‘BUSINESS
CONNECTIONS’ UNDER S.9 of THE INCOME TAX ACT : GRADUAL CHANGES AND
DEVELOPMENT
The Income Tax Act, 1961
provides for levy of income-tax on the income of foreign companies and
non-residents, but only to the extent of their income sourced from India. Under
s. 5, a foreign company or any other non-resident person is liable to tax on
income which is received or is deemed to be received in India by or on behalf of such person, or
income which accrues or arises or is deemed to accrue or arise to it in India. Income
tax is payable by a taxpayer, regardless of whether he is a resident
taxpayer, a non-resident taxpayer, or a non-resident Indian, on the total
income computed by the assessing officer under the provisions of the Income
Tax Act, 1961. Income Tax Act, 1961, s. 9 thereafter specifies certain types
of income that are deemed to accrue or arise in India in certain circumstances.
These two provisions embody the source rule of income taxation in the
domestic law. No income of a non-resident may be taxed in India unless
it falls within the four corners of ss. 5 read with 91. Income Tax Act, 1961,
s. 9(1) specifies that for the income to be taxed in India, it must deemed to accrue or arise in India. And
one among those incomes is income from ‘business connection’ in India. The
basic aim of this paper work is to look into the series of judicial
pronouncements related to the term ‘business connection’ and the
changes that have been introduced.
INCOME TAX ACT,
1961, S. 9
Broadly speaking, business
income of a foreign company or other non-resident person is chargeable to tax
to the extent it accrues or arises through a business connection in India or from any asset or source of income
located in India, and to
the extent such income is attributable to the operations carried out in India.
Certain income is deemed to accrue or arise in India
under s. 92, even though it may actually accrue or arise outside India. Income
Tax Act, 1961, s. 9 applies to all assesses irrespective of their residential
status and place of business. Thus, only Indian income is liable to income
tax in India
in the case of a non-resident person. This means that a non-resident person
is not liable to pay any income tax in India on his foreign income.
Though an income may not actually accrue or arise in India, yet it may be deemed to accrue or arise
in India.
Thus, under s. 9, the following are the important types of income which are
deemed to accrue or arise in India:
(1) income through 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 situated in India;
(2) salary income for service
rendered in India;
and
(3) salary for the rest period
or leave period which is preceded and
succeeded by services rendered
in India
and forms part of the service
contract of employment from the
assessment year 2000.
Also the following incomes that
are payable outside India
are deemed to arise in India:
(1) dividend paid by an Indian
company outside India;
(2) interest payable on money
borrowed and brought into India;
and
(3) royalty and technical
service fees payable in respect of any
right/technical services used
for business/profession in India.
However, royalty and fees for
technical services is exempt, where such royalty/fees earned is in respect of
computer software supplied by a non-resident manufacturer along with the
computer or
computer based equipment under
an approved scheme.
BUSINESS
CONNECTION
The term business connection has
undergone lot of changes. The hon’ble courts have time and again
interpreted the term ‘business connection’ with reference to
facts, circumstances and prevailing conditions. A business connection
involves a relation between a business carried on by a non-resident, which
yields profits or gains and some activity in India that contributes to the
earning of these profits or gains. A business connection may arise between a
non-resident and a resident if both of them carry on business and if the
non-resident earns income through such a connection3. A business connection
involves a relation between business carried on by non-resident that yields
profits or gains and some activity in India, which contributes to the
earning of these profits or gains. A business connection may arise between a
non-resident and a resident of both of then carry on business and if the
non-resident earns income through such connections4. It basically predicates
an
element of continuity between
the business of the non-resident and the activity in India: a
stray or isolated transaction is not normally regarded as business connection
Business
connection as defined in the Income Tax Act, 1961, s.9(1) and also in
Circular no. 23
It includes a
profession connection. It includes a person acting on behalf of a nonresident
and who performs any one or more of the following:
(1) Activity 1: he
exercises in India
an authority to conclude contracts on behalf of non-resident (it does not
cover the activity of only the purchase of goods or merchandise for then
on-resident);
(2) Activity 2: 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; or
(3) Activity 3: he
habitually secures orders in India
(mainly or wholly) for the non-resident or for non-residents under the same
management.
Where such a
business is carried on in India
through a person referred to in Activity one, two or three (mentioned above)
only so much of income is attributable to the operations carried out in India will be deemed to accrue or arise in India. Also
according to the Circular No. 236, some illustrative instances of a
nonresident having business connection in India, are given below:
(1) maintaining a
branch office in India
for the purchase or sale of goods or transacting other business;
(2) appointing an
agent in India
for the systematic and regular purchase of raw materials or other
commodities, or for sale of the nonresident’s goods, or for other
business purposes;
(3) rrecting a
factory in India
where the raw produce purchased locally is worked into a form suitable for
export abroad;
(4) forming a local
subsidiary company to sell the products of the nonresident parent company; or
(4) having financial
association between a resident and a non-resident company.
