Section 93 of ITA, 1961 : Section 93: Avoidance Of Income-Tax By Transactions Resulting In Transfer Of Income To Non- Residents

Explanation using Example

Imagine a scenario where an Indian company (Company A) decides to transfer some of its assets to a subsidiary company (Company B) incorporated in a country with lower tax rates. The assets transferred are intellectual property rights that generate significant royalties. Due to the transfer, the royalties, which are income, now become payable to Company B, the non-resident entity.

Under Section 93 of The Income-tax Act, 1961:

• If Company A, through this transfer, acquires rights that enable it to enjoy the income from the royalties at some point in the future, this income will be deemed to be income of Company A for tax purposes, even though the royalties are paid to Company B.
• If Company A receives any capital sum connected with the transfer, like a lump sum payment for the intellectual property, the income from the royalties (now accruing to Company B) will still be considered as income of Company A for tax purposes.

The law is designed to prevent tax avoidance by ensuring that income payable to non-residents, as a result of asset transfers designed to exploit lower tax rates abroad, is taxed as if it were income of the transferor resident in India.

However, if Company A can prove to the tax authorities that the transfer was for genuine commercial reasons and not for tax avoidance, then Section 93 would not apply.