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2010 (3) TMI 118 - AAR - Income TaxAOC proposes to establish an office in India ( Indian office ) for undertaking procurement support activities for its head office and/or Saudi Aram Co. The Indian office will undertake procurement support services for the purpose of export outside India of various goods/products required by Saudi AramCo e.g. steel pipes, pipe fittings, steel valves, process vessels, heat transfer equipments, electrical equipments etc. These products will be utilized by Saudi AramCo in its business as fixed assets or as consumables. Indian office proposes to render the certain services in relation to procurement of goods from India. The Indian office will not undertake any other business function of AOC or any of its group companies. The Indian office will be funded entirely by reimbursements received by it from its head office without any profit element thereon. Held that If the applicant itself is the purchaser of goods exported from India, the applicant can claim the benefit of cl.(b) of Explanation 1 to Section 9(1)(i) of the Act. Otherwise, it cannot. In other words, if the purchasers are non-residents other than the applicant, the applicant is liable to pay tax in India on the amount received by it for the support services rendered through the branch office in India. The question is thus answered partly in affirmative and partly in negative.
Issues Involved:
1. Taxability of Aramco Overseas Company B.V. (AOC) in India for support services rendered by its Indian office. 2. Applicability of Explanation 1(b) to Section 9(1)(i) of the Income-tax Act, 1961. 3. Interpretation of Section 5(2) of the Income-tax Act, 1961 in relation to income received outside India. 4. Determination of whether AOC's Indian office acts as a buying agent for Saudi AramCo and its affiliates. Detailed Analysis: 1. Taxability of AOC in India: The primary question is whether AOC will be taxable in India for the support services rendered by its Indian office for purchases made by AOC and its group companies. The applicant argued that the activities of the Indian office are confined to the purchase of goods for export, thus falling under Explanation 1(b) to Section 9(1)(i) of the Income-tax Act, which exempts such income from being taxable in India. 2. Applicability of Explanation 1(b) to Section 9(1)(i): The applicant contended that the support services provided by the Indian office are for the purpose of purchasing goods to be exported, thereby qualifying for the exemption under Explanation 1(b) to Section 9(1)(i). However, the Authority found that the applicant did not provide sufficient evidence to demonstrate that the Indian office acts as a buying agent for Saudi AramCo or its affiliates. The Authority emphasized that the provision cannot be stretched to include entities that merely provide support services without being directly involved in the purchase transactions. 3. Interpretation of Section 5(2): The Authority noted that under Section 5(2) of the Income-tax Act, the income accrues or arises in India if the procurement activities are rendered and costs are incurred in India. The fact that the income is received outside India does not affect the applicability of Section 5(2). The Authority rejected the applicant's argument that Section 5(2) should not apply if Explanation 1(b) to Section 9(1)(i) is applicable, stating that the general charging section cannot be excluded in such cases. 4. Determination of AOC's Indian Office as a Buying Agent: The Authority examined whether AOC's Indian office could be considered a buying agent for Saudi AramCo and its affiliates. The applicant failed to provide detailed evidence of the agreements, transactions, and the exact role of the Indian office in the procurement process. The Authority concluded that the applicant's Indian office does not act as a buying agent but merely provides support services, which do not qualify for the exemption under Explanation 1(b) to Section 9(1)(i). Conclusion: The Authority ruled that AOC is not eligible for the benefit of Explanation 1(b) to Section 9(1)(i) of the Income-tax Act, as the Indian office does not act as a buying agent for Saudi AramCo or its affiliates. Consequently, the income by way of a 5% mark-up received for support services rendered in India is taxable under Section 5(2). The ruling was given and pronounced on March 12, 2010, stating that if AOC itself is the purchaser of goods exported from India, it can claim the benefit of Explanation 1(b), otherwise, it is liable to pay tax in India for the support services rendered through its Indian office.
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