Whether activities of a Liaison Office in India leads to income accruing or arising in India

1.  The applicant before the Advance Ruling Authorities put the details as under:

A.. The commercial transactions work in the following way:

(i) The Ikea Group ('Ikea') is a multi-national retailer of furniture and home furnishing products under the brand name IKEA.

(ii) Ikea purchases its products from suppliers worldwide including India.

(iii) Determination of range of products to be sold at retail Ikea outlets around the world is centralized to Ikea of Sweden AB (IOS). The research & development activities, design, determination of range of products, quality and functionality etc. are also centralized to IOS.

(iv) Ikea trading companies throughout the world have been granted the right to purchase products in the IKEA range from suppliers in different geographic markets. For India, this right is vested in the applicant i.e. Ikea Trading (Hong Kong) Limited [w.e.f. 1-9-2006] The Ikea trading agents select those suppliers that fulfill the quality, delivery security, price and production capacity requirements specified by IOS.

(v)  The applicant has established a liaison office ('IHK LO') in New Delhi for the purpose of undertaking liaison activities in connection with the purchase of goods from India. 

B.. The following functions are performed or would be performed by the liaison office in India.

(i) Enquiry into and consideration of potential suppliers for the IKEA product range.

(ii) Collecting information and samples of various home furnishing items from manufacturers and passing on information with regard to various textiles, rugs & carpets and other material (such as plastics, metals and lighting products) available in India.

(iii) Doing quality check of the various products at labs to see whether they adhere to the costing and quality parameters as prescribed by IKEA group.

(iv) Coordinating and acting as the channel of communication between the applicant and the Indian Exporters.

(v) Follow up with the Indian Exporters for timely export of goods ordered by the applicant and supervising the inland logistics.

(vi) Doing social audit of the suppliers to ensure that they adhere to various environmental and other regulations.

2. The applicant seeks advance ruling in respect of the following questions which were slightly recast at the time of hearing.

2.1. Whether looking at the nature of activities carried on or to be carried on by the liaison office of Ikea Trading (Hong Kong) Ltd. in India, as listed in Annexure III, any income would accrue or arise or deemed to accrue or arise in India in terms of section 5(2)(b) of Income Tax Act, 1961.

22. Whether looking at the nature of activities carried on or to be carried on by the liaison office of the applicant in India, the applicant can be said to have a business connection in India as per the provisions of section 9(1)(i) read with its Explanation 2 of Act.

2.3. Whether various activities carried out by liaison office of applicant in India and as detailed in Annexure III is covered under the phrase 'through or from operations which are confined to the purchase of goods in India for the purpose of export' as used in part (b) of Explanation 1 to Section 9(1)(i)?

2.4. If the answer to the Query 1 is affirmative, whether the whole or any part of applicant's income (if so what part) is liable to be taxed in India.

3.  After considering the provisions, AAR has ruled that:

3.1. The first question is answered in the negative, that is to say, that no income accrues or arises or deemed to accrue or arise in India to the applicant.

3.2. It is unnecessary to record an answer to the second question.

3.3. Third question is answered in the affirmative, accepting the contention of the applicant.

3.4. The answer to 4th question is not called for in view of the answer to 1st question.

For full text of ruling - visit 2008 -TMI - 31870 - AUTHORITY FOR ADVANCE RULINGS