2014 (1) TMI 799 - AT - Income Tax

Income deemed to accrue or arise in India - Activities of the Liaison Office (LO) - Non Resident - Section 9(1)(i) - assisting the Indian manufacturer to manufacture the goods according to its specification is to see that the said goods manufactured has an international market, therefore, it could be exported - Held that - Following Nike Inc v. ACIT 2013 (8) TMI 194 - KARNATAKA HIGH COURT The assessee is enabling the manufacturer to purchase goods of a particular specification which is required by a foreign buyer to whom the manufacturer sells - As the orders are placed by the assessee with the manufacturer and the goods are manufactured according to its 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 there from shall not be deemed to accrue or arise in India and it shall not be deemed to be an income under section 9 - If one keeps the object with which the proviso to clause (b) of Explanation 1 to section 9(1)(i) was deleted, the object is to encourage exports thereby the country can earn foreign exchange - The activities of the assessee is assisting the Indian manufacturer to manufacture the goods according to its 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 it is earning income outside India under a contract which is entered outside India, no part of its income could be taxed in India either under section 5 or section 9. Explanation 1(b) to s. 9(1)(i) of the Act is clearly applicable to the assessee s case - No income was derived by the assessee in India through its operations as LO in India. It is ordered accordingly Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the order passed u/s 147 r.w.s 144C of the Income Tax Act, 1961.
2. Determination of whether the Liaison Office (LO) constitutes a Permanent Establishment (PE) in India.
3. Attribution of income to the LO's operations in India.
4. Computation of profit or loss and the consequential levy of interest u/s 234A and 234B of the Act.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed u/s 147 r.w.s 144C of the Income Tax Act, 1961:
The assessee company challenged the order dated October 20, 2011, passed by the AO under section 147 read with section 144C of the Income Tax Act, 1961, claiming it to be bad in law. The Tribunal did not provide a separate analysis for this issue, implying that the primary focus was on the substantive issues concerning the nature of the LO and the attribution of income.

2. Determination of Whether the LO Constitutes a Permanent Establishment (PE) in India:
The assessee argued that the activities of the LO were confined to the purchase of goods in India for export, covered by the exemption under clause (b), Explanation 1 of section 9(1)(i) of the Act. The LO acted merely as a communication channel between Tesco Hong Kong and the vendors. The AO, however, concluded that the LO's activities were not limited to the purchase of goods but extended to supply chain management, thus constituting a PE in India. The DRP upheld the AO's view, relying on the AAR's decision in the case of Columbia Sportswear. The Tribunal, however, found the facts of the present case to be more aligned with the Nike Inc. case, where the LO's activities were deemed to be confined to the purchase of goods for export, and thus, no income was deemed to accrue or arise in India.

3. Attribution of Income to the LO's Operations in India:
The AO attributed profits to the LO's operations, arguing that the LO's activities significantly contributed to earning commission income. The AO assigned points to different inputs essential for earning the profit and concluded that 70% of the income was attributable to India. The DRP confirmed this view but directed the AO to check the arithmetical accuracy of the computation. The assessee contended that the activities performed by the LO were insignificant compared to the entire chain of activities performed by Tesco Hong Kong and that, at most, 1.5% of the commission received by Tesco Hong Kong could be attributed based on the LO's activities. The Tribunal, referencing the Nike Inc. case, concluded that the LO's activities were confined to the purchase of goods for export, and thus, no income was attributable to the LO's operations in India.

4. Computation of Profit or Loss and the Consequential Levy of Interest u/s 234A and 234B of the Act:
The AO computed the income of the LO and allowed expenses, resulting in a net loss. However, the AO mistakenly computed a profit figure and levied interest under sections 234A and 234B. Given the Tribunal's decision that no income was derived by the assessee in India through its LO operations, the computation of profit and the consequential levy of interest became superfluous.

Conclusion:
The Tribunal concluded that the activities of the LO were confined to the purchase of goods for export, covered by the exemption under Explanation 1(b) to section 9(1)(i) of the Act. Consequently, no income was deemed to accrue or arise in India from the LO's operations. The appeals for the assessment years 2003-04 to 2007-08 were allowed, and the attribution of income and the levy of interest under sections 234A and 234B were rendered moot.