2005 (2) TMI 17 - AAR - Income Tax

SMPL, applicant is an advertisement concessionaire of a company registered in U.K. and is carrying on business of publishing magazines from London applicant collecting advertisement charges from the Indian advertisers in overseas publications, such collections being in Indian currency, converting them to foreign currency and remitting the same to UK comany would tantamount to accruing or arising of deemed income in India u/s 9 of the Income-tax Act to the non-resident

Issues Involved:
1. Whether the collection of advertisement charges by SMPL from Indian advertisers for TENL constitutes income deemed to accrue or arise in India under Section 9 of the Income Tax Act, 1961.
2. If such income is deemed to accrue or arise in India, what is the withholding tax rate to be adopted by SMPL?
3. Whether Indian advertisers should deduct income tax at source while making payments to SMPL.
4. Whether SMPL should deduct income tax at source while remitting collections to TENL.

Issue-wise Detailed Analysis:

1. Whether the collection of advertisement charges by SMPL from Indian advertisers for TENL constitutes income deemed to accrue or arise in India under Section 9 of the Income Tax Act, 1961:

The Authority examined whether there exists a "business connection" between SMPL and TENL within the meaning of Explanation 2 to Section 9(1)(i) of the Act. The Commissioner contended that SMPL is not an independent agent and therefore, TENL has a business connection in India, making its income taxable under Section 9(1)(i). The Authority noted that the term "business connection" involves a real and intimate relation between the trading activities carried on outside India by a non-resident and the activities within India, contributing to the earning of income by the non-resident. The Authority concluded that the business activities carried out by SMPL for TENL in India establish a business connection under Explanation 2 to Section 9(1)(i). However, the Authority also considered the Double Taxation Avoidance Agreement (DTAA) between India and the UK, which stipulates that profits of TENL shall be taxable in India only if it has a permanent establishment (PE) in India. The Authority concluded that SMPL does not constitute a PE of TENL under Article 5 of the DTAA, as SMPL's activities are not carried out wholly or almost wholly for TENL.

2. If such income is deemed to accrue or arise in India, what is the withholding tax rate to be adopted by SMPL:

Given the ruling on the first issue that TENL's income is not liable to tax under the DTAA, the question of withholding tax rate becomes redundant. The Authority did not pronounce a ruling on this issue as it is consequential to the ruling on the first issue.

3. Whether Indian advertisers should deduct income tax at source while making payments to SMPL:

This issue was not explicitly addressed in the ruling, as the primary focus was on the tax liability of TENL under the DTAA. However, the implication of the ruling on the first issue suggests that since TENL's income is not taxable in India under the DTAA, there would be no requirement for Indian advertisers to deduct tax at source when making payments to SMPL.

4. Whether SMPL should deduct income tax at source while remitting collections to TENL:

Similar to the third issue, this question was not directly addressed. However, based on the ruling that TENL's income is not taxable in India under the DTAA, SMPL would not be required to deduct tax at source while remitting collections to TENL.

Conclusion:

The Authority concluded that while TENL has a business connection in India under Section 9 of the Income Tax Act, the provisions of the DTAA between India and the UK override the Act. Therefore, TENL's income is not liable to tax in India under the DTAA. Consequently, there is no requirement for withholding tax by SMPL or Indian advertisers. The Authority did not pronounce rulings on the other issues as they were consequential to the ruling on the first issue.

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