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Scope of taxable income of non-residents

Income received in India
Income deemed to be received in India
Income accruing or arising in India
Income deemed to accrue or arise in India

Counted only once

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Income deemed to accrue or arise in India

Long list of circumstances – incomes through or from

Business connection
Property
Asset or source of income
Transfer of capital asset
Salary earned in India
Dividend paid by Indian company
Interest on money borrowed for Indian business
Royalty for Indian business
Fees for technical services for Indian business

Etc…

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Business Connection – scope of the expression

Expression has not been defined in the Act (Advance Ruling P. No. 8 of 1995 (1997) 223 ITR 416 (AAR))
It is an expression of wide and indefinite import (Bikaner Textile Merchants (1965) 58 ITR 169 (Raj))
Includes: -

Business activity through a person, who, acting on behalf of non-resident;

Has and habitually exercises authority to conclude contracts
Maintains stock of goods for delivery on behalf of non-resident
Habitually secures orders for non-resident

Significant economic presence

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Business connection … scope of the expression

The phrase ‘business connection’ is different from, though not unrelated to, the term ‘business’ – Currimbhoy Ebrahim (1935) 3 ITR 395 (PC)
It does not lead to a business connection where there is an isolated business transaction between resident and non-resident; continuity required – Anglo-French Textile (1953) 23 ITR 101 (SC), Metro Goldwyn Mayer (1939) 7 ITR 176 (Bom), Bikaner Textile Merchants (1965) 58 ITR 169 (Raj). But see Formula One – Supreme Court
Postulates a real and intimate relation between the trading activity inside and outside the country, which relation contributes to earning the profit by the non-resident – R D Aggarwal (1965) 56 ITR 20 (SC)
It may take several forms – carrying on part of the main business, incidental through an agent or a mere relation between business of the non-resident and activity in the country which facilitates the business – Advance Ruling P. No. 8 of 1995 (1997) 223 ITR 416 (AAR)

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Business connection – illustration from leading cases

R D Aggarwal 56 ITR 20 (SC)

Bangalore Woollen 18 ITR 423

Hindustan Shipyard 109 ITR 158

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Business connection – implication of having

In a business where part of the operations are carried out in India, such part of the income as is reasonably attributable to the operations carried out in India will be taxable in India as ‘deemed to accrue or arise through or from the business connection’

This is true for business connections other than those in the form of ‘significant economic presence’

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Business connection – operations carried out in India – various forms

Not every business activity of manufacturer qualifies as ‘operation’; isolated transactions of purchases do not, systematic and habitual purchases through an established agency do – Anglo French (1953) 23 ITR 101 (SC)
Income from following operations;

Advertisement targeting a customer residing in India or using Indian IP address
Sale of data collected from a person residing in India or using Indian IP address
Sale of goods or services using data collected from a person residing in India or using Indian IP address

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Operations not considered business connection, not giving rise to taxable income

Operations for: -

Purchase of goods in India for the purpose of exports
Collection of news and views in India for transmitting out of India
Shooting of cinematographic film in India
Display of uncut diamond in notified zone

Business activity through a broker, general commission agent, other agent of independent status if they are acting in ordinary course of their business

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Illustration of income ‘reasonably attributable to operations …in India’

Ahmedbhai Umarbhai 18 IT 472 (SC)

Anglo French 23 ITR 101 (SC)

Currently, the calculation of amount ‘reasonably attributable to operations …in India’ is governed by Rule 10 of the Income-tax Rules, 1962. Rule 10 provides –

If the attributable income cannot be otherwise computed the following approximation may be done

% of turnover
Proportion of turnover to profit
As the AO may determine

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Attribution – proposed formulae (not yet a law)

Profits attributable to operations in India = ‘Profits derived from India’ 92 x [SI/3xST + (NI/6xNT) +(WI/6xWT) + (AI/3xAT)]

Where, SI = sales revenue derived by Indian operations from sales in India

ST = total sales revenue derived by Indian operations from sales in India and outside India

NI =number of employees employed with respect to Indian operations and located in India

NT = total number of employees employed with respect to Indian operations and located in India and outside India

WI= wages paid to employees employed with respect to Indian operations and located in India

WT = total wages paid to employees employed with respect to Indian operations and located in India and outside India

AI = assets deployed for Indian operations and located in India

AT = total assets deployed for Indian operations and located in India and outside India

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Exempted operations - illustrations

Purchase for the purpose of export - N K Jain 206 ITR 692 (Del)

Collections of news in India for transmission abroad – Time Inc 67 Taxman 518

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Business connection v. Permanent Establishment

Permanent Establishment is elaborately defined in treaties

It means ‘a fixed place’ through which the business of the enterprise is carried on
It ‘includes especially’ the following

Branch/ office, etc.
Plantation, etc.
Installation/ construction site
Major machinery (e.g. India-Australia DTAA)
Provision of services (e.g. Australia, Canada, UK, USA, etc. DTAAs)
Dependent agent

Subject to ‘preparatory and auxiliary exclusion’

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Business connection v. Permanent Establishment

PE also has inclusive definition, but the list is so exhaustive its scope seems to be more definite
BC has practically no definition, very limited inclusive definition, leaving scope for interpretation
Hence, it may be said that all PEs are BCs but all BCs are not PEs
However in Formulae One World Championship (CA 3850 & 3851 of 2017) Supreme Court held that FOWC was liable to pay tax in India on the income earned from the Event, as it had conducted business in India through a permanent establishment.

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Business connection – PE – attribution

Nebulous area of tax law
Identification of BC
Thereafter, profit attribution
An ever-evolving topic, affected by continuously developing commercial practices, science and technology, human tastes and preferences, level of population, etc.

Thank you!