Permanent establishment test excludes Indian tax on film distribution receipts where the counterparty acted independently.

Amounts received under a film distribution agreement were not taxable in India as business profits because the non-resident had no permanent establishment in India. The Tribunal followed its earlier year's view that the Indian company acted independently and therefore did not constitute an agency permanent establishment. It applied the principle that, even where a business connection is alleged, Indian taxation of a non-resident's business income is limited to profits attributable to a permanent establishment. On the facts found, no such permanent establishment existed, so the distribution receipts could not be brought to tax in India as business income.

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Issues: Whether the amounts received under the film distribution agreement were taxable in India as business profits attributable to a permanent establishment, or whether the assessee had no permanent establishment in India so that the receipts were not taxable in India.

Analysis: The dispute was treated as identical to the issue decided in the assessee's own earlier year. The Tribunal followed its earlier view that the Indian company acted independently and, therefore, did not constitute an agency permanent establishment of the assessee. It was held that, even where a business connection is alleged, income can be taxed in India only to the extent attributable to a permanent establishment. On the facts found, the assessee had no permanent establishment in India, and the receipts under the distribution agreement could not be brought to tax as business income in India.

Conclusion: The issue was decided in favour of the assessee; the receipts under the distribution agreement were held not taxable in India.

Ratio Decidendi: In the absence of a permanent establishment in India, and where the Indian counterparty acts independently, business profits of a non-resident cannot be taxed in India merely on the basis of a business connection.

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