2008 (5) TMI 371 - AT - Income Tax

Income deemed to accrue or arise in India - Operations through its liaison office - Activities of the Liaison Office (LO) - Non Resident - liaison office in India as the PE - Applicability of cl. (b) of Expln. 1 to s. 9(1)(i) of the IT Act - main activity of purchase or procurement of apparels from India for the purpose of export by those manufacturers directly to the various subsidiaries of the assessee spread at various places in the world - HELD THAT - Assessee had clarified that its duties or activities are confined to communicating and co-ordinating of purchase and is not to be a part of contract of purchase by itself other than identifying the buyer to the manufacturer and the ultimate affiliates to whom the goods are sent. It was clearly mentioned that all purchase orders are issued by the office in USA and only that the goods are supplied to various affiliates whose addresses are provided. It was also explained that the goods that are exported to various affiliates located at different parts of the world have made payments. The liaison office was clearly not an office which was floating tenders placing purchase orders and taking physical delivery of the goods since it was only an agency office of the assessee or buying agents for all its affiliates in the course of its activity as agent to see that the various affiliates receive the goods they want and to the quality they expect. The officials train the employees of the manufacturers only so that the standard that is required and maintained by the assessee affiliates and that the name of the Nike related to a quality is sustained. It was also explained that all the services provided by the liaison office were in connection with the supplies to be made by the manufacturer to the affiliates. The training and other activities were only carried with the manufacturers to whom contract has been awarded for manufacturing apparels for supply to affiliates it was not provided to any other third party. Further since all these were required for the purpose of ultimate quality control it was only an identical activity as the assessee supervising manufacturing by itself. No billing was made on the manufacturer and hence there was no income on this count. The various employees of different types with different qualifications were only assisting the manufacturers and ensuring that the quality product is purchased by the affiliates of the assessee. The authorities below in our opinion had gone wrong in holding that the assessee did not buy the goods for export and exemption is not applicable under s. 9(1)(i) on the reasoning that it is applicable only to the actual buyer. Assessee has opened a liaison office solely for the purpose of helping its affiliates located at different parts of the world to buy the goods etc. for trading operations. The assessee is the purchasing agent of the various affiliates who are actual buyers. The assessee as the purchasing agent places the orders specifying the quantity price the affiliate with address on whom the bill is to be raised and the destination to which the goods should be sent. There are three ways of purchase. (1) Purchase of goods and receipt of goods at the same time at one place where the office of the assessee is located. (2) Purchase information sent by the assessee but goods dispatched to the various places as directed by it which may be where its sale outlets are located. (3) The assessee as an agent of buyers indicates to the manufacturer the rate at which the goods will be supplied the names of the buyers and the address of the buyers where the goods have to be sent under intimation to it and that the person so indicated will be the purchaser on whom the bill should be raised and such person shall make the payment also. Liaison office in India as the PE - Assessee in USA apparently is a world wide organization and carries on as agents for its various affiliates who ultimately buy the goods and sell the goods - Activities of the assessee non-resident are confined to purchase of goods though not for itself but for its affiliates and it ends by export of the same from India - The only contract between the local manufacturer and the assessee is to manufacture various products according to the specifications provided by the assessee and raise the invoice on the various affiliates indicated by the assessee and finally dispatch the goods to the destination of the various affiliates as indicated by the assessee. The local manufacturer raises the invoice and supplies the material to the affiliates of the assessee and receives sale consideration in convertible foreign exchange from these affiliates. The assessee nowhere acts as the agent of the local manufacturer but always remains the agent of its various affiliates with activities of identifying the manufacturer and assisting in the affiliates receiving the goods as per the norms at the price determined by the assessee. It is a case of the assessee purchasing the goods for the purpose of exports. In the absence of there being any prima facie contract between the assessee and the local manufacturer the only relationship is that of buyer s agent and the local manufacturer knows the assessee only as the agent of the buyers The local manufacturers know that the agent of the buyer viz. the assessee has placed the orders on it with a view to buy the goods in the course of export and as directed exported it to various affiliates of the assessee. Therefore the Expln. (1)(b) purchase for the purpose for export clearly applies to the assessee and hence no income is derived by it in India through its operations of the liaison office in India. In the result the appeals by the assessee are allowed and that of the Department are dismissed.

Summary

Issues Involved:
1. Whether the assessee's liaison office in India generates or derives any taxable income in India.
2. Whether the activities of the liaison office exceed the permissions granted by the Reserve Bank of India (RBI).
3. The applicability of Section 9(1)(i) of the Income Tax Act, particularly Explanation 1(b), regarding the purchase of goods for export.
4. Whether the liaison office constitutes a Permanent Establishment (PE) under the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

Detailed Analysis:

1. Whether the assessee's liaison office in India generates or derives any taxable income in India:
The assessee contended that its liaison office in India does not generate or derive any income from its operations in India. It argued that its activities are confined to procurement and quality assurance of goods for export by its affiliates. The Department, however, argued that the CIT(A) had reduced the taxable income percentage from 11.37% to 5%, which was contested.

2. Whether the activities of the liaison office exceed the permissions granted by the Reserve Bank of India (RBI):
The RBI had granted permission to the assessee to open a liaison office in India with specific restrictions, including not undertaking any trading, commercial, or industrial activities, not charging any commission or fees, and not earning any income in India. The assessee argued that its activities were within these limits, as the liaison office merely facilitated communication and coordination between the head office and manufacturers. The Department argued that the liaison office's activities, such as factory training, product development, and quality assurance, exceeded these permissions.

3. The applicability of Section 9(1)(i) of the Income Tax Act, particularly Explanation 1(b), regarding the purchase of goods for export:
Section 9(1)(i) of the Income Tax Act deems certain incomes to accrue or arise in India. Explanation 1(b) specifies that no income shall be deemed to accrue or arise in India to a non-resident through operations confined to the purchase of goods for export. The assessee argued that its activities fell under this exemption, as it was involved in procurement for its affiliates, who directly exported the goods. The Department contended that the liaison office's activities were not limited to purchase for export and thus did not qualify for this exemption.

4. Whether the liaison office constitutes a Permanent Establishment (PE) under the Double Taxation Avoidance Agreement (DTAA) between India and the USA:
The Department argued that the liaison office constituted a PE in India, as defined under Article 5 of the DTAA, due to its extensive activities, including factory training, product development, and quality assurance. The assessee countered that its activities were preparatory and auxiliary in nature, and thus did not constitute a PE under Article 5(3) of the DTAA, which excludes activities that are preparatory or auxiliary.

Judgment Summary:

The Tribunal considered the detailed submissions and evidence presented by both parties. It found that the activities of the liaison office were indeed confined to procurement and quality assurance for export, which fell within the permissions granted by the RBI. The Tribunal noted that the liaison office did not engage in any trading, commercial, or industrial activities, nor did it earn any income in India.

The Tribunal also held that the activities of the liaison office fell within the scope of Explanation 1(b) to Section 9(1)(i) of the Income Tax Act, as they were confined to the purchase of goods for export. Consequently, no income was deemed to accrue or arise in India from these activities.

Regarding the issue of Permanent Establishment, the Tribunal concluded that the liaison office did not constitute a PE under the DTAA, as its activities were preparatory and auxiliary in nature. The Tribunal emphasized that the liaison office's role was limited to facilitating communication and coordination between the head office and manufacturers, without engaging in any revenue-generating activities.

Conclusion:
The Tribunal allowed the appeals by the assessee, holding that the liaison office did not generate or derive any taxable income in India, and its activities were within the scope of the permissions granted by the RBI and the exemptions provided under Section 9(1)(i) of the Income Tax Act. The Department's appeals were dismissed.