TMI Blog2011 (7) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... even if a non-resident has a business connection in India, no part of income of such business can be deemed to have accrued or arisen in India - Held that: onclusion is also in harmony with the conclusions arrived at by a Coordinate Bench in assessee's own case for the assessment years 2002-03 to 2005-06, reported in Dy. DIT v. Star Cruises India Travel Services (P.) Ltd. [2010] 39 SOT 18 (Mum.) - Appeal is dismissed - IT APPEAL NO. 3941 (MUM.) OF 2010 - - - Dated:- 22-7-2011 - PRAMOD KUMAR, VIJAY PAL RAO, JJ. C.G.K. Nair for the Appellant. Dr. K. Shivram for the Respondent. ORDER Pramod Kumar, Accountant Member. By way of this appeal, the Assessing Officer has challenged correctness of CIT(A)'s order dated 24-2-2010, in the matter of ascertainment of tax withholding liability under section 195 read with section 201 of the Income-tax Act, 1961, for the assessment year 2006-07, on the following ground : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that tax is not deductible at source under section 195 of the Act, on payments made to Star Cruise Management Limited, Isle of Man, out of sale proceeds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies from time to time. (ii) To and remit monies received from PSAs for cruse packages, shore excursions promoted by SCML in India. (iii) To keep SCML advised on all relevant laws and regulations and operating criteria relating to the sale of tickets with particular reference to consumer and contract legislation. (iv) To treat as confidential all books, documents and information received from SCML and to return the same upon demand; and (v) To keep and render to SCML fair and accurate accounts of any dealings or of all monies received by SCITS from PSAs in relations to sale, booking, confirmation for and on behalf of SCML and to pay over to SCML all monies so received from PSAs without any deductions except as may be agreed upon or authorized between SCML and SCITS." 4. In consideration of services so rendered, the Star Isle of Man was to pay 3 per cent of net cruise charges, remitted by the Star India, as retainer fees. The other obligations of Star Isle of Man, as set out in the canvasser agreement, are as follows: "3.1 SCML shall provide and supply SCITS with promotional information and details of the programme and itineraries in respect of the cruise vesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. Having thus held the taxability of Star Isle of Man's income on sale of cruise passage in India, the Assessing Officer proceeded to determine, based on certain assumptions which we need not deal with at this stage, the quantum of income taxable in India at 5 per cent of the net cruise charges. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) held that "in the present cases, services rendered by the assessee are general in nature and that cannot be interpreted to give colour of business connections as contemplated under section 9(1)(i) of the Act". Accordingly, it was concluded that Star Isle of Man had no tax liability in India, and, therefore, the assessee could not be faulted for not deducting tax at source from cruise passage remittances made to Star Isle of Man. The impugned tax liability was thus quashed. The Assessing Officer is not satisfied by the relief so granted by the Commissioner (Appeals) and is in appeal before us. 7. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 8. Let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nection in India. 10. Section 9(1)(i), as it stood at the relevant point of time, is as follows: "9. Income Deemed to Accrue or Arise In India. (1) The following incomes shall be deemed to accrue or arise in India: (i) All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India; Explanation 1 For the purposes of this clause (a) In the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) In the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; (c) In the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business." 11. A plain reading of the above statutory provisions makes it clear that any income directly or indirectly accruing or arising to a non-resident, through or from any 'business connection' in India, is in principle taxable in India. Even as the legal provision throws some light on what will, and what will not, constitute business connection, the precise connotations and scope of 'business connection' remains to be neatly defined. However, one important principle which is clearly discernible from the statutory provision is that even when there is a business con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess connection or not is a wholly academic question - unless, of course, the very fact of such agent having been compensated fairly or at an arm's length for the work done for the non-resident is under challenge. A non-resident's tax liability under section 9(1)(i) read with section 5(2)(b) cannot come into play in a situation in which a sales agency - dependent or independent, which constitutes his 'business connection' in India, is paid a fair and arms-length remuneration for the services rendered by him, or operations carried out by him. What is perceived as Star Isle of Man's business connection in India is Star India, but given this situation it is wholly immaterial as to whether or not Star India indeed constitutes Star Isle of Man's business connection in India. Viewed from this perspective, the very foundation of the case made out by the Assessing Officer is thus devoid of legally sustainable basis, and the CIT(A) was quite justified in holding that no taxability can be imposed on the Star Isle of Man by the virtue of section 9(1)(i) read with section 5(2)(b). However, give the factual matrix of this case in which the matter is already covered by Hon'ble High Court's judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by