Taxation of shares of Indian companies allotted to non-residents in consideration for the purchase of machinery and plant delivered abroad - Income Tax - 382/1984

Taxation of shares of Indian companies allotted to non-residents in consideration for the purchase of machinery and plant delivered abroad Circular No. 382 Dated 4/5/1984 Clauses (vi) and (vii) have been inserted in sub-section (1) of section 9 of the Income-tax Act, 1961, by the Finance Act, 1976, with effect from June 1, 1976. As a result, income by way of royalties and fees for technical services is deemed to accrue or arise in India in the cases specified under these provisions. There are, however, two exceptions to the above general position. Firstly, lump sum consideration paid under approved agreements made before April 1, 1976, for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark, or other similar property is not deemed to accrue or arise in India, and secondly, income by way of fees for technical services under approved agreements made before that date is not deemed to accrue or arise in India. 2. In this context, certain questions have been raised as to whether the clarifications contained in Public Circular No. 21 of 1969* would be applicable. In para. 11+ of this circular, it was stated that in a case where shares are issued at the time of incorporation of an Indian company in consideration for the transfer abroad of technical know-how or services, or delivery abroad of machinery and plant, and the payment is not taxable under section 5(2)(b) of the Income-tax Act as income accruing or arising or deemed to accrue or arise in India, no attempt should be made by the Department to bring to tax the profits or gains on such transactions merly on the ground that the situs of the shares is in India. 3. As a result of the amendments brought about by the Finance Act, 1976, royalties or fees for technical services paid in pursuance of collaboration agreements entered into on or after April 1, 1976, are chargeable to tax under section 5(2)(b) of the Income-tax Act. The contents of para. 11* of Circular No. 21 of 1969 would cover only cases where shares in Indian companies are allotted to a non-resident for delivery abroad of machinery and plant. Where shares in Indian companies are allotted in consideration for the machinery and plant, the income embodied in the payments would be received in India as the shares in the Indian companies are located in India and would accordingly attract liability to income-tax as income received in India. 4. In view of the legal position, the concessions in paragraph 11 of the said circular are in the nature of extra legal concessions and the Board have decided to withdraw the same. Paragraph 11 of the Public Circulr No. 21 may, therefore, be treated as withdrawn with immediate effect. (Sd.) Bhuvanendra Nigam, Director, Central Board of Direct Taxes. * [1969] 73 ITR (St.) 19. + Ibid., p. 22 ** Paragraph 11 of Circular No. 21 of 1969 reads as follows: "With reference to cases of foreign capital participation, it may be noted that where shares are allotted to a non-resident participant in the form of equity capital of an Indian concern, in consideration for transfer abroad of technical know-how or services, or delivery abroad of machinery and plant, and the payment is not taxable under section 5(2)(b) of the Income-tax Act as income accruing or arising or deemed to accrue or arise in India, it has been decided that no attempt should be made by the Department to bring to tax the profits or gains on such transaction merely on the gound that the situs of the shares is in India. However, if any operations are effected or services are rendered in India, the income will, to that extent, accrue or arise in India and will be chargeable to tax in India. If payments of royalty are made by way of a free issue of equity shares, the value thereof will of course be liable to tax. It is only those shares which are issued at the time of incorporation of the Indian company in lieu of a lump sum payment for the technical know-how delivered abroad that will be exempt from income-tax as well as the tax on capital gains. Further, if the shares issued in consideration for technical know-how at the time of the incorporation of the Indian company are subsequently sold, the capital gains realised therefrom would be subject to tax. Preference shares allotted will be treated in the same way as equity shares in this regard."