H P Agrawal: Business link through Indian agent

Under Section 9 of Income-Tax Act, all income accruing or arising, whether 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 - whether the taxpayer is an Indian or a foreign enterprise.

The Finance Act, 2003 inserted two new explanations to Section 9 clarifying that the expression "business connection" shall include a person acting on behalf of a non-resident, who :

Has and habitually exercises in India an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or

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; or

Habitually secures orders in India, mainly or wholly for the non-resident directly or indirectly.

The "business connection", however, shall not be held to be established in cases where the non-resident carries on business through a broker, general commission agent or any other agent of an independent status, provided that such a person is acting in the ordinary course of his business.

Significance of this amendment is:

In those cases where the non-resident belongs to a country with which India has signed a tax treaty for avoidance of double taxation, creation of a business connection will virtually amount to establishment of their "permanent establishment" in India. Thus, in all such cases, business profits from transactions in India will become liable to tax in India.

In those cases where there is no tax treaty, creation of a business connection will render any income accruing or arising, whether directly or indirectly, through or from any business connection in India, as liable to tax in India because such income will be deemed to accrue or arise in India.

In a recent case of Sutron Construction before the Authority for Advance Rulings (268 ITR 156), an American company engaged an agent in India.

The Authority held that the agent was at least a paid agent of the applicant for the purpose of collecting market information, notices inviting tenders by various institutions and government departments relating to the applicant's products and services and supplying such information to the applicant, submitting bid proposals to the respective customers and executing the contract for the enterprise and performing other tasks as authorised by the applicant. Therefore, the applicant had a business connection in India.

It was further held that this business connection will lead to establishment of a "permanent establishment" in India.

The Authority thus held that under paragraph 1 of Article 7 of the Agreement for Avoidance of Double Taxation between India and the US, if the applicant carried on business in India through a permanent establishment, the profits of the business would be taxable in India to the extent they were attributable to the permanent establishment.

In other words, income derived from sale and installation of equipment and machinery as well as from furnishing services would be taxable in India if they were through a permanent establishment in India.

All foreign enterprises doing business with India will therefore be well advised to keep the aforesaid provisions in mind while finalising their contracts with Indian parties to ensure that no 'business connection' is unnecessarily created in India ""which could push them in the Indian tax net.

agar@nda.vsnl.net.in