TaxTMI 
TaxTMI 
2011 (7) TMI 95
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....justified, ignoring the fact: (i) that the assessee has been appointed as an agent to provide sales and marketing services relating to cruises and holiday packages for Star Cruises and its appointment as General Sales Agent in India is mainly for the purpose of collecting money in India; (ii) that the entire sale proceeds received by the agents in this case were received on behalf of the SCML, and belonged to it - subject to the rights of the agents; (iii) that the Board Circular No. 23, dated 23-7-1969 is not applicable in the assessee's case as it is withdrawn on 23-7-2009; and (iv) that the Assessing Officer was right in holding that the gross receipts received by the SCML as principal from agent is chargeable to tax under section 5(2)(a) of the Act." 2. The short issue that we are required to adjudicate, set out in somewhat argumentative grounds of appeal set out above, is whether or not the Star Cruise Management Limited ('SCML' or 'Star Isle of Man' - in short) was liable to income-tax in India in respect of the payments received it by through this assessee ('SCITLS' or 'Star India' - in short). There is no dispute that in c....
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....n to customs, immigration and quarantine regulations in the countries where the vessels operate. 3.3 SCML shall pay a prescribed retainer fee to SCITS in accordance with Clause 4 to this agreement. 3.4 SCML shall keep SCITS informed of the rates in force and the terms and conditions of various cruise packages from time to time which SCITS is not entitled to change. 3.5 SCML shall issue the booking confirmation/statement to PSAs only upon full receipt of the monies collected on behalf." 5. On these facts, the stand of the Assessing Officer has been that Star Isle of Man is liable to be taxed in India, in respect of the cruise passage money so received from India through Star India, mainly on the ground that Star Isle of Man had a business connection in India, which is sufficient to invoke tax liability of a non-resident in India - in view of the provisions of section 9(1)(i) read with section 5(2)(i) of the Indian Income-tax Act, 1961. The Assessing Officer also relied upon Hon'ble Supreme Court's judgments in the cases of CIT v. R D Aggarwal & Co. [1965] 56 ITR 20 and Anglo French Textile Co. Ltd. v. CIT [1953] 23 ITR 101 (SC) to come to the conclusion that the essentia....
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....scheme of taxability of non-resident taxpayers under the Indian Income-tax Act, 1961, so far as relevant to issue in appeal before us. The source rule of taxation, which typically originates in domestic tax law, is based on the principle that an income earned in a tax jurisdiction, irrespective of the residential status of the person earning the said income, is liable to be taxed in the tax jurisdiction where the income is earned. Therefore, a tax object, i.e. the income which is to be taxed, as a rule attracts taxability in the source jurisdiction. On the face of it, the application of source rule in the Indian Income-tax Act, however, seems to be going little beyond this universally accepted international tax norm. The source rule embedded in our domestic tax legislation does not only cover any income of a person, de hors his residential status, which accrues or arises in India, but also such an income which is deemed to (emphasis supplied by us) accrue and arise in India. Section 5(2) provides that subject to the provisions of this Act, the total income of any previous year of a person who is a non resident includes all income from whatever source derived which is (a) received o....
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....azines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India; (d) In the case of a non-resident, being (1) An individual who is not a citizen of India; or (2) A firm which does not have any partner who is a citizen of India or who is resident in India; or (3) A company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India; Explanation 2-For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident, (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) has no s....
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....defined. However, one important principle which is clearly discernible from the statutory provision is that even when there is a business connection, by way of an agent or otherwise, the income which can be subjected to tax in India can never exceed the income attributable to operations carried out in India - by the non-resident or by the agent. Clause (a) of Explanation 1 to section 9(1)(i) makes it clear that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. While Explanation 2 sets out the situations in which mere existence of an agent of the non-resident can be treated as business connection, Explanation 3 clarifies that in such situations, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India. In other words, while a business in which some part of operations are not carried out in India, taxability under section 9(1)(i) read with section 5(2)(b) cannot exceed income reasonably attributable....
