Exemption under Explanation (b) to S. 9(1)(i) can apply only where income is ‘deemed to accrue or arise in India’ u/s.5(2)(b), but not where ‘income accrue or arise in India u/s.5(2)(b).

(i) Exemption under Explanation (b) to S. 9(1)(i) can
apply only where income is ‘deemed to accrue or arise in India’ u/s.5(2)(b),
but not where ‘income accrue or arise in India u/s.5(2)(b).

(ii) The question of actual or deemed accrual or arrisal of
income in India should be seen from standpoint of the taxpayer and not of any
other person.

The taxpayer was a company incorporated in HongKong (HKCo).
HKCo was a subsidiary of a company based in BVI (BVICo). BVICo had entered into
agreement with various customers for assisting them in locating suppliers of
apparels and garments in India. HKCo was engaged in providing facilitation
services for procurement of goods from various countries in Asia (Including
India). HKCo had also set up Liaison Offices (LOs) in India at several places.
BVICo sub-contracted the work to HKCo and received commission from its buyers as
coordinating agency. The taxpayer received remuneration of 1% FOB value of goods.

During the course of survey at one of the LOs of HKCo, it was
found that the LO was engaged in various services, such as product design and
development, sourcing, merchandising follow-up, quality control, factory
evaluation and shipping coordination, supply chain management, etc. The
statements of certain key personal of HKCo were also recorded. Based on these,
the AO concluded that BVICo was a non-functional entity and did not play any
role in the goods sourced from India; employees of HKCo directly corresponded
with clients; website of HKCo mentioned that it was a one-stop global sourcing
solution provider; and hence, based on the functions performed by the LO, 90% of
the commission received was attributable to the Indian operations.

In appeal, the CIT(A) upheld the order of the AO and
attributed 72% of commission received to PE in India.

The Tribunal held as follows :

(i) Section 5(2)(b) of the Income-tax Act has two components
: (a) Income which accrues or arises in India; and (b) Income which is deemed to
accrue or arise in India. The second component (deeming fiction) is linked to
section 9(1) of the Income-tax Act. The exclusion under explanation (b) to
section 9(1)(i) would apply only to a taxpayer who is engaged in exports.
Further, it cannot be applied to a case where income accrues or arises in India.
If income accrues or arises in India, question of its deemed to accrue or arise
in India cannot arise.

(ii) The question whether any income accrues or arises or is deemed to accrue
or arise to the taxpayer in India has to be seen from the standpoint of the
business of the taxpayer and not from the standpoint of the business of BVICo.