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

ITA 3942/MUM/2010 | 2009-2010
Pronouncement Date: 22-07-2011 | Result: Dismissed

Appeal Details

RSA Number 394219914 RSA 2010
Assessee PAN AAFCS4154H
Bench Mumbai
Appeal Number ITA 3942/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 2009-2010
Appeal Filed On 14-05-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH MUMBAI [CORAM: SHRI PRAMOD KUMAR AM AND SHRI VIJAY PAL RAO JM] ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 ADDITIONAL DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) CIRCLE 2(1) MUMBAI . APPELLANT VS. STAR CRUISE INDIA TRAVEL SERVICES PVT LTD RESPONDENT G 15 EVEREST TARDEO ROAD MUMBAI 400 034 [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 THESE APPEALS THE ASSESSING OFFICER H AS CHALLENGED CORRECTNESS OF CIT(A)S ORDER DATED 24 TH FEBRUARY 2010 IN THE MATTER OF ASCERTAINMENT OF TAX WITHHOLDING LIABILITY UNDER SE CTION 195 R.W.S. 201 OF THE INCOME TAX ACT 1961 FOR THE ASSESSMENT YEARS 2007 -08 TO 2009-10 ON THE FOLLOWING GROUND : 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 ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 2 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 AN D HOLIDAY PACKAGES FOR STAR CRUISES AND ITS APPOINTMENT AS G ENERAL SALES AGENT IN INDIA IS MAINLY FOR THE PURPOSE OF C OLLECTING 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 BELON GED TO 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 WITHDRAW N 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 AGE NT IS CHARGEABLE TO TAX UNDER SECTION 5(2) (A) OF THE ACT . 2. VIDE OUR ORDER OF EVEN DATE AND ON THE SAME SET OF FACTS WE HAVE REJECTED THE GRIEVANCE RAISED BY THE ASSESSING OFFI CER. WHILE DOING SO WE HAVE INTER ALIA OBSERVED AS FOLLOWS: 2. THE SHORT ISSUE THAT WE ARE REQUIRED TO ADJUDI CATE SET OUT IN SOMEWHAT ARGUMENTATIVE GROUNDS OF APPEAL SET OUT AB OVE 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 RESP ECT OF THE PAYMENTS 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 VICARIO US TAX WITHHOLDING LIABILITY FROM THE PAYMENTS SO MADE TO STAR ISLE OF MAN. THE CORE ISSUE THUS REALLY IS WHETHER OR NOT STAR ISLE OF MAN HAD ON THE FACTS OF THIS CASE ANY INCOME TAX LIABILITY IN INDIA. 3. THE ISSUE IN APPEAL LIES IN A RATHER NARROW COM PASS OF MATERIAL FACTS. STAR ISLE OF MAN IS A COMPANY REGISTERED I N ISLE OF MAN AND IS PROVIDING SALES MARKETING AND PROMOTIONAL SERVICE S FOR THE CRUISE VESSELS OWNED MANAGED OPERATED OR CHARTERED THROU GH THE STAR CRUISE GROUP OF COMPANIES. STAR ISLE OF MAN HAS APPOINTED STAR INDIA AS ITS CANVASSER IN INDIA MAINLY TO CANVASS BUSINESS FOR I TS OPERATIONS AND FOR MARKETING ITS CRUISE PACKAGES AND SHORE EXCURSIONS. AS A PART OF THIS ARRANGEMENT AND VIDE AGREEMENT DATED 1 ST MARCH 2005 STAR INDIAS ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 3 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 FRO M PSAS IN RELATIONS TO SALE BOOKING CONFIRMATION FOR AND ON BEHALF OF SCML AND TO PAY OVER TO SCML ALL MONIES S O 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 S TAR ISLE OF MAN WAS TO PAY 3% OF NET CRUISE CHARGES REMITTED BY THE STAR INDIA AS RETAINER FEES. THE OTHER OBLIGATIONS OF STAR ISLE OF MAN AS SET O UT IN 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 ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 4 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 B EHALF. 