The Hindu Business Line : Distance lends disenchantment

Aphorisms are supposed to have universal application. But sometimes they are also turned on their head. One such is `distance lends enchantment.' People may find that farther, deeper and longer the separation greater the fondness, but the Income-Tax Department finds distance a positive nuisance.

Many an intrepid tax evader has succeeded in thumbing his nose at the taxman by the simple expedient of explaining away ill-gotten income and wealth as having been received as gift from distant shores by a doting relative.

The tax authorities have, more often than not, foundered in the face of such facile explanation, given that the onus of proving an income is on them. In fact, the agonisingly tedious proceedings in the Bofors case have got a lot to do with the foreign factor.

Covering turf the smart way

Against this backdrop, one can understand the provisions in the income-tax law that bail out the authorities from the difficulty of contending with the wiles and guiles of offshore assessees, as it were. The resident of India dealing with a non-resident does so at his own peril in the sense that he is treated as representative assessee of the latter and has to cough up the tax payable by the non-resident to the extent it relates to the transaction(s) entered into with him in case he was remiss in fully deducting tax at source. The tax authorities indeed have covered their turf well knowing well that a non-resident is simply not going to make himself available whenever called upon to do so.

Shift of Stance

Section 44C of the Income-Tax Act is of a piece with the above peremptory treatment of non-residents' tax liability when it restricts head office expenses of Multinational Corporations (MNCs) to 5 per cent of the profit of the Indian branch or permanent establishment or the actual expenses claimed on this account, whichever is less. And in a refreshing shift of stance, the Double Taxation Avoidance Agreements (DTAA) India has signed with a number of countries vide Article 7 invariably give primacy to Section 44C. This is refreshing because normally the perception is DTAA tend to give extra concessions and benefits to non-residents.

In the absence of this restriction, the tax authorities in India would have been at their wits end in verifying the genuineness of the purported expenses incurred by the head office abroad for the benefit of its Indian permanent establishment, especially the appropriateness of its allocation among various beneficiaries spread across the globe.

This almost unique and exceptional primacy given to the law of the land has not been sufficiently publicised so much so that the recent verdict of the Bombay bench of the ITAT in Mashreqbank, a company incorporated in the UAE and having its head office there with a branch in India, laying bare this legal position has surprised many, including the cognoscenti.

Section 90(2) gives the non-resident the option to choose a provision contained in the Income-Tax Act or the DTAA on the subject, whichever is more beneficial to him. Section 44C puts paid to this latitude when it comes to head office expenses.

(The author is a Delhi-based chartered accountant.)

More Stories on : Income Tax | Reassessment

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Right move

Fertiliser pricing — Time to scrap the archaic scheme

The fine art of taxing

Attribution of profits to PE vs. arm's length payment

English — advantage India

Not just for form's sake

ESOPs — no more a benefit at the fringe

Distance lends disenchantment

Gratuity for teachers