TAX FORUM : QUESTIONS & ANSWERS
A confusing circular from the board
You must have noticed that there is a recent Board Circular No. 7 of 2009 dated October 22, 2009, withdrawing three earlier circulars relating to non-resident taxation. The withdrawn circulars merely state the law, which has stood the test of time, from the inception of law. This withdrawal circular would upset, what was always considered to be the settled law and is totally undesirable and unnecessary. What is your comment on the same?
Circular No.7 dated October 22, 2009, lacks justification on any count. Actually, the three withdrawn circulars are merely repetitions of a still earlier circular No. 17 dated July 17, 1953. Even prior to the circular, the law has always been understood in a manner consistent with all these circulars.
Board circulars and instructions are recognised as having force of law. Even if they are withdrawn, they will have to be followed for the period during which they were in force.
The first circular No. 23 dated July 23, 1969, that is withdrawn, merely lists out illustrations as to when a non-resident will be liable or not liable.
The withdrawn circular does not indicate which part of the circular is sought to be modified.
The second circular No. 163 dated May 29, 1975, that is withdrawn, points out that where a non-resident has a permanent establishment in India, only the income attributable to the operations of the permanent establishment will be taxable and that even a regular agency constituting a permanent establishment for purchase of goods, would not be liable to tax on profits from such purchase activity. This has been the law in the statute itself in Explanation 1 to Sec. 9(1)(i) of the Act and forms a regular part of all the Double Tax Avoidance Agreements. No country taxes the mere purchaser of goods from it as a matter of State policy to encourage exports. It is, therefore, incomprehensible, why this circular should have been withdrawn.
The third circular No. 786 dated February 7, 2000, that is withdrawn, reiterates the earlier view in the past circulars that a non-resident agent procuring orders from abroad solely from his activity abroad, will not be liable to tax in India. This was reiterated with the concurrence of Comptroller and Auditor General of India by adding further that consequentially there will be no requirement of tax deduction at source nor disallowance of payment under Sec. 40(a)(i) of the Act.
Such income with no territorial nexus with India is not taxable even under the statute irrespective of the instructions of the Board. The Supreme Court has also held so in a decision rendered in 1980 itself in CIT v Toshoku Ltd. (1980) 125 ITR 525 (SC).
No reason has been given for withdrawal of any of these three circulars which have given reasons for them. These have been acted upon by the authorities and were enforced by the courts. Apart from not giving any reasons for withdrawal, the Board further states that even during the period prior to withdrawal, it is open to the authorities to urge that the circulars are not applicable to a particular case. In other words, they can be disregarded. If the apprehension is that the circulars are misapplied or abused, all that is to be done is to explain, where they are being misunderstood for the guidance of both the taxpayers and the Department. In the absence of any reason for the somersaults on the part of the Board, litigation is in the cards.
The reader is right that the withdrawal does not make any sense at all and that it is only the circular withdrawing the three earlier circulars badly needs to be revoked. Sooner the better.
S. RAJARATNAM
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