5. ON THESE FACTS THE STAND OF THE ASSESSING OFFI CER HAS BEEN THAT STAR ISLE OF MAN IS LIABLE TO BE TAXED IN INDIA IN RESP ECT OF THE CRUISE PASSAGE MONEY SO RECEIVED FROM INDIA THROUGH STAR INDIA M AINLY ON THE GROUND THAT STAR ISLE OF MAN HAD A BUSINESS CONNECTION IN INDIA WHICH IS SUFFICIENT TO INVOKE TAX LIABILITY OF A NON RESIDEN T 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 RE LIED 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 (2 3 ITR 101) TO COME TO THE CONCLUSION THAT THE ESSENTIAL FEATURES OF BUSI NESS CONNECTION FOR THE PURPOSES OF APPLICATION OF SECTION 9(1)( I) ARE AS FOLLOWS: A REAL AND INTIMATE RELATION MUST BETWEEN THE TRADI NG ACTIVITIES BY A NON-RESIDENT CARRIED ON OUTSIDE INDIA 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 FURNISH A ST RONG INDICATION OF BUSINESS CONNECTION. 6. THE ASSESSING OFFICER BASED ON THIS ANALYSIS O F 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 CRUIS E 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 PASSAGE IS DEEMED TO ACCRUE OR ARISE IN INDIA BY T HE VIRTUE OF STAR ISLE OF MANS BUSINESS CONNECTION IN INDIA. HAVING THUS HEL D THE TAXABILITY OF STAR ISLE OF MANS INCOME ON SALE OF CRUISE PASSAGE IN I NDIA THE ASSESSING OFFICER PROCEEDED TO DETERMINE BASED ON CERTAIN AS SUMPTIONS WHICH WE NEED NOT DEAL WITH AT THIS STAGE THE QUANTUM OF IN COME TAXABLE IN INDIA AT 5% OF THE NET CRUISE CHARGES. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER ASSESSEE CARRIED THE MATTER IN A PPEAL BEFORE THE CIT(A). LEARNED CIT(A) HELD THAT IN THE PRESENT CASES SERVICES RENDERED BY ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 5 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 THEREFORE THE ASSESSEE COULD NOT BE FAULTED FOR NOT DEDUCTING TAX AT SOURCE FROM CRUISE PASSAGE REMITTANCES MADE TO STAR ISLE OF MAN. THE IMPUGNED TAX LIABILI TY WAS THUS QUASHED. THE ASSESSING OFFICER IS NOT SATISFIED BY THE RELIE F SO GRANTED BY THE COMMISSIONER (APPEALS) AND IS IN APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED TH E 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 RELEVANT TO ISSUE IN APPEAL BEFORE US. THE SOURCE RULE OF TAXAT ION WHICH TYPICALLY ORIGINATES IN DOMESTIC TAX LAW IS BASED ON THE PRI NCIPLE THAT AN INCOME EARNED IN A TAX JURISDICTION IRRESPECTIVE OF THE R ESIDENTIAL STATUS OF THE PERSON EARNING THE SAID INCOME IS LIABLE TO BE TAX ED 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 TAX ABILITY 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 IN COME OF A PERSON DE HORS HIS RESIDENTIAL STATUS WHICH ACCRUES OR ARISE S 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 SUBJEC T TO THE PROVISIONS OF THIS ACT THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PER SON 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 DEEM ED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR. SECTION 9 WHICH SET S OUT THE SCOPE OF EXPRESSION INCOME DEEMED TO ACCRUE OR ARISE IN IND IA INTER ALIA STATES ALL INCOME ACCRUING OR ARISING WHETHER DIRECTLY O R INDIRECTLY THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA OR THROUGH O R FROM ANY PROPERTY