Legal Service India - Business Connections - Under section 9 of Income Tax Act 1961, – Gradual Changes and Development
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Business Connections - Under section 9 of Income Tax Act 1961, – Gradual Changes and Development

Written by: Swati Upadhyay - pursuing law form Gujarat National Law University, Gandhinagar. Currently in 4th year
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The Indian Income-tax Act provides for levy of income-tax on the income of foreign companies and non-residents, but only to the extent of their income sourced from India. Under section 5 of the Act, a foreign company or any other non-resident person is liable to tax on income which is received or is deemed to be received in India by or on behalf of such person, or income which accrues or arises or is deemed to accrue or arise to it in India. Income tax is payable by a taxpayer, regardless of whether he is a resident taxpayer, a non-resident taxpayer, or a non-resident Indian, on the total income computed by the Assessing Officer under the provisions of the Income Tax Act 1961. Section 9 thereafter specifies certain types of income that are deemed to accrue or arise in India in certain circumstances. These two sections embody the source rule of income taxation in the domestic law. No income of a non-resident can be taxed in India unless it falls within the four corners of section 5 read with section 9 of the Income-tax Act. Section 9(1) of the I.T. Act specifies that for the income to be taxed in India, it should deemed to accrue or arise in India.

And one among those incomes are income from “business connection” in India .The basic aim of this paper work is to look into the series of judicial pronouncements related to the term “business connection” and the changes which have been introduced therein after.

Section 9 of IT Act: Broadly speaking, business income of a foreign company or other non-resident person is chargeable to tax to the extent it accrues or arises through a business connection in India or from any asset or source of income located in India, and to the extent such income is attributable to the operations carried out in India. Certain income is deemed to accrue or arise in India under section 9 of the said act, even though it may actually accrue or arise outside India .Section 9 applies to all assesses irrespective of their residential status and place of business. Thus, only Indian income is liable to income tax in India in the case of a non-resident person. This means that a non-resident person is not liable to pay any income tax in India on his foreign income. Though an income may not actually accrue or arise in India, yet it may be deemed to accrue or arise in India.

Thus, under Section 9, the following are the important types of income which are deemed to accrue or arise in India:

• Income through any business connection in India, or 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 situated in India.

• Salary income for service rendered in India; and

Salary for the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment from the A.Y. 2000.Also the following incomes which are payable outside India are deemed to arise in India:-
a. Dividend paid by an Indian company outside India.
b. Interest payable on money borrowed and brought into India.
c. Royalty and technical service fees payable in respect of any right/ technical services used for business / profession in India. However, royalty and fees for technical services is exempt, where such royalty / fees earned is in respect of computer software supplied by a Non-resident manufacturer along with the computer or computer based equipment under an approved scheme.

“Business Connection”-The term business connection has undergone lot of changes .The Hon’ble Courts have time and again interpreted the term “business connection” with reference to facts, circumstances and prevailing conditions. A business connection involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in India which contributes to the earning of these profits or gains .A business connection can arise between a non-resident and a resident if both of them carry on business and if the non-resident earns income through such a connection. A business connection involves a relation between business carried on by non-resident which yields profits or gains and some activity in India which contributes to the earning of these profits or gains.

A business connection can arise between a non-resident and a resident of both of then carry on business and if the non-resident earns income through such connections. It basically predicates an element of continuity between the business of the non-resident and the activity in India: a stray or isolated transaction is not normally regarded as business connection.

“BUSINESS CONNECTION” as defined in the Act (Sec. 9(1) I.T.ACT)

And also in Circular No 23, Section(s) Referred 9 of income tax
It includes a profession connection. It includes a person acting on behalf of a non-resident and who performs any one or more of the following –
Activity 1: He exercises in India an authority to conclude contracts on behalf of non-resident (it does not cover the activity of only the purchase of goods or merchandise for then on-resident)

Activity 2: He has no such authority but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident

Activity 3: He habitually secures order in India (mainly or wholly) for the non-resident or for non-residents under the same management.
Where such a business is carried on in India through a person referred to in Activity one, two or three (mentioned above) only so much of income is attributable to the operations carried out in India shall be deemed to accrue or arise in India.

