Taxability of income in hands of a non-resident not a relevant consideration for treating a resident to be an agent of a non-resident

Date of pronouncement : 29/02/2012

ORDER

PER N.V.VASUDEVAN, J.M.

ITA No.2212/M/02 to ITA No.2214/M/02 are appeals by M/S.Jet Airways India Pvt. Ltd., hereinafter referred to as the Appellant, against three orders all dated 22/2/2002 of CIT(A) 31, Mumbai relating to assessment year 1998-99. All these appeals are against orders passed under section 163 of the Income Tax Act, 1961 (the Act) treating the appellant herein as the Agent of M/s. Murcurbank Aaktiengeseuschaft, Austria (MA), M/s. Malaysian Airlines System, Berhad (MAS) & M/s. Airline Rotables Ltd. UK,(ARL) respectively. All these appeals arise out of identical facts and circumstances and, therefore, we deem it appropriate to pass a common order.

2. The facts in the case M/s. Airline Rotables Ltd. UK,(ARL) are as follows:

M/s. Airline Rotables Limited (‘ARL’) is a company incorporated in United Kingdom and its main business is that of providing spares and component support for aircraft to aircraft operators. Pursuant to an agreement with the appellant, ARL was to providerotables (aircraft components) to the appellant. This process involves obtaining faulty components from appellant in exchange of components in good condition, and repair or overhaul of the faulty components. ARL was to provide to the appellant consignment stock of good components at the Appellants’ operating base. The appellant is entitled to obtain components from this stock on need basis. The appellant had made a request u/s. 195 for non deduction of tax from the payment made to ARL. This request was made to the DCIT, TDS Circle-1(1), Mumbai (‘DCIT’). The request was rejected by the DCIT, TDS Circle-1(1), vide his order u/s. 195 dt. 1.12.1998. It was held by him that the ARL has Permanent Establishment (‘PE’) in India within the meaning of Article 5 of the Indo UK Double Taxation Avoidance Agreement (‘DTAA’). The DCIT accordingly held that the tax is required to be deducted at source. He estimated the income of the ARL at 10% of the total billing (payments) and accordingly directed deduction of tax at the rate of 4.8% of the total billing. The appellant filed appeal against this order before the CIT(A)-XXV, Mumbai u/s. 195 of the I.T. Act, 1961. This appeal was decided by the learned CIT(A)-XXV, vide his order No.CIT(A)XXV/DCIT (TDS)/CIR. 1(l)/ 120/98-99 dt. 5.11.1999. The learned CIT(A)-XXV upheld the finding of the DCIT, Circle —1(1), Mumbai and held that the ARL has a PE in India. The tax was accordingly required to be deducted at source as per sec. 195. He upheld the finding of the DCIT regarding estimation of income at 10% of the total billing and for deducting tax at source at 48% of such income.

3. ARL filed the return of income for AY 98-99 on 11.06.1999 declaring total income at ‘Nil’. By an order of assessment dt.30.3.200 1, the AO following the findings of the DCIT and those of the learned CIT(A)-XXV, Mumbai in the proceedings u/s. 195 of the Act, held that ARL has a PE in India within the meaning of Article 5 of the DTAA. The AO also held that the income of the ARL had to be estimated at 10% of the total billing. The AO accordingly assessed the income. On further appeal by ARL the CIT(A) by his order dated 28.2.2006 confirmed the order of the AO. On further appeal by ARL to the Tribunal, the Tribunal in ITA No.3254/Mum/2006 by order dated 2 1.5.2010 held that ARL had no Permanent Establishment in India and therefore income from business that accrued to it in India cannot be taxed. However, the Tribunal remanded the issue of taxability of consideration attributable to the right to use replacement component under Article 13(3)(b) of the India UK DTAA,

4. When the proceedings against ARL for assessment for AY 98-99 were pending, the AO issued a notice u/s.163 of the Act dated 26.2.200 1 calling upon the Appellant to show cause as to why the appellant should not be treated as Agent and Representative Assessee of ARL. The AO passed an order dt. 12.3.2001 treating the appellant as agent and representative Assessee of ARL holding that (a) the appellant  has a business connection with ARL and (b) ARL was in receipt of any income directly or indirectly from the Appellant. The AO held that the appellant’s case was squarely covered u/s. 163(1) (b) and 163(1) (c) of the I.T. Act, 1961.