setting out, under section 314(183), a rather exhaustive definition of 'permanent establishment' as a fixed place of business through which business of the non-resident is wholly or partly carried out. When a non-resident has a place of business, through which his business is wholly or partly carried out, the income of business so carried out has to be treated as 'accruing or arising' in India, and its taxability is not to depend upon a deeming fiction as 'business connection' envisages. The deeming fiction of 'business connection', in this view of the matter, does not really enlarge the scope of non-resident's taxability in India, but ends up substituting for, in a limited and somewhat ambiguous way though, the PE profit allocation rules under the domestic law. 13. While dealing with the concept of business connection under the legal position as it stands now, it is useful to also take note of the concept of 'business connection' as set out in the Income-tax Act, 1922 and in the context of which several landmark judicial precedents, including in the cases of R.D. Aggarwal Co. (supra) and Anglo French Textile Co. Ltd. (supra) which have been relied upon by the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... British India, may be liable to tax under the combined operation of sections 3, 4 and 42; that is to say, a non-resident may be liable to tax in respect of sources of income, which would not be liable to tax in the case of a resident. The proposition is no doubt a somewhat startling one, but it is desirable that decisions of Courts in India under the Income-tax Act should be uniform as far as practicable, and I think we ought to follow these two cases without pausing to inquire whether we should ourselves have arrived at the same conclusion " CIT v. National Mutual Life Association of Australasia [1933] 1 ITR 350 (Bom.) 15. It is thus clear that under the scheme of the domestic law, as it then stood; a mere business connection was enough to attract taxability of a business subject, i.e., business itself. The quantum of taxability was then determined on the basis of the provisions of the domestic law i.e., percentage of turnover, proportion of profits or such other residual method as the Assessing Officer may adopt. These apparently harsh provisions resulted in situations, as was noted by Hon'ble Bombay High Court in the observations extracted above, that what was not even taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at this stage briefly deal with a very illuminating judgment of Hon'ble Supreme Court which deserves to be noted as much for its binding nature as much for a very erudite and pragmatic analysis of the concept of 'business connection' in the light of commercial realities. In this judgment, i.e. R.D. Aggarwal's case (supra), Hon'ble Supreme Court had an occasion to deal with a situation in which the assessee was carrying on the business as commission agents for two non-resident exporters of worsted woollen yarn. The question which came up for consideration of Hon'ble Supreme Court was whether the non-resident exporters could be said to have business connection in India, on account of their sale agency arrangements with the Indian concern, and, whether, on that basis, a part of income of the non-resident exporters could be brought to tax in India. Their Lordships took note of the fact that the assessee was not an agent of the non-resident inasmuch as assessee merely communicates the orders canvassed by them to the non-residents for acceptance, and final decision to accept or not to accept the order rests with the principals. Their Lordships noted that that "the only question that fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expression 'business connection' does not cover, in its scope, mere canvassing for business by an agent in India as is the situation that we are in seisin of in this case. Their Lordships also observed that the expression 'business connection' postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity" which suggested that the business operations carried out outside taxable territories and inside taxable territories must have such a relationship as to contribute to business operations as a whole. It suggested greater nexus of the core business operations. Considering that this decision, though delivered in 1964 i.e. after Indian Income-tax Act, 1961 came into effect, was dealing with the provisions in Indian Income-tax Act, 1922, it marked quite a paradigm shift in judicial perceptions about the concept of business connection. As a matter of fact, as we have noted above, this is a decision in which Hon'ble Supreme Court has in a way indicated a greater nexus of operation in taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissions arose in India the when the foreign concerns, undertakings and government departments participated in the IFOWS. Therefore, the AAR considered that the agent's income accrued from a business connection in India (cf. IN. AAR 3July, 2006, Rajiv Malhotra, AAR/671/2005)." 20. However, the observations so made by Prof. Lang, and the ruling rendered by Authority for Advance Ruling in the case of Rajiv Malhotra (284 ITR 564), did not have the benefit of examining the impact of Explanation 1(a) to section 9(1)(i) of the Act. As a matter of fact, in Rajiv Malhotra, In re [2006] 155 Taxman 101 (AAR - New Delhi), the Authority for Advance Ruling does observe that "the facts that the agent renders services abroad in the form of pursuing and soliciting the participants and that the commission is remitted to him abroad are wholly irrelevant for the purpose of determining the situs of his income" but then this observation overlooks the fact that in terms of Explanation 1(a) to section 9(1)(i), "in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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