The quantum of revenue accruing to a taxpayer in India can be attributed to activities carried out in India and shall be derived at on the basis of FAR Analysis

[Vivek Jalan]

Explanation 1(a) under clause (1) of Sub-Section (1) of Section 9 of the Income Tax Act, reads 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 other than the business having business connection in India on account of significant economic presence 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."

Consider a case where service is provided by an offshore computer, where majority of work is done by the offshore computer and only miniscule work is done by the local Computer in India. For example, a reservation system installed in Spain and having distribution points in India. In this case the would be considered that the distribution network constituted Permanent Establishment (PE) in two forms, namely, fixed place PE and dependent agent PE (DAPE).

However, it was held by The Hon’ble Supreme Court that the quantum of revenue accruing to the taxpayer in respect of bookings in India which can be attributed to activities carried out in India shall be derived at on the basis of FAR analysis (Functions performed, assets used, and risks undertaken). The Commission paid to the distribution agents would obviously be deducted even if it was more than amount of attribution.

On the contrary it can be argued that as per Article 7 of DTAA The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. However, the above Article may not really sail through for the reason that in the contracting state, the entire income derived by the assessee will be taxable. This is why Section 9(1) confines the taxable income to that proportion which is attributable to the operations carried out in India as was held in the case of AMADEUS IT GROUP SA VAISH ASSOCIATES, NEW DELHI VERSUS ACIT, CIRCLE 1 (1) (1) , INTT. TAXATION CIVIC CENTER, NEW DELHI - 2023 (10) TMI 1138 - ITAT DELHI