INCOME BY VIRTUE OF BUSINESS CONNECTION Flashcards
Income by virtue of Business Connection
In cases where all the operations or activities of a business are not carried on in India but a part of them arise by virtue of the business connection in India, the income which is deemed to accrue or arise in India, should be
taken to be only that part which could reasonably by attributed to the operations carried on in India. Rule 10 of the Income-tax Rules contains the basis on which the income attributable to the operations carried out in India could be deemed to accrue or arise in India.
However, where a substantial part of a non-residents output is sold in the Indian market through brokers to various customers in India, or mere rendering of services outside India to a person carrying on business in India
does not amount to a business connection in India.
Similarly, where an Indian exporter selling goods through non-resident selling agents, receives sale price in India, credits commission on sales to non-resident agents in his books of account and remits the amount to them
later, such commission to non-residents is neither received or deemed to be received in India nor deemed to accrue or arise in India [C.I.T. v. Toshoku Ltd. (1980) 125 ITR p. 525 (S.C.)].
Permanent establishment- Article 5 DTAA
- For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
- An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm’s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.
The expression business connection includes:
(i) the maintenance of a branch office, factory, agency, receivership, management or other establishment
for the purchase or sale of goods or for transacting any other business;
(ii) the erection of a factory where the raw products purchased locally are processed or converted into some form suitable for export outside India;
(iii) appointing an agent or agents in India for the systematic and regular purchase of raw materials or other commodities or for the sale of the non-resident’s goods, or for any other purpose;
(iv) the formation of a close financial association between a resident and a non-resident company which may or may not be related to one another as a holding and subsidiary company;
(v) the formation of a subsidiary company to sell or otherwise deal with the products of the non-resident parent company;
(vi) the grant of a continuing license to a non-resident for the purpose of exploitation for profit of an asset belonging to the non-resident;
(vii) any business activity carried out through a person acting on behalf of the non-resident If.
a) He must have an authority which is habitually exercised to conclude contracts on behalf of the non- resident. However, if his activities are limited to the purchase of goods or merchandise for the non- resident, this provision will not apply.
b) Where he has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident, a business connection is established.
c) Business connection is also established where he habitually secures orders in India, mainly or wholly for the non-resident. Further, there may be situations when other non-residents control the above-mentioned non-resident. Secondly, this non-resident may also control other non-residents.
Thirdly, all other non-residents may be subject to the same common control, as that of the non- resident. In all the three situations, business connection is established, where a person habitually secures orders in India, mainly or wholly for such non-residents.
Exception: “Business connection”, however, shall not be held to be established in cases where the non-resident carries on business through a broker, general commission agent or any other agent of an independent status, if such a person is acting in the ordinary course of his business. A broker, general commission agent or any other agent shall be deemed to have an independent status where he does not work mainly
or wholly for the non- resident.
Significant economic presence of a non-resident in India
(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such
amount as may be prescribed; or
(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed:
Provided that the transactions or activities shall constitute significant economic presence in India, whether or not –
(i) the agreement for such transactions or activities is entered in India; or
(ii) the non-resident has a residence or place of business in India; or
(iii) the non-resident renders services in India
SEP- CBDT
The Central Board of Direct Taxes (“CBDT”) has on May 3, 2021 notified the thresholds referred to in Explanation 2A of section 9(1)(i) for determination of SEP. As per this, the monetary threshold for the aggregate of payments arising from transaction or transactions in respect of any goods, services or property carried out by a non-resident with any person in India, including provision of download of data or software in India during the previous year falling within Explanation 2A (a) has been prescribed as INR 20 million (Indian Rupees Two crores). The threshold number of users under Explanation 2A(b) with whom systematic and continuous business activities should be solicited or who are engaged in interaction has been prescribed as 0.3 million (three lakhs). Determination of SEP of a non-resident in India as per these thresholds will come into force from April 1, 2022.
Exemption to Business Connection
- Tax Exemption for encouraging Export: For the purpose of encouraging exports, a specific tax concession
has been given by providing that no income shall be deemed to accrue or arise in India to a non- resident through or from his operations which are confined to the purchase of goods in India for the purpose of export. Consequently, the exemption would not be available if the goods purchased in
India are sold in India or are not exported outside India.
Further, if the non-resident works up the raw-materials into finished or semi-finished products, the exemption would be withdrawn and he would become chargeable on such portion of the profits as is attributable to his manufacturing it in India.
- Operations confined to collection of news and views for transmission outside India by or on behalf of Non Resident who is engaged in the business of running news agency or of publishing newspapers, magazines or out and out sale by the parties concerned journals;
- Operations confined to shooting of cinematograph films in India if such Non-Resident is :
(a) an Individual - he should not be a citizen of India; or
(b) a firm - the firm should not have any partner who is a citizen of India or who is resident in India; or
(c) a company - the company does not have any shareholder who is a citizen of India or who is resident in India.
