Many countries including India have formulated their tax laws at a time when cross-border trade was much lower and simpler in comparison to transactions discussed above. Typically, theintent was to cast the net in the widest possible way and tax is levied on any transaction which has even the remotest of connection to India or Indian residents. To take an example, any payment on account of royalty made by a resident of India to a non-resident would be taxed in India unless the royalty is used for a business or purpose outside India. In other words, the Indian resident could have gone outside India, bought some know-how and paid the amount abroad. Such amount would be subject to tax in India though the seller having no idea as to the final use of the royalty. Such examples can be multiplied. Certainly, tax treaties have sought to considerably lessen the impact of such wide provisions. However, unless the parties concerned are really aware of such broad provisions of the Indian tax law, they may come to grief.

A classic example of this, which may provide amusement to some of us, can be seen in a recent decision of the Authority for Advance Rulings ((see P. No 19 of 1995 (1999) 238 ITR610(AAR)). In this case, the facts are simple but for a small twist which, actually, represents just one of the typical complications that arise out of globalised transactions as described above. The applicant assessee was a private limited company incorporated in UK and fully managed in that country. It was in the process of acquiring a number of residential apartments in the UK for the purpose of running an apartment renting agency for Indian businessmen and tourists visiting that country. In other words, Indian businessman visiting UK would be using the facility of such apartments there. However, for purposes, apparently of convenience, the collection of such rent was sought to be made in India. Note, once again, the facts. The company collecting the rent was located and managed in UK, the apartments were in UK and the apartments were used in UK. The only link with India was that the rent was collected in India. The question was whether such rent could be taxed in India?

To answer this question, onewould have to go back to the basic principles of tax law in India. The law states that any income received by any person in India will be taxed in India. Similarly, any income arising or accruing in India will also be taxed in India. Thus, even if the money is received in India for purposes of convenience or for any other reason, such receipt would result in levy of tax in India. An employee working or staying abroad may make the mistake of requesting his employer that a certain percentage of his salary may be directly paid to his family in India. The result may be that the portion of salary received in India may be subject to Indian tax.Not surprisingly, therefore, the answer of the Authority for Advance Rulings in the case described above was that the rent that was merely received in India would be subject of tax in India. The applicant company tried to impress upon the authority that the collection of rent in India leads to substantial savings of foreign exchange since otherwise the businessmen would haveto pay the amount in foreign exchange in UK. However, and, it is respectfully submitted, rightly so, the authority stated that this argument had no legal support in terms of exempting the receipt from taxation in India.

Thus, a company such as one described above would then have to either not grant such facility to the Indian businessmen to pay the money in Indian currency in India or simply not provide such services to Indian businessmen. In either case, not only the applicant company would suffer, but the Indian businessmen and consequently India would also stand to lose.

It may so happen that by structuring such transactions in a slightly different way, the Indian tax would be avoided. Clearly, nevertheless, the tax laws need to be amended with a fresh look so that the tax laws further, but do not hinder global trade. Till that time, Indian and foreign enterprises will have to be conscious of such provisions and structure their transactions accordingly.

The author is a Mumbai-based charteredaccountant