Taxability of non-resident transport income turns on dependent agency and permanent establishment under India-USA DTAA.

Income arising to a non-resident from a transportation agreement is taxable in India to the extent attributable to operations carried out in India under section 9(1)(i) read with Explanation 1(a). The agreement showed that the Indian applicant was not a mere independent contractor, because the foreign company retained operational control through the manual, audit rights, compensation terms, insurance arrangements, and risk allocation, while the applicant performed activities integral to the foreign company's business. On that basis, the applicant was treated as acting for and on behalf of the foreign company, so business operations existed in India. Under the India-USA DTAA, Article 5 and Article 7 supported taxation in India to the extent attributable to a permanent establishment.

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Issues: Whether the income arising to the American company from the transportation agreement was taxable in India under the Income-tax Act, 1961 and the India-USA Double Taxation Avoidance Agreement, having regard to whether the Indian applicant acted as an independent contractor or as an agent/permanent establishment of the American company.

Analysis: The income of a non-resident is taxable in India when it accrues or arises, or is deemed to accrue or arise, in India, and under section 9(1)(i) read with Explanation 1(a) only that part of business income is taxable as is reasonably attributable to operations carried out in India. The agreement, read as a whole, showed that the applicant was not functioning merely as an independent contractor: the American company retained control through the operational manual, audit rights, compensation structure, insurance arrangements, and risk allocation, and the applicant performed activities in India that were integral to the American company's business. On that basis, the applicant was treated as acting for and on behalf of the American company, so business operations of the American company were held to exist in India for purposes of the Act. Under the treaty, Article 7 permits taxation in India only to the extent attributable to a permanent establishment, and Article 5 treats a person acting on behalf of the enterprise, including one habitually securing orders wholly or almost wholly for it, as a permanent establishment in India. The applicant's activities satisfied that test.

Conclusion: The income arising to the American company under the transportation agreement was held taxable in India under the Income-tax Act, 1961 as well as under the India-USA DTAA, and the applicant was treated as the American company's agent/permanent establishment in India.

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