Section 5(2)

Section 5(2) — the law in short

What the courts have decided on section 5(2), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• DIT v Travelport Inc. Supreme CourtHelps taxpayer
  The Assessing Officer has found a permanent establishment and wants to tax my client's entire Indian booking revenue. My client already pays its Indian distributor a commission larger than anything that could be attributed to India. Is there anything left to tax?
  No, where the commission already paid to the Indian agent exceeds the profit attributable to the Indian operations, the assessment is extinguished. The Supreme Court upheld the Tribunal's attribution of 15 per cent of the revenue to India on a functions, assets and risks analysis and held that, because the distribution commission was more than twice that figure and had already been taxed, no further income was taxable in India — and it declined to decide whether there was a permanent establishment at all, because the attribution answer disposed of the appeals.
• Union of India v U.A.E. Exchange Centre Supreme CourtHelps taxpayer
  My UAE client's Indian liaison office only downloads remittance instructions from the head office server and prints cheques on Indian banks. The Assessing Officer says that is a permanent establishment and wants to tax the whole remittance commission. Is he right?
  No, on these facts. The Supreme Court held that a liaison office whose only activity is downloading information from the head office server and printing and despatching cheques is carrying on an activity of a preparatory or auxiliary character, which Article 5(3)(e) of the India-United Arab Emirates DTAA expressly takes out of the expression 'permanent establishment'. Once the office is deemed by that legal fiction not to be a PE, Article 7 gives India no right to tax the enterprise's profits, and the deeming provisions in ss.5 and 9 of the Act 'can have no bearing whatsoever'.
• Kanchanganga Sea Foods Ltd v CIT Supreme CourtHelps departmentNo later treatment found
  I pay a non-resident in kind, not in cash. Do I still have to deduct tax at source under section 195?
  Yes. The Supreme Court held that charter fee discharged by handing a non-resident owner 85 per cent of the fish caught was a payment attracting section 195, and that the non-resident received it in India. Until the catch was apportioned it belonged wholly to the Indian charterer; the non-resident got control only when its share was handed over at Chennai after certification, valuation and customs clearance. That was the first receipt in the eye of law and it was in India, so the income was chargeable under section 5(2). The company was rightly treated as an assessee in default under section 201 for not deducting.
• CIT v Hyundai Heavy Industries Co Ltd Supreme CourtCuts both ways
  I am a foreign company on a turnkey contract. I fabricated the platform abroad and only installed it in India. Can the Department tax the offshore fabrication profit because the contract was one indivisible whole?
  No, on these facts. The Supreme Court held that an installation permanent establishment comes into existence only at the installation stage, which is after the equipment has been sold and delivered abroad, so profits on the offshore supply are not attributable to it. Under Article 7 what is taxed is not the real profit but the hypothetical profit the permanent establishment would have made as a wholly independent enterprise, so nothing can be attributed on the supply unless the Department shows the price was not at arm's length or included an element for the establishment's services. On quantum, ten per cent of the Indian gross receipts was upheld.
• Ishikawajima-Harima Heavy Industries Ltd v DIT Supreme CourtHelps taxpayerSuperseded by amendment
  Our turnkey contract has offshore supply and offshore services alongside Indian work. Is the whole contract taxable in India?
  No — a composite turnkey contract can be split. Profits on equipment supplied and paid for outside India, where title passes outside India, are outside the Indian charge, because the contract being signed in India is immaterial and there must be a sufficient territorial nexus. On offshore services the Court read s.9(1)(vii) as requiring the services to be both utilised in India and rendered in India; that second requirement has since been removed retrospectively by statute, so only the offshore supply holding survives on the domestic law side.
• Sedco Forex International Drill Inc v CIT Supreme CourtHelps taxpayer
  My foreign employees work on rigs in India for a month and then spend a month on standby at home. Is the salary for the off period taxable in India for years before 2000-01?
  No. The Supreme Court held that salary paid for field breaks spent in the United Kingdom was not earned in India for assessment years 1992-93 and 1993-94. Under the Explanation to section 9(1)(ii) as it stood from 1979, only salary payable for service rendered in India was deemed earned in India, and these employees rendered no service here in the off period; they were training and standing by for work anywhere in the world. The Explanation substituted in 1999, which brings in rest and leave periods, takes effect from 1 April 2000 and does not reach back.
