TMI Blog2009 (7) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... with the proposed transactions with the non-resident Company by name Zaikog Trading Co. Zaikog Trading Co. (hereafter referred to as 'Zaikog') is a company incorporated in the Republic of South Africa and it is in the business of promotion and distribution of various products. Zaikog has offered its services to promote and market the product known as 'Imida Chloprid formulation for termite control'. For the services rendered by it, Zaikog will receive from the applicant a commission of 3% or a mutually agreed percentage on every completed transaction. In the application, it is broadly stated that the role of Zaikog is to communicate the details of the interested parties to the applicant who will pursue the proposal for confirmed orders. Such confirmed orders will be executed directly by the applicant. The sale consideration will be received in India by the applicant. The amount of commission payable to Zaikog is paid from India by the applicant. The applicant submits that Zaikog renders all services outside India i.e., in South Africa and no services of whatsoever nature are performed in India and Zaikog does not maintain any establishment in India. As the income received by Zaikog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanent establishment in India? 3. On the facts and circumstances of the case whether the amounts paid by the applicant to Zaikog would be taxable as fees for technical services under the Income Tax Act? 4. On the facts and circumstances of the case whether there is any liability for Zaikog to file a return of income in India? 5. The concerned Commissioner, without furnishing the comments on merits has taken the following stand in his communication dated 22nd April, 2009. "The Assessing Officer has conducted enquiries and found that the company was incorporated on 29.03.2008 and that the return of income for the first year of operation upto 31.3.2009 relevant to the Asst. Year 2009-10 is due on 30.09.2009 which is yet to be filed by the assessee. In the absence of return of income, we are not in a position to send the comments/records called for in the above case." 6. The learned counsel for the applicant contends that the payments made to Zaikog towards commission for services rendered by it abroad are not liable to be taxed in India either going by the provisions of the Income-tax Act or the Double Taxation Avoidance Agreement (DTAA) between India and South Africa. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment." 8.1 Thus, the profits received by Zaikog in South Africa on account of commission received can be taxed only in South Africa based on the principle of tax residency. The exception is carved out in a case where the enterprise carries on business through a permanent establishment situated in the other country. If such PE exists, only such part of the profits as are attributable to the PE can be taxed by the contracting state in which the PE is located. The expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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;" 9.1 Explanation 2 contains an inclusive definition of business connection but it applies only to a business activity carried out through a person acting on behalf of a non-resident. That situation does not exist here. 9.2 Relying on the decision of the Supreme Court in CIT Punjab vs. RD Aggarwal Co. and CIT, Kolkata vs. T.I. and M. Sales Ltd., it is contended that Zaikog has no business connection in India. In the latter case (TI and M Sales Ltd.). It was observed thus : "The position, therefore, is that in a case like this, there can be no business connection unless the Indian assessee has the authority to accept offers or enter into contracts on behalf of the non-residents". It is pointed out by the learned counsel with considerable force that the above enunciation of law applies a fortiori to the instant case. Irrespective of the existence or otherwise of the business connection, the Explanation fully suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT vs. R.D.Aggarwal and Co. [1965] 56 ITR 20 (SC)." It was then observed: "In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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