IN INDIA OR THROUGH OR FROM ANY ASSET OR SOURCE OF IN COME IN INDIA 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 LONG AS AN INCOME HAS BUSINESS CONNECTION IN INDIA NO MATTE R IN WHICH PART OF THE 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 ASSIG NED TO THAT EXPRESSION UNDER SECTION 9(1)(I) OF THE INDIAN INCOME TAX ACT 1961 AND IF SO TO ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 6 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 CA PITAL 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 OPERATIONS WHICH ARE CONFINED TO THE PURCHASE OF GOODS IN INDI A 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 ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 7 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 BUSINESS AC TIVITY CARRIED OUT THROUGH A PERSON WHO ACTING ON BEHALF OF THE N ON-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 REGULAR LY 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 GEN ERAL COMMISSION AGENT OR ANY OTHER AGENT HAVING AN INDEP ENDENT STATUS IF SUCH BROKER GENERAL COMMISSION AGENT OR ANY OTHER AGENT HAVING AN INDEPENDENT STATUS 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 REGULAR LY DELIVERS GOODS OR MERCHANDISE ON BEHALF OF THE NON- RESIDENT; OR ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 8 (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 GEN ERAL COMMISSION AGENT OR ANY OTHER AGENT HAVING AN INDEP ENDENT STATUS IF SUCH BROKER GENERAL COMMISSION AGENT OR ANY OTHER AGENT HAVING AN INDEPENDENT STATUS 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 ARISING TO A NON- RESIDENT THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA IS IN PRINCIPLE TAXABLE IN INDIA. EVEN AS THE LEGAL PROVI SION THROWS SOME LIGHT ON WHAT WILL AND WHAT WILL NOT CONSTITUTE BUSINES S CONNECTION THE PRECISE CONNOTATIONS AND SCOPE OF BUSINESS CONNECT ION REMAINS TO BE NEATLY DEFINED. HOWEVER ONE IMPORTANT PRINCIPLE W HICH IS CLEARLY DISCERNABLE FROM THE STATUTORY PROVISION IS THAT EV EN WHEN THERE IS A BUSINESS CONNECTION BY WAY OF AN AGENT OR OTHERWIS E THE INCOME WHICH CAN BE SUBJECTED TO TAX IN INDIA CAN NEVER EXCEED T HE INCOME ATTRIBUTABLE TO OPERATIONS CARRIED OUT IN INDIA B Y THE NON-RESIDENT OR BY THE AGENT. CLAUSE (A) OF EXPLANATION 1 TO SECTI ON 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 DE EMED UNDER THIS CLAUSE TO ACCRUE OR ARISE IN INDIA SHALL BE ONLY SU CH PART OF THE INCOME AS IS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CAR RIED OUT IN INDIA. WHILE EXPLANATION 2 SETS OUT THE SITUATIONS IN WHIC H MERE EXISTENCE OF AN AGENT OF THE NON-RESIDENT CAN BE TREATED AS BUSI NESS CONNECTION EXPLANATION 3 CLARIFIES THAT IN SUCH SITUATIONS ON LY 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 INDI A TAXABILITY UNDER SECTION 9(1)(I) R.W.S. 5(2)(B) CAN NOT EXCEED INCOM E REASONABLY ATTRIBUTABLE TO OPERATIONS CARRIED OUT IN INDIA I N THE CASE OF AN AGENT DEPENDENT OR INDEPENDENT TAXABILITY IN INDIA CANNO T EXCEED THE INCOME ATTRIBUTABLE TO OPERATIONS CARRIED OUT IN INDIA. W HATEVER BE THE OPERATIONS THAT AN AGENT CARRIES OUT FOR THE NON RE SIDENT 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 WHATE VER NAME CALLED NON- RESIDENTS INCOME DEEMED TO ACCRUE OR ARISE IN INDI A CAN ONLY