TMI Blog2008 (11) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... roprietor of that business. Through that business concern, the applicant sells jewellery in local market as well as by export, mostly to Singapore. The applicant has established a Company in Singapore under the name of Mustafa Pte. Ltd. and he holds bulk of shares therein. He is also Managing Director of another Company by name Md. Mustafa and Samsuddin Company Pte. Ltd., Singapore. Apart from the proprietory business of dealing in gold jewellery, the applicant is engaged in the activity of purchasing gold ornaments and exporting the same. Moreover, the applicant purchases gold for the purpose of conversion into jewellery and exports the said jewellery. The applicant submits that the activities of purchase of gold/gold ornaments for export are unrelated to the sole proprietory business carried on by him at Chennai. He states that he maintains separate accounts for his proprietory business and in regard to the purchases meant for export. The applicant submits that in terms of clause (b) of Explanation (1) to Section 9(1) of the Income Tax Act, 1961*, no income shall be deemed to accrue or arise in India from his operations confined to the purchase of gold/gold ornaments in India fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax has to be first tested on the anvil of 'accrual' because receipt follows accrual. Section 5(2)(b) renders liable to tax the income that accrues or is deemed to accrue in India or the income received or deemed to be received in India. Once the accrual is ruled out by applying Explanation 1(b) to Section 9(1), no liability can be fastened on the non-resident by reason of the receipt of income in India on account of exports. Accordingly, no income can be deemed to have accrued to the applicant on account of purchase of gold and export of the same either in the same form or in the form of jewellery. By reason of exporting, the applicant does not forfeit the claim for exclusion under Explanation 1(b) because the said clause itself contemplates the purchase of goods for export. Once the income gets excluded from the ambit of accrual as per Explanation 1(b), it cannot be subjected to tax when it is actually received in India at a later stage. Section 5(2) is subject to the other provisions of the Act and therefore Explanation 1(b) of Section 9 should be given full effect, notwithstanding what is contained in Section 5(2)(b). Explanation 1(b) is a beneficial provision intended to encou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of export, 'sales realization' has been recognized in the accounts on the basis of invoices raised. Under RBI regulations, no export bill can be allowed unrealized without prior permission of the RBI. It is also pointed out that the applicant claimed exemption under section 5 of CST Act on the ground of export sales. In view of these undisputed facts, it is contended by the Revenue that the provisions of section 5(2) are clearly attracted and it is not a case of deemed accrual. 7. Two crucial provisions of the Act which we have to consider are section 5(2) and section 9(1)(i) together with its explanation. They are extracted below: Section 5. Scope of total income (1) xx xx xx xx xx (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1:- Income accruing or arising outside Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source of income in India and (d) transfer of capital asset in India. 9. Analysis of Explanation 1 to S.9(1)(i) In order to understand the Explanation 1 to Section 9(1)(i) in proper perspective, it will be apposite to make a brief reference to the legislative history and background in which clause (b) of Explanation (1) was enacted. The relevant Section in the 1922 Act was Section 42 which bears the heading "income deemed to accrue or arise within the taxable territories". Section 9(1)(i) of the present Act broadly corresponds to Section 42(1) of the old Act without its provisos. Clause (a) of Explanation (1) to Section 9 is similar to Section 42(3) of the old Act. A provision similar to Clause (b) of Explanation (1) with which we are more concerned was not there in the old Act. 10. There were decisions to the effect that even if the operations in British India were confined to purchase of goods, a portion of the profits can be reasonably attributed to such acts of purchase under Section 42(3). In the case of Anglo French Textile Co. vs. CIT decided by the Supreme Court (1953) 23 ITR 101), two questions arose: (i) Is mere purchase of raw material an 'operation' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is that no income is deemed to accrue in India to a non-resident through or from operations confined to the purchase of goods in India for export even if the purchases are made through a regular agency established in India for that purpose". 12. The extent to which the consequent tax liability is negated will be discussed later. (vide para 13 ) One point to be mentioned at this juncture is that originally, there was a proviso to cl.(b) of Explanation 1 in the 1961 Act which laid down that the non-residents should have no office or agency in India for carrying out the operations of purchase and secondly the goods should not be subjected to any manufacturing process before being exported from India. This proviso was omitted by the Finance Act 1964 with a view to give wider relief to the non-resident exporters who purchase goods in India. 13. Ambit and applicability of Expl 1(b) of Sec 9(1)(i) What is the true scope and import of clause (b) of Explanation 1 and how far the applicant can take recourse to it are the questions which need to be addressed at this stage. There are three Explanations to section 9(1). We are directly concerned with clause (b) of Explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantially enure to the benefit of those non-residents who purchase the goods in India through a business connection, export them to self and then sell those goods in a foreign country because in such a case, no other income triggering activity, apart from purchase and carrying them to a foreign destination, takes place. The net result is, if the case of the applicant falls under the deeming provision contained in section 9(1)(i), the applicant has the limited right to insist that by reason of purchase operations in India, no part of income can be attributed to him under the said deeming provision. One cannot get out of the net of taxation altogether, by invoking Explanation 1(b). The proposition advocated by the applicant's counsel that Explanation 