Even if a non-resident had a business connection in India, no income can be deemed to have accrued or arisen in India if no business operations were carried on in India.
Facts
Star Group operates, manages and charters cruises. Star Cruise Management Limited is a company registered in Isle of Man (‘Star Isle of Man’). Star Isle of Man was providing sales, marketing and promotional services for Star Group cruises. Star Isle of man appointed Star Cruise India Travel Services Pvt. Ltd. (‘taxpayer’) as its canvasser in India for canvassing business. Taxpayer was responsible to remit all monies received by it to Star Isle of Man without any deduction and to advise Star Isle of Man on all relevant laws and regulations. Star Isle of Man was to pay 3% of the net cruise charges as retainer fees to the taxpayer.
While making assessment, the AO held that Star Isle of Man had a ‘business connection’ in India through the taxpayer. Consequently, in terms of section 9(1) (i) read with section 5(2)(i), Star Isle of Man was taxable in India. The AO relied on CIT v. R. D. Aggarwal & Co., (1965) 56 ITR 20 (SC) and Anglo-French Textile Company Ltd. v. CIT, (1953) 23 ITR 101 (SC). Based on certain assumptions, the AO determined 5% of the net cruise charges as income of Star Isle of Man.
In appeal, the CIT(A) held that the services rendered by the taxpayer were general in nature and they could not be interpreted to constitute ‘business connection’ u/s.9(1)(i) and concluded that Star Isle of Man had no tax liability in India.
Held
The Tribunal observed and held as follows. As per the source rule of taxation the income is taxed in the jurisdiction in which it is earned. However, the Income-tax Act also covers income which is deemed to accrue or arise in India if a non-resident has a ‘business connection’ in India. However, even under such situation, tax in India can never exceed beyond income attributable to operations carried out in India. Thus, where a non-resident has a business connection through an agent, and the agent is fully compensated for his services, no further income of non-resident can be taxed u/s.9(1)(i) r.w.s 5(2)(b).
Supreme Court decision in R. D. Aggarwal & Co. supports that for business connection trigger, a greater nexus of operation in taxable territories with core operations of business is essential. Further, the Supreme Court held that the scope of ‘business connection’ does not cover mere canvassing for business by an agent.
Since Star Isle of Man had no tax liability in India, the taxpayer had no obligation to deduct tax u/s.195.
