CBDT Circular No. 23 Date of Issue 23/7/1969

Date of Issue: 23/7/1969
Section(s) Referred: 9
Statute: Income-Tax Act

1. Non-residents-Income accruing or arising through or from business connection in India-Liability to tax-Section 9 of the Income-tax Act, 1961.

Section 9 of the Income-tax Act (corresponding broadly to section 42 of the Indian Income-tax, 1922) provides, inter alia, that income accruing or arising directly or indirectly, through or from any business connection in India, shall be deemed to be income accruing or arising in India and hence, where the person entitled to such income is a non-resident, it will be includible in his total income. Clarifications issued in the past by the Board on the scope of the provisions of section 42 and their applicability in certain types of cases, are hereby consolidated and restated for the information and convenience of the public.

2. The expression ‘business connection’ limits of 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. and another, [56 I.T.R. 20]. 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. However, 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.

3. The following clarifications would be found useful in deciding questions regarding the applicability of the provisions of section 9 in certain specific situations :

(1) Non-resident exporter selling goods from abroad to Indian importer.-

(i) No liability will arise on accrual basis to the non-resident on the profits made by him where the transactions of sale between the two parties, are on a principal-to-principal basis. In all cases, the real relationship between the parties has to be looked into on the basis of an agreement existing between them, but where-

(a) the purchases made by the resident are outright on his own account;

(b) the transactions between the resident and the non-resident are made at arm’s length and at prices which would be normally chargeable to other customers;

(c) the non-resident exercises no control over the business of the resident and sales are made by the latter on his own account,
or

(d) the payment to the non-resident is made on delivery of documents and is not dependent in any way on the sales to be effected by the resident, it can be inferred that the transactions are on the basis of principal-to- principal.

(ii) A question may arise in the above type of cases whether there is any liability of the non-resident under section 5(1)(a) of the Income-tax Act, 1961, on the basis of receipt of sale proceeds including the profit in India. If the non-resident makes over the shipping documents to a bank in his own country which discounts the documents and sends them for collection to the bankers in India, who present the sight or usance draft to the resident importer and deliver the documents to him against payment or acceptance by the latter, the non-resident will not be liable to tax on the profit arising out of the sales on receipt basis. Even if the shipping documents are not discounted in the foreign country, but are handed over in India against payment or acceptance, no portion of the profits will be chargeable to tax under the Income-tax Act, if this is the only operation carried on in India on behalf of the non-resident.

(2) Non-resident company selling goods from abroad to its Indian subsidiary.-

(i) A question may arise whether the dealings between a non-resident parent company and its Indian subsidiary can at all be regarded as on a principal-to-principal basis since the former would be in a position to exercise control over the affairs of the latter. In such a case, if the transactions are actually on a principal-to-principal basis and are at arm’s length, and the subsidiary company functions and carries on business on its own, instead of functioning as an agent of the parent company, the mere fact that the Indian company is a subsidiary of the non-resident company will not be considered a valid ground for invoking section 9 for assessing the non-resident.

(ii) Where a non-resident parent company sells goods to its Indian subsidiary, the income from the transaction will not be deemed to accrue or arise in India under section 9, provided that (a) the contracts to sell are made outside India, (b) the sales are made on a principal-to-principal basis and at arm’s length and (c) the subsidiary does not act as an agent of the parent. The mere existence of a “business connection” arising out of the parent subsidiary relationship will not give rise to an assessment, nor will the fact that the parent company might exercise control over the affairs of the subsidiary.

(3) Sale of plant and machinery to an Indian importer on instalment basis.-
Where the transaction of sale and purchase is on a principal-to-principal basis and the exporter and the importer have no other business connection, the fact that the exporter allows the importer to pay for the plant and machinery in instalments will not, by itself, render the exporter liable to tax on the ground that the income is deemed to arise to him in India. The Indian importer will not, in such a case, be treated as an agent of the exporter for the purposes of assessment.

• Foreign agents of Indian exporters.-A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India. Such an agent is not liable to income-tax in India on the commission.

• Non-resident person purchasing goods in India.-A non-resident will not be liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident has an office or an agency in India for this purpose. Where a resident person acts in the ordinary course of his business in making purchases for a non-resident party, he would not normally be regarded as an agent of the non-resident under section 163 of the Act. But, where the resident person is closely connected with the non-resident purchaser and the course of business between them is so arranged that the resident person gets no profits or less than the ordinary profits which might be expected to arise in that business, the Income-tax Officer is empowered to determine the amount of profits which may reasonably be deemed to have been derived by the resident person from that business and include such amount in the total income of the resident person.

• Sales by a non-resident to Indian customers either directly or through agents.-

(a) Where a non-resident allows an Indian customer, facilities of extended credit for payment, there would be no assessment merely for this reason provided that (i) the contracts to sell were made outside India and (ii) the sales were made on a principal-to-principal basis.

(b) Where a non-resident’s sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent’s services, provided that (a) the non-resident principal’s business activities in India are wholly channelled through his agent, (b) the contracts to sell are made outside India, and (c) the sales are made on a principal-to-principal basis. In the assessment of the amount of profit, allowance will be made for the expenses incurred, including the agent’s commission, in making the sales. If the agent’s commission fully represents the value of the profit-attributable to his service, it should prima facie extinguish the assessment.

(c) Where a non-resident principal’s business activities in India are not wholly channelled through his agent in India the assessment in India will be on the sum-total of the amount of profit attributable to his agent’s activities in India and the amount of profit attributable to his own activities in India, less the expenses incurred in making the sales.

• Extent of the profit assessable under section 9.-Section 9 does not seek to bring into the tax-net the profits of a non-resident which cannot reasonably be attributed to operations carried out in India. Even if there be a business connection in India, the whole of the profit accruing or arising from the business connection is not deemed to accrue or arise in India. It is only that portion of the profit which can reasonably be attributed to the operations of the business carried out in India, which is liable to income-tax.

• To constitute a business connection some continuity of relationship between the person in India who helps to make the profits and the person outside India who receives or realises the profits, is necessary. Where all that has happened is that a few transactions of purchases of raw materials have taken place in India and the manufacture and sale of goods have taken place outside India, the profits arising from such sales cannot be considered to have arisen out of a business connection in India. Where, however, there is a regular agency established in India for the purchase of the entire raw materials required for the purpose of manufacture and sale abroad and the agent is chosen by reason of his skill, reputation and experience in the line of trade, it can be said that there is a business connection in India so that a portion of the profits attributable to the purchase of raw materials in India can be apportioned under the explanation (a) to section 9(1)(i).