BE SUCH INCOME AS IS ATTRIBUTABLE TO THE OPERATIONS SO CARR IED OUT BY THE AGENT. ONE WAY OF LOOKING AT THIS SITUATION IS THIS. WHAT CAN BE LOGICALLY DEDUCED FROM THESE DISCUSSIONS IS THAT IN A CASE IN WHICH AGENT OF THE NON-RESIDENT WHICH CONSTITUTES THE BUSINESS CONNEC TION HAS ALREADY BEEN COMPENSATED FOR THE SERVICES RENDERED BY THE A GENT OR TO PUT IT ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 9 DIFFERENTLY OPERATIONS CARRIED OUT FOR THE INON- R ESIDENT IN INDIA AND IT IS NOT EVEN THE CASE OF THE REVENUE THAT AGENT HAS NOT BEEN PAID ARMS- LENGTH OR FAIR REMUNERATION FOR THE SERVICES SO REN DERED OR OPERATIONS SO CARRIED OUT IN INDIA THERE CANNOT BE ANY FURTHE R INCOME OF THE NON- RESIDENT WHICH CAN BE BROUGHT TO TAX UNDER SECTION 9(1)(I) R.W.S. 5(2)(B). VIEWED THUS WHETHER A SALES AGENT BY WHATEVER NAM E CALLED CONSTITUTES A BUSINESS CONNECTION OR NOT IS A WHOLL Y ACADEMIC QUESTION UNLESS OF COURSE THE VERY FACT OF SUCH AGENT HAVI NG BEEN COMPENSATED FAIRLY OR AT AN ARMS LENGTH FOR THE WORK DONE FOR THE NON-RESIDENT IS UNDER CHALLENGE. A NON-RESIDENTS TAX LIABILITY UN DER 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 A S TO WHETHER OR NOT STAR INDIA INDEED CONSTITUTES STAR ISLE OF MANS BU SINESS CONNECTION IN INDIA. VIEWED FROM THIS PERSPECTIVE THE VERY FOUN DATION OF THE CASE MADE OUT BY THE ASSESSING OFFICER IS THUS DEVOID OF LEGALLY SUSTAINABLE BASIS AND THE CIT(A) WAS QUITE JUSTIFIED IN HOLDIN G THAT NO TAXABILITY CAN BE IMPOSED ON THE STAR ISLE OF MAN BY THE VIRTU E 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 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 B E LEFT TO BE DECIDED IN A FIT CASE. WE THUS MAKE IT CLEAR THAT THE ABOVE O BSERVATIONS WHICH ARE SOMEWHAT ACADEMIC IN THE ABOVE CONTEXT SHOULD NOT BE TREATED AS OF PRECEDENCE VALUE. IN THE PRESENT CASE THE PRINCIPA L TAX LIABILITY ITSELF IS QUASHED BY A COORDINATE BENCH OF THIS TRIBUNAL . AS 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 NOT HAVE ANY PRINCIPAL TAX LIABILITY IN INDIA THE IMPUGNED VICA RIOUS 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 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 S IMPLICITER TAXABILITY OF AN INCOME EARNED IN A TAX JURISDICTION IRRESPECTIV E OF THE RESIDENTIAL STATUS OF THE PERSON EARNING THE SAID INCOME IN TH E TAX JURISDICTION WHERE THE INCOME IS EARNED. WHILE THE MAIN PROVISI ON OF THE DEEMING FICTION SEEMS TO BE TAKING A RATHER AGGRESSIVE VIEW OF THE SOURCE RULE EXPLANATIONS TO THE DEEMING FICTION CONSIDERABLY NA RROW DOWN THE SCOPE OF THE SAME. IT IS IMPORTANT TO NOTE THAT EVE N THIS DEEMING PROVISION RESTRICTS TAXABILITY OF AN INCOME OF THE NON-RESIDENT TO THE EXTENT OF INCOME ATTRIBUTABLE TO THE OPERATIONS CAR RIED OUT IN THE SOURCE JURISDICTION AND THAT IS QUITE IN HARMONY WITH THE FIRST PRINCIPLES OF ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 10 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 OV ERLAPPING IN EFFECT INASMUCH AS THESE PROVISIONS COVER ONLY SUCH INCOME OF THE NON RESIDENT AS IS ATTRIBUTABLE TO OPERATIONS CARRIED OUT BY TH E 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 SECTION 9(1)(I) DOES NOT APPEAR TO BE ANYTHING MORE THAN CLARIFICATORY A BOUT THE SCOPE OF FIRST LIMB OF SECTION 5(2)(B). THE