ADIT (IT) 2(1), MUMBAI v. STAR CRUISE (INDIA) TRAVEL; SERVICES P. LTD, MUMBAI

ITA 3941/MUM/2010 | 2006-2007
Pronouncement Date: 22-07-2011 | Result: Dismissed

Appeal Details

RSA Number 394119914 RSA 2010
Assessee PAN AAFCS4154H
Bench Mumbai
Appeal Number ITA 3941/MUM/2010
Duration Of Justice 1 year(s) 2 month(s) 8 day(s)
Appellant ADIT (IT) 2(1), MUMBAI
Respondent STAR CRUISE (INDIA) TRAVEL; SERVICES P. LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted E
Tribunal Order Date 22-07-2011
Date Of Final Hearing 14-07-2011
Next Hearing Date 14-07-2011
Assessment Year 2006-2007
Appeal Filed On 14-05-2010
Judgment Text
I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 1 OF 21 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH MUMBAI [CORAM: PRAMOD KUMAR AM AND VIJAY PAL RAO JM] ITA NO. 3941/MUM/2010 ASSESSMENT YEAR: 2006-07 ADDITIONAL DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) CIRCLE 2(1) MUMBAI . APPELLANT VS. STAR CRUISE INDIA TRAVEL SERVICES PVT LTD RESPONDENT [PAN : AAFCS4154H] APPEARANCES: C G K NAIR FOR THE APPELLANT DR K SHIVRAM FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR : 1. BY WAY OF THIS APPEAL THE ASSESSING OFFICER HAS CHALLENGED CORRECTNESS OF CIT(A)S ORDER DATED 24 TH FEBRUARY 2010 IN THE MATTER OF ASCERTAINMENT OF TAX WITHHOLDING LIABILITY UNDER SECTION 195 R.W.S. 201 OF THE INCOME TAX ACT 1961 FOR THE ASSESSMENT YEAR 2006-07 ON THE FOLLO WING GROUND : I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 2 OF 21 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN HOLDING THAT TAX IS NOT DED UCTIBLE AT SOURCE UNDER SECTION 195 OF THE ACT ON PAYMENTS MADE TO S TAR CRUISE MANAGEMENT LIMITED ISLE OF MAN OUT OF SALE PROCEE DS OF CRUISE TICKETS BOOKED BY THE ASSESSEE AND THEREFORE CON SEQUENTIAL LEVY OF TAX AND INTEREST UNDER SECTION 201(1) AND 201(1A) B Y THE ASSESSING OFFICER WAS NOT JUSTIFIED IGNORING THE FACT: I. THAT THE ASSESSEE HAS BEEN APPOINTED AS AN AGE NT TO PROVIDE SALES AND MARKETING SERVICES RELATING TO CRUISES AND HOLI DAY PACKAGES FOR STAR CRUISES AND ITS APPOINTMENT AS GENERAL SA LES AGENT IN INDIA IS MAINLY FOR THE PURPOSE OF COLLECTING MONEY IN INDIA; II. THAT THE ENTIRE SALE PROCEEDS RECEIVED BY THE A GENTS IN THIS CASE WERE RECEIVED ON BEHALF OF THE SCML AND BELONGED T O IT SUBJECT TO THE RIGHTS OF THE AGENTS; III. THAT THE BOARD CIRCULAR NO. 23 DATED 23.07.1969 IS NOT APPLICABLE IN THE ASSESSEES CASE AS IT IS WITHDRAWN ON 23.7.2 009; AND IV. THAT THE ASSESSING OFFICER WAS RIGHT IN HOLDING THAT THE GROSS RECEIPTS RECEIVED BY THE SCML AS PRINCIPAL FROM AGE NT IS CHARGEABLE TO TAX UNDER SECTION 5(2) (A) OF THE ACT . 2. THE SHORT ISSUE THAT WE ARE REQUIRED TO ADJUDIC ATE SET OUT IN SOMEWHAT ARGUMENTATIVE GROUNDS OF APPEAL SET OUT ABOVE IS W HETHER 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 PAY MENTS RECEIVED IT BY THROUGH THIS ASSESSEE ( SCITLS OR STAR INDIA IN SHORT). THERE IS NO DISPUTE THAT IN CASE STAR ISLE OF MAN HAD ANY SUCH INCOME TAX LIABILITIES STAR INDIA HAD A CORRESPONDING VICARIOUS TAX WITHHOLDING LIABILITY FROM THE PAYMENTS SO MADE TO STAR ISLE OF MAN. THE CORE ISSU E THUS REALLY IS WHETHER OR NOT STAR ISLE OF MAN HAD ON THE FACTS OF THIS C ASE ANY INCOME TAX LIABILITY IN INDIA. I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 3 OF 21 3. THE ISSUE IN APPEAL LIES IN A RATHER NARROW COMP ASS OF MATERIAL FACTS. STAR ISLE OF MAN IS A COMPANY REGISTERED IN ISLE OF MAN AND IS PROVIDING SALES MARKETING AND PROMOTIONAL SERVICES FOR THE CRUISE VESSELS OWNED MANAGED OPERATED OR CHARTERED THROUGH THE STAR CRUISE GROUP OF COMPANIES. STAR ISLE OF MAN HAS APPOINTED STAR INDIA AS ITS CANVASSER IN INDIA MAINLY TO CANVASS BUSINESS FOR ITS OPERATIONS AND FOR MARKETING ITS C RUISE PACKAGES AND SHORE EXCURSIONS. AS A PART OF THIS ARRANGEMENT AND VID E AGREEMENT DATED 1 ST MARCH 2005 STAR INDIAS OBLIGATIONS AND DUTIES ARE AS FOLLOWS: I. TO ACT AS CANVASSER IN INDIA FOR CRUISE PACKAG ES SHORE EXCURSIONS PROMOTED BY SCML. IN RESPECT OF VESSELS OWNED CHARTERED MANAGED AND/OR OPERATED BY STAR CRUISE GROUP OF COMPANIES FROM TIME TO TIME. II. TO AND REMIT MONIES RECEIVED FROM PSAS FOR CRU SE PACKAGES SHORE EXCURSIONS PROMOTED BY SCML IN IN DIA. III. TO KEEP SCML ADVISED ON ALL RELEVANT LAWS AN D REGULATIONS AND OPERATING CRITERIA RELATING TO THE SALE OF TICKETS WITH PARTICULAR REFERENCE TO CONSUMER AND CONTRACT LEGISLATION. IV. TO TREAT AS CONFIDENTIAL ALL BOOKS DOCUMENTS AND INFORMATION RECEIVED FROM SCML AND TO RETURN THE SA ME UPON DEMAND; AND V. TO KEEP AND RENDER TO SCML FAIR AND ACCURATE AC COUNTS OF ANY DEALINGS OR OF ALL MONIES RECEIVED BY SCITS FROM PSAS IN RELATIONS TO SALE BOOKING CONFIRMATION FO R AND ON BEHALF OF SCML AND TO PAY OVER TO SCML ALL MONIE S SO RECEIVED FROM PSAS WITHOUT ANY DEDUCTIONS EXCEPT AS MAY BE AGREED UPON OR AUTHORIZED BETWEEN SCML AND SCITS. 