2014 (9) TMI 887 - HC - Income Tax

Income deemed to accrue or arise as per Explanation to Section 9(1)(i)(b) or not Activities amounts to purchase of goods in India or not - Held that - If an assessee carries on operations which results in purchase of goods in India for the purpose of export and the income so accrued or arising out of such transactions are exempted from payment of income tax - The whole object of this provision being to encourage export of merchandise from India which enables Indian manufacturer to earn and when it is exported the country would earn foreign export - An incentive is given to a nonresident to carry on business in India - Otherwise the explanation would have no meaning and that is precisely what the Tribunal has held. Relying upon Commissioner of Income Tax International Taxation v. Nike Inc 2013 (8) TMI 194 - KARNATAKA HIGH COURT - 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 - 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 manufactured has an international market, therefore, it could be exported - the whole object of the respondent assessee is giving its services both to the foreign buyer and the Indian purchaser is to export the merchandise to the foreign buyer which results in earning foreign exchange - Merely because the assessee do not place orders for purchase, in law it makes no difference - Without placing an order in its name the assessee is enabling a foreign buyer to place order directly with the manufacturer after the assessee approves the manufacturer and requirement and the assessee takes the responsibility of maintaining quality and dispatch of the goods to the destination - The purchase and export of merchandise takes place and therefore the object with which the provision is inserted is achieved thus, the assessee is entitled to the benefit of exemption Decided against revenue.

Summary

Issues Involved:
1. Whether the assessee's income is exempt under Section 9(1)(i) Explanation 1(b) of the Income Tax Act, 1961.
2. Whether the activities performed by the assessee in India amount to purchase of goods for the purpose of export.
3. Whether the income derived from the services rendered by the assessee is taxable in India.

Detailed Analysis:

1. Exemption under Section 9(1)(i) Explanation 1(b) of the Income Tax Act, 1961:

The primary issue was whether the assessee's income is exempted under Section 9(1)(i) Explanation 1(b) of the Income Tax Act, 1961. The Tribunal held that the assessee's income is exempt as the operations were confined to the purchase of goods in India for export purposes. This interpretation was based on the understanding that the section does not necessitate the assessee to directly purchase and export goods. The Tribunal clarified that any operations limited to the purchase of goods for export purposes are exempt from tax.

2. Nature of Activities Performed by the Assessee:

The Assessing Officer concluded that the branch offices in India were not involved in purchasing activities but were engaged in supply chain management services, including product design, development, sourcing, merchandising, quality control, and shipping coordination. The Appellate Commissioner supported this view, stating that these activities constituted a "business connection" in India, contributing directly or indirectly to the earning of income by the assessee outside India. Consequently, this income was deemed to accrue or arise through the branch office in India and was taxable under Section 9(1)(i)(b).

3. Taxability of Income Derived from Services:

The Tribunal, however, disagreed with the Assessing Officer and Appellate Commissioner. It held that the activities performed by the assessee, such as tracing reliable suppliers, quality assurance, and logistics coordination, were part of operations confined to the purchase of goods for export. Therefore, the income derived from these services was not taxable in India. The Tribunal emphasized that the entire effort of the assessee resulted in valid buyers placing orders with Indian manufacturers, leading to the export of goods. This interpretation aligns with the objective of Section 9(1)(i) Explanation 1(b), which aims to encourage export activities from India.

Additional Considerations:

The Tribunal referred to the case of Commissioner of Income Tax International Taxation v. Nike Inc, where it was held that no income shall be deemed to accrue or arise in India to a non-resident through operations confined to the purchase of goods for export. The Tribunal concluded that the assessee's activities, though not involving direct purchase orders, facilitated the export of goods, thereby achieving the provision's objective.

Conclusion:

The High Court upheld the Tribunal's decision, stating that the assessee's activities were confined to facilitating the purchase and export of goods, and thus, the income derived from these activities was exempt under Section 9(1)(i) Explanation 1(b). The substantial question of law was answered in favor of the assessee, confirming that the income earned was not liable to tax in India.