DIRECT TAXES BI LL 2011 MAKES THIS OVERLAPPING EFFECT EVEN MORE GLARING BY PROVIDING UNDER SECTION 314(40) THAT A BUSINESS CONNECTION WILL INCLUDE PE RMANENT ESTABLISHMENT AND BY SETTING OUT UNDER SECTION 31 4(183) A RATHER EXHAUSTIVE DEFINITION OF PERMANENT ESTABLISHMENT AS A FIXED PLACE OF BUSINESS THROUGH WHICH BUSINESS OF THE NON RESIDENT IS WHOLLY OR PARTLY CARRIED OUT. WHEN A NON RESIDENT HAS A PLACE OF BUS INESS THROUGH WHICH HIS BUSINESS IS WHOLLY OR PARTLY CARRIED OUT THE I NCOME 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 BUS INESS CONNECTION IN THIS VIEW OF THE MATTER DOES NOT REALLY ENLARGE TH E SCOPE OF NON RESIDENTS TAXABILITY IN INDIA BUT ENDS UP SUBSTIT UTING FOR IN A LIMITED AND SOMEWHAT AMBIGUOUS WAY THOUGH THE PE PROFIT AL LOCATION RULES UNDER THE DOMESTIC LAW. 13. WHILE DEALING WITH THE CONCEPT OF BUSINESS CONN ECTION UNDER THE LEGAL POSITION AS IT STANDS NOW IT IS USEFUL TO A LSO TAKE NOTE OF THE CONCEPT OF BUSINESS CONNECTION AS SET OUT IN THE INCOME TAX ACT 1922 AND IN THE CONTEXT OF WHICH SEVERAL LANDMARK JUDICI AL PRECEDENTS 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 WELL 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 PR OFITS 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 B E INCOME ACCRUING OR ARISING WITHIN THE TAXABLE TERRITORIES. THIS PROV ISION EXISTED AT A TIME WHEN A PART OF INDIA WAS UNDER DIRECT BRITISH RU LE IN WHICH INDIAN INCOME TAX ACT HAD APPLICATION AND WHICH WERE TERME D 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 THA T SOME ACTIVITIES OF A BUSINESS WERE CARRIED OUT IN THE TAXABLE TERRITORIE S AND SOME OPERATIONS OF THE SAME BUSINESS WERE CARRIED OUTSIDE TAXABLE T ERRITORIES. IT WAS IN THIS BACKDROP THAT THE LEGISLATION SAW AN EXTENDED SOURCE RULE ARGUABLY TYPICAL OF COLONIAL APPROACH TO EXTEND ITS AREA OF JURISDICTION WHICH LAID ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 11 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 THI S PROVISION WAS ATTRACTED RULE 33 PROVIDED THE METHOD OF COMPUTATI ON OF INCOME DEEMED TO ACCRUE OR ARISE IN INDIA WHICH RANGED FR OM (A) A PERCENTAGE OF 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 WH ICH THE RECEIPTS ACCRUING OR ARISING BEAR TO THE TOTAL RECEIPTS OF T HE BUSINESS; AND (C) IN SUCH OTHER MANNER AS THE ITO MAY DEEM SUITABLE [ S EE NETHERLANDS STEAM NAVIGATION CO LTD VS CIT 74 ITR 72 SC]. THE SE LEGAL PROVISIONS WERE SO JUDICIALLY INTERPRETED THAT A COMPANY RESI DENT OUTSIDE BRITISH INDIA WHICH RECEIVED GOODS FROM BRANCHES WITHIN BR ITISH INDIA WAS ASSESSABLE TO INDIAN INCOME TAX IN RESPECT OF SALE OF THOSE GOODS OUTSIDE BRITISH INDIA. TAKING NOTE OF THESE RESULTS C HIEF JUSTICE BEAUMONT WITH DIGNIFIED RESTRAINT WHICH WAS HALLMARK OF JUDI CIAL CONDUCT IN THE GOOD OLD DAYS ANYWAY 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 LIAB LE 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 T O ATTRACT TAXABILITY OF A BUSINESS SUBJECT I.E. BUSINESS ITSELF. THE QU ANTUM OF TAXABILITY WAS THEN DETERMINED ON THE BASIS OF THE PROVISIONS OF T HE DOMESTIC LAW I.E. PERCENTAGE OF TURNOVER PROPORTION OF PROFITS OR SU CH OTHER RESIDUAL METHOD AS THE ASSESSING OFFICER MAY ADOPT. THESE A PPARENTLY HARSH PROVISIONS RESULTED IN SITUATIONS AS WAS NOTED BY HONBLE