5. Against the order of the AO treating the appellant as agent of ARL, the Assessee preferred appeal before CIT(A) and submitted that the appellant did not have any business connection with ARL and that the entire payment was neither receivable nor payable in India. In this regard appellant placed reliance on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. S.G Pgnatal 124 ITR 391 (Guj), wherein it was held that if the liability to income arises out of India and the same is receivable and payable outside India, the same cannot be deemed to have accrued or arising in India. It was also submitted that the income received by the non-resident from the appellant was not taxable in India and, therefore, the assessee could not be treated as an agent of the non-resident. Reliance was also placed on the decision of the SC in the case of CIT vs. R.D.Aggarwal and Co. 56 ITR 20 and it was contended that the appellant has not received any income for and on behalf of ARL accordingly, it could not be treated as an agent u/s. 163 of the IT Act, 1961. The Appellant further relied on the decision of the Hon’ble S C in the case of Carborandum vs.CIT 108 ITR 335 wherein it was held that if all the operations are not carried out in India, the profit and gains deemed to accrue arise in India, can only be such profits and gains as are reasonably attributable to that part of operations which are carried in side India.

6. The CIT(A) held that ARL was not maintaining any branch office in India for the purchase or sale of goods for transacting other business. ARL did not appoint any agent in India for sale and purchase of the aircraft. ARL has not established any aircraft factory or service centre in India till now and it does not render any services to anybody in India. ARL was not having any subsidiary company in India. ARL did not have any financial association with the appellant. The CIT(A) therefore held that treating the appellant as an agent u/s. 163(l)(b) and/or 163(1) (c) of ARL was not  proper. Aggrieved by the order of the CIT(A), the revenue has filed ITA No.22 14/Mum/2002.

7. In the case of Murcurbank Aaktiengeseuschaft,Austria (MA) the facts are identical. The appellant had taken an Aircraft on lease from MA on a principal to principal basis. The Aircraft was used by the appellant in India on a monthly fixed variable lease rental. The claim of the Appellant in response to show cause notice dt. 16.3.2001 of AO for treating the appellant as agent of MA and representative Assessee u/s. 163 of the Act, was that the Aircraft was taken on lease outside India and, therefore, none of the clauses in section 163 were attracted so as to treat the appellant as agent of the non-resident. The AO however, held that the Aircraft was used for business operation in India and, therefore, the place where the agreement of lease was signed was irrelevant. Since the activities were carried in India which resulted in generation of Income by the non-resident the income was taxable in India as it accrues or arise in India. For other identical reasons given in the case of ARL the AO treated the assessee as an agent of MA.

8. In the case of M/S.Malaysian Airlines System, Berhad (MAS), the facts were identical to the case of MA namely lease of Aircraft for use by the assessee in India. The claim of the Appellant in response to show cause notice dt. 16.3.200 1 of AO for treating the appellant as agent of MAS and representative Assessee u/s. 163 of the Act, was that the Aircraft was taken on lease outside India and, therefore, none of the clauses in section 163 were attracted so as to treat the appellant as agent of the non-resident. For identical reasons as were given in the case of MA the AO treated the appellant as agent of MAS. In the case of both MA & MAS the CIT(A) cancelled the order of the AO treating the appellant as agent and representative Assessee of MA & MAS by following the order and reasons given in the case of ARL.