4. IN CONSIDERATION OF SERVICES SO RENDERED THE ST AR ISLE OF MAN WAS TO PAY 3% OF NET CRUISE CHARGES REMITTED BY THE STAR INDI A AS RETAINER FEES. THE I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 4 OF 21 OTHER OBLIGATIONS OF STAR ISLE OF MAN AS SET OUT I N THE CANVASSER AGREEMENT ARE AS FOLLOWS: 3.1 SCML SHALL PROVIDE AND SUPPLY SCITS WITH PROMOTIO NAL INFORMATION AND DETAILS OF THE PROGRAM AND ITINERAR IES IN RESPECT OF THE CRUISE VESSELS. 3.2 SCML SHALL PROVIDE AND SUPPLY SCITS WITH ALL INF ORMATION IN RELATION TO CUSTOMS IMMIGRATION AND QUARANTINE REG ULATIONS IN THE COUNTRIES WHERE THE VESSELS OPERATE. 3.3 SCML SHALL PAY A PRESCRIBED RETAINER FEE TO SCIT S IN ACCORDANCE WITH CLAUSE 4 TO THIS AGREEMENT. 3.4 SCML SHALL KEEP SCITS INFORMED OF THE RATES IN FO RCE AND THE TERMS AND CONDITIONS OF VARIOUS CRUISE PACKAGES FRO M TIME TO TIME WHICH SCITS IS NOT ENTITLED TO CHANGE. 3.5 SCML SHALL ISSUE THE BOOKING CONFIRMATION/STATEM ENT TO PSAS ONLY UPON FULL RECEIPT OF THE MONIES COLLECTED ON BEHALF. 5. ON THESE FACTS THE STAND OF THE ASSESSING OFFIC ER HAS BEEN THAT STAR ISLE OF MAN IS LIABLE TO BE TAXED IN INDIA IN RESPECT O F 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 WHI CH 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 INC OME TAX ACT 1961. THE ASSESSING OFFICER ALSO RELIED UPON HONBLE SUPREME COURTS JUDGMENTS IN THE CASES OF CIT VS R D AGGARWAL & CO (56 ITR 20) AND ANGLO FRENCH TEXTILE CO. LTD VS CIT (23 ITR 101) TO COME TO THE CONCLUSION T HAT THE ESSENTIAL FEATURES OF BUSINESS CONNECTION FOR THE PURPOSES OF APPLI CATION OF SECTION 9(1)( I) ARE AS FOLLOWS: I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 5 OF 21 A REAL AND INTIMATE RELATION MUST BETWEEN THE TRADI NG ACTIVITIES BY A NON-RESIDENT CARRIED ON OUTSIDE IND IA AND THE ACTIVITIES WITHIN INDIA. THE RELATION CONTRIBUTION DIRECTLY OR INDIRECTLY TO THE EARNING OF INCOME BY THE NON-RESIDENT IN HIS BUSINESS; A COURSE OF DEALING OR CONTINUITY OF RELATIONSHIP A ND NOT A MERE ISOLATED OR STAY NEXUS BETWEEN THE BUSINESS OF THE NON- RESIDENT INDIA AND THE ACTIVITY IN INDIA WOULD FUR NISH A STRONG INDICATION OF BUSINESS CONNECTION. 6. THE ASSESSING OFFICER BASED ON THIS ANALYSIS OF LEGAL POSITION AS ALSO TAKING INTO ACCOUNT THE FACT THAT THE CLIENTS FOR THE CRUISE MAKE PAYMENT OF CRUISE CHARGES IN INDIA WAS OF THE VIEW THAT THERE EXISTS A BUSINESS CONNECTION IN INDIA OF THE CRUISE ACTIVITY OF THE PAYEE ( I.E. STAR ISLE OF MAN) WHICH MAY BE TAKING PLACE OUTSIDE INDIA . IN EFFECT HE WAS OF THE OPINION THAT THE INCOME ON ACCOUNT OF SALE OF PASSA GE IS DEEMED TO ACCRUE OR ARISE IN INDIA BY THE VIRTUE OF STAR ISLE OF MANS BUSINESS CONNECTION IN INDIA. HAVING THUS HELD THE TAXABILITY OF STAR ISLE OF MAN S INCOME ON SALE OF CRUISE PASSAGE IN INDIA THE ASSESSING OFFICER PROCEEDED T O DETERMINE BASED ON CERTAIN ASSUMPTIONS WHICH WE NEED NOT DEAL WITH AT THIS STAGE THE QUANTUM OF INCOME TAXABLE IN INDIA AT 5% OF THE NET CRUISE CHARGES. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER ASSESSEE C ARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). LEARNED CIT(A) HELD THAT IN THE PRESENT CASES SERVICES RENDERED BY THE ASSESSEE ARE GENERAL IN NATURE AND THAT CANNOT BE INTERPRETED TO GIVE COLOUR OF BUSINESS CONNECTIONS AS CONTEMPLATED UNDER SECTION 9(1)(I) OF THE ACT . ACCORDINGLY IT WAS CONCLUDED THAT STAR ISLE OF MAN HAD NO TAX LIABILITY IN INDIA AND THE REFORE THE ASSESSEE COULD NOT BE FAULTED FOR NOT DEDUCTING TAX AT SOURCE FROM CRU ISE PASSAGE REMITTANCES MADE TO STAR ISLE OF MAN. THE IMPUGNED TAX LIABILI TY WAS THUS QUASHED. THE ASSESSING OFFICER IS NOT SATISFIED BY THE RELIEF SO GRANTED BY THE COMMISSIONER (APPEALS) AND IS IN APPEAL BEFORE US. I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 6 OF 21 7. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS A LSO THE APPLICABLE LEGAL POSITION. 