IT Act 2025
(Section 306) 3.—Representative assesses—Special cases
IT Act 2025
(Section 306)
3.—Representative assesses—Special cases
Who may be regarded as agent.
306. (1) For the purposes of this Act, “agent”, in relation to a non-resident, includes––
(a) any person in India—
(i) who is employed by or on behalf of the non-resident; or
(ii) who has any business connection with the non-resident; or
(iii) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or
(iv) who is the trustee of the non-resident;
(b) any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India.
(2) A broker in India who, in respect of any transactions, does not deal directly with or on behalf of a non-resident principal but deals with or through a non-resident broker shall not be deemed to be an agent under this section in respect of such transactions, if the following conditions are fulfilled:—
(a) the transactions are carried on in the ordinary course of business through the first-mentioned broker; and
(b) the non-resident broker is carrying on such transactions in the ordinary course of his business and not as a principal.
(3) A person shall not be treated as the agent of a non-resident unless he has had an opportunity of being heard by the Assessing Officer as to his liability to be treated as such.
(4) For the purposes of this section, “business connection” shall have the meaning assigned to it in section 9(9)(a).
Analysis
Section 306 – Who May Be Regarded as Agent
1. Objective of Section 306: The key purpose of Section 306 is to:
i. Identify persons in India who can be treated as an agent of a non-resident.
Enable the tax authorities to recover tax from such agents when the non-resident earns income from India but does not have a direct presence here.
Support effective implementation of the representative assessee framework under Sections 303 and 304.
This ensures that non-resident income does not escape taxation due to geographical barriers.
2. Sub-section (1): Definition of “Agent”: Section 306(1) uses inclusive language, meaning it covers all mentioned cases and can extend to similar circumstances.
(i) Clause (a): Persons in India: A person in India can be treated as an agent if they satisfy any one of the following conditions:
Sub-clause Who is Included Practical Example
(i) Employed by or on behalf of the non-resident. An Indian company managing the non-resident’s business operations in India
(ii) Has any business connection with A supplier who regularly executes
the non-resident. orders for a foreign entity.
(iii) From or through whom the non-resident An Indian distributor collecting
is receiving income, directly or indirectly. royalties on behalf of a foreign software company.
(iv) Trustee of the non-resident. A trust holding investments in India
on behalf of an overseas individual.
(ii) Clause (b): Acquirer of Capital Asset in India
i. Any person, whether resident or non-resident, who has acquired a capital asset in India by transfer from a non-resident can also be treated as an agent.
ii. This ensures tax collection on capital gains arising from property transfers involving non-residents.
3. Sub-section (2): Exemption for Certain Brokers: This sub-section protects intermediaries like brokers from being unnecessarily classified as agents.
Conditions for exemption:
(i) The Indian broker must not deal directly with or on behalf of the non-resident principal.
ii) The transactions must be carried out:
(i) In the ordinary course of business, and
Through a non-resident broker who is also operating in the ordinary course of his business and not acting as a principal.
(iii) Example: An Indian stockbroker dealing with a foreign broker (not directly with a foreign investor) will not be treated as an agent, provided both act in the ordinary course of their brokerage businesses.
4. Sub-section (3): Natural Justice Principle:
“A person shall not be treated as the agent of a non-resident unless he has had an opportunity of being heard by the Assessing Officer as to his liability to be treated as such.”
(i) Before officially designating someone as an agent, the Assessing Officer (AO) must:
i. Give notice, and
ii. Provide an opportunity to present their case.
(ii) This safeguards against arbitrary actions and upholds principles of natural justice.
5. Sub-section (4): Definition of Business Connection:
“For the purposes of this section, ‘business connection’ shall have the meaning assigned to it in section 9(9)(a).”
(i) This links Section 306 to Section 9, which defines business connection, including Significant Economic Presence (SEP).
(ii) The scope covers both:
i. Physical presence-based activities, and
ii. Digital/online business presence.
This is crucial for taxing e-commerce operators and digital businesses that engage Indian customers without a physical presence in India.
6. Implications for Taxpayers:
Type of Taxpayer Implication
Non-resident Must carefully identify potential agents in India to avoid unintended tax liabilities.
Indian business partners Could be treated as agents even without explicit agreements, if they meet conditions of Section 306(1).
Indian brokers Protected if they act only as intermediaries and satisfy conditions in sub-section (2).
7. Role of Assessing Officer (AO):
AO Duty Explanation
Identification of agent Verify the relationship and nature of transactions between the non-resident and the Indian party.
Due process Issue notice and provide hearing opportunity before declaring someone as an agent.
Enforcement Once confirmed, issue assessment orders in the name of the agent under Section 304 and recover taxes.
8. Practical Examples:
(i) Royalty Income
A foreign company licenses software to Indian customers.
(i) Indian distributor collecting payments can be treated as an agent under Section 306(1)(a)(iii).
(ii) Capital Gains
(i) A non-resident sells immovable property in India to another non-resident.
(ii) The buyer becomes an agent under Section 306(1)(b) and must ensure capital gains tax compliance.
(iii) Stockbroker Scenario
i. An Indian broker routes trades through a foreign broker acting independently.
ii. Indian broker is not an agent if all conditions in sub-section (2) are satisfied.
9. Relationship with Other Sections:
Related Section Connection to Section 306
Section 303 Identifies representative assessee, where an agent under Section 306 is included for non residents.
Section 304 Specifies liabilities and assessment procedures for the agent once designated.
Section 305 Provides the agent the right to recover taxes paid from the non-resident.
Section 9(9)(a) Defines “business connection,” a key criterion in determining agency.
10. Safeguards for Agents:
Agents have the right to contest their designation before the AO under sub-section (3).
They can recover taxes paid from the non-resident under Section 305, ensuring they are not personally burdened.
11. Summary Table:
Sub-section Essence Key Takeaway
(1) Defines categories of agents for non-residents. Broad coverage to prevent tax evasion.
(2) Exempts certain brokers from being treated as agents. Protects genuine intermediaries.
(3) Requires AO to provide a hearing before Upholds natural justice.
declaring someone as an agent.
(4) Refers to Section 9 for the meaning of Links to SEP and digital taxation.
business connection.
12. Conclusion: Section 306 creates a clear, enforceable mechanism to identify and hold responsible individuals or entities in India for the tax obligations of non-residents.
It ensures effective tax collection, especially in cross-border transactions, while also safeguarding the rights of intermediaries and agents through procedural fairness.
For taxpayers, it highlights the importance of transparency in structuring business connections with non-residents.
For Assessing Officers, it provides a powerful tool for enforcement, particularly in today’s era of global digital businesses