Business connection Income Tax Act

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Business connection Income Tax Act

Business connection is relevant to decide taxability of foreign companies doing business in India . Thus, it is important to understand its meaning under the Income Tax Act .

BUSINESS CONNECTION INCOME TAX ACT – MEANING 

  • ‘Business connection’ shall include any business activity carried out through a person acting on behalf of the non-resident [Explanation 2 to section 9(1)(i)]

BUSINESS ACTIVITIES CARRIED OUT THROUGH A PERSON ACTING ON BEHALF OF NR – SECTION 9(1)(I)

BUSINESS CONNECTION WHEN AGENT OF NON-RESIDENT HAS AUTHORITY TO CONCLUDE CONTRACTS IN INDIA – SECTION 9(1)(I)

  • The “ business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident have authority which is habitually exercised  to conclude contracts on behalf of the non-resident .

 BUSINESS CONNECTION INCOME TAX ACT – WHEN AGENT OF NR MAINTAINS STOCK  OF GOODS IN INDIA – SECTION 9(1)(I)

  • The “ business connection” shall include any business activity carried out through a person who has no such authority to conclude contract, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or   merchandise on behalf of the non-resident.

BUSINESS CONNECTION INCOME TAX ACT – WHEN AGENT OF NR SECURES ORDERS IN INDIA FOR THE NR – SECTION 9(1)(I)

  • The “ business connection” shall include any business activity
  • carried out through a person who
  • habitually secures orders in India,
  • mainly or wholly
  • for the non-resident.
  • Further, there may be situations when the person acting on behalf of the non-resident (NR 1) secure order for other non-residents. In such situation, business connection for other non-residents is established if,
  • such other non-resident controls the NR-1 or
  • such other non-resident is controlled by NR-1 or
  • such other non-resident is subject to same control as that of NR-1.
  • In all the three situations, business connection is established, where a person habitually secures orders in India, mainly (more than 90% but less than 100%) or  wholly for such non-residents.

BUSINESS CONNECTION INCOME TAX ACT – AGENTS HAVING INDEPENDENT STATUS ARE NOT INCLUDED IN BUSINESS CONNECTION

  • No Business connection shall be established, where the non-resident carries on business through a broker, general commission agent or any other agent having an independent status, if such a person is acting in the ordinary course of his business.
  • A broker, general commission agent or any other agent shall be deemed to have an independent status where he does not work mainly or wholly for the non-resident.

Points to be considered for business connection

  • The Agent, would not be considered to have an independent status in the three situations (i.e., authority to conclude contract, maintenance of stock, procurement of orders in India) explained in preceding slides, where he is employed by such a non-resident.
  • Where a business is established, then only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India [Explanation 3 to section 9(1)(i)]

EXCEPTIONS IN CASE OF BUSINESS CONNECTION INCOME TAX ACT

The following shall not be treated as business connection of a non-resident in India [Explanation 1 to section 9(1)(i)]:

  1. For business whose part of operations are carried out in India [Explanation 1(a) to section 9(1)(i)]:
  • In the case of a business of which all the operations are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of income as is reasonably attributable to the operations carried out in India.

Purchase of goods in India for export [Explanation 1(b) to section 9(1)(i)] : –

  • No income shall be deemed to accrue or arise in India to a non-resident from operations, which are confined to the purchase of goods in India for the purpose of export.

Collection of news and views in India for transmission out of India [Explanation 1(c) to section 9(1)(i)]:

  • Where a non-resident is engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India.

Shooting of cinematograph films in India [Explanation 1(d) to section 9(1)(i)]:

  • In the case of a non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to the shooting of any cinematograph film in India, if such non-resident is :
  • an individual, who is not a citizen of India or
  • a firm which does not have any partner who is a citizen of India or who is resident in India; or
  • a company which does not have any shareholder who is a citizen of India or who is resident in India.
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