days in FY 2021-22, and

(b) his remuneration is paid by, an employer (Know How LLP) who is not a resident in India, and

(c) the remuneration is not borne by a PE of Know How LLP in India

Therefore, his salary received from Know-How LLP upon return to the Netherlands would not be taxed in India. However, salary received from JV Co for the number of days spent in India would be taxable in India since we have already concluded that he does not qualify in that case for relief underArticle 15.

QUESTIONS?