Taxation - Income TaxQuestion 5615 of 146
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Question 2 (a) State with reasons whether income chargeable to tax in India for the A.Y. 2025-26 in the hands of recipients in following independent situations: (i) Mr. Mahesh received dividend of ` 7 lakhs declared and paid by a foreign company outside India. Such dividend has been declared in respect of shares which derive their value substantially from assets situated in India. He is resident and not ordinarily resident in India.3 (ii) Mr. Shivansh is a non-resident in India and residing in China has deposited ` 16 lakhs with M/s ABC Ltd., an Indian company, on 01-09- 2024. He has received interest @ 12% per annum in China during the previous year 2024-25. (iii) Mr. Ramesh received royalty of ` 8,25,000 in consideration of providing patent rights to Mr. Sunil. Mr. Sunil has developed a new product in India by utilizing the patent rights. 30% of the royalty was received in India 3 Out of syllabus and 70% was received outside India. Mr. Ramesh and Sunil both have status of non-resident in India. (6 Marks) (b) Discuss the relevant provisions of Income-tax Act, 1961 with respect to tax deduction at source (TDS) and calculate amount of TDS also for the A.Y. 2025-26 in the following independent situations: (i) Marks Pictures Ltd. is a movie and short films production house having turnover of ` 15.22 crores during the previous year 2023-24. Solar Varanasi LLP also produces short films and clippings and it has already produced a short film namely 'Maha Kumbh'. On 16-10-2024, Marks Pictures Ltd. acquired television rights in consideration of ` 52 lakhs from Solar Varanasi LLP. (Both have valid PAN) (ii) Mr. Mayank, a salaried individual, paid rent for his residential house at Mumbai to the house owner Mr. Nikhil in the following manner: From April, 2024 to September, 2024: ` 75,000 per month; and From October, 2024 to March, 2025: ` 1,00,000 per month. (4 Marks)

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Detailed Solution & Explanation

