Business connection and treaty PE rules: resident intermediary triggers domestic deeming, but independent agent status blocks taxability.

A resident concessionaire handling advertisements for a non-resident created a business connection in India under section 9(1)(i) read with Explanation 2, so the non-resident's income from those activities was deemed to accrue or arise in India. However, the same resident was not treated as a permanent establishment under article 5 of the treaty because it had other clients and its work for the non-resident was not wholly or almost wholly devoted to that business. By virtue of section 90, the treaty position prevailed, so the non-resident's business profits were not taxable in India under article 7.

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Issues: (i) Whether the non-resident's income was deemed to accrue or arise in India through the resident concessionaire's activities under section 9(1)(i) read with Explanation 2; and (ii) whether the resident concessionaire constituted a permanent establishment or dependent agent under the treaty so as to make the non-resident's business profits taxable in India.

Issue (i): Whether the non-resident's income was deemed to accrue or arise in India through the resident concessionaire's activities under section 9(1)(i) read with Explanation 2.

Analysis: The deemed-income provision applied because the resident acted in India in relation to the non-resident's advertisement business and the activities fell within the statutory concept of business connection. Explanation 2 to section 9(1)(i) was treated as an inclusive definition enlarging the scope of business connection, and the resident's role in securing and handling advertisements for the non-resident satisfied that requirement.

Conclusion: Yes. The collections and remittances through the resident concessionaire resulted in income deemed to accrue or arise in India to the non-resident under section 9.

Issue (ii): Whether the resident concessionaire constituted a permanent establishment or dependent agent under the treaty so as to make the non-resident's business profits taxable in India.

Analysis: Under article 5 of the treaty, an agent of independent status is excluded from permanent establishment status unless its activities are carried out wholly or almost wholly for the non-resident or for connected enterprises. The resident had other clients and its activities for the non-resident did not meet the wholly or almost wholly threshold. The treaty therefore did not treat it as a permanent establishment, and by virtue of section 90 the treaty position prevailed over the Act.

Conclusion: No. The resident was not a permanent establishment of the non-resident, and the business profits were not taxable in India under article 7 of the treaty.

Final Conclusion: The application succeeded only to the extent that, although the domestic law deeming provision was attracted, the treaty prevented taxation of the non-resident's business profits in India, and the remaining questions did not require separate rulings.

Ratio Decidendi: A resident intermediary constitutes a business connection under section 9 where it carries out the relevant business activities in India for the non-resident, but it will not create a treaty permanent establishment if it is an independent agent whose activities are not wholly or almost wholly devoted to that non-resident; in such a case the treaty overrides the domestic charging provision.

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