• CIT v Toshoku Ltd Supreme CourtHelps taxpayer
  I credited commission in my books to a foreign selling agent who works entirely outside India, and remitted it later. Is that commission taxable in India in his hands?
  No. The Supreme Court held that a credit entry in the exporter's own books is not receipt by the non-resident: a credit balance without more is only a debt, and a book entry in the debtor's own books is not payment discharging it, so the amounts were neither received nor deemed received in India. Nor did the commission accrue or arise here. Under the Explanation to section 9(1)(i), where all the operations of a business are not carried out in India only the part of the income reasonably attributable to Indian operations is deemed to accrue here - and these agents carried out no operations in India at all.
• Carborandum Co v CIT Supreme CourtHelps taxpayer
  We are a foreign company paid a technical service fee by an Indian company. Does that fee accrue in India if all our work was done abroad?
  No. The Supreme Court held that the technical service fee neither accrued nor was deemed to accrue in India. Know-how was supplied from outside India, and the foreign personnel were made available outside India, taken on by the Indian company as its employees, paid by it and working under its control, so the services were rendered wholly abroad. Even assuming a business connection existed, no part of the operations was carried out in India, so the deeming provision was not attracted at all. The Court also held that the High Court should not have entertained a business connection point raised for the first time on reference.
• CIT v R.D. Aggarwal & Co Supreme CourtHelps taxpayer
  I canvass orders in India for foreign suppliers and pass them on for acceptance abroad. Does that give the foreign supplier a business connection here, so that I can be taxed as its agent?
  No, on these facts. The Supreme Court held there was no business connection between the Amritsar firm and the two non-resident yarn exporters. The contracts of sale were made outside India, the price was received outside India and delivery was given outside India. Nothing - procuring raw materials, manufacture, sale or delivery against price - happened here. The firm merely procured orders which were offers it had no authority to accept, and which the non-residents were free to reject. Business connection postulates a real and intimate relation between the trading activity outside India and trading activity within it, contributing to the non-resident's income.
• CIT (International Taxation)-3 v Bank of Tokyo-Mitsubishi UFJ Ltd High CourtHelps taxpayerNo later treatment found
  Our Indian branch earned interest on balances kept with the head office and overseas branches. Is that taxable in India?
  No, on the years before the 2015 amendment. A branch is not a separate legal personality, and one cannot make a profit out of oneself, so interest received by the Indian permanent establishment from its own head office or overseas branches is not chargeable to tax in India. The Explanation to s.9(1)(v), which deems a banking permanent establishment to be a separate and independent person, took effect only from 1 April 2016 and had no application.
• Sumana Bandyopadhyay v DDIT High CourtHelps taxpayer
  The AO taxed my foreign salary because it landed in my Indian NRE account. Can he do that if I am a non-resident?
  No. Salary that became due and accrued to a non-resident for services rendered outside India does not become chargeable on a receipt basis merely because the foreign employer paid it into an Indian NRE account. Income accrues where the services are rendered, not where the money is banked, and the High Court allowed the appeal and answered the question in the assessee's favour.
• Utanka Roy v Director of Income Tax High CourtHelps taxpayerNo later treatment found
  I am a non-resident. I worked on a foreign employer's ship outside India for most of the year and was paid by that foreign company. The department says the salary is taxable in India. Where does salary accrue?
  Where the services are rendered. The Calcutta High Court held that for a non-resident, whose total income is governed by s.5(2), the place of accrual has to be found, and for that purpose the place where the services were rendered is what matters; the source of the income is not relevant. A marine engineer who had rendered services outside India for 286 days and had received his remuneration from a foreign company had received income outside India, and both the s.143(1) intimation and the s.264 order were set aside.
• Rolls Royce Plc v DIT (International Taxation) High CourtCuts both waysNo later treatment found
  My foreign company sells to Indian customers through its Indian subsidiary, which I pay on a cost-plus basis. If that subsidiary is treated as my permanent establishment, is the cost-plus fee the end of it?