BOMBAY HIGH COURT IN THE OBSERVATIONS EXTRACTED ABOVE THAT WHA T 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. C ONTRAST THIS WITH THE PRESENT SCHEME OF LAW WHICH REFERS TO BUSINESS CON NECTION BUT EXPRESSLY RESTRICTS THE TAXABILITY TO BUSINESS OBJECT I.E. B USINESS ACTIVITY CARRIED OUT IN INDIA AND RESTRICTS THE SAME ONLY TO SUCH O PERATIONS AS ARE PERFORMED IN INDIA. THEREFORE WHEN BUSINESS ACTIV ITY IS NOT CARRIED OUT ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 12 IN INDIA THERE CANNOT BE ANY TAXABILITY IN INDIA A T 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 CHARA CTER AND WHAT HAS BEEN HELD IN THE CONTEXT OF THE FORMER WILL NOT NEC ESSARILY 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) HONBLE SUPREME COURT HAS HELD RESTRICTED APPLICATION OF TAXABILITY AS A RESULT OF BUSINESS CONNECTION BUT WE WILL DEAL WITH THAT ASPECT OF T HE MATTER A LITTLE 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 INDI A WHILE MANUFACTURING ACTIVITY WAS CARRIED OUT IN FRENCH IN DIA (I.E. PONDICHERRY) AND ALSO SALES WAS ENTIRELY OUTSIDE BR ITISH INDIA. IT WAS IN THIS CONTEXT THAT THEIR LORDSHIPS INTER ALIA OBSE RVED THAT THE ASSESSEE HAD A BUSINESS CONNECTION IN INDIA BY THE VIRTUE OF HAVING SOURCING OPERATIONS IN INDIA AND ACCORDINGLY INCOME IN R ESPECT OF THE SAME IN DEEMED TO ACCRUE OR ARISE IN BRITISH INDIA. SOURING OF RAW MATERIAL IS AN INTEGRAL PART OF THE BUSINESS ACTIVITY 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 OR FROM OPERATIONS WHICH ARE CONFINED TO TH E PURCHASE OF GOODS IN INDIA FOR THE PURPOSE OF EXPORT MERELY BECAUSE RAW MATERIAL IS PURCHASED FROM INDIA AND EXPORTED OUTSI DE INDIA FOR PROCESSING TAXABILITY CAN NOT ARISE. THE LEGAL PRO VISIONS ARE THUS NOT IN PARI MATERIA VIS--VIS THE LEGAL PROVISIONS AS THEY STOOD AT THE RELEVANT POINT OF TIME. WHEN LEGAL PROVISIONS ARE NOT IN PAR I MATERIA THE JUDICIAL PRECEDENT CEASES TO BE RELEVANT IN THE PRESENT CONT EXT. 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 A ND PRAGMATIC ANALYSIS OF THE CONCEPT OF BUSINESS CONNECTION IN THE LIGH T OF COMMERCIAL REALITIES. IN THIS JUDGMENT I.E. R D AGGARWALS C ASE (SUPRA) HONBLE SUPREME COURT HAD AN OCCASION TO DEAL WITH A SITUA TION IN WHICH THE ASSESSEE WAS CARRYING ON THE BUSINESS AS COMMISSION AGENTS FOR TWO NON-RESIDENT EXPORTERS OF WORSTED WOOLLEN YARN. THE QUESTION WHICH CAME UP FOR CONSIDERATION OF HONBLE SUPREME COURT WAS WHETHER THE NON-RESIDENT EXPORTERS COULD BE SAID TO HAVE BUSINE SS CONNECTION IN INDIA ON ACCOUNT OF THEIR SALE AGENCY ARRANGEMENTS WITH THE INDIAN CONCERN AND WHETHER ON THAT BASIS A PART OF INC OME 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 DECISION TO ACCEPT OR NOT TO ACCEPT THE ORDER RESTS WITH THE PRINCIPALS. THEIR LORDSHIPS NOTED ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 13 THAT THAT THE ONLY QUESTION THAT FALLS TO BE DETER MINED IN THESE APPEALS IS WHETHER THERE WAS IN TWO CASES BETWEEN THE NON- RESIDENTS AND THE ASSESSEE SUCH A RELATION AS MAY BE CALLED BUSINES S 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 COM PANIES 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 FO UND BY THE REVENUE AUTHORITIES CONTRACTS FOR THE SALE OF GOOD S TOOK PLACE OUTSIDE THE TAXABLE TERRITORIES PRICE WAS RE CEIVED