Although the term
business connection is not defined in the enactment, the courts have given
various judicial pronouncements which have been categorically classified
below:
There must be
element of continuity as well as real and intimate Connection
The expression
‘business connection’ undoubtedly means something more than
‘business’. A business connection involves a relation between a
business carried on by a non-resident which yields profits or gains and some
activity in the taxable territories which contributes directly or indirectly
to the earning of those profits or gains. It predicates an element of
continuity between the business of the nonresident and the activity in the
taxable territories. The expression ‘business connection’
postulates a real and intimate relation between trading activity carried on
outside the taxable territories and trading activity within the territories,
the relation between the two contributing to the earning of income by the non-resident
in his trading activity.
In the case of Commissioner
of Income Tax vs. R.D. Aggarwal and Company7, the contracts for the sale
of goods took place outside the taxable territories, price was received by
the non-residents outside the taxable territories, and delivery was also
given outside the taxable territories. Therefore in the view of the court,
where such a relation with respect to expression ‘business
connection’ must be real and intimate through or from which income must
accrue or arise whether directly or indirectly to the non-resident, in this
case, it was absent. The Supreme Court in the same case further observed that
a business connection...involves a relation between a business carried on by
a non-resident which yields profits or gains and some activity in the taxable
territories which contributes directly or indirectly to the earning of those
profits or gains. Business connection may take several forms: it may include
carrying on a part of the main business or activity incidental to the main
business of the nonresident through an agent, or it may merely be a relation
between the business of the non-resident and the activity in the taxable
territories, which facilitates or assists the carrying on of that business.
In each case the question whether there is a business
7 1964 INDLAW SC 254, [1965] 56 ITR 20
(SC).
connection from or
through which income, profits or gains arise or accrue to a nonresident must
be determined upon the facts and circumstances of the case. The expression
‘business’ is defined in the Income Tax Act, 1961, as any trade,
commerce, manufacture or any adventure or concern in the nature of trade,
commerce or manufacture, but the enactment contains no definition of the
expression ‘business connection’ and its precise connotation is
vague and indefinite. In Commissioner of Income Tax vs. Fried Krupp
Industries8 it was held that an isolated transaction between a
non-resident and a resident in India without any course of dealings such as
might fairly be described, as business connection does not attract the
provision. There is no question of continuing business relating when a
person purchases machinery or other goods abroad or uses them in India and
earns profit.
But where there is connection
a continuity in business relationship between the person in India who helps to make the profits and the
person outside India
who receives and realises the profit, such relationship constitute a business
connection. In each of such case whether there is a business connection from
or through which income arises or accrues must be determined upon the facts
or circumstances of that case
‘Business’
includes profession, vocation and callings
The expression
‘business’ does not necessarily mean trade or manufacture only.
It is being used as including within its scope profession, vocations and
calling from a fairly long-time. In the context in which the expression
‘business connection’ is used in s. 9(1), there is no warrant for
giving a restricted meaning to it excluding ‘professional’
connection, from its scope. The definition of the expression
‘business’ given in the Income Tax Act, 1961 is an inclusive one.
The expression ‘business connection’, however, is not defined in
the enactment. It is no doubt true that there is specific reference to
‘business’ in s. 9(1) and there is no reference to
‘profession’. In Commissioner of Income Tax vs. Currimbhoy
Ebrahim and Sons Limited11, Sir George Rankin, speaking for the Judicial
Committee of the Privy Council, while construing the expression
‘business connection mentioned in the Income Tax Act, 1922, observed:
‘the phrase 'business connection' is different from, though doubtless
not unrelated to, the word business of which there is a definition in the
Act’. The expression ‘business’ does not necessarily mean
trade or manufacture only. It is being used as including within its scope
professions, vocations and callings from a fairly long time. The Shorter
Oxford English Dictionary defines ‘business’ as ‘stated occupation,
profession or trade’ and ‘a man of business’ is defined as
meaning ‘an attorney’ also. In view of the above dictionary
meaning of the word ‘business’, it may not be said that the
definition of business given in the Partnership Act, 1890, s. 11 1935 INDLAW PC 4, (1935) 3 ITR
395.45 was an extended definition intended for the purpose of that enactment
only.
Partnership Act,
1890, s. 45 states that: ‘........the expression 'business'
includes every trade, occupation, or profession’.
Indian Partnership
Act, 1932, s. 2(b) also defines ‘business’ thus: ‘Business
includes every trade, occupation and profession’. The observation of
Rowlett J. in Christopher Barker and Sons vs. IRC12, ‘all
professions are
businesses, but all businesses are not professions.............’ also
supports the view that professions are generally regarded as businesses. The
same learned judge in IRC vs. Marine Steam Turbine Company Limited13
held:
‘The word
‘business’, however, is also used in another and a very different
sense, as meaning an active occupation or profession continuously carried on
and it is in this sense that the word is used in the enactment with which we
are here concerned’.