  No. The Delhi High Court held that where the Indian subsidiary is the permanent establishment and carries on the core marketing, negotiating and selling functions, an arm's length cost-plus remuneration to it does not exhaust the tax. Profits of the foreign enterprise attributable to the Indian operations remain chargeable, and the Court upheld the Tribunal's functional apportionment of global profit - 50 per cent to manufacturing, 15 per cent to research and development, and the balance 35 per cent to marketing carried out in India. Both the assessee's appeals and the Revenue's appeals were dismissed.
• Asia Satellite Telecommunications Co Ltd v DIT High CourtHelps taxpayerSuperseded by amendment
  We pay a foreign satellite operator for transponder capacity, and the satellite is nowhere near India — is that payment royalty taxable in India?
  No, on the reasoning of this judgment. The Delhi High Court held on 31 January 2011 that a customer buying transponder capacity uses neither equipment nor a process belonging to the satellite operator. A transponder cannot function apart from the satellite — it depends on the satellite's power, antennae, positioning, temperature control and tracking — so it is not equipment capable of being handed over, and control never leaves the operator. The labels lease, lessor and rental in the agreement are not determinative; the substance is that the customer is given access to bandwidth while the operator performs the process. There was accordingly no use of a process by the TV channels.
• Clifford Chance v DCIT High CourtHelps taxpayer
  My UK firm advised on Indian projects, partly from London and partly on visits to India, and our partners were here more than 90 days. Is the whole fee taxable in India?
  No. The Bombay High Court held that only the income attributable to services actually performed in India is chargeable, measured on the firm's hourly billing for work done in India. Article 15 of the India-UK treaty taxes an individual, including a member of a partnership, in the other State only if he performs services there and is present 90 days or more, and then only so much of the income as is attributable to those services. Under section 9(1)(vii)(c) the services must be both rendered in India and utilised in India, and territorial nexus does not permit the whole of a composite fee to be treated as arising in every jurisdiction touched.
• Unnikrishnan V S v ITO (International Taxation) — an ESOP benefit accrues where the qualifying services were rendered, so a non-resident who was granted options for work done in India is taxed here on exercise ITATHelps departmentNo later treatment found
  My client is a non-resident now. He exercised options granted years ago while he worked in India, and his employer deducted tax. Can he claim the perquisite did not accrue in India, or take treaty protection?
  No, on these facts — and this is stage one, the perquisite on exercise under s.17(2)(vi). The Tribunal held that the benefit accrued and arose in India at the time the options were GRANTED, in consideration of services rendered in India, even though s.17(2)(vi) brings it to tax only in the year of exercise. Article 15 of the India-UAE treaty gave no protection because the employment to which the benefit related was exercised in India, and the taxpayer's own authorities pointed the other way. Both appeals were dismissed.
• ACIT v Robert Arthur Keltz — where the employee did not render service in India for the whole grant period, only the proportion of the ESOP perquisite relatable to Indian service is taxable in India ITATHelps taxpayerNo later treatment found
  My client came to India part way through the vesting period of his options and exercised them here. The Assessing Officer has taxed the whole perquisite. Can he apportion?
  Yes, on these facts — and this is stage one, the perquisite on exercise. The Delhi Tribunal upheld the Commissioner (Appeals) in holding that because the assessee had not rendered service in India for the whole grant period, only such proportion of the ESOP perquisite as was relatable to the service he rendered in India was taxable in India. The Revenue's appeal was dismissed.
• ITO v Right Florists P Ltd ITATHelps taxpayer
  I pay Google Ireland and Yahoo for online search advertising. Must I deduct tax at source, or will the expense be disallowed?
  No tax was deductible, so no disallowance. The Kolkata Tribunal held that payments for online search advertising to Google Ireland and Yahoo USA were not taxable in India. Neither had a permanent establishment here, and a website by itself is not a PE. The service is fully automated with no human intervention, so it is not fees for technical services under section 9(1)(vii) or under the India-Ireland treaty; and under the India-USA treaty nothing was made available. With no primary liability on the recipient there was no withholding obligation under section 195 and no disallowance under section 40(a)(i).