BY THE NON-RESIDENTS OUTSIDE THE TAXABLE TERRITORIES AND DELIVERY WAS ALSO GIVEN OUTSIDE THE TAXABLE TERRITO RIES. NO OPERATION SUCH AS PROCURING RAW MATERIALS MANUFACT URE OF FINISHED GOODS SALE OF GOODS OR DELIVERY OF GOODS AGAINST PRICE TOOK PLACE WITHIN THE TAXABLE TERRITORIES : T HE ASSESSEE MERELY PROCURED ORDERS FROM MERCHANTS IN AMRITSAR F OR PURCHASE OF GOODS FROM THE NON-RESIDENT COMPANIES. THE ORDERS WERE OFFERS WHICH THE ASSESSEES HAD NO AUTHO RITY TO ACCEPT ON BEHALF OF THE NON-RESIDENTS. SOME COMMERC IAL ACTIVITY WAS UNDOUBTEDLY CARRIED ON BY THE ASSESSEE S IN THE MATTER OF PROCURING ORDERS WHICH RESULTED IN CONTRA CTS FOR SALE BY THE NON-RESIDENTS OF GOODS TO MERCHANTS AT AMRITSAR. BUT ON THIS ACCOUNT NO BUSINESS CONNECTION OF THE A SSESSEES WITH THE NON-RESIDENTS WITHIN THE TAXABLE TERRITORI ES RESULTED. THE ACTIVITY OF THE ASSESSEES IN PROCURIN G ORDERS WAS NOT AS AGENTS OF THE NON-RESIDENTS IN THE MATTE R OF SALE OF GOODS MANUFACTURED BY THE LATTER NOR OF PROCURI NG RAW MATERIALS IN THE TAXABLE TERRITORIES FOR THEIR MANU FACTURING PROCESS. THEIR ACTIVITIES LED TO THE MAKING OF OFFE RS BY MERCHANTS IN THE TAXABLE TERRITORIES TO PURCHASE GO ODS MANUFACTURED BY THE NON-RESIDENTS WHICH THE LATTER WERE NOT OBLIGED TO ACCEPT. THE EXPRESSION 'BUSINESS CONNECT ION' POSTULATES A REAL AND INTIMATE RELATION BETWEEN TRA DING ACTIVITY CARRIED ON OUTSIDE THE TAXABLE TERRITORIES AND TRADING ACTIVITY WITHIN THE TERRITORIES THE RELATI ON BETWEEN THE TWO CONTRIBUTING TO THE EARNING OF INCOME BY TH E NON- RESIDENT IN HIS TRADING ACTIVITY. IN THIS CASE WAS SUCH A RELATION 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 TH E EXPRESSION BUSINESS ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 14 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 BETWE EN THE TWO CONTRIBUTING TO THE EARNING OF INCOME BY THE NON-RE SIDENT IN HIS TRADING ACTIVITY WHICH SUGGESTED THAT THE BUSINESS OPERATIONS CARRIE D OUT OUTSIDE TAXABLE TERRITORIES AND INSIDE TAXABLE TERRITORIES MUST HAVE SUCH A RELATIONSHIP AS TO CONTRIBUTE TO BUSINESS OP ERATIONS AS A WHOLE. IT SUGGESTED GREATER NEXUS OF THE CORE BUSINESS OPERAT IONS. CONSIDERING THAT THIS DECISION THOUGH DELIVERED IN 1964 I.E. A FTER INDIAN INCOME TAX ACT 1961 CAME INTO EFFECT WAS DEALING WITH THE PRO VISIONS IN INDIAN INCOME TAX ACT 1922 IT MARKED QUITE A PARADIGM SH IFT IN JUDICIAL PERCEPTIONS ABOUT THE CONCEPT OF BUSINESS CONNECTIO N. AS A MATTER OF FACT AS WE HAVE NOTED ABOVE THIS IS A DECISION IN WHICH HONBLE SUPREME COURT HAS IN A WAY INDICATED A GREATER NEXU S OF OPERATION IN TAXABLE TERRITORIES WITH CORE OPERATIONS OF THE BUS INESS IN ORDER THAT THE NON-RESIDENT CAN BE SAID TO HAVE BUSINESS CONNECTIO N IN TAXABLE TERRITORIES. VIEWED THUS THIS DECISION IF ANYTHI NG SUPPORTS THE CASE OF THE ASSESSEE. AS WE MAKE THESE OBSERVATIONS WE A RE ALIVE TO THE FACT THAT AS HELD BY HONBLE CALCUTTA HIGH COURT IN TH E CASE OF BIYANI & SONS VS CIT (120 ITR 887) IT IS APPRECIATION OF AG REEMENT AS A WHOLE WHICH IS DECISIVE OF THE NATURE OF RELATIONSHIP BE TWEEN INDIAN ASSOCIATE AND THE NON-RESIDENT AND IN EFFECT WHETHER OR NOT SUCH RELATIONSHIP CONSTITUTES BUSINESS CONNECTION BUT THEN REVENUE HAS NOT EVEN QUESTIONED BONAFIDES OF NOMENCLATURE OF THE AGREEME NT. . 