TMI Blog2011 (8) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... uch doubt in such circumstances that the liaison office would be a permanent establishment of the applicant within the meaning of article 5.1. of the DTAA In terms of Article 5 of DTAA, the applicant has a permanent establishment in India, the applicant is liable to be taxed in India in terms of Article 7(1) of the DTAA on so much of the profits as is attributable to the permanent establishment or to other business activities carried on in India of the same or similar kind as those effected through that permanent establishment - The Indian Liaison Office involves a “Permanent Establishment‟ for the applicant under Article 5.1 of the DTAA with USA - income attributable to Liaison office is taxable in India - A.A.R. No.862 of 2009 - - - Dated:- 8-8-2011 - V.K. Shridhar, P. K. Balasubramanyan, JJ. Present for the applicant : Mr. Rajan Vohra, C.A Mr. Prasanna T.A., CA [S.R.Batliboi Co.] Mr. R. Vijayaraghwan, Advocate Present for the department : Ms Meera Srivastava, JCIT(Intl. Taxn.), Bangalore RULING The applicant is a company incorporated under the laws of United States of America. It is a tax resident of USA. It is a multinational wholesaler and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Inquiry into, consideration of potential suppliers and interaction with existing suppliers for purchase of Columbia product range. (b) Collecting information and samples of various items from manufacturers with regard to various materials available in India. (c) Quality check of various products at laboratories to see whether it adheres to the costing and quality parameters as prescribed by the applicant. (d) Coordinate and act as a channel of communication between the applicant and the Indian vendors. 3. The applicant has gone on to explain what the activities under the four broad heads entail. The applicant has asserted that the Indian liaison office does not have any revenue streams; it does not source products to be sold locally in India. It does not undertake any activity of trading, commercial or industrial in nature in India. The expenditure of the liaison office are entirely met by remittances made by the applicant. 4. On these facts the applicant approached this Authority essentially seeking a ruling on the question whether in the nature of the activities carried on by the liaison office it could be understood as a permanent establishment of the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only outside India. No product is sold in India. A liaison office in India was established for the purpose of undertaking liaison activities in connection with purchase of goods in India. Purchases are invoiced by the Indian suppliers directly to the applicant who in turn sells, the same to wholesale/retail customers. The sales are made by the applicant to customers wholly outside India. The sale price is received by the applicant from the customers outside India. What the applicant does in India relates to a source of expenditure and not a source of income. The activity of purchase is one that involves expenditure and is in no way related to generation of revenue. No revenue generating activity takes place in India and consequently there can be no question of any right to receive income arising in India. As the source of Revenue lies in sales effected outside India, no income accrues or arises in India under section 5(2) of the Income-tax Act. The activities of the Indian liaison office are only those permitted by the Reserve Bank of India while permitting the establishment of the liaison office. The applicant has not undertaken any business activity and thus no income has been ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y disputed the claim of the applicant that its operations are confined only to purchase of goods for the purpose of export. It has also argued that purchase of goods itself may give rise to profits. If the argument on behalf of the applicant to the effect that there was no income in the activity of purchase, were to be accepted, then, explanation 1(b) to section 9(1)(i) of the Income-tax Act would become redundant because if no income accrues on purchase, then there is no question of excluding the same by way of a specific explanation. It is submitted that the establishment of the applicant set-up in India and to be shifted to Bangalore was a permanent establishment and that there was no exclusion of the same as claimed by the applicant and clearly, a business connection was established between the applicant and its liaison office. The liaison office had a permanent establishment and had 35 employees. It was carrying on the business of the applicant. Under the circumstance the activities of the Indian liaison office, constitute a business connection with the applicant or it has to be treated as a permanent establishment of the applicant. It is contended that the exclusion in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s quality training to the newly selected vendors and is responsible for communicating the quality processes of the applicant and expectations to suppliers. The team also ensures that standard methods, tools, machinery and layouts are used. The liaison office also summarises seasonal vendor quality performance for the consideration of the applicant. The liaison office also ensures compliance with the quality process including seeking to ensure that the targeted defect percentage is maintained. It also ensures that the requirements of environmental laws and labour laws of the country are obeyed by the suppliers. 9. The argument on behalf of the applicant is that all these activities of the Liaison Office are concerned with the purchase of the goods in this country and since no final product purchased by the applicant from India is sold in India, it could not be said that the applicant derives any income in India. In other words, no income either accrues or can be deemed to accrue to the applicant from the mere activity of purchase and the activities related to ensure purchase of quality goods. What generates income is the sale and the sale is wholly outside India. Even the goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erated by such an activity in India to be taxed in India either from the standpoint of section 5(2) or section 9(1)(i) read with Explanation1(b) of the Income-tax Act. It is true that the activities undertaken by the applicant therein included some of the activities undertaken by the applicant before us. But, what ultimately emerges from that decision is that it is a question of fact to be found as to whether the activities are confined to the purchase of goods in India. If they are not so confined, obviously the question will have to be considered with reference to the facts available in the given case. We, therefore, proceed to analyse the activities of the applicant before us undertaken by the liaison office of the applicant in India. 12. The question, therefore, is whether the activities undertaken by the liaison office on behalf of the applicant are activities limited to or confined to the purchase of goods in India by the applicant. We have referred to in detail to the various activities undertaken by the liaison office on behalf of the applicant. We have also noticed that it has about 35 employees divided into 5 teams dealing with material management, merchandising, prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel for the applicant, and on which the whole argument is founded - that it is the act of sale alone from which the profits accrue or arise can no longer be sustained and has to be repelled in view of the decision of this Court in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai Co.1 It was held by this court that the profits of that part of the business, viz.,, the manufacture of the oil in the Mill in Raichur, accrued or arose in Raichur even though the manufactured oil was sold in Bombay and the price was received there, and, accordingly that part of the profits derived from sales in Bombay which was attributable to the manufacture of the oil in Raichur was exempt from excess profits tax under the proviso to Section 5 of the Act. Their Lordships quoted the following observations of Lord Davy in Inre: Commissioners of Taxation v Krik2. It appears to their Lordships that there are four processes in the earning or production of this income: (1) The extraction of the ore from oil soil; (2) the conversion of the crude ore into a merchandisable product, which is a manufacturing process; (3) the sale of the merchandisable product; (4) The receipt of the moneys aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he commission agent was also purchasing dress materials on behalf of the non-resident and was getting it stitched into garments through tailoring establishments in India and exporting them to the assessee. The Tribunal had rendered a finding of fact which the High Court accepted that the assessee was carrying on the business of readymade garments and that his arrangement was only to purchase the readymade garments through an agent and that the assessee was entitled to the benefit of clause (b) of Explanation to Section 9(1)(i) of the Act. This conclusion was accepted by the High Court. There was no argument based on the decision of the Supreme Court before the High Court. There was no reference to that decision and there was no consideration of an argument that a purchase could not be totally divorced from a sale in such cases. There is no ratio emerging that by virtue of the addition of the Explanation, the principle set down by the Supreme Court in Anglo-French Textile Company Ltd., is no more relevant or binding. 17. In Mustaq Ahmed in Re, this Authority, after noting the decision of the Supreme Court above referred to and the history of the Explanation to Section 9(1)(i) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase of goods in India for the purpose of export. The applicant, in fact, transacts in India its business of designing, quality controlling, getting manufactured consistent with its policy and the laws, the branded products it sells elsewhere. All these activities cannot be understood as activities confined to purchase of goods in India for export from India. Confined‟ means, limited, restricted‟. Purchase‟ means get by payment, buy‟. We find it difficult to accept that all the activities above enumerated are activities confined to purchase. We are also unable to accept the position that these activities are limited to the purchase of goods. 23. Income resulting from manufacture, purchase and sale cannot be compartmentalized and confined to one arising out of a sale only. The whole process of procurement and sale has to be completed to generate income. Hence, getting manufactured and purchasing form integral parts of the process of generating income. The liaison office acts as the arm of the applicant regarding that part of the activity. A function related to purchase is not a function confined to purchase or mere purchase. 24. There is another as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablishment in sub-article 2. Sub-article 3 excludes certain establishments from within the term permanent establishment‟. Clause (d) therein excludes a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the enterprise. Clause (e) excludes a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. It is argued that the liaison office is not a permanent establishment going by the establishments mentioned in clauses (a) to (i) of sub-article 2 and hence the liaison office could not be treated as a permanent establishment. On behalf of the Revenue it is pointed out that sub-article 2 includes certain establishments which may or may not come within the definition contained in sub-article 1 of article 5 and the question is whether the liaison office in question does or does not satisfy the requirements of article 5.1. According to us, article 5.1 defines a permanent establishment as meaning a fixed place of business through which the business of an enterprise is wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he liaison office identifies a competent manufacturer, negotiates a competitive price, helps in choosing the material to be used, ensures compliance with the quality of the material, acts as go between, between the applicant and the seller or the manufacturer-seller of the goods and even gets the material tested to ensure quality in addition to ensuring compliance with its policies and the relevant laws of India, by the suppliers. What sub-article 3(d) excludes is a place of business solely for the purpose of purchasing goods or of collecting information for the enterprise. The activities carried on by the liaison office cannot said to be an activity solely for the purpose of purchasing the goods or for collecting information for the enterprise. It is practically an involvement in all the activities connected with the business of the applicant except the actual sale of the products outside the country. On these facts, it is not possible to find that such an establishment would be excluded by clause (d) of sub-article 3 of article 5. 30. It is argued on behalf of the Revenue that Article 5.3 (d) has no application at all in this case, since the applicant has admitted that its liai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trading, commercial or industrial nature. The liaison office, on the applicant‟s own showing is also engaged in identifying suppliers, recommending them for acceptance, getting competitive quotations from suppliers, recommending their acceptance and so on. In addition, it is also doing the work of the applicant in Egypt and Bangladesh. Whether all these activities will also come within the permission granted by the Reserve Bank of India, need not be considered here. Suffice it is to say that one has to test the effect of the activities admittedly undertaken by the liaison office in the context of Article 5 of DTAA to adjudge whether it would be a permanent establishment within that Article. On the basis of our reasoning as above, we are satisfied that the liaison office in question would qualify to be a permanent establishment in terms of Article 5 of the DTAA. 33. Once we find that in terms of Article 5 of DTAA, the applicant has a permanent establishment in India, the applicant is liable to be taxed in India in terms of Article 7(1) of the DTAA on so much of the profits as is attributable to the permanent establishment or to other business activities carried on in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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