Q: An Indian company had been sued in the US.The suit has now been settled out of court.The Indian company is liable to pay a substantial amount as compensation to the American party.Would the Indian company be liable to deduct tax at source and pay only the balance amount to the American company?

- S.R. Singh Doha

A: The Indian company is liable to deduct tax at source only if it is required to pay an amount which is in the nature of income liable to tax in the hands of the foreign company.Therefore the issue to be considered is whether the compensation paid under the settlement is income in nature.According to a recent ruling given by the Authority for Advance Rulings (AAR) tax would be deductible at source only if the settlement amount is linked with the income-generating apparatus. If the payment is made in consideration for surrendering the 'right to sue' such payment would not be treated as income in nature.Such amount would be a capital receipt which would fall outside the ambit of income tax.According to the AAR the 'right to sue' is a capital asset.However it is not a transferable right under Indian law.Hence the amount would not be taxable even as capital gain.In such a case no tax would be deductible at source.

Q: Many Indian companies are sending their employees for overseas employment.Would the Indian companies be liable to contribute to social security in the foreign countries where the employees are sent?If so it would increase the burden on Indian companies as social security contributions in foreign countries are quite hefty.Would the contribution be deductible from the employee's taxable income?

- C.K. Rodrigues Dubai

A: The Indian government has signed social security agreements with several foreign countries. Under these agreements the Indian government has obtained exemption from contribution towards social security in foreign countries for Indian employees who are working there.However the exemption is available under the agreement only if contribution is made to social security in India for which a certificate of coverage has to be obtained from the Employees' Provident Fund Organisation (EPFO).

The EPFO has clarified that provident fund contributions should be deducted by the Indian employer and deposited with the EPFO when the salary is actually paid or payable.Further the provident fund compliances should continue during the period of assignment and it should remain the same as it was at the start of the overseas assignment.If the salary of an employee is not taxable in India as he has become a non-resident the provident fund contribution made to EPFO would not be deductible under section 80-C of the Income-tax Act as the Indian employee would not have any gross total income chargeable to tax in India.

Q: An Indian company wishes to start a business overseas.Can it buy property in such foreign country for the purpose of its business?If part of such property is let out would the rental income be taxed in India?

- K.P. Mehra Dubai

A: Under the Foreign Exchange Management Act regulations Indian companies can purchase properties outside India for its overseas offices.They can also buy residential properties outside India for providing accommodation to its employees. However the remittances for such purchase are subject to certain limits.The initial amount for purchase cannot exceed 15 per cent of the average annual income or turnover of the Indian company during the last two financial years or cannot exceed 25 per cent of the net worth whichever is higher.For recurring expenses the remittance limit is 10 per cent of the average annual income or turnover during the last two financial years. The property can partially be let out with the permission of the Reserve Bank of India.Such income would be liable to tax in India because it is earned by a company which is incorporated in India.If the income is taxable under the head 'Income from House Property' municipal taxes would be deductible.Further 30 per cent of the rent earned would be eligible for deduction under section 24 of the Income-tax Act.

Q: When I left India there were stringent regulations for Indians who wished to open foreign bank accounts.I am now told that these are greatly diluted.Are resident Indians freely allowed to open and operate bank accounts outside India? Will such person be liable to disclose to the tax authorities in India in his return of income that such accounts have been opened?

- L.K. Goswami Sharjah

A: An Indian citizen who is resident in India now has the freedom to open a foreign bank account.He is free to remit from India an amount equivalent to $250000 in every financial year.This is done under the Liberalised Remittance Scheme.The remittance can only be made through his bank account and the funds can be utilised for any purpose including buying of shares securities immovable properties etc.The income earned from all these assets including capital gains would be taxable in India. A person who goes abroad for studies can also open a foreign bank account.A person who goes abroad to participate in an exhibition or trade fair is also permitted to open a bank account in a foreign country.If a person is visiting a foreign country he can open a bank account in that country without any prior approval of the Reserve Bank.However on his return to India he is required to close such bank account and repatriate the balance funds to India.

The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policies.