2008 (11) TMI 20 - AAR - Income Tax

Applicant is a non-resident - applicant sells jewellery in local market as well as by export, mostly to Singapore income arising to the applicant on the purchase in India of gold for the purpose of manufacturing gold jewellery in India for export held that such income attracts charge to tax under sub-section (2) of Sec.5 as the income is received in India and has accrued in India - Explanation 1(b) to Sec. 9(1)(i) does not come to the aid of the applicant - income is taxable in India

Issues Involved:
1. Taxability of income derived from the purchase and export of gold jewellery.
2. Applicability of Section 5(2) and Section 9(1) of the Income Tax Act, 1961.
3. Interpretation of Explanation 1(b) to Section 9(1)(i) concerning non-residents.
4. Relevance of income receipt and accrual in India.
5. Consideration of non-discrimination clause under Art.26 of the Treaty.

Detailed Analysis:

1. Taxability of Income Derived from the Purchase and Export of Gold Jewellery:
The primary issue was whether the income derived by the applicant from the purchase and export of gold jewellery accrues or arises in India and is taxable in India. The applicant, a non-resident in India and resident of Singapore, argued that his activities of purchasing gold/gold ornaments for export are unrelated to his proprietary business in Chennai and should not be taxable in India under Explanation 1(b) to Section 9(1) of the Income Tax Act, 1961. However, the Revenue contended that the income accrues in India and is actually received in India, thus falling under Section 5(2).

2. Applicability of Section 5(2) and Section 9(1) of the Income Tax Act, 1961:
The court examined the interplay between Section 5(2) and Section 9(1). Section 5(2) includes all income received or deemed to be received in India or accruing or deemed to accrue in India. Section 9(1)(i) deals with income deemed to accrue or arise in India through any business connection in India. The court concluded that if income is actually received or accrued in India, the deeming provision under Section 9 is not required.

3. Interpretation of Explanation 1(b) to Section 9(1)(i) Concerning Non-Residents:
Explanation 1(b) to Section 9(1)(i) states that no income shall be deemed to accrue or arise in India to a non-resident through operations confined to the purchase of goods in India for export. The applicant argued that this clause should exempt his income from tax. However, the court clarified that Explanation 1(b) limits the attribution of income to purchase operations but does not entirely preclude the application of Section 9(1)(i). The court held that the clause does not prevent the accrual of income altogether.

4. Relevance of Income Receipt and Accrual in India:
The court emphasized that income received or accrued in India is taxable under Section 5(2). The applicant's banks in Chennai received the export sale proceeds, and the right to receive the income became vested in the applicant in India. Therefore, the income was both received and accrued in India, making it taxable.

5. Consideration of Non-Discrimination Clause under Art.26 of the Treaty:
The applicant raised a contention based on the non-discrimination clause in Art.26 of the Treaty, arguing for similar benefits as available to a resident under Section 80 HHC. However, the court did not address this issue as it was raised late in the hearing, and related revision proceedings were pending before the CIT. The court left this point open for the applicant to raise before the appropriate forum.

Ruling:
The court ruled that the income derived by the applicant from the purchase and export activities is taxable in India under Section 5(2) of the Income Tax Act, 1961, as the income is received and accrued in India. Explanation 1(b) to Section 9(1)(i) does not exempt the applicant from tax liability. The answers to the questions framed were affirmative, confirming the taxability of the income in India. The ruling was pronounced on November 19, 2008.

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