1(b) excludes the income that has otherwise accrued to the applicant from the ambit of section 5(2)(b) and section 9(1)(i) cannot therefore be accepted. Explanation 1(b), as explained earlier, does not lead to that result. So much we have said, testing the case of the applicant from the standpoint of Section 9 dehors the provisions of Section 5(2). Now, let us approach the question from the standpoint of Section 5(2) and let u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of Section 42 (I) would apply and such income, profits and gains should be dealt with as income, profits and gains deemed to accrue or arise in India and consequently the inclusion of such income, profits and gains in the total income should be under Section 4 (I) (c) for the Association is non-resident . Mr. Mitra urges that the charging under Section 3 is to be "in accordance with and subject to the provisions of this Act." Likewise, section 4(I) is also "subject to the provisions of this Act". This, according to Mr. Mitra at once attracts Section 42 and such income, profit and gains being within Section 42 must be included in Section 4 (I)(c) and the other alternative, i.e., Section 4(I)(a), is no longer applicable. In other words, according to Mr. Mitra's contention, section 4(1)(a) becomes a dead letter so far as income, profits and gains arising or accruing to a non-resident are concerned. We are unable to accede to this contention. Section 42 only speaks of deemed income. The whole object of that section is to make certain income, profits and gains to be deemed to arise in India so as to bring them to charge. The receipt of the income, profits and gains being o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be applied. In this context, the learned judges referred to CIT, Bombay vs. Ahmedbhai Umarbhai Co., and observed, thus: "The above passage is also sufficient in our opinion to establish that the apportionment of income, profits or gains between those arising from business operations carried on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of Section 42 (3) of the Act but on general principles of apportionment of income, profits or gains. That was really the ratio of the judgment of the majority in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai Co., Bombay." We shall now refer to the decision of the Supreme Court in Performing Right Society LTD. vs. CIT (106 ITR 11), in which the question of accrual of income was considered from the standpoint of the charging provisions of the present Act. The argument on behalf of the assessee was that any income for the purpose of section 5(2)(b) relating to a non-resident must be income as could be found in section 9(1)(i). Before any liability can be fixed by virtue of section 9(1)(i), it must be an income accruing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt based on the opening phrase "subject to the provisions of this Act" was rejected by the learned judges. Moreover, this decision was approvingly referred to by the Supreme Court in Turner Morris (supra). The first question set out in Hira Mills case was: "(1) Whether, on the facts of the case, the profits and gains derived from sales made at Cawnpore by the assessee`s salesman of the goods manufactured by the assessee at Ujjain outside British India were rightly held to accrue or arise to the assessee in British India within the meaning of Section 4(1) (c) or received in British India by or on behalf of the assessee within the meaning of Section 4(1) (a) of the Indian Income-tax (Amendment) Act, 1939?" Section 5(2) of the present Act corresponds to section 4(1) of the 1922 Act. The discussion is found in the following passage: "We think that this question is most easily disposed of on the ground, which has been noted by the Tribunal, that the profits and gains in question were actually received by or on behalf of the assessee in British India and are, therefore, assessable under Section 4(1) (a) of the Act. That the gross profits indeed, the gross sale proceeds, were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d] The dicta and observations in the said decisions fully support the Revenue's stand that if the income primarily falls under Section 5(2), the resort to Section 9 is impermissible. Apart from what was laid down in those cases, we would like to further clarify that the expression "subject to the provisions of this Act" occurring in section 5(2) does not lead to the conclusion that the charging provision in section 5(2) is controlled by another charging provision in section 9(1). What all the phrase conveys is that the total income of a non-resident from whatever source derived on account of (a) actual receipt or deemed receipt in India, (b) accrual or deemed accrual in India shall be computed and worked out in accordance with other provisions of the Act. In fact, the expression "subject to the provisions of this Act" occurring in section 5(2) will have to be projected into section 9 also so that the deemed income will also be computed in conformity with the other provisions of the Act. Section 5(2) and section 9(1) shall be read harmoniously so that the charge under both the provisions could be effectively enforced. The clash between the two provisions ought not to be create ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re recording our answers to the questions framed we may mention that after the matter was partly heard, the applicant raised a contention based on the non-discrimination clause embodied in Art.26 of the Treaty. The applicant submits that a similar benefit as available to a resident under Sec.80 HHC ought to be extended to a non-resident as well. Section 80 HHC was in force till the assessment year 2005-06. The learned counsel for the applicant pointed out that the claim of the applicant for deduction under Sec.80 HHC of the Act in respect of the proceeds from the exported jewellery was being allowed by the assessing officer. However, the Commissioner initiated revision proceedings for the year 2004-05 in order to withdraw the relief. We are not inclined to decide this question raised at the fag end of the hearing, more so when the revision proceedings under Sec.263 of the Act are pending before the CIT. However, it is made clear that we are not expressing any view on the merits of such contention and it is open to the applicant to raise that point before the appropriate forum. RULING 21. In the result, the three questions framed are answered as follows :- The income deriv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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