2010 (1) TMI 690 - AT - Income Tax

Reassessment - Liaison activity or business activity - Survey - assessee is having its head office in Hongkong and branches in India at Bangalore, Tirpur and Delhi and the branches are headed by office manager who is responsible for the overall working of the branches - Activities of the branch office of M/s Mondial Orient Ltd., in India include evaluating the correct manufacturers/suppliers and assessing their suitability to the buyers - Held that - it is not necessary that assessee should directly export if the non-resident operates through the assessee but confined to the purchase of goods for the purpose of export is exempted. - Therefore, purchase per se for the purpose of export is not the requirement of the section 9. There is no question of PE because there is no DTAA between India and Hongkong. - Assessee s income is exempted under s. 9(1)(i) Expln. 1(b). - Revenue s case that assessee falls under s. 5 is not acceptable.

Issues Involved:
1. Taxability of income in India for activities carried out by the assessee's branch.
2. Applicability of Explanation 1(b) to Section 9(1)(i) of the Income Tax Act.
3. Nature of activities performed by the assessee's branch in India.
4. Validity of RBI approval for setting up the branch office.
5. Determination of income attributable to the branch office in India.

Detailed Analysis:

1. Taxability of Income in India:
The primary issue was whether the assessee, a Hongkong-based company, was liable to tax in India for activities carried out by its branch office in India. The Assessing Officer (AO) held that the assessee's activities were business activities resulting in income accruing or arising in India, which was not offered for tax. Consequently, a survey action under section 133A was initiated, and a notice under section 148 was issued.

2. Applicability of Explanation 1(b) to Section 9(1)(i):
The assessee argued that no income could be deemed to accrue or arise in India under Explanation 1(b) to Section 9(1)(i) of the Income Tax Act, as the branch's activities were confined to purchasing goods in India for export. The AO and the CIT(A) rejected this, stating that the branch was not involved in purchasing activities but in supply chain management, which included substantial business activities.

3. Nature of Activities Performed:
The AO found that the branch office was engaged in supply chain management services, including product design, sourcing, quality control, and shipping coordination. Statements from employees confirmed these activities. The CIT(A) held that these activities were not confined to purchasing goods for export and thus did not qualify for exemption under Explanation 1(b) to Section 9(1)(i).

4. Validity of RBI Approval:
The CIT(A) noted that the assessee obtained RBI approval to set up a branch office without disclosing the service agreement with Mondial Services Ltd. The CIT(A) held that the approval was obtained by suppressing material facts, and thus the nature of activities described in the RBI's approval letter could not be relied upon.

5. Determination of Income Attributable:
The AO computed the income attributable to the branch office based on a net profit margin of 0.28% of the turnover, attributing 25% of this to the Indian branch. The CIT(A) modified this, holding that the income should be computed at cost plus 5%, as specified in the service agreement between the assessee and Mondial Services Ltd.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the activities of the branch office fell within the scope of Explanation 1(b) to Section 9(1)(i), as they were confined to operations related to the purchase of goods for export. Consequently, no income was deemed to accrue or arise in India. The Tribunal dismissed the Revenue's appeals, noting that the determination of arm's length price was not applicable in this case.

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