Also according to the Circular No 23 , income tax some illustrative instances of a non-resident having business connection in India, are given below:
(a) Maintaining a branch office in India for the purchase or sale of goods or transacting other business.
(b) Appointing an agent in India for the systematic and regular purchase of raw materials or other commodities, or for sale of the non-resident's goods, or for other business purposes.
(c) Erecting a factory in India where the raw produce purchased locally is worked into a form suitable for export abroad.
(d) Forming a local subsidiary company to sell the products of the non-resident parent company.
(e) Having financial association between a resident and a non-resident company.

Although the term business connection is no where defined in the act but the courts have given various judicial pronouncements which have been categorically classified below:
1) There must be element of continuity as well as real and intimate connection - The expression ‘business connection’ undoubtedly means something more than ‘business’. A business connection involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories. The expression ‘business connection’ postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity.

In the case of CIT v. R.D. Aggarwal & Co. ,the 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. Therefore in the view of the court case such a relation w.r.t expression "business connection" must be real and intimate through or from which income must accrue or arise whether directly or indirectly to the non-resident. was absent. The Supreme Court in the same case further observed that a business connection.....involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains.. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case.

The expression "business" is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression "business connection" and its precise connotation is vague and indefinite.

In CIT v. Fried Krupp Industries it was held that an isolated transaction between a non-resident and a resident in India without any course of dealings such as might fairly be described as business connection does not attract section 9 .There is no question of continuing business relating when a person purchases machinery or other goods abroad or uses them in India and earns profit

But where there is connection a continuity in business relationship between the person in India who helps to make the profits and the person outside India who receives and realizes the profit, such relationship constitute a business connection In each of such case whether there is a business connection from or through which income arises or accrues must be determined upon the facts or circumstances of that case.

2) ‘Business’ includes profession, vocation and callings - The expression ‘business’ does not necessarily mean trade or manufacture only. It is being used as including within its scope profession, vocations and calling from a fairly long-time.

In the context in which the expression ‘business connection’ is used in section 9(1), there is no warrant for giving a restricted meaning to it excluding ‘professional’ connection, from its scope .The definition of the expression "business" given in the Act is an inclusive one. The expression "business connection", however, is not defined in the Act It is no doubt true that there is specific reference to "business" in section 9(1) and there is no reference to "profession".

In CIT v. Currimbhoy Ebrahim & Sons Ltd ., Sir George Rankin, speaking for the Judicial Committee of the Privy Council, while construing the expression "business connection mentioned in the Indian I.T. Act, 1922, observed (p. 400):
"The phrase 'business connection' is different from, though doubtless not unrelated to, the word business of which there is a definition in the Act."
The expression "business" does not necessarily mean trade or manufacture only. It is being used as including within its scope professions, vocations and callings from a fairly long time. The Shorter Oxford English Dictionary defines "business" as "stated occupation, profession or trade" and "a man of business" is defined as meaning "an attorney" also. In view of the above dictionary meaning of the word "business", it cannot be said that the definition of business given in section 45 of the Partnership Act, 1890 (53 & 54 Vict. clause 39), was an extended definition intended for the purpose of that Act only. Section 45 of that Act says:
"........The expression 'business' includes every trade, occupation, or profession."

Section 2(b) of the Indian Partnership Act, 1932, also defines "business" thus:
" 'Business' includes every trade, occupation and profession."
The observation of Rowlett J. in Christopher Barker & Sons v. IRC , "All professions are businesses, but all businesses are not professions ..." also supports the view that professions are generally regarded as businesses. The same learned judge in another case, IRC v. Marine Steam Turbine Co. Ltd. held:
"The word 'business', however, is also used in another and a very different sense, as meaning an active occupation or profession continuously carried on and it is in this sense that the word is used in the Act with which we are here concerned."

The word "business" is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labor or skill with a view to earning an income. The Courts are of the view that in the context in which the expression "business connection" is used in section 9(1) of the Act, there is no warrant for giving a restricted meaning to it excluding "professional connections" from its scope.

In the case of Barendra Prasad Ray v. ITO, the contention of the appellants was that a professional connection cannot amount to a business connection attracting section 9(1) of the Act. The Court held that the word "business" is one of wide import and it means an activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. The judges were of the view that in the context in which the expression "business connection" is used in section 9(1) of the Act, there is no warrant for giving a restricted meaning to it excluding "professional connections" from its scope.