9. Aggrieved by the orders of the CIT(A) the revenue has preferred the present appeals before the Tribunal.

10. The ld. D.R relied on the findings of the AO and submitted that the case of the appellants squarely falls within the ambit of section 163(1) (c) of the Act. In this regard it was submitted by him that the receipt of income by the non-resident would alone be relevant. As to whether the receipts by the non-resident from the appellant were chargeable to tax in India would not relevant at the stage of proceedings under section 163 of the Act. In this regard ld. D.R submitted that the CIT(A) fell into an error in going into the question regarding chargeability of tax of the receipts by the non-resident from India, which is not the mandate of the provisions to section 163 of the Act.

11. The Ld. Counsel for the appellant on the other hand, submitted that as far as the case of ARL is concerned, this Tribunal has already taken a view that the receipts in question are not chargeable to tax. In this regard our attention was drawn to the order of the ITAT in the case of M/s. ARL Ltd. vs. JCIT, ITA No.3254/M/06 for A.Y 1998-99[ since reported in 131 TTJ 385(Mum)]. The Tribunal had already taken a view that the receipts by ARL from the appellant was in the nature of business income and since ARL did not have a PE in India the income cannot be brought to tax. However the taxability of the receipts attributable to the right to use replacement equipment under Article 13(3)(b) of Indo-UK DTAA was directed to be examined by the CIT(A). The ld. Counsel for the appellant, therefore, submitted that the order of the CIT(A) in any event has to be confirmed as the chargeability to tax of receipts to a large extent has been held in favour of ARL. His next submission was that the proceedings under section 163 of the Act, were commenced by issue of show cause notice in the case of ARL on 26/2/200 1. It was brought to our notice that as early as 11/6/1999, ARL had filed return of Income in India and the AO passed an order of assessment for A.Y 1998-99 on 30/3/2001. It was his submission that since proceedings for assessment of income of the non-resident have been initiated, it was not open to the revenue to initiate proceedings under section 163 of the Act against the appellant. In this regard our attention was drawn to the decision of the Hon’ble Bombay High Court in the case Aditya Birla Nuvo Ltd.vs. DDIT, 200 Taxaman 437(Bom). In the aforesaid decision the Hon’ble Bombay High Court had held as under:

“76. We are aware that continuing the assessment proceeding against the representative assessee as well as the non-resident simultaneously would operate harshly against the representative assessee, because, if the revenue can assess and collect the tax directly from the non-resident, there is no reason as to why the assessment and collection of tax should be made in the hands of the representative assessee and leave the representative assessee to collect the said amount from the non-resident. The very object of assessing the income of the non-resident in the hands of the representative assessee is, on account of the fact that it is quite often difficult to recover the tax from the non-resident. In the present case, remittances to the non-resident were made by Indian Rayon by obtaining section 195(2) certificate based on incorrect statement. In these circumstances, in our opinion, it would be just and proper to hold that ordinarily the Assessing Officer must not proceed against the representative assessee once the assessment proceedings are initiated against the non-resident but in exceptional cases like the present one, where complex issues are involved relating to the computation of capital gains and the Assessing Officer is unable to make up his mind on account of suppression of material facts, then, it would be open to the Assessing Officer to continue with the assessment proceedings against the representative assessee and the non-resident simultaneously till he decides to assess either of them.”

12. The next submission of the ld. Counsel for the appellant was that once income has been brought to charge of tax in the hands of the principal the same income cannot be once again assessed in the case of representative assessee. In this regard reliance was placed on the decision of the ITAT, Mumbai Bench in the case of Hindalco Industries Ltd. vs. DCIT, ITA No.3667/Mum/2005 order dated 14/5/20 10.