9(1) (b) Income arising from any property in India
Income arising in a foreign country from any property situated in India would be deemed to accrue or arise in India. In this context, the term property does not refer to house property alone but it refers to all tangible properties whether movable or immovable. For instance, the rent or hire charges for the use of buildings or machinery of the assessee which, under an agreement are payable only outside India, would be deemed to
accrue or arise in India.
9(1) (c) Income arising from any assets or source of Income in India
Income arising through or from any asset or source of income in India would also be deemed to accrue or arise
in India. In this context, the term source means not a legal concept but something which a practical man would
regard as a real source of income.
9(1) (d) Income arising from transfer of any capital assets situated in India
a) Capital gains arising to an assessee from the transfer of a capital asset situated in India would be deemed to accrue or arise in India irrespective of the fact whether the capital asset in question represents a movable or immovable property or a tangible or intangible asset.
b) It is also immaterial whether the consideration for the transfer of the capital asset is actually paid or payable in India or outside.
c) The place of registration of the document of transfer of property is equally immaterial.
d) However, if the capital asset, prior to the transfer, is situated outside India, the provisions of Section 9(1) would not apply to deem the capital gains arising on the transfer as accruing or arising in India for purposes of its taxation in India.
9(2) Income from Salaries
Income which is chargeable under the head Salaries is deemed to accrue or arise in India in all cases when earned in India. For this purpose income is said to be earned in India if the services are rendered in India.
The actual place of accrual of the salaries, the residential status of the employer, the citizenship or nationality of the employee and whether the employee is a Government servant or an employee of private enterprise are immaterial.
9(3) Income from Salaries which is payable by the Government to a citizen of India for services
rendered outside India
Income from salaries payable by the Government to a citizen of India outside India for his services rendered outside India, is deemed to accrue or arise in India even though the income is actually accruing outside India and is also received outside India. Thus, under this provision, salary income of all Government servants, working outside India is deemed to accrue in India. In the absence of this provision they would not be chargeable to tax in respect of such income as they would, after some time, become non-residents.
9(4) Dividend paid by a Indian company outside India
l
Dividend paid by any Indian company outside India is deemed to accrue or arise in India and the income is consequently chargeable to income-tax irrespective of the fact whether the dividend is interim dividend or a final dividend and whether it is an actual dividend or a notional dividend.
l
The place of declaration of the dividend is immaterial and the date of payment is equally immaterial for deeming the income to accrue in India.
l
Normally, dividend income arises at the place where the source of income is situated, i.e., where the shares yielding the income are kept. Shares are said to be situated at the place where the share register of the company is kept. While the share register of a company should ordinarily be kept at the place where its registered office is located, even if the share register is kept outside India and the dividends are declared outside India, the dividend would still be deemed to accrue in India because the
company is an Indian company.
l
Dividends declared by foreign companies outside India would not, however, be deemed to accrue or arise in India even in cases where the foreign company is resident in India because of the control and management of its affairs being situated wholly in India.
l
In order to deem the dividend income as arising in India, the residential status of the shareholder as also the status of the assessee, whether he is an individual, company or local authority, are irrelevant.
9(5) Interest
Interest payable in following cases will be deemed to accrue or arise in India and will be taxable in the hands of recipient irrespective of his residential status (i.e., ROR, RNOR or NR).
Interest payable by :
l
Government; or
l
A Resident in India, except where interest is payable in respect of moneys borrowed and used for the purpose of business or profession carried outside India or earning any income from any source outside India (i.e., Interest payable by a Resident for loan used in India for any purpose, whether for business or
profession or otherwise);
l
A Non-Resident in India provided interest is payable in respect of moneys borrowed and used for a business or profession carried on in India (i.e., Interest payable by a Non-Resident for loan used for only business or profession in India).
9(6) Royalty
Royalty payable in following cases will be deemed to accrue or arise in India and will be taxable in the hands of recipient irrespective of his residential status (i.e., ROR, RNOR or NR).
Royalty payable by:
l
Government; or
l
A Resident in India except where it is payable in respect of any right/information/property used for the purpose of a business or profession carried on outside India or earning any income from any source outside India (i.e., Royalty payable by a Resident for right/information/property used for any purpose in India whether business or profession or for earning other incomes);
l
A Non-Resident in India provided royalty is payable in respect of any right/information/property used for the purpose of the business or profession carried on in India or earning any income from any source in India (i.e., Royalty payable by a Non-Resident for right/information/property used for any purpose in India whether business or profession or for earning other incomes).
9(7) Fees for Technical Services
Fees for technical services payable in following cases will be deemed to accrue or arise in India and will be taxable in the hands of recipient irrespective of his residential status (i.e., ROR, RNOR or NR).
Fees for technical services payable by:
l
Government; or
l
A Resident in India except where services are utilized for the purpose of a business or profession carried on outside India or earning any income from any source outside India (i.e., Fees for technical services payable by a Resident for services utilised for any purpose in India whether business or profession or
for earning other incomes);
l
A Non-Resident in India provided fee is payable in respect of services for the purpose of a business or profession carried on in India or earning any income from any source in India (i.e., Fees for technical services payable by a Resident for services utilised for any purpose in India whether business or
profession or for earning other incomes)