8. LET US FIRST LOOK AT THE SCHEME OF TAXABILITY OF NON-RESIDENT TAXPAYERS UNDER THE INDIAN INCOME TAX ACT 1961 SO FAR AS RE LEVANT TO ISSUE IN APPEAL BEFORE US. THE SOURCE RULE OF TAXATION WHICH TYPIC ALLY ORIGINATES IN DOMESTIC TAX LAW IS BASED ON THE PRINCIPLE THAT AN INCOME E ARNED IN A TAX JURISDICTION IRRESPECTIVE OF THE RESIDENTIAL STATUS OF THE PERSO N 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 T O BE TAXED AS A RULE ATTRACTS TAXABILITY IN THE SOURCE JURISDICTION. ON THE FAC E 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 O NLY COVER ANY INCOME OF A PERSON DE HORS HIS RESIDENTIAL STATUS WHICH ACC RUES 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 SU BJECT 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 D ERIVED WHICH IS (A) RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SU CH YEAR BY OR ON BEHALF OF SUCH PERSON; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR. SECTION 9 WHICH SETS OU T THE SCOPE OF EXPRESSION INCOME DEEMED TO ACCRUE OR ARISE IN INDIA INTER ALIA STATES ALL INCOME ACCRUING OR ARISING WHETHER DIRECTLY OR INDIRECTLY THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA OR THROUGH OR FROM AN Y PROPERTY IN INDIA OR THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN IN DIA OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA WILL BE DEEMED TO ACCRUE OR ARISE IN INDIA. IN EFFECT THUS IT WOULD SEEM THAT AS LON G AS AN INCOME HAS BUSINESS I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 7 OF 21 CONNECTION IN INDIA NO MATTER IN WHICH PART OF TH E WORLD IT ACCRUES OR ARISES IT CAN STILL BE CHARGED TO TAX IN INDIA. 9. THE TAXABILITY OF THE STAR ISLE OF MAN IN INDIA MUST THEREFORE DEPEND ON WHETHER OR NOT STAR ISLE OF MAN COULD BE SAID TO HAVE A BUSINESS CONNECTION IN INDIA WITHIN MEANINGS ASSIGNED TO TH AT EXPRESSION UNDER SECTION 9(1)(I) OF THE INDIAN INCOME TAX ACT 1961 AND IF SO TO WHAT EXTENT INCOME EARNED BY STAR ISLE OF MAN COULD BE SAID TO BE ATTRIBUTED TO SUCH BUSINESS CONNECTION IN INDIA. 10. SECTION 9(1)(I) AS IT STOOD AT THE RELEVANT PO INT OF TIME IS AS FOLLOWS: SECTION 9: INCOME DEEMED TO ACCRUE OR ARISE IN INDI A (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA: (I) ALL INCOME ACCRUING OR ARISING WHETHER DIRECTL Y OR INDIRECTLY THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA O R THROUGH OR FROM ANY PROPERTY IN INDIA OR THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN INDIA OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA; EXPLANATION 1: FOR THE PURPOSES OF THIS CLAUSE (A) IN THE CASE OF A BUSINESS OF WHICH ALL THE OPER ATIONS ARE NOT CARRIED OUT IN INDIA THE INCOME OF THE BUSINES S DEEMED UNDER THIS CLAUSE TO ACCRUE OR ARISE IN INDIA SHALL BE ONLY SUCH PART OF THE INCOME AS IS REASONABLY ATTRIBUTAB LE TO THE OPERATIONS CARRIED OUT IN INDIA; (B) IN THE CASE OF A NON-RESIDENT NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA TO HIM THROUGH OR FROM I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 8 OF 21 OPERATIONS WHICH ARE CONFINED TO THE PURCHASE OF GO ODS IN INDIA FOR THE PURPOSE OF EXPORT; (C) IN THE CASE OF A NON-RESIDENT BEING A PERSON E NGAGED IN THE BUSINESS OF RUNNING A NEWS AGENCY OR OF PUBLISH ING NEWSPAPERS MAGAZINES OR JOURNALS NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA TO HIM THROUGH O R 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 IND IA 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 AN Y CINEMATOGRAPH FILM IN INDIA; EXPLANATION 2 : FOR THE REMOVAL OF DOUBTS IT IS HE REBY DECLARED THAT 'BUSINESS CONNECTION' SHALL INCLUDE ANY BUSINE SS ACTIVITY CARRIED OUT THROUGH A PERSON WHO ACTING ON BEHALF OF THE NON- RESIDENT (A) HAS AND HABITUALLY EXERCISES IN INDIA AN AUTHO RITY TO CONCLUDE CONTRACTS ON BEHALF OF THE NON-RESIDENT UN LESS HIS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MERCHANDISE FOR THE NON-RESIDENT; OR (B) HAS NO SUCH AUTHORITY BUT HABITUALLY MAINTAINS IN INDIA A STOCK OF GOODS OR MERCHANDISE FROM WHICH HE REGUL ARLY DELIVERS GOODS OR MERCHANDISE ON BEHALF OF THE NON- RESIDENT; OR (C) HABITUALLY SECURES ORDERS IN INDIA MAINLY OR W HOLLY FOR THE NON-RESIDENT OR FOR THAT NON-RESIDENT AND OTHER NON- RESIDENTS CONTROLLING CONTROLLED BY OR SUBJECT TO THE SAME COMMON CONTROL AS THAT NON-RESIDENT: PROVIDED THAT SUCH BUSINESS CONNECTION SHALL NOT IN CLUDE ANY BUSINESS ACTIVITY CARRIED OUT THROUGH A BROKER GENERAL I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 9 OF 21 COMMISSION AGENT OR ANY OTHER AGENT HAVING AN INDEPENDENT STATUS IF SUCH BROKER GENERAL COMMISS ION AGENT OR ANY OTHER AGENT HAVING AN INDEPENDENT STAT US IS ACTING IN THE ORDINARY COURSE OF HIS BUSINESS EXPLANATION 3 : WHERE A BUSINESS IS CARRIED ON IN I NDIA THROUGH A PERSON REFERRED TO IN CLAUSE (A) OR CLAUSE (B) OR C LAUSE (C) OF EXPLANATION 2 ONLY SO MUCH OF INCOME AS IS ATTRIBU TABLE TO THE OPERATIONS CARRIED OUT IN INDIA SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. (A) HAS AND HABITUALLY EXERCISES IN INDIA AN AUTHO RITY TO CONCLUDE CONTRACTS ON BEHALF OF THE NON-RESIDENT UN LESS HIS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MERCHANDISE FOR THE NON-RESIDENT; OR (B) HAS NO SUCH AUTHORITY BUT HABITUALLY MAINTAINS IN INDIA A STOCK OF GOODS OR MERCHANDISE FROM WHICH HE REGUL ARLY DELIVERS GOODS OR MERCHANDISE ON BEHALF OF THE NON- RESIDENT; OR (C) HABITUALLY