13. We have considered the rival submissions. The provisions regarding liability in respect of taxes payable by a non-resident have been laid down in Sec. 160, 161 of Act. Sec. 160 of the Act lays down that in respect of the income of a non-resident specified in clause (i) of Sub-section (1) of Section 9, the agent of the non-resident, including person who is treated as an agent u/s. 163 of the Act, will be regarded as representative Assessee of the non-resident. Sec. 161 casts liability on a representative Assessee and it lays down that his liability, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing  to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income. The section thus creates a vicarious liability, in so far as the agent is concerned, for the tax which the non-resident has to pay. Because of the aforesaid liability, an agent or any person who apprehends that he may be assessed as such an agent can retain out of the money payable to the non-resident a sum equal to the estimated liability. Sec. 163 of the Act lays down as to who can be regarded as Agent for the purpose of the Act.

163. (1) For the purposes of this Act, “agent”, in relation to a non-resident, includes any person in India—

(a) who is employed by or on behalf of the non-resident; or

(b) who has any business connection with the non-resident; or

(c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or

(c) who is the trustee of the non-resident;

and includes also any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India:

Provided that a broker in India who, in respect of any transactions, does not deal directly with or on behalf of a non-resident principal but deals with or through a non-resident broker shall not be deemed to be an agent under this section in respect of such transactions, if the following conditions are fulfilled, namely:—

(i) the transactions are carried on in the ordinary course of business through the first-mentioned broker; and

(ii) the non-resident broker is carrying on such transactions in the

ordinary course of his business and not as a principal.

Explanation.—For the purposes of this sub-section, the expression “business connection” shall have the meaning assigned to it in Explanation 2 to clause (i) of sub-section (1) of section 9 of this Act.

(2) No person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard by the Assessing Officer as to his liability to be treated as such.

Expln.to Sec. 163(1) which lays down that the expression “business connection” shall have the meaning assigned to it in Expln.2 to Clause(i) of Sub-Section (1) of Section 9 of the Act. This explanation was inserted by the Finance Act, 2003 w.e.f 1-4-2004. Expln.-2 to clause(i) of Sub-Section (1) of Sec.9 was also simultaneously inserted by the finance Act, 2003, w.e.f. 1-4-2004 reads as follows:

Income deemed to accrue or arise in India.

9.(1) The following incomes shall be deemed to accrue or arise in India:—

(i)all income accruing or arising, whether directly or indirectly, through or from 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 situate in India.

Explanation 2.—For the removal of doubts, it is hereby declared that “business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident,—

(a) 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

(b) 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

(c) habitually secures orders in India, mainly or wholly 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 include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business:

Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.

The Explanation to Sec. 163(1) and Expln.2 to Sec.9(1)(i) which are applicable only from 1-4-2004 would not be relevant for the present cases which relates to assessment years 98-99. Even as per the Explanation-2 to Sec.9(1)(i) of the Act, the term “business connection” has only been defined to include certain business activity. The term business connection cannot therefore be confined to only business activity as mentioned in Expln.-2 to Sec.9(1)(i) of the Act. Therefore the expression “business connection” as used in Sec. 163(1)(b) and Sec.9(1)(i) of the Act has also to be understand as it was explained in various decided cases, prior to the insertion of the aforesaid explanation.

14. The provisions by which a person in India was treated as agent of non-resident and made liable for taxes payable by the non-resident under the Income Tax Act, 1922( 1922 Act) were contained Sec.42 and 43 of the 1922 Act, which read as follows:

“Sec.42(1) In the case of any person residing out of British India, all profits or gains accruing or arising to such person, whether directly or indirectly, though or from any business connection or property in British India, shall be deemed to be income accruing or arising within British India, and shall be chargeable to income-tax in the name of the agent of any such person, and such agent shall be deemed to be, for all the purposes of this Act, the assessee in respect of such income-tax:

Provided that any arrears of tax may be recovered also in accordance with the provisions of this Act from any assets of the non-resident person which are, or may at any time come, within British India.”

Sec.43. Any person employed by or on behalf of a person residing out of British India, or having any business connection with such person, or through whom such person is in the receipt of any income, profits or gains upon whom the Income-tax Officer has caused a notice to be served of his intention of treating him as the agent of the non-resident person shall, for all the purposes of this Act be deemed to be such agent:

Provided that no person shall be deemed to be the agent of a non-resident person, unless he had an opportunity of being heard by the Income-tax Officer as to his liability.”

