2013 (8) TMI 194 - HC - Income Tax

Income u/s 5(2) - Income deemed to accrue or arisen in India u/s 9 - Part of business done in India - CIT upheld imposition of tax - Tribunal held that assessee purchases the goods for the purpose of exports, hence not liable to tax - Held that - 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 and see that they manufacture goods according to their specification which would be sold to their affiliates. The person who purchases the goods pays the money to the manufacturer, in the said income, the assessee has no right - The buyer who is a non-resident may in turn pay some consideration 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. As the orders are placed by the assessee with the manufacturer and the goods are manufactured according to their 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 therefrom 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 - Following decision of Commissioner of Income-Tax, Punjab v. R.D. Agarwal and Company 1964 (10) TMI 9 - SUPREME Court . 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 manufactured has an international market, therefore, it could be exported. In the process, the assessee is not earning any income in India. If at all he is earning income outside India under a contract which is entered outside India, no part of their income could be taxed in India either under Section 5 or Section 9 of the Act. - Decided against the Revenue

Summary

Issues Involved:
1. Whether the activities carried on by the assessee amount to income accruing or arising in India under Section 5(2) read with Section 9(1)(i) of the Income Tax Act.
2. Eligibility for exemption under Clause (b) of Explanation 1 to Section 9(1)(i) of the Income Tax Act.

Detailed Analysis:

Issue 1: Income Accruing or Arising in India

The Revenue challenged the order of the Income Tax Appellate Tribunal (ITAT) which allowed the appeal filed by the assessee, a well-known brand in sports apparels with a liaison office in India. The primary contention was whether the activities carried out by the liaison office led to income accruing or arising in India under Section 5(2) read with Section 9(1)(i) of the Income Tax Act.

The assessing authority, after conducting a survey under Section 133A and examining the activities of the liaison office, concluded that the office's functions extended beyond mere liaison activities. It was found that the office was involved in identifying manufacturers, assisting in the procurement of raw materials, conducting quality checks, and facilitating the export of goods. Consequently, the assessing authority deemed that part of the income accrued or arose in India and levied tax on 5% of the export value.

The Commissioner of Income Tax (Appeals) upheld this view, stating that the assessee was not involved in the purchase of goods in India for export, thus not qualifying for the exemption under Section 9(1) of the Act.

Issue 2: Exemption under Clause (b) of Explanation 1 to Section 9(1)(i)

The Tribunal, upon reassessment, held that the assessee's activities were confined to purchasing goods for export. It emphasized that the liaison office acted as a communication channel between the head office and Indian manufacturers, without entering into any contracts or earning income in India. Therefore, the Tribunal concluded that no income was derived by the assessee in India through its liaison office operations, granting relief to the assessee and dismissing the Revenue's cross-appeals.

The High Court examined the legal provisions under Sections 5 and 9 of the Income Tax Act. Section 5(2) includes all income received or deemed to be received in India or accruing or arising in India to a non-resident. Section 9(1)(i) deems income to accrue or arise in India if it is through any business connection in India. Explanation 1(b) to Section 9(1)(i) provides that no income shall be deemed to accrue or arise in India to a non-resident from operations confined to the purchase of goods in India for export.

The Court referred to precedents, including the Supreme Court's interpretation of "business connection," emphasizing the need for continuity and real, intimate relations contributing to the earning of profits. It concluded that the assessee's liaison office did not engage in any business in India but merely facilitated the purchase of goods by foreign affiliates, with all contracts and income transactions occurring outside India. Consequently, any income arising from these activities was outside the purview of Indian taxation under Section 5(2) and Section 9(1)(i).

Conclusion:

The High Court upheld the Tribunal's decision, stating that the activities of the assessee's liaison office were confined to facilitating the purchase of goods for export, and no income accrued or arose in India. The substantial question of law was answered in favor of the assessee, and the appeals by the Revenue were dismissed.