• Smt. Trishla Jain v. Dy. CIT (ITAT Delhi) — short-term capital gains derived from a foreign exchange asset fall within 'investment income' in s.115C(c) and take the concessional rate, notwithstanding that s.115E names only long-term capital gains ITATHelps taxpayerNo later treatment found
  My NRI client bought equity shares of an Indian company in convertible foreign exchange and sold them within a year. The assessing officer says section 115E mentions only long-term capital gains, so the short-term gain goes at ordinary rates. Is there any authority the other way?
  Yes. The Tribunal held that a short-term capital gain derived from a foreign exchange asset is income derived from that asset and therefore falls within the definition of 'investment income' in section 115C(c), so the assessee is entitled to the concessional rate under section 115E. It rejected the Revenue's argument that the express mention of long-term capital gains in section 115E excludes short-term gains by necessary implication.
• KnoWerX Education (India) P Ltd v DIT Advance RulingHelps taxpayer
  We collect examination fees in India for two American professional bodies and send the money on. Is that taxable here, and must we deduct tax before we remit?
  No. The Authority ruled that the examination fees collected for APICS and AST&L and remitted to them were not taxable in India, that the income was business income in nature, and that the applicant need neither deduct tax nor pay any. The fees were received in India by the applicant on the American bodies' behalf, so section 5(2)(a) was in play; but both bodies were residents of the United States for the agreement notwithstanding their exemption under section 501(c)(6) of the Internal Revenue Code, and the applicant was not their permanent establishment. With no permanent establishment, article 7 left the profits taxable only in the United States, and section 195 had nothing to bite on.
• In re International Hotel Licensing Company S.A.R.L. Advance RulingHelps departmentSuperseded by amendment
  Our Luxembourg company collects a share of an Indian hotel's revenue to fund worldwide marketing, all of it done abroad. Is that money taxable in India?
  Yes. The Authority ruled that the contributions were taxable in India. It refused to treat them as reimbursements: the 1.5 per cent of gross hotel revenue and the 3.4 per cent of Marriott Rewards room charges were contractual charges with no direct nexus to the applicant's actual costs, the programmes benefited the whole chain, and any excess was retained. There was a business connection under section 9(1)(i), the twenty-five year participation agreement showing a real and intimate relation with the owner's Indian hotel and continuity rather than an isolated dealing. The services were also managerial and consultancy services within Explanation 2 to section 9(1)(vii), and the exception for services used outside India did not apply.
• In re Angel Garment Ltd Advance RulingHelps taxpayer
  Our Hong Kong company wants an Indian liaison office that only gathers information from garment makers and chases up shipments. Does that create Indian tax?
  No. The Authority ruled that on the activities described the applicant could not be held to have earned any income taxable in India. The proposed liaison office would collect information about garments and textiles from Indian manufacturers, communicate product information to the Hong Kong head office, act as a channel between the applicant and Indian exporters, and follow up the timely export of goods ordered. It would carry on no commercial activity, would have no authority to contract, and would be funded by remittances from the head office. Those operations were confined to the purchase of goods in India for the purpose of export, so clause (b) of Explanation 1 to section 9(1)(i) applied.
• In re General Electric Pension Trust Advance RulingHelps departmentSuperseded by amendment
  We are a US pension trust, exempt from tax at home, investing a small part of our fund in Indian securities. Can we claim the India-US treaty, and are our gains business income?
  No on the treaty, and yes on business income - the trust lost. The Authority ruled that the profits arising to General Electric Pension Trust from the sale of its portfolio investments in India would be treated as its business income, given the continuous purchases and sales through Indian brokers. It then held that the trust was a resident of the United States for treaty purposes only so far as its income was subject to tax there; being tax-exempt, it was not a resident of a contracting State and could not claim the convention. The business income was therefore taxable in India under the Act. The ruling binds only that applicant.
• In re Gutal Trading Est Advance RulingCuts both waysSuperseded by amendment
  My UAE establishment wants an Indian liaison office to run seminars and pass enquiries back to Dubai. Will that be a business connection, and can I use the India-UAE treaty?
  It depends, and the answers split. The Authority ruled that the proposed liaison office would generate no income for the applicant and would not amount to a business connection in India under section 9(1)(i): it would only be a channel of communication, a cost centre reimbursed periodically, holding seminars, relaying enquiries to Dubai and passing product information to Indian customers, with no power to negotiate or conclude contracts or to collect payments. But it added a warning that enlarging the office's scope to negotiating imports or purchases by Indian customers would be a business connection. On the treaty the applicant lost: as a UAE individual establishment it could not claim the agreement.
• In re Airports Authority of India (feasibility study) Advance RulingHelps taxpayer
  A US firm did a feasibility study for us, but it is paid directly out of a US government grant, not by us. Is the fee taxable in India, and must we deduct tax?
  No. The Authority ruled that the payments to Innovative Solutions International Inc of Virginia were not taxable in India, either under the Act or under the agreement with the United States. The study for the applicant's communication, navigation and surveillance and air traffic management project was prepared in the United States; the firm had no office or establishment in India and its work here was confined to some meetings with the applicant's officials and coordination with local vendors. Decisively, the money was payable only by the US Trade and Development Agency out of its grant of US$450,600, and the firm had no remedy against the applicant if the Agency did not pay.
• Von Der Mark v CIT Advance RulingCuts both waysNo later treatment found
  I am a German engineer on the board of an Indian company and I also consult for it from Germany. The department says everything the company pays me is directors' fees taxable in India. Is it?
  It depends, and the ruling splits the payments. The Authority held that the consultancy fees paid by Pennwalt India Ltd to a German engineering consultant for services rendered entirely from Germany were professional services within article 14 of the India-Germany agreement and taxable only in Germany, because he had no fixed base in India and his stay here was 13, 13 and 25 days in the three relevant years. It rejected the department's case that his directorship was itself a fixed base, and that his fees were salary under s.15. But the fee for attending board meetings and any similar payments fall under article 16, are taxable in India, and tax is deductible at source on them. The ruling binds only the applicant.
• CBDT Circular 13/2017 on seafarer salary in an NRE account CBDT Circulars & InstructionsHelps taxpayer
  My client is a non-resident seafarer and his foreign employer credits his salary straight into his Indian NRE account. Is that receipt in India?
  No. The Board clarified that salary accrued to a non-resident seafarer for services rendered outside India on a foreign ship is not included in total income merely because it has been credited to an NRE account maintained with an Indian bank. Under s.5(2)(a) only income received or deemed to be received in India is taxable for a non-resident, and the Board treats the credit into the NRE account as not making the salary income received in India.
• Foster's Australia Ltd v CIT Advance RulingCuts both waysOverruled
  We sold our global beer brand and the Indian trade marks went with it. Is any part of the price taxable in India, and can the split be made on our own valuation?
  It depends, and the Authority split it. It ruled that the trade marks and the Foster's brand intellectual property were capital assets situated in India when they were transferred in 2006, so that income was deemed to accrue here under section 9(1)(i), article 13(6) of the India-Australia agreement leaving domestic law untouched. The brewing intellectual property was different: the manuals had reverted to the applicant in Australia and were handed over there, so it was not situated in India. On the second question the Authority refused to work from the applicant's own valuation, holding that the entire consideration for the Indian assets is gross income and leaving the assessing officer to apportion.
• In re UAE Exchange Centre LLC Advance RulingHelps departmentOverruled
  Our UAE remittance house has Indian liaison offices that download remittance particulars and post cheques to the beneficiaries. Does that make us taxable in India?
  Yes, the Authority said so, but the decision did not survive. It ruled that income was deemed to accrue in India from the activities carried out by the liaison offices. It found a business connection under section 9(1)(i): a real and intimate relation between the remittance business carried on in the UAE and what the offices did here, contributing to the earning of income, with continuity. On the treaty it distinguished two modes. For telegraphic transfers the offices only handled complaints, which was auxiliary; but downloading the data, preparing the cheques and despatching them by courier was an important part of the main work itself, so those offices were a permanent establishment.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.