2011 (7) TMI 95 - AT - Income Tax

Assessee in default - TDS u/s 195 - whether or not the Star Cruise Management Limited was liable to income-tax in India in respect of the payments received it by through this assessee - The source rule of taxation, which typically originates in domestic tax law, is based on the principle that an income earned in a tax jurisdiction, irrespective of the residential status of the person earning the said income, is liable to be taxed in the tax jurisdiction where the income is earned - Even as the legal provision throws some light on what will, and what will not, constitute business connection, the precise connotations and scope of business connection remains to be neatly defined - in the case of business connection by the virtue of a sales agent, by whatever name called, non-resident s income deemed to accrue or arise in India can only be such income as is attributable to the operations so carried out by the agent - It would thus seem to us that when no business operations are carried out in India, even if a non-resident has a business connection in India, no part of income of such business can be deemed to have accrued or arisen in India - Held that onclusion is also in harmony with the conclusions arrived at by a Coordinate Bench in assessee s own case for the assessment years 2002-03 to 2005-06, reported in Dy. DIT v. Star Cruises India Travel Services (P.) Ltd. 2010 39 SOT 18 (Mum.) - Appeal is dismissed

Summary

Issues Involved:
1. Tax withholding liability under section 195 read with section 201 of the Income-tax Act, 1961.
2. Taxability of payments made to Star Cruise Management Limited (SCML) under Indian tax laws.
3. Applicability of Board Circular No. 23, dated 23-7-1969.
4. Determination of 'business connection' under section 9(1)(i) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Tax Withholding Liability under Section 195 Read with Section 201:
The Assessing Officer (AO) challenged the correctness of the CIT(A)'s order, which held that tax is not deductible at source under section 195 on payments made to SCML. The AO argued that the payments were subject to tax and interest under sections 201(1) and 201(1A), as the assessee was appointed as an agent to collect money in India for SCML.

2. Taxability of Payments Made to SCML:
The core issue was whether SCML had any income-tax liability in India. The AO contended that SCML had a business connection in India, invoking tax liability under section 9(1)(i) read with section 5(2)(i) of the Income-tax Act, 1961. The AO relied on Supreme Court judgments in CIT v. R D Aggarwal & Co. and Anglo French Textile Co. Ltd. v. CIT to argue that SCML's income from cruise passage money received through the assessee was taxable in India. However, the CIT(A) held that the services rendered by the assessee were general in nature and did not constitute a business connection under section 9(1)(i), thus quashing the tax liability.

3. Applicability of Board Circular No. 23, dated 23-7-1969:
The AO argued that the Board Circular No. 23 was not applicable as it was withdrawn on 23-7-2009. The CIT(A) did not specifically address this point but focused on the nature of services and the definition of business connection.

4. Determination of 'Business Connection' under Section 9(1)(i):
The AO argued that SCML had a business connection in India through the assessee, which was sufficient to invoke tax liability. The CIT(A) disagreed, stating that the services rendered were general and did not establish a business connection. The Tribunal examined the scheme of taxability of non-resident taxpayers, emphasizing that income attributable to operations carried out in India is taxable. The Tribunal concluded that since the assessee was compensated at arm's length for services rendered, no further income of SCML could be taxed in India. The Tribunal upheld the CIT(A)'s decision, stating that the principal tax liability of SCML was quashed, and consequently, the assessee's vicarious tax withholding liability was also not justified.

Conclusion:
The Tribunal dismissed the appeal, affirming that SCML did not have a tax liability in India, and therefore, the assessee was not required to deduct tax at source on payments made to SCML. The decision was consistent with the principles of source rule taxation and the specific provisions of section 9(1)(i) and section 5(2)(b) of the Income-tax Act, 1961.