SECURES ORDERS IN INDIA MAINLY OR W HOLLY FOR THE NON-RESIDENT OR FOR THAT NON-RESIDENT AND OTHER NON- RESIDENTS CONTROLLING CONTROLLED BY OR SUBJECT TO THE SAME COMMON CONTROL AS THAT NON-RESIDENT: PROVIDED THAT SUCH BUSINESS CONNECTION SHALL NOT IN CLUDE ANY BUSINESS ACTIVITY CARRIED OUT THROUGH A BROKER GENERAL COMMISSION AGENT OR ANY OTHER AGENT HAVING AN INDEPENDENT STATUS IF SUCH BROKER GENERAL COMMISS ION AGENT OR ANY OTHER AGENT HAVING AN INDEPENDENT STAT US IS ACTING IN THE ORDINARY COURSE OF HIS BUSINESS : 11. A PLAIN READING OF THE ABOVE STATUTORY PROVISIO NS MAKES IT CLEAR THAT ANY INCOME DIRECTLY OR INDIRECTLY ACCRUING OR ARISI NG TO A NON-RESIDENT THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA IS IN PRINCIPLE TAXABLE IN INDIA. EVEN AS THE LEGAL PROVISION THROWS SOME LIGH T ON WHAT WILL AND WHAT WILL NOT CONSTITUTE BUSINESS CONNECTION THE PRECI SE CONNOTATIONS AND SCOPE OF BUSINESS CONNECTION REMAINS TO BE NEATLY DEFIN ED. HOWEVER ONE I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 10 OF 21 IMPORTANT PRINCIPLE WHICH IS CLEARLY DISCERNABLE FR OM THE STATUTORY PROVISION IS THAT EVEN WHEN THERE IS A BUSINESS CONNECTION B Y WAY OF AN AGENT OR OTHERWISE THE INCOME WHICH CAN BE SUBJECTED TO TAX IN INDIA CAN NEVER EXCEED THE INCOME ATTRIBUTABLE TO OPERATIONS CARRIE D OUT IN INDIA BY THE NON-RESIDENT OR BY THE AGENT. CLAUSE (A) OF EXPLAN ATION 1 TO SECTION 9(1)(I) MAKES IT CLEAR THAT IN THE CASE OF A BUSINESS OF W HICH ALL THE OPERATIONS ARE NOT CARRIED OUT IN INDIA THE INCOME OF THE BUSINES S 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 O UT 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 CONNECT ION 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 SO ME PART OF OPERATIONS ARE NOT CARRIED OUT IN INDIA TAXABILITY UNDER SECTION 9(1)(I) R.W.S. 5(2)(B) CAN NOT EXCEED INCOME REASONABLY ATTRIBUTABLE TO OPERAT IONS CARRIED OUT IN INDIA IN THE CASE OF AN AGENT DEPENDENT OR INDEPE NDENT TAXABILITY IN INDIA CANNOT EXCEED THE INCOME ATTRIBUTABLE TO OPERATION S CARRIED OUT IN INDIA. WHATEVER BE THE OPERATIONS THAT AN AGENT CARRIES OU T FOR THE NON RESIDENT HE IS COMPENSATED FOR THE SAME UNDER THE AGREEMENT UNDER WHICH THE SAID OPERATIONS ARE CARRIED OUT. ACCORDINGLY IN THE CA SE OF BUSINESS CONNECTION BY THE VIRTUE OF A SALES AGENT BY WHATEVER NAME CA LLED NON-RESIDENTS INCOME DEEMED TO ACCRUE OR ARISE IN INDIA CAN ONLY BE SUCH INCOME AS IS ATTRIBUTABLE TO THE OPERATIONS SO CARRIED OUT BY TH E AGENT. ONE WAY OF LOOKING AT THIS SITUATION IS THIS. WHAT CAN BE LOGI CALLY DEDUCED FROM THESE DISCUSSIONS IS THAT IN A CASE IN WHICH AGENT OF TH E NON-RESIDENT WHICH CONSTITUTES THE BUSINESS CONNECTION HAS ALREADY BE EN COMPENSATED FOR THE SERVICES RENDERED BY THE AGENT OR TO PUT IT DIFFE RENTLY OPERATIONS CARRIED OUT FOR THE NON- RESIDENT IN INDIA AND IT IS NOT E VEN THE CASE OF THE REVENUE THAT AGENT HAS NOT BEEN PAID ARMS-LENGTH OR FAIR RE MUNERATION FOR THE SERVICES SO RENDERED OR OPERATIONS SO CARRIED OUT IN INDIA THERE CANNOT BE I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 11 OF 21 ANY FURTHER INCOME OF THE NON- RESIDENT WHICH CAN B E BROUGHT TO TAX UNDER SECTION 9(1)(I) R.W.S. 5(2)(B). VIEWED THUS WHETH ER A SALES AGENT BY WHATEVER NAME CALLED CONSTITUTES A BUSINESS CONNEC TION OR NOT IS A WHOLLY ACADEMIC QUESTION UNLESS OF COURSE THE VERY FAC T OF SUCH AGENT HAVING BEEN COMPENSATED FAIRLY OR AT AN ARMS LENGTH FOR THE WORK DONE FOR THE NON-RESIDENT IS UNDER CHALLENGE. A NON-RESIDENTS TAX LIABILITY UNDER SECTION 9 (1)(I) R.W.S. 5(2)(B) CANNOT COME INTO PLAY IN A SITUATION IN WHICH A SALES AGENCY- DEPENDENT OR INDEPENDENT WHICH CONSTITUTES HIS BUSINESS CONNECTION IN INDIA IS PAID A FAIR AND ARMS-LENG TH REMUNERATION FOR THE SERVICES RENDERED BY HIM OR OPERATIONS CARRIED OUT BY HIM. WHAT IS PERCEIVED AS STAR ISLE OF MANS BUSINESS CONNECTION IN INDIA IS STAR INDIA BUT GIVEN THIS SITUATION IT IS WHOLLY IMMATERIAL AS TO WHETHER OR NOT STAR INDIA INDEED CONSTITUTES STAR ISLE OF MANS BUSINESS CONN ECTION IN INDIA. VIEWED FROM THIS PERSPECTIVE THE VERY FOUNDATION OF THE CASE MADE OUT BY THE ASSESSING OFFICER IS THUS DEVOID OF LEGALLY SUSTAIN ABLE BASIS AND THE CIT(A) WAS QUITE JUSTIFIED IN HOLDING THAT NO TAXABILITY C AN BE IMPOSED ON THE STAR ISLE OF MAN BY THE VIRTUE OF SECTION 9(1)(I) R.W.S. 5(2)(B). HOWEVER GIVE THE FACTUAL MATRIX OF THIS CASE IN WHICH THE MATTER IS ALREADY COVERED BY HONBLE HIGH COURTS JUDGMENT IN FAVOUR OF THE ASSESSEE IT IS NOT REALLY NECESSARY TO GIVE A JUDICIAL ADJUDICATION ON THIS SCHOOL OF THOU GHT. 