Introduction to the concept of Business Connection
• Section 9(1)(i) of ITA, 1961 – BC is the Indian equivalent of PE
• Finance Act, 2003 inserted inclusive definition mainly including business carried on through Dependent Agent as BC
• Two major factors relevant in determination of the BC
• Real and Intimate connection
• Continuity Permanent Establishments
• In order to have a BC, there must be a real and intimate connection between the activity carried on by the non-resident outside India and the activity carried out in India and such activity must be one, which contributes to the earnings of profits by the non-resident in his business – CIT v R D Aggarwal & Co 56 ITR 20 (SC)
• BC undoubtedly would be a commercial connection but all commercial connections will not necessarily constitute BC within the meaning of the concept unless the commercial connection is really and intimately connected with the business activity of the non-resident in India and is contributory to the earning of profits in the said trading activity – Blue Star Engineering Co (Bom) (P) Ltd v CIT (1969) 73 UTR 283, 291 (Bom)]
Introduction to PE & Article 5 of OECD MC 6
• International taxation should be based on either political, residential or economic allegiance between the taxpayer and the taxing state.
• It defines the requisite level of nexus in a source country to support taxation of income at source
• A PE would amount to a virtual projection of the foreign enterprise in the other country Article 5 of OECD MC
• Article 5(1) – Fixed place of PE / general rule PE • Article 5(2) – illustrative list
• Construction site PE – Article 5(3)
• Excluded activities list – Article 5(4)
• Agency PE ‒ Article 5(5) – dépendent agents a PE ‒ Article 5(6) – independent agents not a PE
• Controlled companies – Article 5(7)
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