1996 (2) TMI 560 - AAR - Income Tax

Summary

Issues Involved:
1. Whether various activities by the applicant's subsidiary or agents in India constitute a "business connection" u/s 9(1)(i) of the Income-tax Act, 1961.
2. Whether these activities establish a "permanent establishment" under the Double Taxation Agreement (DTA) with Switzerland.
3. Extent of income deemed to accrue or arise in India and its taxability.

Summary:

Issue 1: Business Connection u/s 9(1)(i) of the Income-tax Act, 1961

The applicant, a Swiss company with no place of business in India, proposed to engage in trading activities involving India through a subsidiary. The Authority considered whether activities such as signing and submitting tenders, signing contracts, routine follow-up, documentation, and consultancy services by the subsidiary or independent agents create a "business connection" in India. The Supreme Court's interpretation in CIT v. R. D. Aggarwal and Co. was referenced, emphasizing continuity and an intimate relationship between the non-resident's business and the Indian activities. The Authority concluded that the continuous and systematic activities of the subsidiary, as per the proposed agreements, constituted a "business connection" u/s 9(1)(i).

Issue 2: Permanent Establishment under the DTA

Article 5 of the DTA defines "permanent establishment" and includes various fixed places of business and agents with authority to negotiate and enter into contracts. The Authority examined whether the subsidiary's activities, as per the proposed agreements, would create a permanent establishment. It was noted that the subsidiary's extensive role in tendering, contract negotiation, and follow-up, coupled with the continuous nature of these activities, met the criteria for a permanent establishment under Article 5.2(l) of the DTA. Additionally, the subsidiary was not considered an independent agent under Article 5.5, given its devoted activities to the applicant.

Issue 3: Extent of Income and Taxability

The applicant sought clarity on the extent of income deemed to accrue in India and its taxability. The Authority noted that while section 9 of the Act and Article 7 of the DTA provide for taxation of income attributable to operations in India, the exact quantum of taxable income would depend on the actual working of the applicant and its subsidiary. Thus, this question could not be answered hypothetically.

Ruling:

Question A: The continuous and intimate relationship between the applicant and its subsidiary in India constitutes a "business connection" u/s 9(1)(i) of the Income-tax Act, 1961. The subsidiary also amounts to a permanent establishment under Article 5.2(l) of the DTA.

Question B: The extent of income deemed to accrue or arise in India depends on the actual working of the applicant and the subsidiary and cannot be answered hypothetically.