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 S HOULD NOT BE TREATED AS OF PRECEDENCE VALUE. IN THE PRESENT CASE THE PRINC IPAL TAX LIABILITY ITSELF IS QUASHED BY A COORDINATE BENCH OF THIS TRIBUNAL.. A S STAR INDIAS TAX WITHHOLDING LIABILITY IS ONLY A VICARIOUS LIABILITY UNDER SECTION 195 ONCE WE COME TO THE CONCLUSION THAT STAR ISLE OF MAN DID NO T HAVE ANY PRINCIPAL TAX LIABILITY IN INDIA THE IMPUGNED VICARIOUS TAX WITH HOLDING LIABILITY OF STAR INDIA MUST ALSO BE HELD TO BE NOT GOOD IN LAW. THE CIT(A) WAS QUITE JUSTIFIED IN DELETING THE SAME. I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 12 OF 21 12. IN THE LIGHT OF THE ABOVE DISCUSSIONS WHAT APP EARS 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 RESIDENTIAL STATUS OF THE PERSON EARNING THE SAID INCOME IN THE TAX JURISDICTION WHERE THE INCOME IS EARNED. WHILE THE MAIN PROVISION OF THE DEEMING FICTION SEEMS TO BE TAKING A RATHER AGGRESSIVE VIEW OF THE SOURCE RULE EXPLANATIONS TO THE DEEMING FICTION CONSIDERABLY NARROW DOWN THE SCOPE OF THE SAME. IT IS IMPORTANT TO NOTE THAT EVEN THIS DEEMING PROVISION RESTRICTS TAXABILITY OF AN INCOME OF THE NON- RESIDENT TO THE EXTENT OF INCOME ATTRIBUTABLE TO TH E OPERATIONS CARRIED OUT IN THE SOURCE JURISDICTION AND THAT IS QUITE IN HARMO NY WITH THE FIRST PRINCIPLES OF SOURCE RULE OF TAXATION WHICH HAS BEEN EMBEDDED IN THE SCHEME OF THE INDIAN INCOME TAX ACT AS WELL. AS A MATTER OF FACT THE PROVISIONS OF SECTION 9(1)(I) AS THEY STAND NOW ARE SOMEWHAT OVERLAPPIN G IN EFFECT INASMUCH AS THESE PROVISIONS COVER ONLY SUCH INCOME OF THE NON RESIDENT AS IS ATTRIBUTABLE TO OPERATIONS CARRIED OUT BY THE NON RESIDENT OR HIS AGENT IN INDIA WHICH MAY ANYWAY BE TAXABLE UNDER SECTION 5( 2)(B) AS INCOME ACCRUING OR ARISING IN INDIA. IN OTHER WORDS SECTI ON 9(1)(I) DOES NOT APPEAR TO BE ANYTHING MORE THAN CLARIFICATORY ABOUT THE SC OPE OF FIRST LIMB OF SECTION 5(2)(B). THE DIRECT TAXES BILL 2011 MAKES THIS OVE RLAPPING EFFECT EVEN MORE GLARING BY PROVIDING UNDER SECTION 314(40) THAT A BUSINESS CONNECTION WILL INCLUDE PERMANENT ESTABLISHMENT AND BY SETTING OUT UNDER SECTION 314(183) A RATHER EXHAUSTIVE DEFINITION OF PERMAN ENT ESTABLISHMENT AS A FIXED PLACE OF BUSINESS THROUGH WHICH BUSINESS OF T HE NON RESIDENT IS WHOLLY OR PARTLY CARRIED OUT. WHEN A NON RESIDENT HAS A PL ACE OF BUSINESS THROUGH WHICH HIS BUSINESS IS WHOLLY OR PARTLY CARRIED OUT THE INCOME OF BUSINESS SO CARRIED OUT HAS TO BE TREATED AS ACCRUING OR ARISI NG IN INDIA AND ITS TAXABILITY IS NOT TO DEPEND UPON A DEEMING FICTION AS BUSINESS CONNECTION ENVISAGES. THE DEEMING FICTION OF BUSINESS CONNEC TION IN THIS VIEW OF THE MATTER DOES NOT REALLY ENLARGE THE SCOPE OF NON RE SIDENTS TAXABILITY IN INDIA I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 13 OF 21 BUT ENDS UP SUBSTITUTING FOR IN A LIMITED AND SOME WHAT AMBIGUOUS WAY THOUGH THE PE PROFIT ALLOCATION RULES UNDER THE DO MESTIC LAW. 13. WHILE DEALING WITH THE CONCEPT OF BUSINESS CONN ECTION UNDER THE LEGAL POSITION AS IT STANDS NOW IT IS USEFUL TO ALSO TA KE NOTE OF THE CONCEPT OF BUSINESS CONNECTION AS SET OUT IN THE INCOME TAX ACT 1922 AND IN THE CONTEXT OF WHICH SEVERAL LANDMARK JUDICIAL PRECEDEN TS INCLUDING 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 W ELL WERE DELIVERED. 14. SECTION 42(1) OF THE 1922 ACT IN SO FAR AS IT MATERIAL IN THIS CONTEXT INTER ALIA PROVIDED THAT ALL INCOMES PROFITS AND GAINS ACC RUING OR ARISING WHETHER DIRECTLY OR INDIRECTLY THROUGH OR FROM ANY TAXABLE TERRITORIES ( I.E. TERRITORIES UNDER DIRECT CONTROL OF BRITISH INDIA A ND EXCLUDING PRINCELY STATES) SHALL BE DEEMED TO BE INCOME ACCRUING OR ARISING WI THIN THE TAXABLE TERRITORIES. THIS PROVISION EXISTED AT A TIME WHE N A PART OF INDIA WAS UNDER DIRECT BRITISH RULE IN WHICH INDIAN INCOME T AX 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 I NCOME 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 CARRI ED OUTSIDE TAXABLE TERRITORIES. IT WAS IN THIS BACKDROP THAT THE LEGIS LATION SAW AN EXTENDED SOURCE RULE ARGUABLY TYPICAL OF COLONIAL APPROACH TO EXTEND ITS AREA OF JURISDICTION WHICH LAID DOWN THAT AS LONG AS THERE IS A BUSINESS CONNECTION IN THE TAXABLE TERRITORIES THE INCOME OF A PERSON LIVING OUTSIDE TAXABLE TERRITORIES WAS ALSO SUBJECT TO TAXATION IN BRITISH INDIA. ONCE THIS PROVISION WAS ATTRACTED RULE 33 PROVIDED THE METHOD OF COMPU TATION OF INCOME DEEMED TO ACCRUE OR ARISE IN INDIA WHICH RANGED FR OM (A) A PERCENTAGE OF I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 14 OF 21 TURNOVER CONSIDERED REASONABLE; (B) A PROPORTION OF THE TOTAL PROFITS (COMPUTED ACCORDING TO THE PROVISIONS OF THE INDIAN IT ACT) OF THE BUSINESS OF THE ASSESSEE EQUAL TO THE PROPORTION WHICH THE R ECEIPTS ACCRUING OR ARISING BEAR TO THE TOTAL RECEIPTS OF THE BUSINESS; AND (C) IN SUCH OTHER MANNER AS THE ITO