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Date: 4 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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Under Section 9 of Income Tax Act
1961 - Gradual Changes & Development The Indian Income-tax Act 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 section 5 of the Act, 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. Section 9 thereafter specifies certain types of
income that are deemed to accrue or arise in India in certain circumstances.
These two sections embody the source rule of income taxation in the domestic
law. No income of a non-resident can be taxed in India unless it falls within
the four corners of section 5 read with section 9 of the Income-tax Act. Section 9(1) of the I.T. Act specifies that for the income to be
taxed in India, it should deemed to accrue or arise in India .And one among
those incomes are 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 which have been introduced therein after. Section 9 of IT Act: 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 section 9 of the said act, even
though it may actually accrue or arise outside India .Section 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 Section 9, the following are the important types of
income which are deemed to accrue or arise in India: 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 A.Y. 2000.Also the following incomes which
are payable outside India are deemed to arise in India:- “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 which contributes to the earning of these profits or gains .A
business connection can 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
connection. A business connection involves a relation between business
carried on by non-resident which yields profits or gains and some activity in
India which contributes to the earning of these profits or gains A business connection can arise between a non-resident and a
resident of both of then carry on business and if the non-resident earns
income through such connections. 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 Act (Sec. 9(1) I.T.ACT) And
also in Circular No 23, Section(s) Referred 9 of income tax It includes a profession connection. It includes a person acting
on behalf of a non-resident and who performs any one or more of the following
– Activity 3: He habitually
secures order in India (mainly or wholly) for the non-resident or for
non-residents under the same management. Also according to the Circular No 23 , income tax some
illustrative instances of a non-resident having business connection in India,
are given below: Although the term business connection is no where
defined in the act but the courts have given various judicial pronouncements
which have been categorically classified below: In the case of CIT v. R.D. Aggarwal & Co. ,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 case such a relation w.r.t 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. 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 non-resident 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 connection from or through which
income, profits or gains arise or accrue to a non-resident must be determined
upon the facts and circumstances of the case. The expression "business" is defined in the Act as any
trade, commerce, manufacture or any adventure or concern in the nature of
trade, commerce or manufacture, but the Act contains no definition of the
expression "business connection" and its precise connotation is
vague and indefinite. In CIT v. Fried Krupp Industries 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 section 9 .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 realizes 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. 2) ‘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 section 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 Act is an inclusive one. The expression
"business connection", however, is not defined in the Act It is no
doubt true that there is specific reference to "business" in
section 9(1) and there is no reference to "profession" In CIT v. Currimbhoy Ebrahim & Sons Ltd ., Sir George
Rankin, speaking for the Judicial Committee of the Privy Council, while
construing the expression "business connection mentioned in the Indian
I.T. Act, 1922, observed (p. 400): 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 cannot be said that
the definition of business given in section 45 of the Partnership Act, 1890
(53 & 54 Vict. clause 39), was an extended definition intended for the
purpose of that Act only. Section 45 of that Act says: Section 2(b) of the Indian Partnership Act, 1932, also defines
"business" thus: The observation of Rowlett J. in Christopher Barker
& Sons v. IRC , "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
another case, IRC v. Marine Steam Turbine Co. Ltd. held: 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 section 9(1) of the Act, there is
no warrant for giving a restricted meaning to it excluding "professional
connections" from its scope. In the case of Barendra Prasad Ray v. ITO , the contention of
the appellants was that a professional connection cannot amount to a business
connection attracting section 9(1) of the Act. 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 section 9(1) of the Act, there is no warrant for giving a
restricted meaning to it excluding "professional connections" from
its scope. 3) 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 CIT v. Fried Krupp
Industries .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
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 CIT v. Tata
Chemicals Ltd. , 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 4) Capital gains derived outside India is
excluded - If 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 (a)
through or from any property in India, (b) through or from any asset or
source of income from India, and (c) 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 section 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 CIT v. Quantas Airways Ltd. 5) If no operations are carried in India, deeming
concept cannot apply. In CIT v. Toshoku Ltd. 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 cannot be deemed to accrue or arise in India. 6) 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
section 42(3) of the 1922 Act [corresponding to section 9 of the 1961 Act]
are attracted. In the case of Anglo-French Textile Co. Ltd. v. CIT (No. 2) 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 above mentioned transactions, following transactions does not amount to
business connections:- 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 C.I.T. v. R.D. Aggarwal and Co
.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
can be said to accrue or arise to him within the meaning of section 9 of the
Income-tax Act, 1961, 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
CIT v. Fried Krupp Industries 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 Upadhyay , National Law University, Gandhinagar |
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