However, a fact that is not so well-known is that the Central Board of Direct Taxes (CBDT) had laid down a similar principle way back in 1969. In its Circular No. 23 dated July 23, 1969, the CBDT clarified various issues in relation to a non-resident’s liability to tax by virtue of a business connection in India. This concept of a business connection is akin to the concept of a PE under tax treaties.

In the Circular, the example of a non-resident selling goods to Indian customers through the services of an Indian agent has been discussed. The Circular clarifies that India can tax only the quantum of profits attributable to the agent’s services, provided certain conditions are satisfied, namely, (i) the non-resident’s business activities in India are wholly channelled through the agent, (ii) the sale contracts are made outside India, and (iii) the sales are made on a principal-to-principal basis. The Circular further clarifies that the agent’s commission would be tax deductible in determining the profits of the non-resident. The CBDT has concluded that if the agent’s commission fully represents the value of the profit attributable to his service, this should prima facie extinguish the assessment.

Numerically speaking, if the profit attributable to the agent’s services is five and the commission in turn paid to the agent is five then the income of the non-resident seller chargeable to tax in India would be nil (5-5).

It is a well-settled principle in law that CBDT Circulars are binding on the income-tax authorities — this has been amplified time and again by various courts, including the Supreme Court in the landmark judgment in the UCO Bank case (reported in 237 ITR 889). Accordingly, from the perspective of applying the CBDT Circular of 1969, the Circular can be said to have the backing of the Supreme Court.

The CBDT Circular of 1969 was recently applied by the Delhi Tribunal in the Amadeus case, a Computerised Reservation Services (CRS) company. The Tribunal upheld the applicability of CBDT Circular No. 23 of 1969 and held that as the remuneration paid to the marketing agent consumes the entire income of Amadeus, no further income is taxable in the hands of Amadeus. A similar view has also been expressed by the Delhi Tribunal in the Galileo case, another CRS company.

To conclude, the CBDT had shown great foresight and wisdom in laying down the above position in law in 1969 — the very same principle has now been formally recognised and approved by the Supreme Court.

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