whole of the profits of a non-resident, accruing or arising from a business connection in India is not deemed to accrue or arise in India, and it is only that portion of the profits which can reasonably be attributed to the operations of business carried out in India, which is liable to income-tax. - Income Tax - 885/CBDT

INSTRUCTION NO. 885/CBDT Dated : September 27, 1975 Section(s) Referred: 9 Statute: Income - Tax Act, 1961 In para 3(7) of Boards Circular No. 23* of 1969 dated 23rd July 1969, it was explained that the whole of the profits of a non-resident, accruing or arising from a business connection in India is not deemed to accrue or arise in India, and it is only that portion of the profits which can reasonably be attributed to the operations of business carried out in India, which is liable to income-tax. 2. The question whether these instructions require modification in the light of the decision of the Madras High Court in the case of Commissioner of Income-tax Madras vs. Carborundum Co (92 ITR 411) has been considered by the Board in consultation with the Ministry of Law. 3. In Carborundum's case, a foreign company entered into an agreement with an Indian company for rendering certain services which among others included:- (a) furnishing of technical information know-how and technical management including factory design and lay-out manufacturing specifications, etc; (b) providing the Indian Company with a resident factory manager for starting the plant and other foreign technical personnel necessary for operation of the plant; and (c) training in India and abroad the Indian personnel to replace the foreign technical personnel as rapidly as possible. The salary and other emoluments of the foreign technical personnel were to be paid by the Indian Company under separate agreements entered into between such personnel and the Indian Company. Under the agreement, the foreign company was to receive from the Indian company an annual service fee equal to 30% of the net sales of the products manufactured by the Indian company each year. 4. On a reference the High Court inter-alia held: (i) that the services rendered in the examination and approval of the factory design and lay-out and supply of technical bulletin, instructional film, etc. cannot be said to have been rendered in India; (ii) the sending of foreign technicians to India to work under the Indian company amounts to the foreign company doing some activity or services in India and the technical fee received by the foreign company covers also their services. The fact that the technicians were paid by and were under the control of the Indian company will not affect the question. (iii) the foreign company having rendered at last some services in India which amounts to business activity, the entire technical fee received by it should be taken to have accrued through or from its business connection in India and, therefore taxable, and there is no question of any apportionment as the foreign company did not carry on any business. 5. The judgment of the High Court has laid down two principles:- (i) In so for as making available of technical personnel by the foreign company is concerned, the High Court has concluded that in view of the obligation of the foreign company to make available technicians in India, it has rendered service in India. The Board has been advised that this part of the judgment of the High Court can be accepted as laying down a general priniciple. Accordingly, of under an agreement a non-resident is obliged to send technical or other personnel to work in India and of such personnel were actually sent to India under that agreement the non-resident must be regarded as having rendered services in India. The fact that the personnel were paid by and were under the control of the Indian party will not affect the question, as this is purely a matter of bargain between the non-resident and the Indian Party. (ii) The assessee having rendered at least some services in India which amounts to a business activity the technical fee should be taken to have accrued through or from its business connection in India. Hence the entire receipts by the assessee company have to be taken to have accrued or arisen in India, as a result of its business connection, No question therefore, arises of any apportionment of the income because the assessee cannot be said to have carried on business in India in the context of the definition of "business". In view of the considerations that the matter in the case of Carborundum Company ltd. has been taken to the Supreme Court and there are several other judgments which contain observations to the effect that apportionment has to be made in such cases on the basis of profits reasonably attributable to the operations carried out in India it has been decided by the Board in consultation. With the Ministry of Law that, for the present, it would not be advisable to depart from the existing departmental practice of apportioning income in such cases in accordance with the provisions of clause (a) of the Explanation to Section 9(1)(i) of the Income-tax Act and to tax all receipts. 6. Accordingly, the existing departmental practice of taxing the non-resident only on that portion of the profits which can reasonably be attributed to the operations carried out in India may continue to be followed, until revised instructions in this regard are issued by the Board. In determining the income reasonably attributable to the operations carried out in India, services rendered by technical or other personnel sent by the non-resident to India under an agreement with the Indian party should also be taken into consideration.