WSA Shipping (Bombay) Private Ltd Vs. ADIT (ITAT Mumbai), Decided on 13.05.2011
A relation between the business of a non-resident and activity carried on in India would result in a ‘business connection’ for the purpose of deemed accrual of income in India as well as for considering the resident as the agent of the non-resident
Facts :-WSA Shipping (Bombay) Private Ltd („assessee‟) is engaged in the business of Cargo Consolidation commonly known in the business as Non Vessel Owners Cargo Carriers. The assessee is registered as a Multi modal Transport Operator (MTO) with the Ministry of Shipping; Directorate General of Shipping, Government of India.The assessee receives cargo from various shippers/consignors at Mumbai port for shipments to various destinations worldwide. Based on the volumes of the cargo and business experience, the assessee obtains a container from agents of shipping lines.In the process of cargo consolidation, as the container obtained from the agents of shipping lines may not be stuffed fully for a particular destination, as per the delivery schedule.
The assessee stuffs the cargo of various destinations on a particular route in one container and loads the container with the shipping line.A business associate of the assessee at an intermediary destination turns around the cargo and routes the same to the final destination. For this service, the assessee pays a fee to the overseas business associate.The assessee was unable to produce the agreement entered into with the overseas business associate before the assessing authority.The tax officer held that the non-resident business associate of the assessee had a business connection in India and considered the assessee as an agent of the non-resident business associate.The tax officer also held that the income of the assessee‟s business associates in Hong Kong (in respect of which the assessee was deemed to be an agent) was taxable in India on account of business connection.
Issues before the Mumbai Tribunal –Whether the assessee could be considered as an agent of the non-resident business associate and whether the said income was taxable in India.
Observations and Ruling of the Tribunal –The cases were related to the period prior to the insertion of definition of „business connection‟ in the Indian domestic tax law. Hence the term was to be interpreted on the basis of various judicial precedents in India.The freight charged by the assessee included the freight from the transshipment port to the final destination and the same was being paid to the non-resident business associate. In absence of agreement between the assessee and overseas business associate, it could not be concluded that the dealings between the assessee and the business associate were on a principal to principal basis.Even though the overseas business associate was not a party to the agreement between the assessee and its customers, the assessee had to constantly co-ordinate with the overseas business associate for the availability of container space, the nature of goods being shipped, etc. Hence, it cannot be said that the overseas business associate does not have any control over the manner in which the assessee accepts the cargo.There was an element of continuity between the business of the non-resident and the activity in India. The assessee could not segregate the business activity of shipment of cargo as one upto the port of transshipment and the other from the port of transshipment to the port of final destination. Both these activities were integrated activities.The non-resident business associate has a „business connection‟ in India and hence the assessee could be considered as an agent of the non-resident business associate. Further, the non-resident business associate was in receipt of income from the assessee, and as such assessee could also be considered as agent of the non-resident on the basis of receipt of income criteria set out under the Indian domestic tax law.
Conclusion-The Tribunal held that a relation between the business of non-resident business associate and activity carried on by the assessee in India would result in a ‘business connection’ for the purpose of deemed accrual of income in India as well as for considering the resident as the agent of the non-resident.
Full Text of the Judgement is as follows:-
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “L”,
BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI B.RAMAKOTAIAH (A.M)
|ITA NO.||ASST. YEAR||APPELLANT||RESPONDENT|
|ITA 1173/M/09||2002-03||WSA Shipping (Bombay) Pvt. Ltd.Re Wilson Logistics, Netherlands, B- 101-105 Sagar Tech Plaza, Andheri Kurla Road, Saki Naka, Andheri (East), Mumbai – 72.
PAN: AAACW 2373B
|ADIT(IT) CIR 2(2), RoomNo.116, Scindia House, Ballard Estate, MUMBAI -38|
|ITA 1174/M/09||2002-03||WSA Shipping (Bombay) Pvt. Ltd.RE WSA 1994 Pte Ltd. Singapore
|ADIT(IT) CIR 2(2), Mumbai|
|ITA 1175/M/09||2002-03||WSA Shipping (Bombay) Pvt. Ltd.RE -Miraclecont Lines Singapore
|ADIT(IT) CIR 2(2), Mumbai|
|ITA 1176/M/09||2002-03||WSA Shipping (Bombay) Pvt. Ltd.Re- Sea Road Trans
|ADIT(IT) CIR 2(2), Mumbai|
|ITA 1232/M/09||2003-04||WSA Shipping (Bomay) P. Ltd.Re-Wilson Logistics Netherlands,
|ADIT(IT) CIR 2(2), Mumbai|
|ITA 1233/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re- Troy Container Line Ltd. USA
|ADIT(IT) CIR 2(2), Mumbai|
|ITA 1234/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re WSA Lines International Ltd., Hong Kong, Mumbai.||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1235/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-WSA 1994 Pte.Ltd. Singapore
|ADIT(IT) CIR 2(2), Mumbai|
|ITA 1236/M/09||2003-04||WSA Shipping (Bombay) P Ltd.Re-World Systems Int’l Ltd., Singapore, Mumbai.||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1237/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-Fan Cheng Int’l Transport – China, Mumbai.||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1238/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-Awards Consolidation Services-Singapore, Mumbai.||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1239/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-CAS Agencies -UK, Mumbai||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1240/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re- Perfect Express Corporation-USA, Mumbai||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1241/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-Sea Road Trns. Korea Mumbai||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1242/M/09||2003-04||WSA Shipping (Bombay) P.Ltd.Re-WSA Management Pte. Ltd., Singapore, Mumbai.||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1243/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-Fordable Group Ltd.- Hong Kong, Mumbai||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1244/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-WSA Lines (Thailand) co. Ltd. Thailand, Mumbai.||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1245/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-Tianjin Console International, China, Mumbai.||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1784/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-WSA Lines International Ltd., Hong Kong, Mumbai.||ADIT(IT) CIR 2(2), Mumbai|
|ITA 1785/M/09||2003-04||WSA Shipping (Bombay) P. Ltd.Re-Fordable Group Ltd.- Hong Kong, Mumbai||ADIT(IT) CIR 2(2), Mumbai|
These are 20 appeals by WSA Shipping(Bombay) Pvt. Ltd., (hereinafter referred to as appellant), a company engaged in the business of Cargo consolidation commonly known in the business as Non-Vessel Owners Cargo Carriers (NVOCC). The appellant is registered as a Multi modal Transport Operator (MTO) with the Ministry of Shipping Directorate General of Shipping, Govt. of India.
2. The first 18 appeals are against orders all dated 31/12/08 of CIT(A) XXXI, Mumbai and last two appeals are against orders 23/1/2009. ITA No.1173 to 1 176/M/09 are in relation to A.Y. 2002-03, while ITA No. 1232 to 1245/M/09 are with reference to assessment year 2003-04.
3. First, we shall take up for consideration, the first 18 appeals being ITA No.1173 to 1 176/M/09 and ITA No.1232 to 1245/M/09. The common issue that has to be decided in these appeals is as to whether the CIT(A) was justified in treating the appellant as agent of various non-residents(18 non‑residents) referred to in the orders of CIT(A) under section 163 of the Income Tax Act 1961 (the Act).
4. The facts giving rise to these appeals are as follows:
The appellant is engaged in the business of Cargo Consolidation commonly known in the business as Non Vessel Owners Cargo Carriers (NVOCC). The appellant is registered as a Multi modal Transport Operator (MTO) with the Ministry of Shipping; Directorate General of Shipping, Govt. of India. The appellant receives cargo from various shippers / consignors at Mumbai Port / Container Freight Station Mumbai / JNPT for shipments to various destinations worldwide. Once the cargo is received a document called Bill of Lading (B/L) is issued by the appellant to the shipper. The B/L specifies the consignor, the consignee, cargo description, Destination of the cargo where the delivery has to be made to the consignee. Based on the volumes of the cargo and business experience the appellant obtains a container from Agents of Shipping Lines or Shipping Lines. In the process of Cargo Consolidation, the container obtained from the agents of Shipping Lines or Shipping Lines cannot be stuffed fully for a particular destination. As the delivery schedule of the cargo has to be strictly adhere to, the appellant stuffs the cargo of various destinations on a particular route in one container and loads the container with the shipping line. This concept can be fully understood with the following examples:
1. A shipper hands over the cargo to the appellant for delivery at Sydney, Australia. The volume of the available cargo as on date for Sydney may not be equivalent to full container load. As the appellant is under an obligation to deliver the cargo within time it stuffs this cargo in a container along with cargoes for other destinations en route to Sydney and dispatches the container to Singapore. Singapore is a Hub port wherein the cargoes come from various ports for rerouting to final destinations.
2. The appellant has a business associate in Singapore who turns around the cargo and routes the same to Sydney where the cargo is ultimately destined. For this services rendered in Singapore the said business associate raises an Invoice for on carriage from Singapore to Sydney.
3. As the appellant has collected the freight from Mumbai to Sydney, the cost of carriage i.e. Singapore to Sydney is remitted to the business associate in Singapore.
5. The AO noticed that the appellant has made payment to the nonresident during the relevant assessment years under consideration on which no Tax was deducted at source at the time of making payment. The AO, therefore, issued a show-cause notice to appellant calling upon the appellant to show cause as to why it should not be treated as an agent of the nonresidents to whom the Appellant made payments, u/s. 163 of the Income Tax Act, 1961 (the Act). In response to the same, the appellant submitted that the non-residents to whom payment was made by the appellant were business associates of the appellant but there was no Principal-Agent relationship with them. The appellant submitted that the business associates of the appellant had rendered services at the respective port in respect of Cargoes which are to be sent to further onward destinations and for which all expenses such as onward freight, freight charges, port charges, detention charges are to be borne by them. The remittances made by the Appellant are in respect of Invoices raised by the business associates for these charges in respect of services rendered outside Indian territorial waters. It was also claimed that the appellant that it was not bound to send the Cargo only to the listed business associates and it was free to send the Cargo for onward movement to anyone who offer better quotation for onward movement. The appellant submitted that the business associates did not having Permanent Establishment (PE) in India. The appellant submitted that the recipients of payment from the appellant were non-resident, and income had not accrued or arisen or deemed to have accrued or arisen to them in India. The appellants thus submitted that the receipts from the appellants were chargeable to tax under the Act in the hands of the nonresidents. Therefore the appellant was not required to deduct tax at source in respect of remittances made to them.
6. The AO did not accept the explanation of the appellant and he held as follows:
“that to treat a person as an agent u/s. 163, what is required is to prove that the representative assessee has business connection with the non-resident and from whom or through whom the non-resident is in receipt of any income, whether directly or indirectly. Both these facts have not been disputed by M/s. WSA Shipping (Bombay) P Ltd. It has remitted the freight collected from Mumbai to the ultimate destination without any deduction of tax. In the circumstances, Ms/ WSA Shipping (Bombay) P. Ltd. is treated as an Agent of WSA 1994 Pte Ltd. Singapore.”
It was, therefore, submitted that not a single test of business connection specified in the Board Circular applies to the assessee’s case.
8. With regard to the conclusion of the AO that the non-resident is in receipt of income from the assesse and therefore Sec. 163(1)( c) of the Act, would be applicable, the appellant submitted that the tax ability of the income under the Act has to be examined before holding that Sec.163(1)( c) of the Act applies to the case of the appellant. In this regard the Appellant pointed out that the Income Tax Appellate Tribunal D Bench, Mumbai in the case of Asst. Commissioner of Income Tax Cir. 12(2), Mumbai vs. DHL Operations B.V. Netherlands ( Ref. ITA Nos.7987 and 7988/Bom/92) has held that where only that part of the income which is attributable to the activities of the non-resident in India is taxable in India. According to the Appellant, the business associates of the appellant were rendering services outside India and the appellant cannot be treated as agent so as to bring to tax in India in respect of income on the business activity rendered outside territorial waters. It was further argued that as held by the Hon’ble Bombay High Court in the case of Abdullabhai Kader ( 22 ITR 241), the tests laid down under section 163 of the Income Tax Act, 1961, corresponding to section 43 of the 1922 Act can be invoked and applied only if the income of the non-resident is taxable in India.
8. The CIT(A) however did not agree with the submissions made on behalf of the assessee. The CIT(A) firstly found that the appellant collects the freight from exporter for the ultimate destination of cargo and same is loaded in container and sent to Singapore where its business associates takes delivery and after loading and unloading it is loaded to shipment for final destination. The business associates raises bill for freight from Singapore to final destination of cargo. The appellant has a business associate in Singapore who turns around the cargo and routes the same to Sydney where the cargo is ultimately destined. For this services rendered in Singapore the said business associate raises an Invoice for on carriage from Singapore to Sydney. He noticed from Tariff of business associates, that, the freight chargeable as per tariff of WSA Pte Singapore (Associate of the appellant in Singapore) is also inclusive of pre paid freight collected by the appellant and a invoice is raised on exporter. Against this invoice, the WSA Pte Singapore issues a debit note which included freight as well as other charges incurred by it. According to the CIT(A), there was a tacit understanding, that the appellant is acting on behalf of WSA Pte Singapore without any written agreement. The appellant is under obligation to collect freight from on wards transmission at the rate prescribed by the non-resident. The CIT(A) also found that as per various clauses of Tariff rate issued by the WSA Pte Singapore, the appellant had to obtained prior approval before accepting particular cargo also. Thus the freight remitted by the appellant is nothing but income of the non-resident that accrued in India because of its business connection. This can also be termed as sharing of cargo business as the part of freight collected belongs to appellant and later part belongs to nonresident. The appellant, therefore, satisfies the condition laid down u/s. 163(1) (b) and 163(c) and has been correctly held to be agent of the nonresident.
9. The CIT(A) thereafter referred to the ruling of the Hon’ble Privy Council in the case of Currimbhoy Ebrahim & Sons Ltd. 3 ITR 395, the ruling of the Hon’ble Supreme Court CIT Vs. R.D.Aggarwal & Co. 56 ITR 20 (SC) and Hon’ble A.P.High Court in the case of CIT Vs. Hindustan Shipyard Ltd,. 109 ITR 158 (AP). The proposition laid down in the above decisions briefly were that business connection would mean a relation between a business carried on by a non-resident which yields profits or gains and some activity in India which contributes directly or indirectly to the earning of the profits or gains and that common thread of mutual interest must run through the fabric of the trading activities carried on outside and inside India which has to be real and intimate connection, the commonness of interest may be management control or financial control or sharing of profits.
10. The CIT(A) found that the appellant was remitting freight regularly to various associates at Singapore. The appellant had continued business relationship with the associates at Singapore regularly. Even the Appellant referred to the non-resident as business associate. The appellant and the non-resident were carrying on the same business activity. The business freight for onward transmission from hub (at Singapore) was being collected by the appellant and being remitted to non- resident. This activity is being conducted in a systematic manner with continuity.
11. The CIT(A) also held that onward freight charges are paid in India in the shape of remittance on the prescribed tariff rate on the basis of pre- arranged freight. Though the onward transshipment was beyond the territory of India, the same originated from the source of India and was part and parcel of whole transmission charges collected by the appellant. Thus the freight collected for the ultimate destination is being shared by the non-resident company. In this regard, the CIT(A) also referred to some clauses of the Tariff card of on the non-resident, wherein it has been provided that the appellant has to pre check the availability and onward cargo before accepting the specific cargo. This according to the CIT(A) showed that there was some sort of control being exercised by the non-resident company. Therefore, there was a business connection and also that the non-resident had received income through or from the assessee in India. Hence, the appellant would be agent under section 163(1)(b) and (c) of the Act and there would be a deemed accrual under section 9(1) (i) to the non-resident.
12. On the decision of the Hon’ble Bombay High Court in the case of Abdullabhai Kader (221 ITR 241)(Bom) which lays that we must first find out that whether the non-resident is liable to tax u/s. 42 (corresponding to s.9) before appointing the agent under section 43 (corresponding to s. 163), the CIT(A) held that the said decision was in the context of the provisions under the Income Tax Act, 1922, under which the procedure with regard to assessment of non-residents were different
13. On the applicability of the Board Circular 23 dt. 23/7/1969, the CIT(A) was of the of the view that the appellant collected for itself and the nonresident associate and a debit note was raised for the amount payable to the non-resident associate for onward movement. According to the CIT(A), the freight collected by the appellant also included freight collected for on wards destination for which non-resident. Thus income has accrued in India to non-resident as the freight for onward is collected by the appellant behalf of the non-resident and therefore there was deemed agency established.
14. Aggrieved by the order of the CIT(A) the appellants have filed the present appeals before the Tribunal. The ground of appeal raised in all the appeals are common and for the same of reference the ground from ITA No.1174/M/09 is reproduced.
“Being aggrieved by the order passed by the Commissioner of Income Tax (Appeals) – XXXI Mumbai, your appellant submits the following grounds of appeal for your kind consideration.
The Commissioner of Income Tax (Appeals) XXXI Mumbai erred in treating the Appellant as the Agent of WSA 1994 Pte Ltd.- Singapore
The Appellant craves leave to add, alter, amend, modify or withdraw all or any of the Grounds of Appeal stated herein above.”
15. We have heard the submissions of the learned counsel for the appellant and the learned D.R. The learned counsel for the appellant at the outset submitted that some of the findings given by the CIT(A) regarding the manner in which the appellants were carrying on business is factually not correct. In this regard, he filed a chart before us highlighting the factual mistakes in the findings of the CIT(A). We deal with them later. His submission was that the non-resident had no business connection in India. In this regard, he filed sample copies of Invoice, debit notes raised by the non-resident. He also highlighted as to how the appellant is a multi modal transport operator and filed copy of the Multi modal Transportation of Goods Act, 1993 by which came into effect from 16.10.1992 and how the documents of consignment in the case of multi modal transport have to be maintained and how the mode of documentation maintained by the appellant was in accordance with those provisions. In this regard the main emphasis of the learned counsel for the appellant was the fact that between the customer and India and the non-resident there was no connection whatsoever. The appellant acted independently and the transshipment was done at Singapore. The contract by which transshipment was entrusted to the non-resident at Singapore does not have any business connection with India. It was his submission that the appellant was neither a dependent agent nor an independent agent. He relied on the following observations in the decision of the Hon’ble Bombay High Court in the case of Blue Star Engineering Co. (Bombay) (P) Ltd. Vs. CIT 73 ITR 283 (Bom) that to constitute business connection there must be an activity of the non-resident in the taxable territories having an intimate and real relation of a continuous character with the business of the non-resident and contributing to the earning of profits by the non-resident in his business. The business connection must undoubtedly be a commercial connection but all commercial connections will not necessarily constitute business connection within the meaning of the concept unless the commercial connection is really and intimately connected with the business activity of the non-resident in the taxable territories and is contributory to the earning of profits in the said trading activity. He reiterated the argument based on the CBDT Circular. This has already been set out in the earlier part of this order and the same is not being repeated.
16. His next submission was based on the observations of the Hon’ble Supreme Court in the case of CIT Vs.M/S.Eli Lilly & Company (India) Pvt.Ltd. 312 ITR 225 (SC). The Hon’ble Supreme Court in the aforesaid case was dealing with the question of liability to deduct tax at source on salaries paid abroad. The assessees in that case was joint venture company a foreign company and an Indian company. The foreign partner had appointed four expatriates to the assessee in India. Only part of their aggregate remuneration was paid in India by the assessee. It was found that the total remuneration paid was only on account of services rendered in India. No work was performed by the expatriates for the foreign company. It was held that the assessee was bound to deduct tax at source in respect of the home salary paid abroad by the foreign company to the expatriate employees. The Hon’ble Supreme Court explained the purpose of the provisions relating to deduction of tax and source by observing that Section 9(1)(i) of the Act performs two functions : 1. It deems five categories of income to accrue in India and applies to residents and non-residents alike ; but it has no application where income actually accrues in India or is received in India. 2. It specifies the categories of income in respect of which a vicarious liability is imposed by sections 160 and 161 on an agent to be assessed in respect of a non-resident’s income. In performing this function, clause (i) applies to the income of the non-resident alone ; and clause (ii) specifies the categories of income in respect of which the agent is vicariously liable even if the income actually accrues in India or is received in India. Thereafter the Hon’ble Supreme Court held that the Income Tax Act, 1961 is an integrated code in which one cannot segregate the computation machinery from the collection and recovery machinery. To explain the above, the Hon’ble Supreme Court observed as follows:
“Examples showing inter-linking of various provisions of the 1961 Act:
(a) It may be note that Sections 160(1)(I), 161, 162 and 163 are machinery sections. They do not affect the incidence of taxation under Sections 4 and 5 which are the charging sections. Sections 160 and 161 provide a machinery for collection of a charge which is imposed in general terms elsewhere and yet Sections 160 and 161 are the sections which like Section 201(1) imposes a vicarious liability on an agent to be assessed in respect of the income of the principal. The liability is imposed under Sections 160 and 161 in respect of the income of non-resident principal and it is only in respect of the income falling within Section 9(1) and not any other income. Therefore, one has to read Section 9(1) with Section 160 and Section 161 which are machinery sections (The Law and Practice of Income Tax by Kanga & Palkhivala, eighth edition, at pp.1268 and 1269)”
Relying on the above observations, the learned counsel for the appellant submitted that unless the income of the non-resident falls within the ambit of Sec.9(1) of the Act, person in India cannot be regarded as agent of the non-resident u/s. 163 of the Act.
17. The learned D.R. submitted that the appellant was only a cargo collector. The appellant collects freight for transport of cargo and does not do the job of transportation. The freight collected by the appellant is therefore on behalf of the non-resident at least to the extent it relates to transshipment of the cargo from Singapore to its ultimate destination. Therefore it can be said that the non-resident had a business connection in India. He pointed out that the CBDT circular on which the learned counsel for the appellant placed reliance has been withdrawn (vide Circular No. 7/2009 dated 22-10-2009). Even otherwise his submission was that the said circular is applicable only to sale of goods and not for services rendered. In other respects, he placed reliance on the order of the CIT(A).
18. The learned counsel for the appellant submitted that the withdrawal of the CBDT circular has been held to be prospective by the ITAT Mumbai in the case of Siemens (2010) Tax India online 109 ITAT (Mum).20. 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 nonresident. 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 favor 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 nonresident, 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
(d) who is the trustee of the non-resident;
and includes also any other person who, whether a resident or nonresident, 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 nonresidents 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 prior to 04-05. 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.
21. We have already seen the manner in which the appellant carries on its business. The same has been explained in para-4 of this order. The CIT(A) has given a finding that the appellant charges its customers freight payable inclusive of the freight from the port of transshipment to the ultimate destination and this is done with the tacit understanding with the nonresident who does transshipment outside India. According to the CIT(A), the affairs of the appellant and the non-resident appear to be in a way that the tariff charged by the non-resident business associate for transshipment does not include the tariff from the Indian Port to the transshipment port. It has been the stand of the appellant that the non-resident is not a party to the terms of contract between the Appellant and the exporter. Similarly the exporter is not a party to the terms of the contract between the Appellant and non-resident for transshipment of the cargo. From these facts it cannot be said that there was only a principal to principal relationship as between the appellant and the non-resident. This is because the terms of the agreement between the appellant and the non-resident have not been brought on record. Further we also do not know the shareholding pattern of the appellant. This could be material for ascertaining the control that the non-residents might exercise on the appellant. Though there is no material on record to suggest that the appellants were acting as agents when they dealt with the Indian customer sending cargo, there is equally no material to show that the appellants were dealing with the non-residents only on a principal to principal basis. It cannot be said with certainty that the exporter in India has no knowledge about the transshipment and the appellant utilizing the services of non-resident for onward movement of the cargo to the ultimate destination. In the absence of the terms of the agreement between the appellant and the non-resident it cannot be said that the non-resident had no control over the freight charges collected by the appellants or the terms of contract as between the appellant and the exporter from India. As per the conditions of transshipment as given by M/S. WNS 1994 PTE Ltd., Singapore, one of the non-resident, it is seen that the non-resident charges are ex-Singapore. Another condition is that because of regulations imposed at different ports, the clients are requested to check with the transshipper for acceptance of any hazardous cargo before accepting any shipment. Similarly the non-resident has imposed a condition that only certain categories of goods are allowed for transshipment and therefore one has to check with them as to whether the goods proposed to be sent for transshipment are acceptable for transshipment. These terms have been relied upon by the CIT(A) to give a finding that the non-resident’s consent is required for accepting cargo by the appellant. It is also a fact that the appellant have not placed on record the terms of the contract between the appellant and the non-resident. In such circumstances in our view the finding of the CIT(A) in this regard cannot be said to be baseless. It cannot also be said that the non-resident has no control over the manner in which the appellant accepts the cargo and that the non-resident only undertakes the cargo from the place of transshipment till the port of destination and charges fee for doing so. It is also a fact that the appellant has been dealing with the non-resident over a period of time and it was not a case of single,isolated or sporadic transactions. In the background of the above facts, let us examine the question as to whether the appellant had any business connection with the non-resident.
22. Before we deal with the case laws on the subject relied upon by the parties (which were decided under the 1922 Act), we have to highlight 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). These are contained in 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 nonresident person, unless he had an opportunity of being heard by the Income-tax Officer as to his liability.”
23. 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 nonresident is fixed as per separate provision and not clubbed with agent as was done u/s 42 of the old 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 nonresident. 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 nonresident, 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 nonresident, 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.
24. The learned counsel for the appellant had relied on commentary on Income Tax Act, by Sampath Iyengar page 8786 10th edition synopsis-9, wherein it has been opined that a person in India cannot be treated as agent if there is no liability on the part of the non-resident to pay tax. The cases digested in this regard were Narendra Narayan Chowdhury Vs. Province of Assam 17 ITR 243 (Cal) which is a case under the 1922 Act. The next case is CIT Vs. Toshoku Ltd. 125 ITR 525 (SC) which is a case of assessment and not a case u/s.163(1) of the Act. The next case is one of Barendra Prasad Ray Vs. ITO 129 ITR 295 (SC) which is a case u/s.163(1) of the Act, where the person in India who was treated as agent of a non-resident, filed a writ petition challenging the order u/s. 163 of the Act, was dismissed. On further appeal the Hon’ble Supreme Court held that the non-resident had business connection in India. We have perused the said decision and we do not find any proposition that if the non-resident is not liable to tax then the person in India cannot be treated as agent of non-resident. No such inference can be drawn from the fact that the liability of the non-resident to tax was found to exist in that case. The next case is that of CIT Vs. New Consolidated Gold Fields Ltd. 143 ITR 599 (Pat) which is a case which relates to AY 60-6 1, wherein it was held that in order to bring within the net of taxation under the I.T. Act the income derived by a non-resident, it has to be established that there was an element of continuity between the business of the nonresident and the activity in the taxable territories. On appeal by the Revenue against the decision of the Hon’ble Patna High Court, the Hon’ble Supreme Court in ACIT Vs. New Consolidated Gold Fields Ltd. 257 ITR 770 (SC) found that the issue relates to assessment year 1960-61, more than forty years old and that in absence of details as to the service rendered in India, when such service was carried out both in India and England, it was too late after a lapse of almost forty years to attempt to determine the extent of activities in India and the consequent liability. This case is not an authority for the proposition canvassed by the learned counsel for the appellant before us. The next case is that of Shri Hazoora Singh Vs. CIT 160 ITR 746 (P& H) is a case arising out of an assessment and not against order u/s. 163 of the Act. The case of T I & M Sales Ltd. 151 ITR 286 (Cal) and CIT Vs. Talbot TIM Sales Ltd. 175 ITR 437 (Cal) are cases arising under the 1922 Act. For the very same reason, the decisions in the case of Blue Star Engineering (supra) and Abdullabhai Kader (supra) are also not relevant to the proposition canvassed by the learned counsel for the appellant. Thus the cases relied upon by the learned Counsel for the Appellant does not support the plea raised by him.
27. We also notice a relevant observation of the Hon’ble Bombay High Court in the case of Abdullabhai Kader (supra), at Page 253 11th line from the bottom, which is as follows….Now, it is no use concealing the fact that the expression ?? any business connection in the taxable territories ?? is by no means a very precise expression capable of being construed with any precision. It may be that the Legislature advisedly used a vague and uncertain expression so that the interpretation should not be restricted to any narrow limits. But…..
