Business link does not create permanent status

FORIEGN ENTERPRISES

Under Section 9 of the Income Tax Act, all income accruing or arising -- directly or indirectly -- through or from any "business connection" in India, is deemed to accrue or arise in India. Such income is liable to tax in India subject to fulfilment of other conditions as laid down in the law.

Despite this provision that exists in law since the inception of the Income-Tax Act, the term "business connection" was defined for the first time by the Finance Act 2003.

As per the explanation inserted by the Act, the business connection has been defined to include business activities carried out through agents.

However, there will be no business connection, if a foreign enterprise does business through a broker, general commission agent or any other agent of an independent status, provided such persons are acting in the ordinary course of their business.

In a recent case of Speciality Magazines (P.) Ltd. reported in 144 Taxman 153, the Authority for Advance Rulings (AAR) summed up the features of business connection as:

A real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India;

Such relation shall contribute, directly or indirectly, to the earning of income by the non-resident in his business;

A course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of business connection in India.

As pointed out by the AAR, every business connection will not lead to creation of a permanent establishment in India without which the business income of a foreign company cannot be taxed.

The business income of a foreign company can be taxed in India only if the said foreign company has a permanent establishment situated in India and only if the profit is directly or indirectly attributable to that permanent establishment.

The business conducted by a foreign enterprise through an agent will lead to creation of a permanent establishment only if the activities of such an agent are carried out wholly, or almost wholly, for the foreign enterprise.

In cases where the agent has an independent status in India and is acting for the foreign enterprise in the ordinary course of his business, such relationship may result in a business connection but not in the creation of a permanent establishment.

In the case before the AAR, an Indian company was acting as an advertisement concessionaire of a foreign company for the purpose of collecting advertisement revenue from Indian clients of the foreign company.

Under the agreement between the two companies, the Indian company was authorised to collect the advertisement charges from Indian advertisers in Indian currency and remit the same to the foreign company in foreign currency.

On the face of these facts, the AAR ruled that there was a clear business connection by the foreign company in India but because Indian company was an independent agent and was not carrying out its activities wholly, or almost wholly, for the foreign company, it could not be said to have a permanent establishment in India.

Therefore, the income of the foreign company was not liable to tax in India.

agar@nda.vsnl.net.in