MAY DEEM SUITABLE [ SEE NETHERLANDS STEAM NAVIGATION CO LTD VS CIT 74 ITR 72 SC]. THESE LEGAL PROVISIONS WERE SO JUDICIALLY INTERPRETED THAT A COMPANY RESIDENT OUTSIDE BRITIS H INDIA WHICH RECEIVED GOODS FROM BRANCHES WITHIN BRITISH INDIA WAS ASSES SABLE TO INDIAN INCOME TAX IN RESPECT OF SALE OF THOSE GOODS OUTSIDE BRITI SH INDIA. TAKING NOTE OF THESE RESULTS CHIEF JUSTICE BEAUMONT WITH DIG NIFIED RESTRAINT WHICH WAS HALLMARK OF JUDICIAL CONDUCT IN THE GOOD OLD DAYS A NYWAY OBSERVED THUS: THESE DECISIONS SHOW THAT IN THE CASE OF A NON-RE SIDENT INCOME WHICH NEITHER ACCRUES OR ARISES NOR IS RECEIVED WI THIN BRITISH INDIA MAY BE LIABLE TO TAX UNDER THE COMBINED OPER ATION OF SS. 3 4 AND 42; THAT IS TO SAY A NON- RESIDENT MAY BE LIABLE TO TAX IN RESPECT OF SOURCES OF INCOME WHICH WOULD NOT BE L IABLE TO TAX IN THE CASE OF A RESIDENT. THE PROPOSITION IS NO DOUBT A SOMEWHAT STARTLING ONE BUT IT IS DESIRABLE THAT DECISIONS OF COURTS IN INDIA UNDER THE INCOME TAX ACT SHOULD BE UNIFORM AS FAR A S PRACTICABLE AND I THINK WE OUGHT TO FOLLOW THESE TWO CASES WITH OUT PAUSING TO INQUIRE WHETHER WE SHOULD OURSELVES HAVE ARRIVED AT THE SAME CONCLUSION CIT VS. NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRAL ASIA ( 1 ITR 350) 15. IT IS THUS CLEAR THAT UNDER THE SCHEME OF THE D OMESTIC LAW AS IT THEN STOOD; A MERE BUSINESS CONNECTION WAS ENOUGH TO ATT RACT TAXABILITY OF A BUSINESS SUBJECT I.E. BUSINESS ITSELF. THE QUANTUM OF TAXABILITY WAS THEN DETERMINED ON THE BASIS OF THE PROVISIONS OF THE DO MESTIC LAW I.E. PERCENTAGE OF TURNOVER PROPORTION OF PROFITS OR SUCH OTHER RE SIDUAL METHOD AS THE I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 15 OF 21 ASSESSING OFFICER MAY ADOPT. THESE APPARENTLY HARS H PROVISIONS RESULTED IN SITUATIONS AS WAS NOTED BY HONBLE BOMBAY HIGH COU RT 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 C ARRIED OUT BY A NON- RESIDENT. CONTRAST THIS WITH THE PRESENT SCHEME OF LAW WHICH REFERS TO BUSINESS CONNECTION BUT EXPRESSLY RESTRICTS THE TAX ABILITY TO BUSINESS OBJECT I.E. BUSINESS ACTIVITY CARRIED OUT IN INDIA AND RE STRICTS THE SAME ONLY TO SUCH OPERATIONS AS ARE PERFORMED IN INDIA. THEREFORE W HEN BUSINESS ACTIVITY IS NOT CARRIED OUT IN INDIA THERE CANNOT BE ANY TAXAB ILITY IN INDIA AT ALL. THESE TWO SET OF PROVISIONS I.E. IN THE INDIAN INCOME TA X ACT 1922 AND IN THE INCOME TAX ACT 1961 ARE IN A WAY DIFFERENT IN SCOP E 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 MA Y ADD THAT IN THE LATER CASES MOST NOTABLY IN R D AGGARWALS CASE (SUPRA) HONB LE SUPREME COURT HAS HELD RESTRICTED APPLICATION OF TAXABILITY AS A RESU LT OF BUSINESS CONNECTION BUT WE WILL DEAL WITH THAT ASPECT OF THE MATTER A L ITTLE LATER. 16. IN ANGLO FRENCH TEXTILE CO. LTDS CASE (SUPRA) FOR EXAMPLE HONBLE SURPEME COURT WERE IN SEISIN OF A SITUATION IN WHICH ENTIRE SOURCING OF RAW MATERIAL WAS DONE FROM BRITISH INDIA WHILE MANUFAC TURING ACTIVITY WAS CARRIED OUT IN FRENCH INDIA (I.E. PONDICHERRY) AND ALSO SALES WAS ENTIRELY OUTSIDE BRITISH INDIA. IT WAS IN THIS CONTEXT THAT THEIR LORDSHIPS INTER ALIA OBSERVED THAT THE ASSESSEE HAD A BUSINESS CONNECTI ON IN INDIA BY THE VIRTUE OF HAVING SOURCING OPERATIONS IN INDIA AND ACCOR DINGLY INCOME IN RESPECT OF THE SAME IN DEEMED TO ACCRUE OR ARISE IN BRITISH INDIA. SOURING OF RAW MATERIAL IS AN INTEGRAL PART OF THE BUSINESS ACTIVI TY BUT THEN IF THESE FACTS ARE TO BE EXAMINED ON THE TOUCHSTONE OF LEGAL POSITION AS IT STANDS NOW IN VIEW OF THE PROVISIONS OF EXPLANATION 1(B) TO SECTION 9 (1)(I) WHICH PROVIDES THAT NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN IND IA TO HIM THROUGH I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 16 OF 21 OR FROM OPERATIONS WHICH ARE CONFINED TO THE PURCHA SE OF GOODS IN INDIA FOR THE PURPOSE OF EXPORT MERELY BECAUSE RAW MATERIAL IS PURCHASED FROM INDIA AND EXPORTED OUTSIDE INDIA FOR PROCESSING TA XABILITY CAN NOT ARISE. THE LEGAL PROVISIONS ARE THUS NOT IN PARI MATERIA VIS--VIS THE LEGAL PROVISIONS AS THEY STOOD AT THE RELEVANT POINT OF TIME. WHEN LEGA L PROVISIONS ARE NOT IN PARI MATERIA THE JUDICIAL PRECEDENT CEASES TO BE RELEVANT IN T HE PRESENT CONTEXT. 