Mumbai Income-tax Appellate Tribunal (the Tribunal) in the case of DDIT v. Star Cruises (India) Travels Services Pvt. Ltd [2010-TIOL-04-ITAT-MUM] has held that merely booking of different cruise tour packages for M/s. Star Cruises Management Ltd. (M/s. SMCL) foreign company by the taxpayer cannot per se be decisive for holding that M/s. SMCL is having ‘business connection’ in India within the meaning of section 9(1)(i) of the Income-tax Act, 1961 (the Act). Accordingly, it cannot be said that income has been accrued to M/s. SMCL in India in respect of the booking of tour packages of Cruise made by taxpayer in India.
The Tribunal also held that as per the CBDT Circular no. 23 dated 23 July 1969 (This circular has been withdrawn with effect from 22 October 2009 vide Circular no. 7/2009) since M/s. SMCL sold tickets to Indian customers through the services of a taxpayer in India, the assessment in respect of the income arising out of the transactions will be limited to the amount of profit which is attributable to the taxpayer’s services provided. Further, since the non-resident company and the taxpayer company were separate legal entities and the management of both the companies was totally independent of one another the income of M/s. SCML, a foreign company cannot be held as taxable in India to the extent of the amount of sale of the Cruise tickets in India.
Facts of the case
The taxpayer was an Indian Company which was engaged in the business of providing travelling and tour related services. It entered into an agreement for providing general sales and marketing services with a foreign company, M/s. SCML of Isle of Man, with which India has not entered into the tax treaty. As per the agreement, the taxpayer agreed to sale their cruise tickets and to provide related marketing services in India. The sale proceeds collected on the booking of the cruise tickets by the taxpayer were remitted to SCML without deduction of tax after the approval of the Reserve Bank of India. The Assessing Officer (AO) observed that to the extent of proceeds of tickets sold in India the income of M/s. SCML was taxable under section 5(2)(a) read with section 44B of the Act. Accordingly, the AO held that the taxpayer was liable to deduct tax under section 195 of the Act and he also passed orders under section 201(1A) of the Act after holding the taxpayer as taxpayer in default.
The Commissioner of Income-tax (Appeals) after observing the CBDT Circular no. 23 observed that since SCML has paid an arm’s length consideration to SCTS for services rendered by it, SCTS would have made the same profits dealing with an independent enterprise. Since the said profits are already taxed in the hands of SCTS, no further profits can be attributed to the activities performed by it.
Issue before the Tribunal
Whether the tax was required to be deducted on payments made by the taxpayer to the SMCL out of sale proceeds of cruise tickets booked by the taxpayer?
Tax department’s contentions
Gross receipts received by the SCML being the principal from the taxpayer agent was chargeable to tax under section 5(2) of the Act. Therefore, the taxpayer should have deducted the tax under section 195 of the Act before remitting money to SMCL.
CBDT Circular no. 23 was not applicable as it relates to the deeming provisions, whereas in the SMCL’s case, the income was actually received by it in India through its agents;
Taxpayer’s contentions
The taxpayer contended that the taxability of the sale proceeds from tickets booked in India is governed by the principles (Refer Note- 1) laid down by CBDT circular no. 23. The taxpayer satisfied various criteria laid down by the circular no. 23.
As per the circular if the agent’s commission fully represents the value of profit attributable to his service, the assessment of the Principal it should prima facie extinguish. Further, the SMCL paid an arm’s length commission to the taxpayer for the marketing services rendered by it.
The said amount suffered tax in the hands of taxpayer in its assessments. Therefore, the income of SMCL was not taxable in India.
Ruling of the Tribunal
Merely because the taxpayer company was doing booking of different Cruise Tour packages for M/s. SCML, that can not per se be decisive for holding that M/S. SCML is having ‘business connection’ in India within the meaning of section 9(1)(i) of the Act. The expression ‘business connections’ is of wide meaning but at the same time it is also well settled principles that there should be close and intimate relationship between the business operations of the non-resident and his agent in India.
Since the services rendered by the taxpayer were routine business activities and general in nature it cannot be interpreted to give colour of ‘business connection’ as contemplated in section 9(1)(i) of the Act. Accordingly, it cannot be said that the income from booking of tour packages by the taxpayer in India has been accrued to M/s. SCML in India.
As per the section 44B of the Act, income of the non resident shipping company can not be charged to tax in India unless either the passengers who have booked the Cruise Package, are travelling from or to any port in India. Unless any income was chargeable to tax in India as per the charging provisions of the Act, no effect can otherwise be given to other provisions of the Act.
Further, as per circular no.23, where the non-resident sales to Indian customers through the services of an agent in India, the assessment in respect of the income arising out of the transactions will be limited to the amount of profit which is attributable to the agents’ services provided.
As per the Circular no.23, since M/s SMCL sold tickets to Indian customers through the services of a taxpayer in India, the assessment in respect of the income arising out of the transactions will be limited to the amount of profit which is attributable to the taxpayer’s services provided.
Further, since the non-resident company and the taxpayer company were separate legal entities and the management of both the companies was totally independent of one another the income of M/s. SCML, a foreign company cannot be held as taxable in India to the extent of the amount of sale of the Cruise tickets in India.
Our Comments
The Mumbai Tribunal has held that since the taxpayer fulfilled the conditions prescribed by CBDT circular no. 23 the income earned by the foreign company cannot be held taxable in India. However, it is important to note that circular 23 was withdrawn by the CBDT vide circular no. 7/2009 (For details please refer our flash news dated 26 October 2009) and the decision of the Tribunal is given for the period in which circular no. 23 was valid.
It is pertinent to note that even though the Tribunal has relied on circular no. 23 which has recently been withdrawn with immediate effect, may not impact similar cases because the above principle has already been laid down by the Supreme Court in the case of Morgan Stanley and Co. [2007] 292 ITR 416 (SC) where it was held that since the Permanent Establishment of the foreign company (PE) was remunerated at an arm’s length price there was no need to attribute further profits to the PE.
Note- 1
1. where a non-resident make sales to Indian customers through an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agent’s services, provided that (i) the non¬resident principal’s business activities in India are wholly channeled through his agent, (ii) the contracts to sell are made outside India, and (iii) the sales are made on a principal-to-principal basis.
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