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 MICHAEL LANG A WELL-KNOWN CONTEMPORARY COMMENTATOR ON INTERNATIONA L TAXATION AND RENOWNED INTERNATIONAL TAX ACADEMICIAN HAS MADE FO LLOWING INTERESTING OBSERVATIONS IN THE CONTEXT OF SECTION 9(1)(I) IN HIS BOOK INTRODUCTION TO THE LAW OF DOUBLE TAXATION CONVENT IONS ( 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 DOMEST IC PERSONAL TAX LAW THE NATIONAL LEGISLATOR CAN EVEN TAX SITUATION S 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 LEVIED 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. ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 15 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 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 EXAMININ G THE IMPACT OF EXPLANATION 1 (A) TO SECTION 9(1)(I) OF THE ACT. A S A MATTER OF FACT IN RAJIV MALHOTRAS CASE (SUPRA) THE AUTHORITY FOR AD VANCE RULING DOES OBSERVE THAT THE FACTS THAT THE AGENT RENDERS SERVICES ABROAD IN THE FORM OF PURSUING AND SOLICITING THE PARTICIPANTS AN D THAT THE COMMISSION IS REMITTED TO HIM ABROAD ARE WHOLLY IRR ELEVANT FOR THE PURPOSE OF DETERMINING THE SITUS OF HIS INCOME BUT THEN THIS OBSERVATION OVERLOOKS THE FACT THAT IN TERMS OF EXP LANATION 1(A) TO SECTION 9(1)(I) IN THE CASE OF A BUSINESS OF WHIC H 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 SU CH PART OF THE INCOME AS IS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CAR RIED OUT IN INDIA BUT THEN SINCE NO PART OF THE OPERATIONS WAS CARRIED O UT 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 CAR RIED OUT IN INDIA EVEN IF A NON RESIDENT HAS A BUSINESS CONNECTION IN INDIA NO PART OF INCOME OF SUCH BUSINESS CAN BE DEEMED TO HAVE ACCR UED OR ARISEN IN INDIA. THE VIEWS EXPRESSED BY THE LEARNED AUTHORIT Y FOR ADVANCE RULING WHICH DO NOT FETTER OUR INDEPENDENT OPINION ANYWAY IN VIEW OF ITS LIMITED BINDING FORCE UNDER SECTION 245 S OF THE AC T DO NOT IMPRESS US AND WE DECLINE TO BE GUIDED BY THE SAME. REVENUE TH US DERIVES NO SUPPORT FROM THESE OBSERVATIONS EITHER . IN VIEW OF THESE DISCUSSIONS AND BEARING IN MIND ENTIRETY OF THE CASE WE UPHOLD THE RELIEF GRANTED BY THE LEARNED COMMISSIONER (APPEALS) AND DECLINE TO I NTERFERE IN THE MATTER. THIS CONCLUSION IS ALSO IN HARMONY WITH THE CONCLUSIONS ARRIVED AT BY A COORDINATE BENCH IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2002-03 TO 2005-06 REPORTED IN 134 TTJ AT PAGE 204 AS DDIT VS STAR CRUISE INDIA TRAVEL SERVICES PVT LTD AND VICE VERSA . 3. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY US IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006-07. FOLLOWING THE VIEW SO ITA NO. 3942/MUM/2010: ASSESSMENT YEAR: 2009-10 ITA NO. 3943/MUM/2010: ASSESSMENT YEAR: 2007-08 ITA NO. 3945/MUM/2010: ASSESSMENT YEAR: 2008-09 16 TAKEN US WE REJECT THE GRIEVANCE RAISED BY THE ASSESSING OFFICER AND DECLINE IN THE MATTER. IN EFFECT THE ORDER OF THE CIT(A) IS CONFIR MED IN ALL THE ASSESSMENT YEARS. 4. IN THE RESULT APPEALS ARE DISMISSED. PRONOUNCED IN THE OPEN COURT TODAY ON 22.7.2011. SD/XX SD/XX (VIJAY PAL RAO ) (PRAMOD KUM AR) 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) MUMBAI 5. DEPARTMENTAL REPRESENTATIVE E BENCH MUMBAI 6. GUARD FILE TRUE COPY BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI