Section 9 of the Income-tax Act, 1961 – Income – Deemed to accrue or arise in India – Withdrawal of Circulars No. 23 dated 23rd July, 1969, No. 163 dated 29th May, 1975 and No. 786 dated 7th February, 2000.

Circular No. 7/2009 [F. No. 500/135/2007- FTD-I], dated 22-10-2009

The Central Board of Direct Taxes had issued Circular No. 23 (hereinafter called “the Circular”) on 23rd July 1969 regarding taxability of income accruing or arising through, or from, business connection in India to a non-resident, under section 9 of the Income-tax Act, 1961.

2. It is noticed that interpretation of the Circular by some of the taxpayers to claim relief is not in accordance with the provisions of section 9 of the Income-tax Act, 1961 or the intention behind the issuance of the Circular.

3. Accordingly, the Central Board of Direct Taxes withdraws Circular No 23 dated 23rd July, 1969 with immediate effect.

4. Even when the Circular was in force, the Income-tax Department has argued in appeals, references and petitions that-

(i) the Circular does not actually apply to a particular case, or

(ii) that the Circular can not be interpreted to allow relief to the taxpayer which is not in accordance with the provisions of section 9 of the Income-tax Act or with the intention behind the issue of the Circular.

It is clarified that {he withdrawal of the Circular will in no way prejudice the aforesaid arguments which the Income-tax Department has taken, or may take, in any appeal, reference or petition.

5. The Central Board of Direct Taxes also withdraws Circulars No. 163 dated 29th May, 1975 and No. 786 dated 7th February, 2000 which provided clarification in respect of certain provisions of Circular No 23 dated 23rd July, 1969.

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ANALYSIS OF THE ABOVE CIRCULARS

Section 9 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 have been consolidated and restated in CIRCULAR NO. 23/1969, Dated: July 23, 1969 for the information and convenience of the public.

(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.

(2) Non-Resident Company Selling Goods From Abroad To Its Indian Subsidiary – In such a case, if the transactions are actually on a principal-to- principal basis and are at arms 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.

(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 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.

(4) 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.

(5) 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.

(6) Sales By A Non-Resident To Indian Customers Either Directly Or Through Agents – 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.

(7) 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.

After six years, Board issued a further clarification in CIRCULAR NO. 163/1975, Dated: May 29, 1975

By virtue of clause (b) of the Explanation to section 9(1)(i) of the Income-tax Act, 1961, the correct legal position is that in the case of non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to purchase of goods in India for the purpose of export. Accordingly, the mere existence of an agency established by a non-resident in India will not be sufficient to make the non-resident liable to tax, if the sole function of the agency is to purchase goods for export.

After another twenty five years, Board issued yet another clarification to the 1969 Circular. Board’s Circular No: 786 Dated : February 7, 2000, clarified that:

Subject : Deduction of tax u/s 195 and the taxability of export commission payable to non-resident agents rendering services abroad – clarification regarding.

The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No 23 dated 23.7.1969 is drawn, where the taxability of ‘Foreign Agents of Indian Exporters” was considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No 23 still prevails. No tax is therefore deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure.

And nine years later, all the above circulars are withdrawn. Why?

While withdrawing the Circular, the Board cautiously clarifies that

Even when the Circular was in force, the Income-tax Department has argued in appeals, references and petitions that –

1. the Circular does not actually apply to a particular case, or

2. that the Circular cannot be interpreted to allow relief to the taxpayer which is not in accordance with the provisions of section 9 of the Income-tax Act or with the intention behind the issue of the Circular.

3. the withdrawal of the Circular will in no way prejudice the aforesaid arguments which the Income-tax Department has taken, or may take, in any appeal, reference or petition.

Why to give a Circular, then take a different stand before the judiciary and then withdraw it? Now is this circular withdrawn with retrospective effect? Does the Income Tax Department plan to argue that the Circular never existed?

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