Under the 1922 Act, there were no separate proceedings by which a person in India is treated as Agent of non-resident. Under 1922 Act, in section 42, it was provided that income of the non-resident could be assessed either in his name or in that of his agent, if there was a business connection. However, under the 1961 Act, as  noted above, liability of a non-resident is fixed as per separate provision and not clubbed with agent as was done u/s 42 of the 1922 Act. Under the Income Tax Act, 1961, the provisions contemplate separate proceedings for treating a person in India as Agent of a Non-resident and a right of appeal to the person so treated as agent of non-resident. These are contained in Sec. 163 of the Act, which we have already referred in the earlier paragraphs. Under the procedure for treating a person in India as agent of non-resident, it does not appear that the liability of non-resident to tax has to be established. The provisions of Sec. 163 do not lay down any such condition. The purpose of Sec. 163 is to enable the revenue to proceed against the person in India who is regarded as agent of a non-resident, so that vicarious liability can be imposed on him, if it is found that the income of non-resident is chargeable to tax in India. The income of non-resident whether is chargeable to tax or not, and determination of income so liable to tax are to be determined in separate assessment proceedings in which the person in India who is treated as agent of the non-resident, will have full opportunity and right of appeal, as is available to any other Assessee. At the stage of treating a person in India as agent of a non-resident, the liability to tax of the non-resident need not be established. If any of the parameters laid down in Sec. 163(1) (a) to (d) are satisfied, then the person in India can be treated as Agent of the non-resident.

15. In the present case, the CIT(A) in our view proceeded to examine as to whether the receipts by the non-residents from the Assessee are income chargeable to tax in India. As can be seen from the provisions of Sec. 163(1)(a) to (d) of the Act, the chargeability to tax in India of the receipts from the Appellant in the hands of the non-residents is not a criteria. Such chargeability to tax will arise for consideration only in assessment proceedings either on the non-resident or the Agent or person treated as Agent of the non-resident u/s. 160 read with Sec. 163 of the Act. Therefore the contention of the appellant that since the Tribunal has already held in the case of ARL that receipts from the Assessee by ARL is business income but not chargeable to tax in the hands of the non-resident because of absence of PE in  India the proceedings under section 163 of the Act are an exercise in futility, cannot be accepted. Moreover the chargeability to tax of receipts attributable to the right to use replacement component has been directed to be examined afresh by the CIT(A) in the light of Article 13(3)(b) of the India UK DTAA by the Tribunal in its order.

16. Now we will examine as to whether the parameters laid down in Sec. 163(1)(b) of the Act are satisfied in the case of the appellant. The term “Business Connection” as explained in various judicial pronouncements have to be seen. In R.D. Agarwal and co.(supra), the Hon’ble Supreme Court held as follows:

“Business connection contemplated by section 42 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, a stray or isolated transaction not being normally regarded as a business connection. 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 such cases the question whether there is 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 connection postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity.

17. Applying the tests laid down as above to the present case, we find that there was an element of continuity between the business of the non-resident and the activity in the taxable territory. A mere relation between the business of the non¬resident and the activity in India which facilitates or assists the carrying on of the business of the non-resident would result in a business connection. We are of the view that applying these tests to the present case, it must be held that there was a business connection. The business of the non-resident was hiring of aircraft, supply of spare parts for aircraft respectively. The Appellant utilised the services of the non-resident in its business in India. These facts in our opinion are sufficient to justify the conclusion that there was a business connection within the meaning of  sec. 163(1)(b) as well as Sec.9(1)(i) of the Act. We uphold the conclusion of the AO in this regard and reverse the order of CIT(A).