17. WE MUST AT THIS STAGE BRIEFLY DEAL WITH A VERY ILLUMINATING JUDGMENT OF HONBLE SUPREME COURT WHICH DESERVES TO BE NOTED AS MUCH FOR ITS BINDING NATURE AS MUCH FOR A VERY ERUDITE AND PRAGMATIC ANA LYSIS OF THE CONCEPT OF BUSINESS CONNECTION IN THE LIGHT OF COMMERCIAL RE ALITIES. IN THIS JUDGMENT I.E. R D AGGARWALS CASE (SUPRA) HONBLE SUPREME COURT HAD AN OCCASION TO DEAL WITH A SITUATION IN WHICH THE ASSESSEE WAS CA RRYING ON THE BUSINESS AS COMMISSION AGENTS FOR TWO NON-RESIDENT EXPORTERS OF WORSTED WOOLLEN YARN. THE QUESTION WHICH CAME UP FOR CONSIDERATION OF HON BLE SUPREME COURT WAS WHETHER THE NON-RESIDENT EXPORTERS COULD BE SAID TO HAVE BUSINESS CONNECTION IN INDIA ON ACCOUNT OF THEIR SALE AGENC Y ARRANGEMENTS WITH THE INDIAN CONCERN AND WHETHER ON THAT BASIS A PART OF INCOME OF THE NON- RESIDENT EXPORTERS COULD BE BROUGHT TO TAX IN INDIA . THEIR LORDSHIPS TOOK NOTE OF THE FACT THAT THE ASSESSEE WAS NOT AN AGENT OF THE NON-RESIDENT INASMUCH AS ASSESSEE MERELY COMMUNICATES THE ORDERS CANVASSED BY THEM TO THE NON-RESIDENTS FOR ACCEPTANCE AND FINAL DECISIO N TO ACCEPT OR NOT TO ACCEPT THE ORDER RESTS WITH THE PRINCIPALS. THEIR L ORDSHIPS NOTED THAT THAT THE ONLY QUESTION THAT FALLS TO BE DETERMINED IN T HESE APPEALS IS WHETHER THERE WAS IN TWO CASES BETWEEN THE NON-RESIDENTS A ND 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 QU ESTION BE IN AFFIRMATIVE THE ASSESSEE WOULD AS STATUTORY AGENT BE CHARGEAB LE TO TAX ON BEHALF OF THE NON-RESIDENT COMPANIES ON PROFITS AND GAINS REASON ABLY ATTRIBUTABLE TO I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 17 OF 21 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 FO UND BY THE REVENUE AUTHORITIES CONTRACTS FOR THE SALE OF GOOD S TOOK PLACE OUTSIDE THE TAXABLE TERRITORIES PRICE WAS RECEIVED BY THE NON- RESIDENTS OUTSIDE THE TAXABLE TERRITORIES AND DELI VERY WAS ALSO GIVEN OUTSIDE THE TAXABLE TERRITORIES. NO OPERATION SUCH AS PROCURING RAW MATERIALS MANUFACTURE OF FINISHED GO ODS SALE OF GOODS OR DELIVERY OF GOODS AGAINST PRICE TOOK PLACE WITHIN THE TAXABLE TERRITORIES : THE ASSESSEE MERELY PROCURED ORDERS FROM MERCHANTS IN AMRITSAR FOR PURCHASE OF GOODS FROM TH E NON- RESIDENT COMPANIES. THE ORDERS WERE OFFERS WHICH TH E ASSESSEES HAD NO AUTHORITY TO ACCEPT ON BEHALF OF THE NON-RES IDENTS. SOME COMMERCIAL ACTIVITY WAS UNDOUBTEDLY CARRIED ON BY T HE ASSESSEES IN THE MATTER OF PROCURING ORDERS WHICH RESULTED IN CONTRACTS FOR SALE BY THE NON-RESIDENTS OF GOODS TO MERCHANTS AT AMRITSAR. BUT ON THIS ACCOUNT NO BUSINESS CONNECTION OF THE ASSES SEES WITH THE NON-RESIDENTS WITHIN THE TAXABLE TERRITORIES RESULT ED. THE ACTIVITY OF THE ASSESSEES IN PROCURING ORDERS WAS NOT AS AGE NTS OF THE NON- RESIDENTS IN THE MATTER OF SALE OF GOODS MANUFACTUR ED BY THE LATTER NOR OF PROCURING RAW MATERIALS IN THE TAXAB LE TERRITORIES FOR THEIR MANUFACTURING PROCESS. THEIR ACTIVITIES L ED TO THE MAKING OF OFFERS BY MERCHANTS IN THE TAXABLE TERRIT ORIES TO PURCHASE GOODS MANUFACTURED BY THE NON-RESIDENTS WH ICH THE LATTER WERE NOT OBLIGED TO ACCEPT. THE EXPRESSION ' BUSINESS CONNECTION' POSTULATES A REAL AND INTIMATE RELATION BETWEEN TRADING ACTIVITY CARRIED ON OUTSIDE THE TAXABLE TER RITORIES AND TRADING ACTIVITY WITHIN THE TERRITORIES THE RELATI ON BETWEEN THE I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 18 OF 21 TWO CONTRIBUTING TO THE EARNING OF INCOME BY THE NO N-RESIDENT IN HIS TRADING ACTIVITY. IN THIS CASE WAS SUCH A RELAT ION IS ABSENT. 18. IN ESSENCE THUS THEIR LORDSHIPS HAVE HELD THAT THE EXPRESSION BUSINESS CONNECTION DOES NOT COVER IN ITS SCOPE MERE CANVASSING FOR BUSINESS BY AN AGENT IN INDIA AS IS THE SITUATION T HAT WE ARE IN SEISIN OF IN THIS CASE. THEIR LORDSHIPS ALSO OBSERVED THAT THE EXPRES SION BUSINESS CONNECTION POSTULATES A REAL AND INTIMATE RELATION BETWEEN TR ADING ACTIVITY CARRIED ON OUTSIDE THE TAXABLE TERRITORIES AND TRADING ACTIVITY WITHIN THE TERRITORIES THE RELATION BETWEEN THE TW O CONTRIBUTING TO THE EARNING OF INCOME BY THE NON-RESIDENT IN HIS TRADIN G ACTIVITY WHICH SUGGESTED THAT THE BUSINESS OPERATIONS CARRIED OUT OUTSIDE TAXABLE TERRITORIES AND INSIDE TAXABLE TERRITORIES MUST HAV E SUCH A RELATIONSHIP AS TO CONTRIBUTE TO BUSINESS OPERATIONS AS A WHOLE. IT SU GGESTED GREATER NEXUS OF THE CORE BUSINESS OPERATIONS. CONSIDERING THAT THIS DECISION THOUGH DELIVERED IN 1964 I.E. AFTER INDIAN INCOME TAX ACT 1961 CAME INTO EFFECT WAS DEALING WITH THE PROVISIONS IN INDIAN INCOME TAX AC T 1922 IT MARKED QUITE A PARADIGM SHIFT IN JUDICIAL PERCEPTIONS ABOUT THE CO NCEPT OF BUSINESS CONNECTION. AS A MATTER OF FACT AS WE HAVE NOTED A BOVE THIS IS A DECISION IN WHICH HONBLE SUPREME COURT HAS IN A WAY INDICATED A GREATER NEXUS OF OPERATION IN TAXABLE TERRITORIES WITH CORE OPERATIO NS OF THE BUSINESS IN ORDER THAT THE NON-RESIDENT CAN BE SAID TO HAVE BUSINESS CONNECTION IN TAXABLE TERRITORIES. VIEWED THUS THIS DECISION IF ANYTHI NG SUPPORTS THE CASE OF THE ASSESSEE. AS WE MAKE THESE OBSERVATIONS WE ARE A LIVE TO THE FACT THAT AS HELD BY HONBLE CALCUTTA HIGH COURT IN THE CASE OF BIYANI & SONS VS CIT (120 ITR 887) IT IS APPRECIATION OF AGREEMENT AS A WHOL E WHICH IS DECISIVE OF THE NATURE OF RELATIONSHIP BETWEEN INDIAN ASSOCIATE AN D THE NON-RESIDENT AND IN EFFECT WHETHER OR NOT SUCH RELATIONSHIP CONSTITUTES BUSINESS CONNECTION BUT I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 19 OF 21 THEN REVENUE HAS NOT EVEN QUESTIONED BONAFIDES OF NOMENCLATURE OF THE AGREEMENT. . 