Scheme of Taxation of Non-Residents:
Section 5 of the Income Tax Act, 1961 provides for taxability of income in the hands of Non-Resident. Total
Income of the Non-Resident includes all the income which is received or deemed to be received in India by or on behalf of such person or income accrues or arises or is deemed to accrue or arise in India to the Non-Resident.
Section 7 ibid provides for when income is deemed to be received in India. Section 9 ibid provides for when the income is deemed to accrue or arise in India. Section 9(1)(i) ibid provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India is deemed to accrue or arise in India.
Concept of Agency and its relevance to Business Connection:
As per Explanation 2 to section 9(1)(i) ibid ‘business connection’ shall include:
- any business activity carried out through a person who, acting on behalf of the non-resident has habitually exercise in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident or
- has no such authority, but habitually maintain in India stock of goods or merchandise from which he regularly delivers goods on behalf of the non-resident or
- habitually secure orders in India, mainly or wholly for the non-resident or for the non-resident and other non-residents …….
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 (first proviso)
To establish the business connection toit is not necessary that all the operations of the business are to be carried in India to constitute business connection. As per Explanation 1 to section 9(1)(i) provides in case where all the operations of the business are not carried out in India the income of the business is deemed to accrue or arise in India to the extent it reasonably attributable to the operations carried out in India.
Combined reading of Explanation 1 and Explanation 2 there exists a business connection through agents, other that of independent status, who undertake activities on behalf of non-resident (Agency PE-Permanent Establishment).
In nutshell, if the activities of agent (dependent) in India contributes to the income of the non-resident, such income is deemed to accrue or arise in India and chargeable to tax accordingly.
The deciding factor in agency is the extent of dependency in carrying on activities in India or on behalf of non-resident in India for determining the chargeability of income in India.
In this context, we analyse two Judicial pronouncements to arrive at a reasonable conclusion on agency transactions of non-residents.
Galileo International Inc vs DCIT 19 SOT 257- ITAT DELHI
Facts:
Galileo International was a tax resident of USA. It was engaged in the business of maintaining and operating a Computerized Reservation System (CRS). The said system would receive, process, store and disseminate data about flight schedules, room availability, fare information and provision for booking capabilities, etc. The assessee entered into a Participating Carrier Agreement (PCA) with various participating airlines for providing them with said CRS services.
To market and distribute the CRS services to the travel agents (TAs) in India, Galileo International (assessee) entered into a Distribution Agreement (DA) with an Indian company. The Indian company in turn entered in to a subscriber’s agreement with various TA to provide them with the access code, equipment, communication link and support services.
The communication between the master computer system of the assessee in USA and TA in India arranged by another organization. The assessee paid remuneration to Indian company for acting as a distributor and to the other company which provided the communication channel.
The assessee was remunerated outside India by the airlines and it did not receive any remuneration from the travel agents.
The assessee filed its return declaring nil income on the ground that it had no operations in India and hence no income is accrue or arise in India.
Department’s contention:
All the activities in respect of bookings made by the TAs in India were completed in India through the hardware installed by assessee at travel agent’s premises; that on that basis income accrued or arose in India under section 5 of Income Tax Act, 1961.
Even under the DTAA, the assessee had a PE in India under article 5 and so the income was taxable as business income under article 7; that the assessee earned income on each segment booked through the computers installed in India and, therefore, the same constituted a PE.
The Assessing Officer further held that 'Indian Company' was a PE of the assessee within the meaning of article 5(4) because it was economically dependent on the assessee for its source of business and its activities were devoted wholly and exclusively for the assessee, and further, it entered into and concluded contracts on the assessee's behalf.
On appeal the CIT(A) upheld the impugned findings. Second appeal made before ITAT.
ITAT Ruling:
The ITAT held that the Indian Company was totally dependent upon the assessee in respect of services to the CRS subscribers in India.