∗∗(a)TaxabilityofIncomeinIndiaforA.Y.2025−26:∗∗<br>∗∗(i)DividendreceivedbyMr.Mahesh(RNOR)fromaforeigncompanyoutsideIndia:∗∗DividenddeclaredandpaidbyaforeigncompanyoutsideIndiadoesnotaccrueorariseinIndia,evenifthesharesofsuchforeigncompanyderivetheirvaluesubstantiallyfromassetssituatedinIndia(astheindirecttransferprovisionsu/s9(1)(i)applytocapitalgainsontransferofshares,nottodividends).SinceMr.MaheshisResidentbutNotOrdinarilyResident(RNOR),foreignsourceincomeistaxableinIndiaonlyifitisderivedfromabusinesscontrolledorprofessionsetupinIndia.Here,thedividendisfromaforeigncompanyandpaidoutsideIndia,henceitis∗∗nottaxable∗∗inIndiainhishands.<br>∗∗(ii)InterestreceivedbyMr.Shivansh(Non−Resident)fromM/sABCLtd.(Indiancompany):∗∗InterestondepositswithanIndiancompanyisdeemedtoaccrueorariseinIndiainthehandsoftherecipient(whetherresidentornon−resident)underSection9(1)(v)oftheIncome−taxAct,1961,asthesourceofincomeisinIndia.Interestamount=‘16,00,000×12%×7/12=1,12,000‘(from01−09−2024to31−03−2025).Thus,interestincomeof∗∗‘1,12,000∗∗is∗∗taxable∗∗inIndia.<br>∗∗(iii)RoyaltyreceivedbyMr.Ramesh(Non−Resident)fromMr.Sunil(Non−Resident):∗∗Royaltypaidbyanon−residenttoanothernon−residentisdeemedtoaccrueorariseinIndiaunderSection9(1)(vi)oftheIncome−taxAct,1961,ifitispaidinrespectofanypatent,right,property,orinformationusedforthepurposesofabusinessorprofessioncarriedonbysuchpersoninIndiaorforearninganyincomefromanysourceinIndia.SinceMr.SunildevelopedanewproductinIndiabyutilizingthepatentrights,thesourceisinIndia.Thus,theentireroyaltyof∗∗‘8,25,000∗∗is∗∗taxable∗∗inthehandsofMr.RameshinIndia,irrespectiveofthefactthatonly30<br><br>∗∗(b)TaxDeductionatSource(TDS)Provisions:∗∗<br>∗∗(i)AcquisitionoftelevisionrightsbyMarksPicturesLtd.fromSolarVaranasiLLP:∗∗Theacquisitionoftelevisionrightsofafilmalreadyproducedbyaproductionhousedoesnotamounttoacontractfor"carryingoutanywork"underSection194C,sincethefilmhasalreadybeenproducedandisnotbeingcustom−made.Hence,TDSunderSection194Cisnotapplicable.However,theconsiderationpaidforacquiringtelevisionrightsofafilmfallsunderthedefinitionof"Royalty"asperExplanation2toSection9(1)(vi).Therefore,taxisrequiredtobedeductedatsourceunderSection194J.TheapplicableTDSrateonroyaltyu/s194Jis10TDStobededucted=‘52,00,000×10%=5,20,000‘.<br>∗∗(ii)RentpaidbyMr.Mayank(salariedindividual)toMr.Nikhil:∗∗SinceMr.Mayankisasalariedindividual(notliabletotaxauditu/s44AB),TDSonrentisgovernedbySection194−IB.Underthissection,anindividualpayingrentexceeding‘50,000‘permonthisrequiredtodeductTDS.TheTDSratewas5Thetaxmustbedeductedinthelastmonthofthepreviousyear(March2025).TotalrentpaidinF.Y.2024−25:−ApriltoSept:‘75,000×6=4,50,000‘−OcttoMarch:‘1,00,000×6=6,00,000‘Total=‘10,50,000‘.TheTDStobedeductedfromtherentofMarch2025iscalculatedattherateof2TDS=‘10,50,000×2%=21,000‘.\displaystyle **(a) Taxability of Income in India for A.Y. 2025-26:** <br> **(i) Dividend received by Mr. Mahesh (RNOR) from a foreign company outside India:** Dividend declared and paid by a foreign company outside India does not accrue or arise in India, even if the shares of such foreign company derive their value substantially from assets situated in India (as the indirect transfer provisions u/s 9(1)(i) apply to capital gains on transfer of shares, not to dividends). Since Mr. Mahesh is Resident but Not Ordinarily Resident (RNOR), foreign source income is taxable in India only if it is derived from a business controlled or profession set up in India. Here, the dividend is from a foreign company and paid outside India, hence it is **not taxable** in India in his hands. <br> **(ii) Interest received by Mr. Shivansh (Non-Resident) from M/s ABC Ltd. (Indian company):** Interest on deposits with an Indian company is deemed to accrue or arise in India in the hands of the recipient (whether resident or non-resident) under Section 9(1)(v) of the Income-tax Act, 1961, as the source of income is in India. Interest amount = `16,00,000 \times 12\% \times 7/12 = 1,12,000` (from 01-09-2024 to 31-03-2025). Thus, interest income of **` 1,12,000** is **taxable** in India. <br> **(iii) Royalty received by Mr. Ramesh (Non-Resident) from Mr. Sunil (Non-Resident):** Royalty paid by a non-resident to another non-resident is deemed to accrue or arise in India under Section 9(1)(vi) of the Income-tax Act, 1961, if it is paid in respect of any patent, right, property, or information used for the purposes of a business or profession carried on by such person in India or for earning any income from any source in India. Since Mr. Sunil developed a new product in India by utilizing the patent rights, the source is in India. Thus, the entire royalty of **` 8,25,000** is **taxable** in the hands of Mr. Ramesh in India, irrespective of the fact that only 30% of it was received in India. <br> <br> **(b) Tax Deduction at Source (TDS) Provisions:** <br> **(i) Acquisition of television rights by Marks Pictures Ltd. from Solar Varanasi LLP:** The acquisition of television rights of a film already produced by a production house does not amount to a contract for "carrying out any work" under Section 194C, since the film has already been produced and is not being custom-made. Hence, TDS under Section 194C is not applicable. However, the consideration paid for acquiring television rights of a film falls under the definition of "Royalty" as per Explanation 2 to Section 9(1)(vi). Therefore, tax is required to be deducted at source under Section 194J. The applicable TDS rate on royalty u/s 194J is 10%. TDS to be deducted = `52,00,000 \times 10\% = 5,20,000`. <br> **(ii) Rent paid by Mr. Mayank (salaried individual) to Mr. Nikhil:** Since Mr. Mayank is a salaried individual (not liable to tax audit u/s 44AB), TDS on rent is governed by Section 194-IB. Under this section, an individual paying rent exceeding `50,000` per month is required to deduct TDS. The TDS rate was 5% till 30.09.2024 and was reduced to 2% from 01.10.2024 by the Finance Act, 2024. The tax must be deducted in the last month of the previous year (March 2025). Total rent paid in F.Y. 2024-25: - April to Sept: `75,000 \times 6 = 4,50,000` - Oct to March: `1,00,000 \times 6 = 6,00,000` Total = `10,50,000`. The TDS to be deducted from the rent of March 2025 is calculated at the rate of 2% on the cumulative rent: TDS = `10,50,000 \times 2\% = 21,000`.

Key Concepts to Understand

Consideration

Something of value exchanged for a promise. 'Quid Pro Quo' (Something for something).

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