The word
‘business’ is one of wide import and it means an activity carried
on continuously and systematically by a person by the application of his
labor or skill with a view to earning an income. The courts are of the view
that in the context in which the expression ‘business connection’
is used in s. 9(1), there is no warrant for giving a restricted meaning to it
excluding ‘professional connections’ from its scope. In the
case of Barendra Prasad Ray vs. Income Tax Officer14, the
contention of the appellants was that a professional connection may not
amount to a business connection attracting s. 9(1). The court held that the
word ‘business’ is one of wide import and it means an activity
carried on continuously and systematically by a person by the application of
his labour or skill with a view to earning an income. The judges were of the
view that in the context in which the expression ‘business
connection’ is used in s. 9(1), there is no warrant for giving a
restricted meaning to it excluding ‘professional connections’
from its scope.
Mere purchase
abroad and use in India
is not ‘continuing business’
The term
‘business connection’ postulates a continuity of business
relationship between the foreigner and the Indian. There is no question of
continuing business relation when a person purchase the machinery or other
goods abroad and uses them in India and earns profit as it was held in Commissioner
of Income Tax vs. Fried Krupp Industries15. In this case the court
looked into the question whether principal to principal transaction amounts
to any business connection.
The court observed
that where a person purchased goods from a foreigner without anything more,
and the purchased goods are utilised in commercial operations in India by the
Indian, then the Indian merchant or company is earning his own or its own
income. The foreigner in such a case has nothing to do with the
Indian-assessee’s transaction in India,
as by selling his machinery abroad, he had no further interest in the
business in India.
The term ‘business connection’ postulates a continuity of
business relationship between the foreigner and the Indian. The court held
that there is no question of continuing business relation when a person
1980
INDLAW MAD 128, (1981) 128 ITR 27 (Mad). purchases machinery or other goods
abroad and uses them in India
and earns profit and the part of the foreigner has been played wholly abroad,
so that there is no connection as such with any business in India. The
Supreme Court referred and approved the decision of the Bombay High Court in Commissioner
of Income Tax vs. Tata Chemicals Limited16, wherein it had been
held that in order to rope in the income of a non-resident, under the deeming
provision, it must be shown by the department that some of the operations
were carried out in India in respect of which the income was sought, to be
assessed. Therefore the court declared that in respect of principal to
principal transaction there is no question of any business connection
Capital gains
derived outside India
is excluded
Where the words
‘business connection in India’ were wide enough to cover all
transactions including transactions in capital assets, there was no reason
for Parliament to specifically include income (1) through or from any
property in India; (2) through or from any asset or source of income from
India; and (3) through or from sale of a capital asset situate in India. From
the very fact that the transfer of a capital asset situate in India has been
brought within the purview of s. 9 the intention of Parliament was not to
bring within its purview any income derived out of sale or purchase of a
capital asset effected outside India as it was held in the case of Commissioner
of Income Tax vs. Quantas Airways Limited17.
If no operations
are carried in India,
deeming concept may not apply
In Commissioner
of Income Tax vs. Toshoku Limited18 the court observed that 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 may
not be deemed to accrue or arise in India.
Transactions must
be systematic and well-defined
It is not every
business activity of a manufacturer that comes within the expression
‘operation’ to which the provisions of Income Tax Act, 1922, s.
42(3) (corresponding to Income Tax Act, 1961, s. 9) are attracted. In the
case of Anglo-French Textile Company Limited vs. Commissioner of Income
Tax19 it was observed that activities which are not well defined or are
of a casual or isolated character would not ordinarily fall within the ambit
of this rule, in a case where all that may be known is that a few
transactions of purchase of raw materials have taken place in British India,
it could not ordinarily be said that the isolated acts were in their nature ‘operations’
within the meaning of that expression.
Therefore these were
the changes introduced by the judiciary in the definition of tern
‘business connection’. Other then the abovementioned
transactions, following transactions does not amount to business connections:
(1) in respect of
business operations carried out both in India and overseas, transactions
relating to overseas operations;
(2) transactions
relating only to purchase of goods in India for purpose of export by
the non-resident;
(3) transactions
confined to the collection of news for transmission outside India in the
business of news agency or publishing newspapers, magazines or journals,
carried on by non-resident, and
(4) operations
confined to shooting of cinematography films by a nonresident foreign
national.
CONCLUSION
The expression
‘business connection’ limits no precise definition. The import
and connotation of this expression has been explained by the Supreme Court in
their judgment in Commissioner of Income Tax vs. R.D. Aggarwal and
Company20, which still holds good. Although the question whether a
non-resident has a ‘business connection’ in India from or through
which income, profits or gains may be said to accrue or arise to him within
the meaning of the Income Tax Act, 1961, s. 9, has to be determined on the
facts of each case but its definitely has given some relief so as do away
with the prevalent confusion regarding the term business connection.
Generally confusion prevailed in a situation where few transactions of purchases
of raw materials took place in India and the manufacture and sale of goods
took place outside India, the profits arose from such sales were considered
to have arisen out of a business connection in India which was a wrong
practice. Later the case of Commissioner of Income Tax vs. Fried Krupp
Industries21 has made the concept even more clear by hinting at
‘continuity of business’ which is essential so as to establish
business connections. Therefore the term business connection has been
rationalized with the help of the judicial interpretation and been successful
to a larger extent in resolving various complications related to transaction
and unlike few years back.
Article by Swati
Upadyaya, IVth law student of National law college
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