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Ascertainment of a foreign enterprise’s taxable bu

Posted @ February 16, 2012, 8:21 am under (INTERNATIONAL TAXATI)

Under section 4, it is the total income of every ‘person’ which is taxable. A foreign company which is not wholly controlled or managed in India is a non-resident so far as its residential status is concerned. Section 5(2) lays down that as far as a non-resident assessee is concerned, scope of total income of such an assessee is confined to an income which accrues or arises in India or is deemed to accrue or arise in India and which income is received or deemed to be received by such foreign company.

Therefore, it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India. A non-resident assessee may have several incomes accruing or arising to it in India or outside India but so far as taxability under section 5(2) is concerned, it is restricted to income which accrues or arises or is deemed to accrue or arise in India. The scope of this deeming fiction is mentioned in section 9. Therefore, as far as the income accruing or arising in India, an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(es) or through some other form of its presence in India such as office, project site, factory, sales outlet, etc.[PE].

It is, therefore, important to note that under the Act, while the taxable subject is the foreign General Enterprise (GE), it is taxable only in respect of the income including business profits, which accrues or arises to that foreign GE in India. The Act does not provide for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under sections 44BB, 44BBA, 44BBB, etc.

Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian PE of foreign enterprise are required to be computed under normal accounting principles and in terms of the general provisions of the Act. Therefore, ascertainment of a foreign enterprise’s taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India.

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