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....ead with section 5(2)(b). However, give the factual matrix of this case in which the matter is already covered by Hon'ble High Court's judgment in favour of the assessee, it is not really necessary to give a judicial adjudication on this school of thought. That must be left to be decided in a fit case. We thus make it clear that the above observations, which are somewhat academic in the above context, should not be treated as of precedence value. In the present case, the principal tax liability itself is quashed by a Coordinate Bench of this Tribunal. As Star India's tax withholding liability is only a vicarious liability under section 195, once we come to the conclusion that Star Isle of Man did not have any principal tax liability in India, the impugned vicarious tax withholding liability of Star India must also be held to be not good in law. The CIT(A) was quite justified in deleting the same. 12. In the light of the above discussions, what appears to be prima facie an extension of the classical source rule of taxation in the scheme of the Income-tax Act, is in fact confined to the simpliciter taxability of an income earned in a tax jurisdiction, irrespective of the residenti....
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....cluding in the cases of R.D. Aggarwal & Co. (supra) and Anglo French Textile Co. Ltd. (supra) which have been relied upon by the Assessing Officer as well, were delivered. 14. Section 42(1) of the 1922 Act, insofar as it material in this context, inter alia provided that "all incomes, profits and gains accruing or arising, whether directly or indirectly, through or from any taxable territories (i.e., territories under direct control of British India and excluding princely states) shall be deemed to be income accruing or arising within the taxable territories...". This provision existed at a time when a part of India was under direct British rule in which Indian Income-tax Act had application and which were termed as 'taxable territories' and a part of India was under princely states to which the provisions of Indian Income-tax Act did not extend. In many cases, the situs of business was intermingled in the sense that some activities of a business were carried out in the taxable territories and some operations of the same business were carried outside taxable territories. It was in this backdrop that the legislation saw an extended source rule, arguably typical of colonial approa....
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....ntly harsh provisions resulted in situations, as was noted by Hon'ble Bombay High Court in the observations extracted above, that what was not even taxable in the hands of a resident, ended up being taxable when the same activity was carried out by a non-resident. Contrast this with the present scheme of law, which refers to business connection but expressly restricts the taxability to business object, i.e., business activity carried out in India, and restricts the same only to such operations as are performed in India. Therefore, when business activity is not carried out in India, there cannot be any taxability in India at all. These two set of provisions, i.e. in the Indian Income-tax Act, 1922 and in the Income-tax Act, 1961, are in a way different in scope and character and what has been held in the context of the former will not necessarily hold good in the context of the latter. Having said that, we may add that in the later cases, most notably in R.D. Aggarwal's case (supra), Hon'ble Supreme Court has held restricted application of taxability as a result of 'business connection', but we will deal with that aspect of the matter a little later. 16. In Anglo French Textile C....
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....ents for acceptance, and final decision to accept or not to accept the order rests with the principals. Their Lordships noted that that "the only question that falls to be determined in these appeals is whether there was, in two cases between the non-residents and the assessee, such a relation as may be called 'business connection' in the taxable territories" and proceeded to observe that "if the answer to this question be in affirmative, the assessee would, as statutory agent, be chargeable to tax on behalf of the non-resident companies, on profits and gains reasonably attributable to those parts of operations which were carried out in India". It was in this backdrop that Their Lordships, inter alia, observed as follows: "12. Turning to the facts of the present case, as found by the revenue authorities, contracts for the sale of goods took place outside the taxable territories, price was received by the non-residents outside the taxable territories, and delivery was also given outside the taxable territories. No operation such as procuring raw materials, manufacture of finished goods, sale of goods or delivery of goods against price took place within the taxable territories : t....
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....nnection. As a matter of fact, as we have noted above, this is a decision in which Hon'ble Supreme Court has in a way indicated a greater nexus of operation in taxable territories with core operations of the business in order that the non-resident can be said to have business connection in taxable territories. Viewed thus, this decision, if anything, supports the case of the assessee. As we make these observations, we are alive to the fact that, as held by Hon'ble Calcutta High Court, in the case of Biyani & Sons (P.) Ltd. v. CIT [1979] 120 ITR 887, it is appreciation of agreement as a whole which is decisive of the nature of relationship between Indian associate and the non-resident, and in effect whether or not such relationship constitutes 'business connection' but then revenue has not even questioned bona fides of nomenclature of the agreement. 19. The approach of the Assessing Officer finds support from an interesting quarter in academics, which in turn relies upon a ruling given by the learned Authority for Advance Ruling. Prof. Michael Lang, a well-known contemporary commentator on international taxation and renowned international tax academician, has made following inter....