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2015 (10) TMI 1768 - KARNATAKA HIGH COURT

2015 (10) TMI 1768 - KARNATAKA HIGH COURT - TMI - Income received or deemed to be received in India - accrual of income - Whether the Indian liaison office involves a permanent arrangement for the application under Article 5.1 of the DTAA? - Whether any portion of the income attributable to the liaison office on account of the activity of vendors co-operation of global production management and planning and equitable quality assurance strategy, quality development and is liable to tax? - Held th .....

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the view that the aforesaid activities carried on by the liaison office, cannot be said to be an activity solely for the purpose of purchasing the goods or for collecting information for the enterprise.

We find it difficult to accept this reasoning. If the petitioner has to purchase goods for the purpose of export, an obligation is cast on the petitioner to see that the goods, which are purchased in India for export outside India is acceptable to the customer outside India. To carry .....

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oner assessee before export of goods. Consequently, the reasoning of the authority that for the same reasons, the liaison office in question would qualify to be a permanent establishment in terms of Article 5 of the DTAA is also erroneous. That liaison office is established only for the purpose of carrying on business of purchasing goods for the purpose of export and all that activity also falls within the meaning of the words "collecting information" for the enterprise. - Decided in favour of .....

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America, Europe and Asia. They do not distribute or retail its products in India. The designing of all products is exclusively undertaken from outside India as by its very nature, the activity is based on customer/user requirement arising from market place and as nothing specific to place of manufacturing. The petitioner's centralized sourcing group located outside India is responsible for all key purchase functions including (a) choosing the producing country; (b) Vendor Selection (c) Co-o .....

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e coordination for the petitioner. As part of these activities, the India liaison office is engaged in vendor identification, review of causing data, uploading of material prices into the Internal Product Data Management (PDM) system of the petitioner, vendor recommendation and quality control. It also monitors vendors for compliance with petitioner's policies, procedures and standards related to quality, delivery, pricing and Labour practices. It does not supervise, direct or control the pr .....

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on of certain questions about its tax liability, if any, under the Act in India on account of purchase co-ordination activities of its India liaison office. In the application, they submitted that (a) no income is received or deemed to be received in India by the petitioner under Section 5(2)(a) of the Act; and (b) no income accrues or arises to the petitioner under Section 5(2)(b) of the Act, as sales are made by the petitioner to wholesale/retail customers wholly outside India and the sale pri .....

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the purchase of goods for the purpose of exports as per the exceptions carved out in Explanation 1(b) of Section 9(1)(i) of the Act. They also submitted that there is no permanent establishment that exists in India under the agreement for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains entered into between the Government of India and the Government of USA. It carries out only purchase coordination functions which are covered by the .....

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manent establishment of goods or merchandise for the enterprise by virtue of article 4 of Article 7 under the Treaty. 5. The petitioner and the Revenue authority by the impugned order proceeded on the presumption that designing and manufacturing were obviously carried out by the petitioner itself in India in relation to products purchased by them in India and therefore, opined that a portion of the income relating thereto accrued to the petitioner in India. Further they held that the India liais .....

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-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export. Therefore, it carves out an exception to Section 9, which deals with income deemed to have been accrued or arisen in India. Further, he contends that Article 7 of the Total Taxation Treaty entered into between India and USA provides for taxation in respect of the profits of an enterprise in the other State, but only so .....

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ishment is concerned, he refers to Article 5(3)(d), which provides that notwithstanding the provision under this Article, the term "permanent establishment" shall be deemed not to include the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise. Therefore, he submits that as the petitioner is not purchasing goods for merchandise in India and even if he is collecting information for the purpo .....

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he manufacturers. They are instructing him about the requirements of an outside purchaser and therefore, even if the income is received outside India, it is deemed to have accrued in India liable to tax in view of Section 5(2) of the Act and therefore, he submits that though the entire amount is not taxable, a portion of it is attributable to liaison office and therefore, it is taxable in India. 8. Therefore, the question that arises for our consideration in this writ petition is: (a) Whether th .....

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Income-tax and another V/s. Nike Inc in ITA No.976/2008 and connected matters decided on 7th March, 2013, after referring to Sections 5, 9 and several judgments of the Apex Court on the point has held as under: 16. In the background of this legal position when we examine the facts of this case, the assessee is not carrying any business in India. They have established a liaison office. The object of establishing the said office is to identify the manufacturers, give them the technical know-how a .....

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deration to the assessee outside India, the contract between the assessee and the buyer if at all is entered outside India. Therefore, even if any income arises or accrues to the assessee, it is outside India. Therefore, explanation (1) to sub-section (2) of Section 5 expressly states income accruing or arising outside India shall not be deemed to be received in India within the meaning of the Section. However, under Section 9, all income accruing or arising whether directly or indirectly throug .....

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with Clause (b) of Explanation 1 to Sub-Section (1) of Section 9 in the case of a non-resident, no income shall be deemed to accrue or arise in India to him whether directly or indirectly through or from any "business connection", which are confined for the purpose of export. In the first place, the assessee is not purchasing any goods. The assessee is enabling the manufacturers to purchase goods of a particular specification which is required by a foreign buyer to whom the manufacture .....

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m shall not be deemed to accrue or arise in India and it shall not be deemed to be an income under Section 9 of the Act. If we keep the object with which the proviso to clause (b) of Explanation 1 to Sub-section (1)(i) of Section 9 of the Act was deleted, the object is to encourage exports thereby the Country can earn foreign exchange. The activities of the assessee in assisting the Indian manufacturer to manufacture the goods according to their specification is to see that the said goods manufa .....

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ed in this case is answered in favour of the assessee and against the Revenue. 10. Again in the case of Director of Income Tax and another v. M/s. Mondial Orient Ltd., in I.T.A. No.204/2010 and other connected matters decided on 9th June, 2013, this Court held as under: 12. The aforesaid provisions makes it clear what are the incomes which are deemed to accrue or arise in India for the purpose of levying tax. However, explanation (1)(a) introduces a deeming clause, i.e., though income accrues or .....

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ttracting this provision the assessee must be a purchaser of goods and after such purchase he should export the goods. Then only he can have the benefit of this provision. Nowhere in this section it is mentioned that the assessee should purchase the goods in India for the purpose of export. On the contrary it is expressly mentioned any income accruing or arising in India to him through or from operations which are confined to purchase of goods in India for the purpose of export alone is exempt f .....

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India. Otherwise the explanation would have no meaning and that is precisely what the Tribunal has held. 11. Therefore, what follows is Section 9 of the Income-tax Act deals with income deemed to accrue or arise in India. It provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset sit .....

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dent for it to be taxed. 12. Article 7(1) of the Tax Convention with the Republic of India and the USA reads as under: "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable t .....

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through that permanent establishment, then only, the profits of the enterprise will be taxed. Therefore, there is no tax liability if purchase is made for the purpose of export. The permanent establishment referred to therein is also defined in Article 5. It provides that for the purposes of this convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It is an inclusive definition of wha .....

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n, for the enterprise. In other words if the permanent establishment is established for the purpose of purchasing goods or merchandise for the purpose of collecting information for the enterprise, it is not a permanent establishment as defined under Article 5(1) read with Article 7. According to the Advance Ruling Authority what sub-article 3(d) excludes is the place of business solely for the purpose of purchasing goods or of collecting information for the enterprise. 14. In the instant case, t .....

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