9911796707
TMI Blog2008 (5) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... is. 3. Mr. S.E. Dastur along with Mr. P.J. Pardiwalla supported by Mr. K.R. Sekar appeared for the assessee, and for the Department, Mr. P.K. Prasad, CIT, made elaborate submissions and filed paper books. 4. A plea was taken by the assessee for admission of additional evidence, which was in the shape of arrangement between the assessee and its subsidiaries in Europe, Australia, Japan and parts of Asia and New Zealand. The learned senior counsel submitted that the purpose of placing the additional evidence is to ensure that there is no miscarriage of justice by not considering the proper facts. The learned senior counsel, Mr. Dastur, insisted that though they are called as additional evidence, they have found their place in the order of the Commissioner of Income-tax (Appeals) ["CIT(A)" for short) and he has noted the same in his order. He submitted that with a view to appreciate these evidences and their direct connection to the entire facts of the case, it is necessary that he be allowed to make the submissions about the facts of the operation of the assessee in India. 5. He submitted that the assessee is a world known name or brand in sports apparels. It has its main office in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration. The further restriction was that the liaison office will not have signing or commitment powers except that are required for normal functioning as liaison office. 6. The learned senior counsel submitted that based on the above permission, the assessee opened the liaison office and employed persons in various categories defining qualifications for each post and this was with reference to its 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. For all these activities in India, the liaison office was receiving funds through banking channels from USA. The liaison office in India has no source of income not only because it, had so committed to RBI and its liaison office did liaison between the manufacturers and its head office in USA to help procurement of various apparels at the instance of the head office in USA for export by the manufacturers through the liaison office or directly to the various subsidiaries spread at various places. 7. He submitted that the assessee carries all the activities such as designing, marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agrees on all counts with the sample that was approved. In the course of supervision many activities are required so that the staff of the manufacturer understands what is required by the USA office and it is only to make them or train them to evaluate and select and use the proper factory, manufacture and so on. It is something that is incidental to the manufacture because the assessee did not have its own manufacturing facilities. 8. The learned senior counsel, Mr. Dastur, submitted that the reading of the assessment order shows that though the reply by the staff managers give an indication about the same, the AO has proceeded by twisting the facts. He submitted that the AO in his order does not state that the assessee has charged or raised bills for services on the manufacturers and that payment is received by them. The AO is also not in dispute that the manufacturers have not raised any bills on the assessee for supply of apparels. The AO is aware that the assessee as agent had booked or placed orders for supply to specified customers abroad, who were billed for the value of the goods and it is from them that the manufacturer had received the sale consideration in convertible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en an opportunity to file the written reply on the application for admission of additional evidence and the same has been filed and has been taken on record. The copy of the same was provided to the assessee as well. The objection of the Department was that the activities that were carried on by the liaison office in India consisted of factory training, product development, factory evaluations, price negotiations, technical services covering fabric testing, garment testing, etc., merchandising follow-up, quality assurance activities and shipping co-ordination. In addition, the Department insisted on the same arguments as were noted by the AO in regard to various staff of liaison office with specialized knowledge of various activities. The further submission was that the assessee is not purchasing the goods from the manufacturers. It accepts the claim of the assessee that the goods are directly exported to various buyers that are subsidiaries of the assessee or affiliates. There is a submission which says, "the assessee Nike Inc. is getting service charges on the FOB value of exports". On this basis, it is submitted that the liaison office is not existing solely for the purpose of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liaison office in India is carrying on only such activities as permitted by the RBI and any violation thereof could only be examined by the RBI authorities and it is only those authorities who are empowered to give a conclusion that the activities carried on by the liaison office in India are in excess of the limits. He contended that the authorities had not only travelled beyond the IT Act but had taken upon themselves which is the purview of RBI only. He contended that the IT Act nowhere states that in the course of examination of a case, the authorities including appellate authorities could get extended jurisdiction over other enactments and compliance under those enactments. Therefore, he contended the Tribunal ought to start and limit itself by proceeding on the line that the activities of the liaison office are in line with the permission granted by the RBI and that it has no income whatsoever accruing or arising in India because there are no activities carried on by it other than acting as agent of the USA company. The agency is limited only to obtaining and transmitting information and assisting the office in USA to finalise what to purchase along with pricing, schedule of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lved in purchase of goods in India for the purpose of export. Purchase means transfer of title of goods purchased from seller to buyer. Since the assessee at no point of time purchased the goods, it cannot be termed as a buyer. It was accordingly concluded that the exemption provided by s. 9(1) is not applicable to the assessee. On that basis, the CIT(A) has proceeded to uphold the order of the AO and had limited the income to 5 per cent. He submitted that the additional evidence in no manner brings or throws any new light. 19. The rival contentions in regard to the above as well as the various materials that have been placed like approval of RBI, statements taken during the course of survey, success profile of the employees, distribution agreement between Nike International Ltd. and Sierra, agreement concerning manufacturing terms between Nike Inc. and Karle agreement, application for additional evidence along with 83 pages of different agreements with 12 parties, reply on the additional evidence by the learned Departmental Representative running to 22 pages, have all been very carefully perused. 20. The approval as was granted by the RBI vide its order on 16th Oct., 1997 is rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward remittance certificates; (c) certified copy of the audited final accounts of the office in India; and (d) annual report of the work done by the office in India, stating therein the details of actual export or import, if any, effected during period in respect of which the office had rendered liaison services. (c) The number of staff engaged/appointed and duties assigned to each staff. (vii) The liaison office will not render any consultancy or any other services directly/indirectly, with or without any consideration. (viii) The liaison office will not have signing/commitment powers except than those which are required for normal functioning of liaison office on behalf of the head office. 4. In case you desire to open a head office account in the books of your liaison office in India, we hereby grant you our approval to maintain such an account subject to the conditions that the credits to the account should represent the funds received from head office through normal banking channels for meeting the expenses of the office and no other amount should be credited without prior permission of the Reserve Bank. Similarly, debits to this account could be raised only for me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity)/1997-98, dt. 18th Oct., 1997 is enclosed for your ready reference and record. The liaison office proposes to carry out the following activities. (a) Donations to private organizations in cash and kind. (b) Donations to non-Government organizations in cash and kind. (c) Purchase of samples in India from funds remitted from outside India in convertible foreign exchange. (d) Distribution free of cost of samples purchased in accordance with (c) above; and (e) Supervising fabric testing on behalf of head office and making payments thereof to third parties in India for fabric testing from funds remitted from outside India in convertible foreign exchange. We may submit that all the aforesaid payments have been made from the amount received by the liaison office in convertible foreign exchange remitted from the head office and no payments have been made other than the amount received from the head office in convertible foreign exchange. We request you to kindly confirm whether Nike Inc.'s India liaison office can carry out the aforesaid activities.' The reply received by the appellant from RBI is reproduced below: 'We confirm that your liaison office ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts to Nike Inc., affiliate, manufacturer agrees to comply with the terms of this agreement, including without limitation ss. 8, 11 and 16, regardless of whether or not any Nike Inc., affiliate actually elects to purchase products from manufacturer. 2.3 The parties' execution of this agreement shall not obligate Nike Inc. or any Nike Inc. affiliate to order or to purchase any products from manufacturer, nor shall this agreement obligate manufacturer to sell any products to any Nike Inc. affiliate. No obligation to purchase or to sell shall arise until a firm order is placed and accepted in accordance with s. 4 of this agreement. If any Nike Inc. affiliate elects to place a firm order with manufacturer, the terms and conditions set forth in this agreement shall govern all aspects of the transactions contemplated by the firm order, except to the extent the terms and conditions herein are modified by the firm order pursuant to s. 4.8 or this agreement is amended pursuant to s. 21. 2.4 Each Nike Inc. affiliate shall be deemed to be a party to the contract evidenced by this agreement and any firm order placed by such affiliate. Manufacturer understands and agrees that Nike Inc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matters without written evidences of such approval: (a) Finally settle or compromise any disputes or claims with respect to the products; (b) Amend, modify or waive the application of any provision in this agreement; or (c) Exercise any other right or perform any other obligation that is not specifically granted or delegated to the designated agent in this agreement or by written notice from a Nike Inc. affiliate to manufacturer. 4. Placement and acceptance of firm orders 4.1 As provided in s. 2.3, no Nike Inc. affiliate shall have any obligation to purchase products from manufacturer under this agreement, and manufacturer shall have no obligation to sell products to any Nike Inc. affiliate under this agreement. until a firm order has been placed and accepted in accordance with this s. 4. Manufacturer understands and agrees that Nike Inc. affiliates make independent purchase decisions, and product styles, quantities, and delivery times will vary substantially among those Nike Inc. affiliates that elect to place firm orders with manufacturer. 4.2 For purposes of this agreement, manufacturer shall be deemed to have received a "firm order" when manufacturer has received (e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of performance. Nike Inc. on behalf of each Nike Inc, affiliate, expressly limits Manufacturer's acceptance of a firm order only to the terms of the firm order and this agreement, and hereby timely objects to any inconsistent, additional or different terms in any prior or subsequent proposal, bid, invoice, acknowledgement, confirmation or other document containing manufacturer's terms of sale. Manufacturer shall be deemed to have accepted the terms of the firm order and this agreement even if manufacturer's invoice, acknowledgement. confirmation or other acceptance document purports to make such acceptance conditional on the Nike Inc., affiliate's acceptance of inconsistent, additional or different terms. 4.8 Upon acceptance, the Nike Inc. affiliate that placed the firm order shall be bound to purchase and manufacturer shall be bound to sell the products specified in the firm order, in accordance with the terms of the firm order and this agreement. In the event of any conflict between the firm order and this agreement. the terms of the firm order shall govern; provided, however, that no firm order shall alter, amend or supersede any provision of ss. 6-26 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liate file any intellectual property application or registration relating to Nike product designs/technology. 9. Manufacturing equipment and Nike-specific tooling 9.1 Manufacturer shall pay all costs of acquiring or making all manufacturing equipment, including Nike-specific tooling, required to manufacture the products on a production-basis. Manufacturer shall amortize the cost of Nike-specific tooling over products purchased pursuant to this agreement in a manner to be agreed to by the parties. All manufacturing equipment, including Nike-specific tooling, shall be the property of manufacturer. 9.2 Manufacturer shall not, directly or indirectly, use or allow the use of Nike-specific tooling for any purpose except to manufacture products for Nike Inc. affiliates. This promise shall survive termination of this agreement and any firm order. Upon termination of this agreement or any firm order or upon completion of the performance contemplated by any firm order, Nike Inc. may request, in writing. that manufacturer destroy any Nike-specific tooling. As soon as practicable after receipt of such written request, manufacturer shall destroy such Nike-specific tooling. Nike Inc. and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .'s affiliates and their licensors. 12. Sub-contracting. Manufacturer shall obtain Nike Inc.'s written approval before entering into any sub-contracting arrangements in connection with the manufacturing of products (including packaging) or any components of raw materials bearing the trademarks or otherwise identifiable to any Nike Inc. affiliate. Specifically, manufacturer shall provide Nike Inc. with the names, locations and other relevant details of any sub-contractors that manufacturer proposes to use in connection with the provision of products or such components or raw materials. In all such sub-contractor arrangements, manufacturer shall obtain from each sub-contractor its written assurance of compliance with (i) the trademark usage requirements specified by Nike Inc. affiliates; (ii) the confidentiality requirements set forth in this agreement; (iii) the right of Nike Inc. affiliates and their agents (including Nike Inc.) to enter and inspect facilities; (iv) Nike Inc. affiliates' policies and procedures regarding restricted substances; (v) the Nike code of conduct; and (vi) all other provisions of this agreement and any firm order." 23. A reading of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of export. The contract for the purchase of goods is entered into directly between Nike Inc., USA and third party manufacturers. The liaison office's activities are restricted to merely identifying the manufacturers and therefore maintaining a communication link with them. The nature of activities involved are not, per se, in the nature of revenue generating activities. In light of this factual position it may be noted that: * The activity relates to the purchase for the purpose of export out of India; * Such purchases undertaken by Nike Inc. are not necessarily for the purpose of re-import into India for subsequent sale; * In fact, most retail sales in India (undertaken through distributors) comprise of goods imported from outside India that may not be manufactured in India; * The activity of purchase is one that involves expenditure and in no way relates or translates to generation of revenue; and * Hence, no revenue generating activity can be said to take place in India. It can therefore be noted and concluded from the above that the question of any income accruing or arising in India under s. 5 of the Act cannot and does not arise. 2.3.3 The Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apparel product integrity department and the quality checks through the India liaison office." 2.3.8 The learned CIT(A) will appreciate that all parties who have been identified as manufacturers and with whom Nike Inc. has contracted are third parties. For your reference, we have listed out such parties below: * Gokuldas Export * Gokuldas Images Ltd * K. Mohan & Co. (Exports) * Karle International * Maral Overseas Ltd. * Sai Lakshmi Creations (P) Ltd. * TCNS Ltd. * The Arvind Mills Ltd. * Eastman Export 2.3.9 As your kind self will note Nike Inc. is not in any way related to any of the above parties or have any interest or control over the activities, operations and decisions of such parties. 2.3.10 It is humbly submitted that Nike Inc. is engaged in the design, development and worldwide marketing of high quality sports footwear, apparel, equipment and accessory products. Nike Inc.'s activities in India are restricted to sourcing of products from its business range. 2.3.11 Nike is the largest seller of athletic footwear and athletic apparel in the world and sells its products in more than 120 countries globally. Nike Inc. has annual revenues in excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ependent third party manufacturers under a contract that is entered into directly between Nike Inc. and such parties, are squarely covered by the exclusion envisaged in cl. (b) of Expln. 1 to s. 9(1)(i) of the Act. 2.3.18 The attention of the learned CIT(A) is drawn to the decision of the Hon'ble Delhi Tribunal in the case of IAC vs. Mitsui & Co. Ltd (1991) 41 TTJ (Del)(SB) 569 : (1991) 39 ITD 59 (Del)(SB). The appellant in the said case was carrying out activities in India through branch offices. The Special Bench of the Tribunal held, based on the facts of the case, that even though the appellant had a branch office, the activities were covered under the exclusion contained in the treaty for activities which are preparatory and auxiliary in nature and therefore, would not constitute a PE in India. 2.3.19 The said principle was also upheld by the Hon'ble Delhi High Court in the case of CIT vs. N.K. Jain (1994) 119 CTR (Del) 465 : (1994) 206 ITR 692(Del). 2.3.20 The appellant also submits that all contracts for sale and purchase of goods are concluded between Nike Inc., USA, and the manufacturer directly, on a principal-to-principal basis. 2.3.21 The appellant also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by them. Sample evidences of such rejections are attached herewith as Annex. 6. It is humbly submitted that had Nike Inc. been manufacturing goods through various factories, instances of rejections such as these would not be possible. 2.5.5 Once the contract is entered into, the liaison office acts as a communication link between Nike Inc. and the third party manufacturer. 2.5.6 The learned Asstt. CIT has failed to appreciate the business model followed by Nike Inc. and has proceeded to draw his conclusions without gaining a complete understanding of the transaction. 2.6 Ground No. 8 (a) The learned Asstt. CIT has erred in concluding, without any basis, that the appellant is a PE in India in terms of art. 5 of the Double Taxation Avoidance Agreement between India and the USA (Treaty'). (b) The appellant contends that the learned Asstt. CITs finding that it constitutes a place of management as laid down in art. 5 of the treaty is without any basis and contrary to the provisions of law. (c) The appellant contends that the learned Asstt. CIT has incorrectly interpreted and applied the law in finding that the appellant constitutes a PE by virtue of activities being p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t' in India. The liasion office is merely a sourcing unit which identifies third party manufacturers, and thereafter acts as a communication channel between the head office and such manufacturers. In no way can the liasion office be said to act in a management role for Nike Inc. 2.6.6 It is also humbly submitted that the liaison office does not furnish any 'services' to Nike Inc. which would attract cl. (1) of art. 5(2) in the first place. As your kind self will appreciate, cl. (1) envisages a situation wherein an enterprise renders services in India through its personnel who are present in India. In the instant case, there are no services being rendered by personnel of Nike Inc. in India, which would give rise to this situation. 2.6.7 Without prejudice to the appellant's contention that the provisions of para 5(2) do not apply in its case at all, it is humbly submitted that para 5(23) of the DTAA brings out specific cases which would not give rise to a PE. 2.6.8 In terms of cl. (d) of the said article, 'the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collection information, for the enterprise& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, without assigning any reasons or explanations therefor is clearly inappropriate and liable to be quashed. 2.6.14 It is also submitted that the learned Asstt. CIT has at no point in time refuted the submissions and contentions of the appellant, made specifically vide the appellant's letter dt. 10th Dec., 2004. A copy of the said letter is enclosed herewith for your kind reference as Annex. 7. 2.6.15 Without prejudice to the appellant's contentions above, it is respectfully submitted that the appellant was not provided a reasonable opportunity to make its case before the learned Asstt. CIT." 25. The report dt. 14th Oct., 2005 submitted by the AO reads as under: "A. Applicability in terms of cl. (b) of Expln. 1 to s. 9(1)(i) of the IT Act: 1. Written submissions filed by the appellant before the learned CIT(A))IV, Bangalore, wherein it was stated, at point numbers 1.5. 1.2. 2.3(d), 2.3.2, 2.3.18, 2.3.22 and 2.13.1 in the paper book, that the core activity of the liaison office relates to operations which are confined to the purchase of goods in India for the purpose of export and therefore eligible to be qualified to get benefit under cl. (b), Expln. 1 to s. 9( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on office, sample copy of the commercial invoice, etc. Therefore liaison office was not carrying out any operations relating to purchase of goods in India for the purposes of export. 4. The written submissions of the learned Authorised Representative that the core activity of the liaison office relates to operations which are confined to the purchase of goods in India for the purpose of export are not only factually incorrect but also amount to deliberate misinterpretation of facts and circumstances to get qualified under cl. (b) of Expln. 1 to s. 9(1)(i) of the IT Act. B. Applicability of cl. (a), Expln. 1 to s. 9(1)(i) of the IT Act and applicability of art. 5 of DTAA: 5. Before ascertaining the applicability of cl. (a), Expln. 1 to s. 9(1)(i) of the IT Act and applicability of art. 5 of DTAA relating to the operations carried out in India by the liaison office, it is essential to understand the nature of activities of the liaison office and the direct or indirect nexus, whether exists. between such activities and the profits received by the non-resident company M/s Nike Inc. or its affiliates. 6. In order to understand the nature of activities of the liaison office. it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I have been offered employment based on my above qualification by the director of liaison office. I am a part of materials team of the liaison office of the Nike Inc. I report to the director of the liaison office and there are above 4 material merchandisers in my team who report to me. 6. From the above sworn statements from four employees (only four employees are examined on random basis) of liaison office, it is clear that all the abovementioned employees are specialized in specific field of activity relating to textile and fashion designing. 7. Apart from the basic qualifications/professional expertise of the employees of the liaison office, evidences have been collected in relation to actual job roles as outlined in what is called as 'Success profiles' are collected. Excerpts of a sample success profile is given as under: Success profile of merchandising manager of the liaison office Description of the activity of the merchandising manager percentage of time to be devoted -Take garment design concepts and specifications and translate them into material trim and accessory components for a finished product. -Provide suggestions-alternatives for these c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial chunk of total employees strength of the liaison office 11. Further, actual performance of the liaison office can be understood from the relevant extract of the sworn statement from the director of the liaison office which is reproduced as under: Q. 10 What do you mean by success profiles of various employees of the liaison office? Ans. Success profiles are generic and globally applicable profiles to the employees of the liaison office which illustrate their broad job functions which makes an employee successful in the job in the liaison office of the Nike. Q. 11 Please state the success of your employees in the liaison office of the Nike in the context of the above answer? Ans. Our office performance is rated as successful as most of the employees fall in the category of moderately successful (median execution zone......). 12. During the course of survey proceedings copy of the distribution agreement between M/s Nike International Ltd. and M/s Sierra (P) Ltd. was obtained. In the said distribution agreement, at para 7.2, it states as under: '7.2 The purchase prices for Nike athletic foot wear, apparel, bags and Accessories purchased by distributor under thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Honorable Supreme Court of India regarding the expression 'business connection' in the case of CIT vs. R.D. Aggarwal & Co. & Anr. (1965) 56 ITR 20 (SC) that 'the expression business connection postulates a real intimate relation between the trading activity carried on outside the taxable territories and the trading activities within the territories, the relation between the two confirming to the earning of income by the non-resident in his trading activity.' 17. In the instant case, there is a real and intimate relationship that exists between the activities of the company outside India and those of the liaison office of the company in India. Further, this relationship contributes directly or indirectly to the earning of income by the company in its business and therefore profits of the company attributable to Indian operations are liable to be taxed in India. 18. In view of the above mentioned findings, some of which emerged during the course of remand proceedings, it is hereby appealed to the learned CIT(A)-IV, Bangalore that the income sought to be assessed may be enhanced accordingly as discussed above for the asst. yr. 1999-2000 and 2002-03." 26. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike floating tenders, placing purchase orders, taking custody of products etc. The following points are seemingly clear from the response: (i) that the liaison office (or any of its personnel) does not engaged in any direct contractual activities such as placing of purchase orders, taking custody of goods etc. The denial from the respondent is completely consistent with the response to the same question posed to the director; (ii) the respondent does engage in other activities that are part of the operations related to the purchase of goods in India. It is therefore relevant to understand the entire gamut of activities that are extricably linked and interwined with an operation relating to purchase of goods. We had submitted in writing before your Honour at the last hearing a sample of a typical purchase contract between any two parties and had highlighted the fact that a contract of purchase of goods possessing technical specifications (as opposed to purchase of standard off-the-shelf products) attaches certain rights and obligations, both on the buyers as well as the sellers. We invite your kind attention to the said submission and highlight herewith certain salient featu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r use in connection herewith shall remain the property of the buyer. This envisages a situation where the buyer, in fact, may supply materials, moulds or any other item that facilitates the manufacture of the goods by the seller. The above aspects have been highlighted to explain the significant role played by various activities in a contract of purchase of specialized goods. The purchase contract entered into between Nike Inc. and third party manufacturers in India are already on record of the learned AO. However, we would like to highlight the fact that all personnel of the liaison office report to the India liaison office director. The India director, in turn reports to a South Asia director who in turn reports to the 'Global Apparel Sourcing Director (GASD)'. The GASD is nothing but a global purchase director. It is therefore evident that all functions that are carried out in the liaison office are parts or sub-parts of the purchase function itself. Considering the nature of the goods in the present case, the purchasing function becomes that much more complex and entails more than one activity. All such activities are, therefore, nothing but an integral part of the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India was a mere 0.65 per cent The effort of the liaison office is to assist the home office in increasing these statistics significantly. However, this is on the purchase side that reflects the expenditure side of the business and not the revenue generating activity of sales. The learned AO has stated that from the sworn statements of the four employees (actually six employees), it is clear that all the abovementioned employees are specialized in specific field of activity relating to textiles and fashion designing. He has further opined that if the activities of the liaison office were just confined to act as communication channel, the liaison office does not require employees to have specialized knowledge or expertise in fashion designing, textile technology and other related fields. The observations of the learned AO are completely misplaced. The persons who would be recruited by the liaison office would be persons who have some specialized knowledge in the respective field relating to the business of the company. Given a choice, employers would always like to recruit persons who have some specialized knowledge in the field rather than recruiting somebody else who is unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ighlighted earlier that in any purchase contract concerning a specialized product, the right to conduct a quality check is always retained by the buyer. We have also reiterated in our earlier written submissions that words used such as 'quality control', 'training' etc. are mere semantics but actually reflect activities in the nature of 'quality check' and 'communication of specs', etc. The quality checks are on a random basis and do not translate to a full fledged quality control function that, as submitted earlier, is the responsibility of the third party manufacturers. Based on reasons stated in the remand report, the learned AO has concluded that the activities of the liaison office not only represent the core business activities of the company but also constitute substantial business activity of the company. To this end, the learned AO has relied on the ruling of the AAR in the case of UAE Exchange Centre LLC, In re and the observations of the Supreme Court in the case of R.D. Aggarwal & Co. & Anr. The ruling in the case of UAE Exchange Centre can be completely distinguished on facts. In this case, the liaison office was carrying out activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion agent selling goods in India on behalf of a non-resident. We would like to reiterate the fact that as the activities carried on by the liaison office are purely operations which are confined to the purchase of goods in India for the purpose of export, none of the above cases/rulings has any application. In fact, our case is squarely covered by the judgment of the Hon. Delhi High Court in the case of CIT vs. N.K. Jain (1994) 119 CTR (Del) 465 : (1994) 206 ITR 692 (Del). In this case, the assessee was a non-resident carrying on business in readymade garments in Japan. He had an arrangement with a commission agent in India to purchase readymade garments on his behalf and to export them to him. The agent also purchases dress material on the instruction of the assessee and gets it stitched into garments through tailoring establishments in India. It was argued by the assessee that the operation of purchasing material in India and getting it converted into garments constituted an operation for the purchase of goods in India for the purpose of export, within the meaning of cl. (b) of the Expln. to s. 9(1)(i) and that the assessee, being a non-resident, no income could be deemed to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nificant part of the activity of the enterprise as a whole. Each individual case will have to be examined on its own merits.' Your kind self will appreciate that the activities carried on by the liaison office are insignificant to the larger business of Nike Inc. and therefore squarely fall within this exception as explained in the OECD Model Commentary. It is therefore humbly submitted that the liaison office cannot be said to be a PE of Nike Inc. in India even in terms of art. 5 of the Treaty." 27. The CIT(A) in his order observed as under: "I have gone through the submissions of the Authorized Representative, remand report thereon and the rejoinder. It is an admitted fact that the appellant is not involved in the purchase of goods in India for the purpose of export. Purchase involves transfer of title of goods purchased from the seller to the purchaser. In this sense, the Nike Inc., India, can at no point of time be said to be a purchaser. In his own words: 'The contract for the purchase of goods is entered into directly between Nike Inc., USA, and third party manufacturers. The LO's activities are restricted to merely identifying the manufacturers.' Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation/specification, and we develop it locally from our vendors situated in India, Pakistan and Sri Lanka. We also negotiate price, delivery time, minimum quantity etc. with our vendors and put that in our data-base, PPS and PM software, the server of which is located in USA. Factories must purchase from the vendors specified by Nike. Q. 6 Please give details of merchandise managers' job. A. 6. Merchandise' managers get details of the requirement for sample/proto from home office situated at USA, Europe and Hong Kong. Based on this information we get the information from the system (which is already fed into by various offices globally) regarding the style details, measurement details all the materials which go to make the sample (source of availability of these materials) and this is handed over to the relevant factories to translate it to the garment sample. The job of the merchandiser is to receive this sample, review it against specs and send the sample to the home office along with cost sheets. Merchandiser manager is also responsible for liaisoning with home office for price confirmation. Once samples are approved by home office, it is merchandise managers respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to IT may be calculated- (i) at such percentage of the turnover so accruing or arising as the AO may consider to be reasonable, or (ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or (iii) in such other manner as the AO may deem suitable.' (3) In my opinion, 5 per cent of export value could reasonably be considered as income attributable to India operation i.e., income accruing or arising in India to M/s Nike Inc., USA." 31. One thing that is patently very clear from the reading of the above is that the AO has not given any finding to the effect that the assessee has received any income, other than from its head office in US for meeting its various expenses in India. It is also not the finding of the AO that the liaison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gns, technical know-how and other intangibles that are being presently commanded by Nike are in reality, attributable to the stringent quality assurance and product development activities undertaken by Nike at the manufacturing facilities of contract manufacturers through liaison offices and branch offices that were set up for this purpose. Quality assurance does not get limited to fabric quality or fabric design but gets extended to include styles, shapes, healthy raw materials and human friendly manufacturing processes under which Nike products are manufactured. 2.4 Nike would not have met these stringent quality standards without the help of liaison offices or branch offices which are invested with highly qualified professionals in the relevant field of specialization viz., fabric technology, textile technology, fashion designing, etc. 2.4.1 Apart from quality assurance activities, merchandising activities of these liaison offices/branch offices pertaining to product development i.e., evaluation of new designs, styles etc. in collaboration with Nike's design teams and third party contract manufacturers contributed to the success of Nike as a business enterprise with all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, 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 we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37. The 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. 38. Now, situations (2) and (3) are more or less similar. In si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have done all these by correspondence and by sending its employees whenever necessary without opening a liaison office in India. In both the cases, it is only an agent purchasing for its affiliates has arranged for their exports from India by the manufacturers. In fact, the 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. Therefore, for the purpose of purchase of goods from India, no income could be generated in India because purchase price has to be paid by the buyers. 42. The assessee in USA apparently is a world wide organization and carries on as agents for its various affiliates, who ultimately buy the g00ds and sell the goods. It is one window control to ensure quality of the product world over. Therefore, in our opinion, the alternative plea raised by the assessee may not be gone into, because purchase of goods need not necessarily mean purchase by the ultimate user, but purchase of goods combined with its export out of India, and this is achieved by the assessee by placing orders in India with manufacturers, who export it out of India. The manufacturers rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
