Case Law Details
RELEVANT PARAGRAPH
16. We have heard both the parties. The Hon’ble Apex Court in the case of CIT v. P V A L Kulandagan Chettiar 267 ITR 654 had an occasion to consider the impact of double taxation avoidance agreement provisions of Income Tax Act. The Hon’ble Apex Court held that where liability to tax arises under the local enactment, the provisions of sections 4 and 5 of the Act provide for taxation of globle income of an assessee chargeable to tax there under, then it is subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for avoidance of double taxation as envisaged u/s 90 to the contrary, if any and such an agreement will act as an exception to or modification of sections 4 and 5 of the Income Tax Act. The provisions of such agreement cannot fasten a tax liability where liability is not imposed by a local Act. where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act as is clear from the provisions of section 90(2) of the IT Act. Hence we have to see first as to whether any tax liability is imposed on the non-resident assessee under the Income-Tax Act.
22. The Korean Company is engaged in the trading of semi-conductor components manufactured by various companies across the world. The trading activity will include identification of the customers, requirement of the customers with respect of number and specification, identifying the sources from which such items can be procured, negotiating the purchase price, negotiating the sale price with the customers and thereafter procuring order from the customer. In the instant case, part of the trading activity in respect of supplies made to Indian customers is done by the LO and is in continuation of the trading activity of the South Korean Company. This show that there is a business connection and therefore any income accruing or arising from such business connection is taxable in the hands of the South Korean Company as per the provisions of section 9(l)(i) of the I T Act. As per Explanation 1(a), only that part of the income which can be reasonably attributable to the operations carried out in India will be taxable in the hands of the South Korean Company. Explanation 1(b) provides that no income shall be deemed to accrues or arise in India through or from operations which are confined to the purchase of goods in India for the purpose of export. It means, the Legislature was fully aware that in a trading activity there is always a profit element attached to the purchase of the goods as the entire trading profit cannot be attributed to the activity of sale. Trading activity consists of various steps and profit can be attributed to each such step of trading activity. The profit element in a trading activity depends on various operations of the trading activity and if there is only purchase in India, then such profit was not to be included as per section 9(1) of the IT Act. Explanation 1(c) also provided an exception that income will not be deemed to accrue or arise in India from activities which are confined to the collection of news and views in India for transmission out of India in respect of a person engaged in the business of running a news agency or of publishing newspapers. Thus, the profit element from the collection of news and views has been made excludible as per section 9(1) of the I T Act. Collection of specifications and requirements of the customers is one of the parts of the trading activity and it cannot be said that no profit element can be attached to it and that is why an exception was provided in Explanation 1(c) of section 9(1). Hence, for the asst. years prior to asst. year 2004-05, it is held that there is a business connection in respect of source of income in India of the non-resident assesste and therefore, the income from such activity is to be deemed to accrue or arise in India and will therefore is taxable
23. Article 7 of the DTAA between India and South Korea (available at 165 ITft 191 St.) deals with tax ability of business profit. Article 7 reads as under:-
1. The profits of an enterprise of a Contracting State shaft be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment
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