3) Mere purchase abroad and use in India is not ‘continuing business’ - The term ‘business connection’ postulates a continuity of business relationship between the foreigner and the Indian. There is no question of continuing business relation when a person purchase the machinery or other goods abroad and uses them in India and earns profit as it was held in CIT v. Fried Krupp Industries .In this case the court looked into the question whether principal to principal transaction amounts to any business connection.

The court observed that where a person purchased goods from a foreigner without anything more, and the purchased goods are utilized in commercial operations in India by the Indian, then the Indian merchant or company is earning his own or its own income. The foreigner in such a case has nothing to do with the Indian-assessee's transaction in India, as by selling his machinery abroad, he had no further interest in the business in India. The term "business connection" postulates a continuity of business relationship between the foreigner and the Indian. The court held that there is no question of continuing business relation when a person purchases machinery or other goods abroad and uses them in India and earns profit and the part of the foreigner has been played wholly abroad, so that there is no connection as such with any business in India. .The Supreme Court referred and approved the decision of the Bombay High Court in CIT v. Tata Chemicals Ltd. , wherein it had been held that in order to rope in the income of a non-resident, under the deeming provision, it must be shown by the department that some of the operations were carried out in India in respect of which the income was sought, to be assessed. Therefore the court declared that in respect of principal to principal transaction there is no question of any business connection

4) Capital gains derived outside India is excluded - If the words ‘business connection in India’ were wide enough to cover all transactions including transactions in capital assets, there was no reason for Parliament to specifically include income (a) through or from any property in India, (b) through or from any asset or source of income from India, and (c) through or from sale of a capital asset situate in India. From the very fact that the transfer of a capital asset situate in India has been brought within the purview of section 9 the intention of Parliament was not to bring within its purview any income derived out of sale or purchase of a capital asset effected outside India as it was held in the case of CIT v. Quantas Airways Ltd.

5) If no operations are carried in India, deeming concept cannot apply. In CIT v. Toshoku Ltd. the court observed that If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India.

6) Transactions must be systematic and well-defined - It is not every business activity of a manufacturer that comes within the expression ‘operation’ to which the provisions of section 42(3) of the 1922 Act [corresponding to section 9 of the 1961 Act] are attracted. In the case of Anglo-French Textile Co. Ltd. v. CIT (No. 2) it was observed that activities which are not well defined or are of a casual or isolated character would not ordinarily fall within the ambit of this rule, in a case where all that may be known is that a few transactions of purchase of raw materials have taken place in British India, it could not ordinarily be said that the isolated acts were in their nature ‘operations’ within the meaning of that expression.

Therefore these were the changes introduced by the judiciary in the definition of tern “business connection”. Other then the above mentioned transactions, following transactions does not amount to business connections:-
a. In respect of business operations carried out both in India and overseas, transactions relating to overseas operations,
b. Transactions relating only to purchase of goods in India for purpose of export by the non-resident,
c. Transactions confined to the collection of news for transmission outside India in the business of news agency or publishing newspapers, magazines or journals, carried on by non-resident,
d. Operations confined to shooting of cinematography films by a non-resident foreign national.

Conclusion
The expression 'business connection' limits no precise definition. The import and connotation of this expression has been explained by the Supreme Court in their judgment in C.I.T. v. R.D. Aggarwal and Co .which still holds good. Although the question whether a non-resident has a 'business connection' in India from or through which income, profits or gains can be said to accrue or arise to him within the meaning of section 9 of the Income-tax Act, 1961, has to be determined on the facts of each case but its definitely has given some relief so as do away with the prevalent confusion regarding the term business connection. Generally confusion prevailed in a situation where few transactions of purchases of raw materials took place in India and the manufacture and sale of goods took place outside India, the profits arose from such sales were considered to have arisen out of a business connection in India which was a wrong practice .Later the case of CIT v. Fried Krupp Industries has made the concept even more clear by hinting at “continuity of business” which is essential so as to establish business connections. Therefore the term business connection has been rationalized with the help of the judicial interpretation and been successful to a larger extent in resolving various complications related to transaction and unlike few years back

The author can be reached at: swatiupadhyay@legalserviceindia.com / Print This Article

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