“business connection”
The decision most relied on for business connection is Ishikawajima Harima Heavy Industries Ltd. v. DIT (288 ITR 408), cited in 394 judgments on BharatTax.
Leading authorities on business connection
Income from offshore supply of goods and services is not taxable in India if the entire transaction, including transfer of ownership and payments, occurs outside India.
A non-resident commission agent is not chargeable to tax in India on commission income if no business operations are carried out in India. Consequently, no TDS is required under Section 195 on such payments.
The Supreme Court lays down principles for deducting tax at source (TDS) under Section 195 on payments to non-residents, including aspects of income deemed taxable in India and the application of Double Taxation Avoidance Agreements (DTAAs) under Section 90.
Revenue must demonstrate the existence of a Permanent Establishment (PE) of a foreign enterprise in India, including establishing that transactions underlying a Dependent Agent PE were not at arm's length. Income from the sale of goods is not taxable in India if title and risk in the goods pass outside India.
A 'business connection' for non-residents requires a real and intimate relation between their trading activities outside India and activities within India, contributing directly or indirectly to their earnings. The Supreme Court assigned a wide meaning to this term.
Disallowance under section 40(a)(i) for non-deduction of tax at source on export agency commission paid to a non-resident does not apply if the non-resident's income is not taxable in India under section 9(1), such as when the agent operates outside India without a permanent establishment or business connection in India.
If a Dependent Agency Permanent Establishment (DAPE) is remunerated at arm's length based on transfer pricing principles, no further profits can be attributed to the foreign enterprise. The principles of profit attribution under DTAA Article 7 are pari-materia to Section 9(1)(i) of the Income Tax Act.
Once the arm's length principle has been satisfied under transfer pricing provisions, no further profit can be attributed to a person even if they have a permanent establishment in India. A reassessment notice based solely on the allegation of a permanent establishment is unsustainable if the arm's length price procedure has been followed.