28. We have already seen that the term ??business connection?? is so broad in scope. Explanation 2 inserted below sec. 9(1) by the Finance Act, 2003 with effect from 1-4-2004 expands the scope of the expression. Though the Explanation does not apply to the year under consideration, even applying the tests laid down in decided cases, the issue has to be resolved against the assessee. 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 transhipment of cargo and the appellant engaged their services for shipment of cargo from India to a destination which the appellant could not reach without the assistance of the transhipment through the non-resident. The appellant cannot segregate the business activity of shipment of cargo as one upto the port of transhipment and the other from the port of transhipment to the port of final destination. Both these activities are integrated activities. The absence of privity of contract between the customer in India and the non-resident will not be a ground to hold that the non-resident did not have business connection in India. The transaction as between the person in India and the customer in India, would not be complete unless the cargo reaches the final port of destination. All 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 income-tax authorities to this effect.
29. 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 appellants based on the debit notes raised by the non-resident make payment for transhipment of cargo. Thus the nonresident is 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. We also do not find any qualification that income so received from the non-resident from the resident in India should be found to be chargeable to tax at the time when the person in India is treated as agent of the nonresident. We see no reason as to why this clause should not apply to the case of the appellant. For the reasons given above, we uphold the orders of CIT(A) confirming the order of the AO passed u/s. 163 of the Act. All these appeals by the Assessee are accordingly dismissed.
30. We shall now take up the appeals by the Assessees through their representative assessee viz., the Non-residents WSA Shipping (Bombay) P. Ltd.Re-WSA Lines International Ltd., Hong Kong, WSA Shipping (Bombay) P. Ltd.Re-Fordable Group Ltd.-Hong Kong, Mumbai in ITA No. 1784 and 1785/Mum/09 respectively for AY 03-04.31. We have already seen that the appellants were treated as Agents of the non-residents. In respect of two non-residents referred to in the earlier paragraph, the AO initiated proceedings against the appellant as representative Assessee of the non-residents. The Appellants contended before the AO, that no income accrued or arose to the non-residents in India and therefore the question of bringing to tax any amount received from the non-residents from the appellant does not arise for consideration. The AO however rejected the stand of the appellant and relying on the findings given in the proceedings u/s. 163 of the Act, he held that income accrued and arose to the non-residents in India and consequently held that the income received by the non-residents from the appellants are chargeable to tax in India. The AO found that a sum of Rs.16,82,025 and a sum of Rs.5,33,628 was the outward remittances to WSA Lines International Ltd., Hong Kong and Fordable Group Ltd.-Hong Kong, respectively. He held that the details of expenses had not been furnished and in the circumstances he estimated 10% of the freight income earned by the non-residents referred to above as business income of the non-residents and brought the same to tax through the appellant as representative Assessee of the non-residents. The CIT(A) confirmed the orders of the AO but reduced the estimation of income to 7.5% of the outward remittances to the non-residents instead of 10% determined by the AO. The CIT(A) also held that there was no treaty for avoidance of double taxation between India and Hongkong and therefore the benefit of any treaty provisions could not also be availed by the non-residents.
Aggrieved by the orders of the CIT(A), the Appellants have filed the present appeal before the Tribunal.
32. Before us, the learned counsel for the appellant submitted that the facts of the appellant’s case is identical to the case decided by the Hon’ble ITAT in the case of ACIT Vs. DHL Operations B.V. 2005 (142 Taxman 1 (Tri) (Bom). The learned counsel for the appellant submitted before us that the appellant was transporting cargo from India and was not doing any inward transport of cargo to India. In the case of DHL Operations B.V. (supra) the facts were as follows. The assessee Non-resident entered into an agreement dated 19/5/1989 with Airfreight Ltd., an Indian company, with retrospective effect from 1/1/1989. As per the terms of the new agreement, it was provided that Airfreight Ltd. would render services to the assessee as forwarders, couriers and transporters of urgent business documents and small parcels in India and that the assessee will render such services to Airfreight Ltd. outside India. In the agreement it was specifically provided that the services would be rendered on a principal to principal basis. The new agreement dated 19/5/1989 between the assessee and Airfreight Ltd. was granted permission under section 27 of the Foreign Exchange Regulation Act by the Department of Economic Affairs, Ministry of Finance. It was claimed by the Assessee that as per the agreement it was required to dispatch the documents; small parcels, etc. from outside India for delivery in India to Delhi or Mumbai. The clearance, consolidation and distribution of these consignments in India would be done by Airfreight Ltd. Similarly consignments for delivery outside India are sent by Airfreight Ltd. to Dubai, London and Singapore, depending upon the ultimate destination of the consignments. The clearance, consolidation and forwarding of these consignments thereafter to their ultimate destination is required to be done by the assessee. It was the claim of the assessee that they do not carry on any activity in India. The shipments from foreign countries dispatched by assessee to Delhi or Mumbai are cleared, consolidated and dispatched by Airfreight Ltd. as a principal to various destinations in India. For this service Airfreight Ltd. raises invoices on the assessee. Similarly the assessee raises invoices on Airfreight Ltd for rendering services to them outside India. It is also the claim of the assessee that they do not have any office in India nor had they at any stage stationed their employees in India. Neither the directors nor the shareholders of the assessee are stationed in India or are residents in India. On the above facts, the question before the Tribunal was whether the income on account of incoming consignment and outgoing consignment could be held to have accrued in India. It was held that no income accrued in respect of the outward consignment. The relevant observations of the Tribunal in this regard were as follows:
“We now proceed to consider as to whether the income attributable to the outbound consignments is also taxable in India by virtue of Article 7 of the DTAA. The Assessing Officer has taxed such income also on the ground that the business of the Respondent has been carried on under the trade name of DHL Worldwide Express. He has therefore ignored the terms & conditions of the agreement between the parties. In our considered view the agreement between the parties having been approved by the Government of India, the revenue cannot ignore the same on the basis of a mere suspicion. We do agree that there is scope for a strong suspicion on account of the respondent having allowed Airfreight Ltd. to use its trade name in India in respect of inbound consignments as well as for outbound consignments without any apparent consideration. Nevertheless, it is well established principle of law that suspicion does not take the place of proof. Suspicion is mother investigation but not a substitute for evidence . since there is nothing on record except the suspicion, we are bound to give effect to the terms & conditions of the agreement between the parties especially when the said agreement has been approved by the Government of India. Reverting back to the agreement, it is clear that the respondent had agreed to provide services to Airfreight Ltd. outside India in regard to outbound consignments. Airfreight Ltd. was allowed to collect the consignment as principal without the respondent being involved in regard to such consignments. It was the obligation of Airfreight Ltd. to deliver the consignments to respondent outside after necessary clearance from custom authorities. Therefore, in regard to outbound consignments, no activity was carried out by the respondent in India. By allowing the use of trade name in respect of even outbound consignments, the respondent was also benefited in getting substantial business carried out outside India. However, the business attributable to outbound consignments was restricted to providing services of delivery to Airfreight Ltd. outside India for which compensation was received by the respondent. One possible view is that once the non-resident is found to have carried on part of its business through a permanent establishment in India, entire profits attributable to such establishment are liable for tax in India. The profits attributable to outbound consignments is also attributable to the permanent establishment. But as per amended provisions of section 90(2) the provisions of the Act and DTAA are to be applied in the manner as per beneficial to the non-resident. Since under Explanation to Section 9(1)(i) the income taxable in India is only such portion as is attributable to the activities of the non-resident in India, we hold that only that part of the income which is attributable to the activities of the non-resident in India is taxable in India. Since no part of the services relating to outbound parcels was carried out in India by the respondent, Article 7, in our view , does not impose any tax liability in respect of such activities of the non-resident. We accordingly hold that the respondent is not liable to tax in regard to the income attributable to the outbound consignments. The decision of the CIT(A) in this regard is hereby confirmed. In regard to the inbound consignments the decision of the CIT(A) is set aside and that of the Assessing Officer is restored.”
Based on the above decision, the learned counsel for the appellant submitted that the receipts in question are not chargeable to tax. As already stated, the appellant was admittedly doing the business only of sending consignment of cargo out of India. The learned D.R. submitted that the appellant as well as the non-residents in the present case have not produced the terms of the agreement between them for transshipment. It was his submission that the decision in the case of DHL Operations B.V. (supra) is purely based on the terms of the agreement. According to him there was no such agreement between the appellant and the non-resident. According to him the revenue was justified in drawing adverse inference in the absence of furnishing of the necessary details by the appellant as well as the nonresidents.
33. We have considered the rival submissions. We are of the view that in the light of the findings which we have given in para-2 1 of this order, the facts of the present case are distinguishable from the facts of the case decided by the ITAT in the case of DHL Operations BV (supra). The terms of the agreement was the main reason why the Tribunal held that there was no accrual of income in the hands of the non-resident in India. However in the present case, we have already seen that no such terms existed as between the appellant and the non-residents. In such circumstances, we are of the view that the decision of the ITAT in the case of DHL Operations BV (supra) is not applicable to the facts of the present case. We have already held while deciding the appeals arising out of the order u/s. 163 of the Act that the nonresident had business connection in India and therefore income had accrued and arisen in India to the non-resident which is chargeable to tax. The revenue authorities have held that the income so charged to tax is business income. In the absence of treaty between India and Hong Kong, we have to proceed to tax income that accrues to the non-resident in India. However in the case of non-resident who is a resident of the other State which has a treaty with India, the question whether business income will be taxable because of existence of Permanent Establishment in India or not has to be examined. But in the present two appeals, such question will not arise because of the absence of treaty between India and Hong Kong. In view of the above, we confirm the orders of the CIT(A) and dismiss both these appeals also.
34. In the result, all the appeals are dismissed.
Order pronounced in the open court on the 13th day of May, 2011.