The slab rate of Income-tax depends upon the residential status of a company in India during the relevant previous year. A Company may be either resident or non-resident in India, but the company can’t be an ordinary or not-ordinary resident.
“According to Section 6(3) of the Income Tax Act 1961, a company is said to be resident in India (resident company) in any previous year, if: (i) It is an Indian company; or (ii) It’s a place of effective management (POEM), in that year, is in India.”
If any of the above two tests are satisfied the company would be a resident company in India during that previous year.
From Assessment Year (AY) 2017-18 a foreign company is a resident in India if its POEM during the previous year is in India.
For this purpose, the Place of Effective Management (POEM) 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 are made.
“According to Section 5(1) of the Act, the total income of any previous year of a resident company would consist of: (i) income received or deemed to be received in India during the previous year by or on behalf of such company. (ii) income which accrues or arises or is deemed to accrue or arise to it in India during the previous year. (iii) income which accrues or arises to it outside India during the previous year.”
“It is important to note that under clause (iii) only income accruing or arising outside India is included. Income deemed to accrue or arise outside India is not includible in the hands of residents. Hence, net dividends received from foreign companies are includible in income and not the gross dividends [CIT v. Shaw Wallace & Co. Ltd. (1981) 132 ITR 466].”
In this context, the Calcutta High Court had followed the Supreme Court’s decision in Commissioner of Income-tax v. Clive Insurance Co. Ltd. (1978, 113 ITR 636) holding that the assessee could be said to have paid Income Tax in U.K, by deduction or otherwise, in respect of the net dividend so as to be eligible for relief contemplated by Section 49D of the Indian Income Tax Act, 1922. Following the Supreme Court’s decision, the Bombay High Court held in the case of Commissioner of Income-tax v. Tata Chemicals Ltd. (1986, 162 ITR 556) that the assessee was entitled to double taxation relief under Section 91 of the Income Tax Act, 1961 in respect of dividends from the United Kingdom. Following its decision in the case of Shaw Wallace & Co. Ltd. (supra), the Calcutta High Court held in the case of the same assessee (1983, 143 ITR 207) that dividends from foreign companies are to be assessed not on the gross amount of the dividends but on the gross amount of the dividends less tax deducted there from in foreign countries. In other words, only the net foreign dividends are to be included in the total income of a resident assessee under Section 5(1)(c) of the Income Tax Act, 1961.
Under Section 5(2) of the Act, the total income of any previous year of non-resident company would consist of:
(i) Income received or deemed to be received in India in the previous year by or on behalf of such company;
(ii) Income which accrues or arises or is deemed to accrue or arise to it in India during the previous year.
The decision of the Supreme Court in the case of Standard Triumph Motor Co. Ltd. v. CIT (1993) 201 ITR 391 to the effect that when an Indian resident passes an entry crediting a non-resident with amount payable to him, that would tantamount to the latter receiving income in India, is having grave consequences. In this case, the royalty payable to non-resident in pound sterling was credited to the non-residents accounts in the books of the assessee. The Supreme Court held that the plea to accept royalty income in U.K. was immaterial because the amount was available for the use of the non-resident in India in any manner he liked. Hence, the income was received in India. In the wake of this decision, non-residents who have all along been held to be not liable to Indian Income-tax if the contract was signed outside India, executed outside India and paid for outside India could well fall into the Indian- tax net, should their clients/customers credit them for the amount due before making payments to them outside India. In other words, a non-resident’s tax liability depends upon the accounting entry passed by his client customer.