18. We are also of the view that the parameters laid down in Sec. 163(1)(c) of the Act are satisfied. Under the above provisions agent includes a person from or through whom the non-resident is in receipt of any income, whether directly or indirectly. The appellant makes payment to the non-residents for the services rendered by them in India either in the form of supply of spare parts for aircraft or for hire of aircraft. Thus the non-residents are in receipt of income from the appellant. It is not a case where the non-resident is in receipt of income “through” the appellant but “from” the appellant. Therefore the provisions of Sec. 163(1)( c ) are also attracted. As already stated receipt of income alone is relevant in proceedings u/s. 166 of the Act and their chargeability of such income to tax under the Act is not relevant. For the reasons given above, we reverse the orders of CIT(A) and restore the orders of the AO passed u/s. 163 of the Act. All these appeals by the Revenue are accordingly dismissed.

19. With regard to the arguments of the ld. Counsel for the appellant that simultaneous proceedings for assessment of the same income in the hands of the agent as well as principal should not be resorted, we are of the view that the proceedings under section 163 of the Act, as we have already observed, is only for the purpose of enabling the revenue to safeguard its interest in the event of tax liability being ultimately found to exist in the hands of the non-resident. Such proceedings cannot be said to be assessment proceedings against the agent. Apart from the above, the provisions of Sec. 166 of the Act provides that the provisions for treating person in India as agent of the non-resident does not prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income. Thus there is no bar for proceeding u/s. 163 of the Act when the principal i.e., the non-resident on whose behalf a person in India is  regarded as agent, has already submitted to the jurisdiction of the AO by filing a return of income or participating in the proceedings before the AO. Therefore, the contention of the appellant in this regard is rejected. With regard to the stand of the appellant that same income cannot be brought to tax in the hands of the agent as well as non-resident based on the decision of the ITAT Mumbai in the case of Hindalco Industries(supra), we are of the view that an order under section 163 of the Act is not an order of assessment of income and, therefore, the ratio laid down in the aforesaid decision cannot be applied.

20. For the reasons given above we are of the view that the CIT(A)fell into an error in accepting the plea of the appellant and canceling the order under section 163 of the Act. We, therefore, reverse the order of the CIT(A) and restore the order of AO in this regard.

21. In the result, all the appeals are allowed.

ITA No.477 1 & 4772/M/02:

22. These are appeals by the revenue against two orders, both dated 28/6/2002 of CIT(A)-31, Mumbai relating to assessment year 1998-99 passed in the case of appellant as agent MA, Austria. We have already seen that the appellant was treated as an agent of MA as well as MAS. Consequent to such order, assessment proceedings were initiated against the appellant as an agent of MA & MAS respectively. The payments made by the assessee to MA as well as MAS were treated as income of the assessee and brought to tax by the AO in such assessment proceedings. On appeal by the assessee the CIT(A) was of the view that since the order appointing the appellant as agent and representative assessee of MA and MAS has been cancelled the assessment framed by treating the appellant as agent of MA and MAS could not be sustained. The CIT(A) accordingly cancelled the assessment. Aggrieved by the order of the CIT(A) the revenue has preferred the present appeals before the Tribunal.

23. We have already held while deciding the appeals of the revenue against order of CIT(A) cancelling the order of the AO u/s. 163 of the Act that the proceedings under section 163 of the Act were valid. In view of the above the order of the CIT(A) cancelling the orders of assessment cannot be sustained. The order of the CIT(A) is therefore, set aside and the question of taxability of the receipts by the non-resident is directed to be examined by the CIT(A) on merits. The CIT(A) will afford opportunity of being heard to the assessee before deciding the issue. These appeals are treated as allowed for statistical purposes.

24. In the result, ITA No.2212 to 2214/M/02 are allowed, while ITA No.4771 & 4772/M/02 are allowed for statistical purposes.

Order pronounced in the open court on the 29th day of Feb.2012

Date of pronouncement : 29/02/2012 

ORDER

NF