It further held that the booking would take place in India on the basis of the presence of such seamless CRS. On the basis of booking made by the TAs in India, the income generated to the assessee. But for the booking, no income accrued to the assessee. The assessee was not to receive the payment only for display of information but the income would accrue only when the booking was completed at the desk of the subscriber's computer. In such a situation, there was a continuous seamless process involved, at least part of which was in India and, hence, there was a business connection in India.
The assessee operates the CRS system which was the source of revenue and part of such system existed in India thus there was a business connection established in India and hence the income in respect of the booking which took place from the equipment in India could be deemed to accrue or arise in India and hence taxable in India.
Key observation:
Since part of the booking function was operated in India which directly contributed to the earning of revenue, the activities carried out by the assessee in India were in no way of 'preparatory or auxiliary' character. Thus, the exception provided in article 5(3) would not apply and the assessee would be deemed to have a PE in India
Points to be pondered:
If an agent works exclusively for a single principal, it would establish that the agent is economically dependent on the principal, though it is not conclusive, which could result in existence of dependent agency or agency PE.
DCIT vs Elitecore Technologies (P) Ltd 80 taxmann.com 6 – ITAT AHMEDABAD
Facts:
The assessee is engaged in the business of developing software products. It has utilized the services of non-resident agents for marketing of the products and assistance in procuring sales orders abroad. Assessee has not deducted tax at source on commission paid to non-resident agents on the contention that it is not chargeable to tax in India.
The Assessing Officer was not satisfied with genuineness of commission payment on the ground that there was no material to justify the reasonableness of commission payment and evidence pertaining to services rendered by the non-resident agents having nexus with the assessee business was not available. [though there is no agreement with non-resident agents the invoices and purchase order raised by the them are available]
Assessing Officer Contention:
In view of the provisions of Section 9(1)(i) of Income Tax Act, 1961, income of the non-resident from though or from any business connection in India or any source in India is deemed to accrue or arise in India, and under section 5(2)(b)ibid income deemed to accrue or arise in India is also taxable in India. Since the right to receive the commission income accrued in India, the income is deemed to accrue or arise in India.
CIT(A) observations:
The Supreme Court in CIT vs Toshoku Ltd 125 ITR 525 and CIT vs R.D. Aggarwal and Co 56 ITR 20 held that commission paid to non-residents for securing orders outside India is not taxable in India and hence no tax is required to be withheld on the same. Further, Hon’ble Supreme Court in GE India Technology Center Pvt Ltd 372 ITR 456 held that the provisions of section 195 of Income Tax Act,1961 are not applicable if the payments are not taxable in India. As the payment of foreign commission is not taxable in India, the provisions of section 195ibid are not applicable.
ITAT observations:
Relied on the judgement in DCIT vs Welspun Corporation Ltd 77 taxmann.com 165- ITAT Ahd where it was held that the consideration for which the payment made to the commission agent is obtaining of the orders and not any services per se. The consideration is computed on the basis of business procured. Obviously, if there are no business generated for the principal, the agent gets nothing.
The consideration paid to the agent is also based on the business procured and the agency agreements do not provide for any independent, standalone or specific consideration for these services. The services rendered under the agreement cannot, therefore, be considered to be technical services in nature or character.
Deeming fiction under section 9(1)(i) read with proviso thereto holds the key, and lays down that only to the extent that which the operations of such a business is carried out in India, the income from such a business is taxable in India. When no operations of the business are carried on in India, there is no taxability of the profits of such a business in India either.
The profits of such a business can have taxability in India only to the extent such profits relate to the business operations in India, but then, as are the admitted facts of this case, no part of operations of business were carried out in India. The commission agents employed by the assessee, therefore, did not have any tax liability in India in respect of the commission agency business so carried out.
Points to be pondered:
Generating business or securing orders is an entrepreneurial activity and cannot, by any stretch of logic, be treated as a technical service per se. The point of time when commission agent's right to receive the commission fructifies is irrelevant to decide the scope of Explanation 1 to section 9(1)(I).
Conclusion:
Amount paid to non-resident agents who operate independently/ who carries on activity of procuring orders outside India doesn’t leads to business connection or rendering of technical services in India.