19. THE APPROACH OF THE ASSESSING OFFICER FINDS SUP PORT FROM AN INTERESTING QUARTER IN ACADEMICS WHICH IN TURN REL IES UPON A RULING GIVEN BY THE LEARNED AUTHORITY FOR ADVANCE RULING. PROF MICH AEL LANG A WELL-KNOWN CONTEMPORARY COMMENTATOR ON INTERNATIONAL TAXATION AND RENOWNED INTERNATIONAL TAX ACADEMICIAN HAS MADE FOLLOWING I NTERESTING OBSERVATIONS IN THE CONTEXT OF SECTION 9(1)(I) IN HIS BOOK INT RODUCTION TO THE LAW OF DOUBLE TAXATION CONVENTIONS ( AN IBFD PUBLICATION BY LINDE AUSTRIA; ISBN 978-90-8722-082-2): IN INTERNATIONAL LAW PRACTICE THERE ARE NO SIGNIFI CANT LIMITS ON THE TAX SOVEREIGNTY OF STATES. IN DESIGNING THE DO MESTIC PERSONAL TAX LAW THE NATIONAL LEGISLATOR CAN EVEN TAX SITUA TIONS WHEN FOR EXAMPLE ONLY A GENUINE LINK EXISTS. IT IS ONLY WHEN NEITHER THE PERSON NOR THE TRANSACTION HAS ANY CONNECTION WITH THE TAXING STATE THAT TAX CANNOT BE LEVIED . EXAMPLE: ACCORDING TO THE INDIAN LEGAL TAX SYSTEM TAX IS LE VIED WHEN A GENUINE LINK EXISTS. PURSUANT TO SE.9(1)(I) OF TH E INCOME TAX AT TAX IS LEVIED ON ALL INCOME EARNED OUTSIDE INDIA WHICH ACC RUES WHETHER DIRECTLY OR INDIRECTLY THROUGH OR FROM ANY BUSINES S CONNECTION IN INDIA. THIS PRINCIPLE FORMED THE BASIS FOR THE OPINION OF THE INDIAN AUTHORITY FOR ADVANCE RULINGS (AAR) THAT A COMMISSION PAID TO A NON-RESIDENT AGENT MAY BE TAXABLE IN INDIA EVEN IF THE SERVICES ARE RENDERED OUTSIDE INDIA. THOSE SERVICES CONSISTED OF PURSUING AND SOL ICITING THE PARTICIPATION OF FOREIGN CONCERNS UNDERTAKINGS AND GOVERNMENT DEPARTMENTS IN THE INTERNATIONAL FOOD AND WINE SHOW (IFOWS) IN INDIA. ALTHOUGH THE ACTIVITY OF THE AGENT WAS CARRIED ON A BROAD THE AAR OBSERVED THAT THE AGENTS RIGHT TO RECEIVE COMMISSI ONS AROSE IN INDIA THE WHEN THE FOREIGN CONCERNS UNDERTAKINGS AND GOV ERNMENT DEPARTMENTS PARTICIPATED IN THE IFOWS. THEREFORE THE AAR CONSIDERED I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 20 OF 21 THAT THE AGENTS INCOME ACCRUED FROM A BUSINESS CON NECTION IN INDIA (CF. IN. AAR 3JULY 2006 RAJIV MALHOTRA AAR/671/2005) 20. HOWEVER THE OBSERVATIONS SO MADE BY PROF LANG AND THE RULING RENDERED BY AUTHORITY FOR ADVANCE RULING IN THE CAS E OF RAJIV MALHOTRA (284 ITR 564) DID NOT HAVE THE BENEFIT OF EXAMINING THE IMPACT OF EXPLANATION 1 (A) TO SECTION 9(1)(I) OF THE ACT. AS A MATTER OF FACT IN RAJIV MALHOTRAS CASE (SUPRA) THE AUTHORITY FOR ADVANCE RULING DOES OBSERVE THAT THE FACTS THAT THE AGENT RENDERS SERVICES ABROAD IN THE FORM OF PU RSUING AND SOLICITING THE PARTICIPANTS AND THAT THE COMMISSION IS REMITTE D TO HIM ABROAD ARE WHOLLY IRRELEVANT FOR THE PURPOSE OF DETERMINING TH E SITUS OF HIS INCOME BUT THEN THIS OBSERVATION OVERLOOKS THE FACT THAT IN TERMS OF EXPLANATION 1(A) TO SECTION 9(1)(I) IN THE CASE O F 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 OPERATI ONS CARRIED OUT IN INDIA BUT THEN SINCE NO PART OF THE OPERATIONS WAS CARRI ED OUT IN INDIA NO PART OF ASSESSEES INCOME COULD HAVE BEEN THUS TAXABLE IN I NDIA. IT WOULD THUS SEEM TO US THAT WHEN NO BUSINESS OPERATIONS ARE CARRIED OUT IN INDIA EVEN IF A NON RESIDENT HAS A BUSINESS CONNECTION IN INDIA NO PAR T OF INCOME OF SUCH BUSINESS CAN BE DEEMED TO HAVE ACCRUED OR ARISEN IN INDIA. THE VIEWS EXPRESSED BY THE LEARNED AUTHORITY FOR ADVANCE RULI NG WHICH DO NOT FETTER OUR INDEPENDENT OPINION ANYWAY IN VIEW OF ITS LIMIT ED BINDING FORCE UNDER SECTION 245 S OF THE ACT DO NOT IMPRESS US AND W E DECLINE TO BE GUIDED BY THE SAME. REVENUE THUS DERIVES NO SUPPORT FROM THES E OBSERVATIONS EITHER . IN VIEW OF THESE DISCUSSIONS AND BEARING IN MIND E NTIRETY OF THE CASE WE UPHOLD THE RELIEF GRANTED BY THE LEARNED COMMISSION ER (APPEALS) AND DECLINE TO INTERFERE IN THE MATTER. THIS CONCLUSION IS ALSO IN HARMONY WITH THE CONCLUSIONS ARRIVED AT BY A COORDINATE BENCH IN ASS ESSEES OWN CASE FOR THE I TA NO. 3941 /MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 21 OF 21 ASSESSMENT YEARS 2002-03 TO 2005-06 REPORTED IN 13 4 TTJ AT PAGE 204 AS DDIT VS STAR CRUISE INDIA TRAVEL SERVICES PVT LTD A ND VICE VERSA . 21. IN THE RESULT THE APPEAL IS DISMISSED. PRONOUN CED IN THE OPEN COURT TODAY ON 22 ND DAY OF JULY 2011. SD/XX SD/XX (VIJAY PAL RAO ) (PRAMOD KU MAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 22 ND DAY OF JULY 2011 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) MUMBAI 4. COMMISSIONER (APPEALS) II MUMBAI 5. DEPARTMENTAL REPRESENTATIVE E BENCH MUMBAI 6. GUARD FILE TRUE COPY BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI