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2015 (5) TMI 345 - ITAT BANGALORE

2015 (5) TMI 345 - ITAT BANGALORE - TMI - Entitlement to the benefit granted under Section 9(1)(i) - procurement of goods for the purpose of exports - Assessing Officer treating the Tesco International Sourcing Limited - India Liaison Office as PE of the assessee - Held that:- Respectfully following the decisions of the Hon'ble Karnataka High Court ( 2015 (4) TMI 505 - KARNATAKA HIGH COURT) and that of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Years .....

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014, C.O. Nos.13 to 17/Bang/2015 - Dated:- 10-4-2015 - Shri N.V. Vasudevan And Shri Jason P. Boaz JJ. For the Appellant : Shri K.R. Vasudevan, Adv. For the Respondent : Shri Farhat Hussain Qureshi, CIT (D.R) ORDER Per Bench : These five appeals by Revenue are directed against the orders of the Dispute Resolution Panel, Bangalore ( DRP ) for Assessment Years 2008-09 to 2012-13 passed under Section 144C(5) of the Income Tax Act, 1961 (in short 'the Act') vide separate orders dt.2.6.2014. T .....

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its). Tesco, Hong Kong sources products for the Tesco group companies and ensures that the prices are competitive, while maintaining the quality standards prescribed by the Tesco Group. Tesco International Sourcing Ltd., - India Liason Office ( L.O ), the assessee company, was established in the year 2001. The LO acts as a communication channel between Tesco, Hong Kong and the manufacturers in sourcing apparel from India and undertakes liasioning activities like co-ordinating between the manufac .....

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2011-12 declaring NIL income. After taking into consideration the assessee's submissions, as recorded in the respective orders of assessment, the Assessing Officer observed that although the assessee maintains that its operations in India are insignificant or negligible, the operations in India, in fact, actually contribute significantly to earning the commission income. The attribution of profit to Permanent Establishment ( PE ) is based on assigning certain points to different inputs whic .....

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to Section 9(1)(i) of the Act. The Assessing Officer accordingly passed draft orders of assessment under Section 143(3) rws 144C of the Act vide orders dt.17.10.2013, determining the incomes of the assessee, after allowing expenses, at ₹ 3,06,68,326, ₹ 3,01,25,373, ₹ 5,52,42,893, ₹ 9,34,73,370 and ₹ 17,79,93,487 for Assessment Years 2008-09 to 2012-13 respectively. 3. Aggrieved by the draft orders of assessment for Assessment Years 2008-09 to 2012-13 all dt.17.10.2 .....

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, Bangalore, all dt.2.6.2014 for Assessment Years 2008-09 to 2012-13, the Revenue has preferred these appeals before the Tribunal raising the following common grounds for all these assessment years, and therefore only those pertaining to Assessment Year 2008-09 are extracted as under :- > The Hon'ble DRP is not right in law in allowing the activities of Tesco International Sourcing Limited - India Liaison Office (LO) - as confined to procurement of goods for the purpose of exports and it .....

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or the goods procured by the assessee for TESCO. Further, as per clause 9 of the agreement buyer s company i.e. TESCO will gain title on the goods supplied by the Indian suppliers when the goods were made available to TISL. When in is implied that in such circumstances the purchase has taken place where it was made available to TISL and as per clause 5 TISL becomes eligible for commission on the cost of those goods. > The DRP is not right in law in allowing the appeals of the assessee in spit .....

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the decision of the Hon'ble High Court of Karnataka in the case of Nike Inc reported in 34 TAxmann.com 170. Whereas it ought to have considered the decision of the Hon'ble HC Karnataka in the case of Jebon Corporation Vs. CIT (International Taxation) reported in 19 Taxmann.com 119 wherein the same issue of whether LO can be held as PE for the activities carried out beyond which it is permitted to do under LO has came up for consideration of the Hon'ble HC and it is held by the Hon .....

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f Nike Inc, reported in 34 Taxman.Com 170, whereas it ought to have considered the decision of the Hon'ble High Court of Karnataka in the case of Jebon Corporation India V CIT, reported in 19 Taxman.com 119. The learned Departmental Representative submitted that in the case of Jebon Corporation India (supra), the Hon'ble High Court had held that the activities of the LO constituted a PE in India and that this case was not considered while deciding the issue in the case of Nike Inc. (supr .....

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t Years 2003-04 to 2007-08 have been dismissed by the Hon'ble High Court of Karnataka in its orders in ITA Nos.231 to 234/2014 dt.5.1.2015. A copy of the Hon'ble High Court s order (supra) has been produced and placed on record. 5.2.2 As regards the plea of Revenue that the decision in the case of Jebon Corporation, India (supra) ought to have been followed by the DRP, rather than the decision in the case of Nike Inc., (supra), the learned Authorised Representative brought to our notice .....

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the assessee's own case for Assessment Year 2003-04 to 2007-08 (supra). The learned Authorised Representative prayed that in view of the above submissions and the decisions of the co-ordinate bench and the Hon'ble High Court in the assessee's own case for Assessment Years 2003-04 to 2007-08, revenue s appeals ought to be dismissed. 5.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and placed r .....

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case of Nike Inc. (supra). As the issue before the Hon ble court was similar to that of the issue under dispute, we are of the view that it is appropriate to analyze the ruling of the Hon ble Court. Briefly, the facts of case considered by the Hon'ble High Court were that the assessee was engaged in the business of sports apparels. It had main office in USA and also various associated enterprises or subsidiaries in various parts of the world. From the office in USA, the assessee arranged for .....

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ce in India. The rate or price of each apparel was negotiated by the LO with manufacturers and the quality of each apparel was also indicated. The LO only proposed and gave its opinion about the reasonability of the price etc., and the US office decided about the price, quality, quantity, to whom to be shipped, billed etc. The local manufacturer in India was conveyed the decision of the USA office and once it was accepted, the local manufacturer carried on his activity. The LO kept a close watch .....

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panies and to act as a communication channel between the HO and the parties in India. It was, further, contended that in terms of Explanation 1(b) to s. 9(1)(i) of the Act, no income shall be deemed to accrue or arise in India to a non-resident from operations which were confined to the purchase of goods in India for the purpose of export. However, the AO took a stand that the activities of the assessee were actually beyond its activities as required as a LO. Thus, a part of the entire business .....

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ble to India operation. On appeal, the CIT (A) upheld the order of the AO. When the issue went before the Tribunal, it took a view that it was a case of purchasing the goods for the purpose of export. In the absence of there being any prima facie contract between the assessee and the local manufacturer, the only relationship was that of buyer s agent and the local manufacturer knew the assessee only as the agent of the buyer. The local manufacturer knew that the agent of the buyer i.e., the asse .....

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cal know- how and see that they manufacture goods according to its specification which would be sold to its affiliates. The person who purchases the goods pays the money to the manufacturer. In the said income the assessee has no right. The said income cannot be said to be an income arising or accruing in the tax territories vis-à-vis the assessee. In fact, the evidence on record shows that the assessee bears the entire expenses of the liaison office. The buyer who is a non-resident may i .....

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India. Now by Explanation 2 to section 9(1)(i) business connection has been explained, which includes any business activities carried out by a person who, acting on behalf of the non-resident, has and habitually exercises in India, an authority to conclude contracts on behalf of non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident. If the said definition is read with Explanation 1(b) to section 9(1)(i), in the case of a non-resident, no inc .....

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its specification which is the requirement of the buyer and even if it is held, though the goods are supplied to the buyer, it is deemed to be supplied to the assessee, the whole object of this transaction is to purchase goods for the purpose of export. Once the entire operations are confined to the purchase of goods in India for the purpose of export, the income derived there from shall not be deemed to accrue or arise in India and it shall not be deemed to be an income under section 9. If one .....

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ng income outside India under a contract which is entered outside India, no part of its income could be taxed in India either under section 5 or section 9………… 7.2 To strengthen our view that the facts of the Nike Inc case are similar to the issue under In the case of Nike Inc. In the case of the assessee It had an arrangement with its group companies for sourcing of the products. It had also an arrangement with its group companies for sourcing of the products. Had a L .....

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required for normal functioning as LO LO was procuring for the purpose of export by those manufacturers/suppliers directly to various subsidiaries of Nike Inc around the globe LO was procuring for the purpose of export by the manufacturers/suppliers directly to Tesco Group company One the local manufacturer in India was conveyed of the decision of the USA office, the local manufacturer carries on its activity One the local manufacturer in India was conveyed of the decision of the Hong Kong offi .....

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ies through Head Office Price of each apparel and quality aspects are monitored by LO in India based on the directions of group companies through Tesco Hong Kong Samples of apparels to be forwarded to US Office Samples of apparels to be forwarded to Hong Kong Office LO monitors the progress, quality etc., at the manufacturing workshop, besides the time schedule to be followed and assistance in the dispatch of goods LO monitors the progress, quality etc., at the manufacturing workshop, besides th .....

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t purchase by itself and makes the sales to its subsidiaries, but, arranges for the purchase by Nike affiliates from India In the present case however, Tesco Hong Kong is invoiced for the goods and re-invoices the goods to the buyer without any mark up. Tesco Hhong Kong charges 5% commission on products sourced. The LO facilitates sourcing of goods by Tesco Group retail group companies. Therefore, in the present case, the facts satisfy the condition for the purpose of export more precisely than .....

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nd from Tesco Group Company which is communicated to the vendor. If the vendor is not satisfied with the price, he communicates the same to LO which in turn communicates the same to the Tesco Group Company. A revised price band is given to the LO which communicates the same to the vendor. This process goes on till the price is agreed by the Tesco Group Company and the vendor. Finally, the price is communicated to Tesco Hong Kong for final approval. 7.3. Further, the Hon ble Mumbai Bench of the T .....

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f the right quality of diamonds and price negotiation as per the instructions and specification of the assessee. These activities of the LO is only part of the purchasing process of the diamonds and did not bring any physical or qualitative change in the goods purchased. Even otherwise, the function of the LO as mentioned above are prior to purchase of the diamonds and not subsequent to the purchases. Therefore, no quality change is brought by the LO while doing the operation of purchasing in In .....

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as liaisoning between the manufacturer and the assessee, opines of reasonability of prices, monitoring the progress and quality at the manufacturing end etc, are activities of LO prior to purchase of good by the Tesco Hong Kong. 5.3.2 We also find, as pointed out by the learned Authorised Representative, that the co-ordinate bench of the Tribunal in its order in the assessee's own case for Assessment Years 2003-04 to 2007-08 (supra) at paras 7.5 to 8 has considered the decision of the Hon .....

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e finding that the liaison office is a permanent establishment as defined under article 5 of DTAA and, therefore, the business profits earned in India through this liaison office is liable for tax. However, in the present case, there is no evidence on record to suggest that the LO had indulged in carrying on commercial activities and that it was, in fact, a permanent establishment so as to classify that it doesn t fall within the ambit of Explanation 1(b) to section 9(1) (i) of the Act. We are, .....

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tions as LO in India. It is ordered accordingly. 7.7. We have since decided that no income was derived by the assessee in India through its operations of the LO in India (supra), the assessee s grievance of attribution of income to LO at 60% of total commission and charging of interest u/s 234A and 234B of the Act for all the AYS becomes superfluous. It is ordered accordingly. 8. In the result, the assessee s appeals for the AY's 2003-04 to 2007-08 are allowed. 5.3.3 It is not in dispute tha .....

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the co-ordinate bench of this Tribunal (supra) in the assessee's own case for Assessment Years 2003-04 to 2007-08, we hold that the Explanation 1(b) to Section 9(1)(i) of the Act is applicable in the assessee's case and therefore no income was derived by the assessee in India through its operations as LO in India. Consequently, the grounds of appeal raised by Revenue are dismissed. 6. In the result, Revenue s appeals for Assessment Years 2008-09 to 2012-13 are dismissed. Assessee's C .....

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respondent are related only to purchase activity and is exempt in terms of Clause (b) of Explanation 1 to Section 9. 2. The appellant has erred in attributing profits to the Respondent s operations in India, by referring to the buying agency agreement between Tesco International Sourcing Limited (Tesco, Hong Kong) and Tesco Stores Ltd., UK in terms of which Tesco Hong Kong receives commission of 5% on the goods procured, without appreciating that the commission is received outside India and henc .....

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