Basis of charge and scope of total

Basis of charge and scope of total IncomeSujith SurendranCHARGE OF TAXSECTION 41. Income tax is an annual Tax.2. Income of the previous year is assessed to tax in the assessment year at the rates applicable for that assessment year.3. Rate of Tax for an assessment year is fixed by the Finance Act every year and not by the income tax Act. If on a particular 1st. April of any assessment year the Finance Act has not got the assent of the president of India then for that assessment year the rates as proposed in the Finance Bill or the rates applicable to immediately preceding assessment year , whichever is beneficial to the assessee will apply until the new provision become effective.4. Tax is charged on a person and on his total income. 5. Provisions which are applicable on 1st. April will apply for computing the and if any amendment is made on 2nd day of April onwards that will have no bearing on the Computation of Income of the assessee. This law is applicable only for the computation of total income and for other purposes the amendment will taken place from the date of its enactment.

Scope of Total IncomeSection 5The scope of Taxation on total Income is dependent on the nature of Income and after ascertaining the nature of income, the taxability will depend on the Residential status of the assessee. For this purpose the income can be classified in two parts:- Indian incomeForeign incomeIndian Income(i). Income which is received in India or deemed to be received in India.(ii). Income which is accrues or arises or deemed to accrue or arise in India.Foreign IncomeIncome which is accrues and arise outside India:- Income under this head should naturally be an Income which is not received in India also because if it is received in India then it will become Indian income by virtue of first condition of Indian Income i.e. Income which is received in India or deemed to be received in India.

Dispatch of Income by post

If income is sent through cheque or any other mode from the foreign country on the request of the recipient in India then the post office in foreign country is working as an agent of the receiver and income is received by the post office in foreign country hence it is not a receipt in India.If income is sent through cheque or any other mode from the foreign country without any request of the recipient in India then the post office in foreign country is working as an agent of the payer and income is delivered by the post office in India as an agent of the foreign payer and received by the Indian person in India hence it is a receipt in India.

INCOME DEEMED TO BE RECEIVED IN India (SECTION 7)This is statutory fiction i.e. only as mentioned in law. Three types of Incomes have been mentioned in the Section 7 of Income Tax Act, 1961 which are deemed to be received in India:-

(i).Interest credited in excess of 7.5% in a recognised provident fund(ii).Employers contribution in excess of 12% of the salary of the employee in a recognised provident fund.(iii). Transfer balance of the unrecognized provident fund:- In a particular previous year if unrecognized provident fund is converted in the recognised provident fund then the part of the balance which represent the :-(a). Interest in excess of 7.5%.(b). Employers contribution in excess of 12% of the salary of the employee, From the date of establishment of the unrecognized provident fund to the date of its Recognisition.

INCOME DEEMED TO ACCRUE OR ARISE IN India(SECTION 9)1. Income accruing or arising through or from any business connection in India: - Here see that there should be a Business Connection and by virtue that business connection the Income accrues or arises outside India. If all the business operation are not carried in India , that the reasonable part of Income, the accrual of which is resultant from the India connection will only form part of income which is deemed to accrue in India.2. Income through or from any property, any assets or source of Income in India:-Ex.:- Mr. Sunil Gulati, living in UK has let out his property at Ahemdabad to a Company Called Jems and company and the rent is payable in UK.

3. Income through the transfer of capital assets situated in India: - Ex.:- Mrs. Neelam Kothari, a resident of Hong Kong has transferred her property in Jaipur to a citizen of Japan.4. Salaries earned in India and the salary paid for rest period preceding or succeeding the period for which salary earned in India.5. Salary paid by Government to a citizen for services rendered outside India.6. Any Interest, Royalty and fees for Technical services :-(a). Paid by Any state or Central Government.(b). Paid by resident of India except in the condition when used for business or profession carried on outside India or for any source outside India.Ex.:- Exis-2 company a Singapore based company has been paid the following amount as technical services :- (a). Government of India 10 Lakhs- Taxable(b). Chennai based company has paid Rs. 12 lakhs (i). Rs. 6 lakhs for project in India- Taxable. (ii). Rs. 6 Lakhs for import of designs to be used for a project in UK- Non- Taxable.Residential Status and TaxabilityIncomeRORNORNRReceived in India YYYDeemed to be received in India YYYAccrued in India YYYDeemed to be accrued in India YYYReceived and accrued outside from business controlled and profession set up in India YYN outside India YNNEarned and received outside Remitted to indiaNNN12The vodafone caseThe main companies involved were as under :HTILHutchison-Telecommunications International Ltd. a company incorporated in Cayman Island in 2004. It was listed on Hong Kong and New York Stock Exchanges. It was thesellerand earner of Capital Gain.Vodafone International Holdings BV a company incorporated in Netherlands. It was thepurchaserof the shares of CGP.

CGP Investments (Holdings) Ltd. (CI) a company incorporated in Cayman Islands in 1998. It is the company whoseshare has been transferred.Hutchison Essar Ltd. a company incorporated in India. It is the main business company.Controlling share holdingin the same has beentransferred by virtue of Share Purchase Agreementand several related documents. Transfer of CGP share was one of several documents.

A normal view would be that if one non-resident sells shares of a foreign company to another non-resident of India; and the transaction takes place outside India, there can be no tax on the same.Departments claim, in essence was: CGP is a nullity, a sham entity. Transfer of CGPs shares has no substance.The parties to the transfer themselves laid bare the real transaction that of sale of HEL stake. Real transfer is: The transfer of substantial interest (67% stake) in HEL. This controlling shareholding has its situs in India. Since the transferred asset is situated in India, the capital gains arising on the same is liable to tax in India. VIH was therefore required to deduct tax at source.Honourable Supreme Courthas given a ruling that only the legal transaction sale of CGP share - is to be considered. By selling CGP share, the seller may have transferred its interests in HEL. However, Indian interest arises due to sale of CGP share. It does not arise out of the SPA (which recorded the real facts). All the arguments of the revenue were rejected.Post vodafone caseTheGovernment of India, instead of accepting the Supreme Court verdict, made retrospective amendments in the income-tax act to nullify the effect of Vodafone's case. The Act was amended to provide that:Section 9 includes indirect transfers.Section 2(14), "property" includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.Section 2(47), "transfer" includes transfer of controlling interest of an Indian company by way of transfer of shares of foreign company."Situs of shares" of a company incorporated outside India shall be deemed to be in India if the share derives, directly or indirectly, its value substantially from the assets located in India.

However, it may be emphasised that the impact of the amendments that the transaction between two non-residents would be taxed in India is not universally applicable. Reference in this regard may be made to the decision of the Andhra Pradesh HC in the case of Sanofi Pasteur Holding SA, 354 ITR 316.There is a company in India which is being held by a company incorporated in France, SH. The said French company was ultimately held by other French companies. The ultimate French holding company entered into agreement with another French company, Sanofi, to buy the shares of SH. Applying the amended provisions of the Act, the Income Tax Department took the view that the transaction between the two French companies liable to tax in India. However, the AP High Court has observed that the amendments made in the I-T Act do not override the tax treaties India has with other countries.

It was held by the Court that provisions of Article 14 (relating to taxability of capital gains) of the Indo-France tax treaty does not provide for dual taxation.Under Article 14(5), where shares of a company which is a resident of France are transferred, representing a participation of more than 10 per cent in such entity, the resultant capital gain is taxable only in France.http://law.incometaxindia.gov.in/DIT/intDtaa.aspx