ADIT vs. Star Cruise India Travel Services (ITAT Mumbai)

Non-Resident, even with “business connection”, can be taxed only in respect of business operations carried out in India. While canvassing agent is not “business connection”, fair fee extinguishes non-resident’s liability to tax

Star Isle of Man was engaged in providing promotional services for the cruise vessels operated by the Star Cruise Group. It appointed the assessee as its agent in India to canvass business for marketing its cruise packages and shore excursions. The assessee received 3% of the net cruise charges as retainer fees. The AO took the view that the relationship between the assessee and Star Isle of Man was a “business connection” and that 5% of the net cruise charges was chargeable to tax in the hands of Star Isle of Man u/s 9(1)(i) and that the assessee ought to have deducted tax at source u/s 195 r.w.s. 201. This was reversed by the CIT(A). On appeal by the department to the Tribunal, HELD dismissing the appeal:

(i) The expression ‘business connection’ does not cover mere canvassing for business by an agent in India. It postulates a real and intimate relation between business activity carried on outside India and business activity within India, the relation between the two contributing to the earning of income by the non-resident in his business activity. The business operations carried out outside India and inside India must have such a relationship as to contribute to business operations as a whole. On facts, as Star Isle of Man was merely engaged in providing promotional services, which did not contribute to core business operations as a whole, there was no “business connection” (R D Aggarwal & Co 56 ITR 20 (SC) and Anglo French Textile Co 23 ITR 101 (SC) followed. Rajiv Malhotra 284 ITR 564 (AAR) dissented from);

(ii) The scope of deeming fiction u/s 9 (1)(i) which prima facie appears to be an extension of the classical source rule of taxation is in fact confined to the simpliciter taxability of an income earned in a tax jurisdiction because ‘while the main provision of the deeming fiction seems to be taking a rather aggressive view of the source rule, the Explanations to the deeming fiction considerably narrow down the scope of the same’ and to that extent there is overlapping of s. 9(1)(i) and s.5(2)(b). Further, while s. 9(1)(i) provides that an income with ‘business connection’ in India is chargeable to tax no matter in which part of the world it accrues or arises, the income which can be subjected to tax in India can never exceed the income attributable to operations carried out in India – by the non-resident or by the agent. This is made clear by clause (a) of Explanation 1 to s. 9(1)(i) and Explanation 3. The result is that if the agent (“the business connection”) has been compensated with fair remuneration, there cannot be further income of the non- resident which can be brought to tax u/s 9(1)(i) r.w.s. 5(2)(b).