2015 (10) TMI 1768 - HC - Income Tax

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 that - In the instant case, the liaison office of the petitioner identifies a competent manufacturer, negotiates a competitive price, helps in choosing the material to be used, ensures compliance with the quality of the material, acts as go-between, between the petitioner and the seller or the manufacturer, seller of the goods and even gets the material tested to ensure quality in addition to ensuring compliance with its policies and the relevant laws of India by the suppliers. Therefore, it is of 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 on that business effectively, the aforesaid steps are to be taken by the seller i.e., the petitioner. Otherwise, the goods, which are purchased in India may not find a customer outside India and therefore, the authority was not justified in recording a finding that those acts amounts to involvement in all the activities connected with the business except the actual sale of the products outside the country. In our considered information, all those acts are necessary to be performed by the petitioner 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 assessee.

Summary

Issues Involved:
1. Whether the Indian liaison office constitutes a permanent establishment under Article 5.1 of the DTAA.
2. Whether any portion of the income attributable to the liaison office on account of the activity of vendors' cooperation, global production management, planning, and quality assurance strategy is liable to tax.

Detailed Analysis:

1. Permanent Establishment under Article 5.1 of the DTAA:

The petitioner, a US-based multinational company, established a liaison office in Chennai with the Reserve Bank of India's permission to coordinate purchases from Indian vendors. The liaison office's activities include vendor identification, review of data, uploading material prices, vendor recommendation, and quality control, without engaging in any trading, commercial, or industrial activities. The petitioner argued that the liaison office does not constitute a permanent establishment under Article 5(3)(d) of the DTAA, which excludes fixed places of business solely for purchasing goods or collecting information for the enterprise.

The court referred to previous cases, including The Commissioner of Income-tax v. Nike Inc and Director of Income Tax v. M/s. Mondial Orient Ltd, which held that liaison offices engaged solely in purchasing goods for export do not constitute a permanent establishment. The court emphasized that the petitioner's activities in India are confined to purchasing goods for export, and thus no income accrues or arises in India under Section 9(1)(i) of the Income-tax Act.

2. Tax Liability on Income Attributable to Liaison Office:

The petitioner contended that no income is received or deemed to be received in India under Section 5(2)(a) and no income accrues or arises under Section 5(2)(b) since sales are made outside India. They further argued that under Article 7 of the DTAA, only profits attributable to a permanent establishment in India are taxable, and since the liaison office does not constitute a permanent establishment, no profits can be attributed or taxed in India.

The court reiterated that under Section 9 of the Income-tax Act, income accruing or arising through business connections in India is deemed to accrue in India. However, Explanation 1(b) carves out an exception for non-residents whose operations are confined to purchasing goods for export. The court concluded that the petitioner's activities are solely for purchasing goods for export, and thus no income accrues or arises in India for taxation purposes.

Conclusion:

The court found that the liaison office does not constitute a permanent establishment under Article 5 of the DTAA and that no income attributable to the liaison office's activities is taxable in India. The court quashed the impugned order of the Authority for Advance Rulings, allowing the writ petition in favor of the petitioner and against the Revenue.

Order:

(a) Writ petition is allowed.

(b) The impugned order passed by the authority is hereby quashed.

(c) The substantial question of law framed is answered in favor of the assessee/petitioner and against the Revenue/respondent.

(d) No costs.