9911796707
TMI Blog2011 (8) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... plicant established a liaison office in Chennai for undertaking liaison activities in connection with purchase of goods in India. The liaison activities have subsequently been expanded to Bangladesh and Egypt. Besides coordinating purchase of goods from India, the Indian liaison office also assists the applicant in purchase of goods from Egypt and Bangladesh and engages in quality monitoring and production monitoring of goods purchased from these countries. The goods procured from Egypt and Bangladesh do not come to India but are directly sold to the applicant in the United States. In the year 2000, a support office was opened by the Indian liaison office in Bangalore with the approval of the Reserve Bank of India. The applicant will be moving its liaison office in India to Bangalore. The Indian liaison office of the applicant has about 35 employees including 5 administrative staff. The liaison office is principally divided into 5 teams: (i) Material management (ii) Merchandising (iii) Production Management (iv) Quality control (v) Administrative support constituting teams from finance, human resources and information systems. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant facts (annexure-III), any income accrues or arises in India as per Section 5(2)(b) of the Act? 2. Whether based on the nature of activities carried on by the India LO, as listed in the Statement of relevant facts (annexure-III), the applicant can be said to have a business connection in India as per the provisions of Section 9(1)(i) of Act read with its Explanation 2? 3. If the answer to Query 2 is in the affirmative, whether various activities carried out by the India LO, as listed in the Statement of relevant facts (annexure-III), are covered under the phrase „through or from operations which are confined to the purchase of goods in India for the purpose of export‟ as stated in part (b) of Explanation 1 to Section 9(1)(i) of the Act? 4. If the answer to Query 3 is in the negative, how would profits attributable to the „operations in India‟ be determined and what would be the broad principles to be borne in mind for attributing income to the India LO? 5. Whether the India LO creates a permanent establishment („PE‟) for the applicant in India under Article 5(1) of the Agreement for Avoidance of Double Taxatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly with Indian suppliers. That right solely rests with the applicant. Since the activities performed by the liaison office are an integral part of the purchase function, a business connection will not exist as per explanation (2) to section 9(1)(i) of the Income-tax Act. Clauses (b) and (c) of Explanation (2) to section 9(1)(i) of the Act are not applicable given the nature of activities performed by the Indian liaison office. The liaison office does not maintain in India any stock of goods or merchandise from which it regularly delivers goods or merchandise on behalf of the applicant. The liaison office only assists the applicant by undertaking liaison activities in connection with purchase of goods from India and does not secure or solicit any sale order in India. It is also submitted that the Indian liaison office cannot be considered to be a permanent establishment of the applicant in India under Article 5(1) of the Double Taxation Avoidance Agreement. The applicant thus submits that the questions raised are to be ruled in its favour. It is submitted that considering the nature of the activities carried on by the liaison office, the liaison office will be eligible for exclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing and selling outerwear and sportswear of its own design and made with material chosen by it. On its own showing, the applicant is engaged in creating innovative products after undertaking research and development to develop marketable products. It also performs market research around customer preferences and product pricing. It is also engaged in developing marketing content and implementing strategies. It undertakes inventory management. According to it, its various activities are from outside India and the centralized sourcing group of the applicant is also located outside India. The liaison office of the applicant in India is engaged in vendor identification, review of costing data, vendor recommendation, quality control and up loading of material prices into the internal product data management system of the applicant. The liaison office monitors vendors for compliance with its policies, procedures and standards related to quality, delivery, pricing and labour practices. The liaison office is engaged in quality monitoring and production monitoring for goods purchased from Egypt and Bangladesh. It coordinates, ascertains, monitors and verifies with the vendors to develop t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase would take the activities of the liaison office outside the purview of taxation in India. In the context of section 9(1) of the Act, it could not be said that the applicant had a business connection in India. In terms of DTAA also, the applicant could not be said to have a permanent establishment in India. Even if it were to be deemed that it had a permanent establishment, the activities of purchase taken up by the permanent establishment would come under the category of exemption under the DTAA and would still be not taxed in India. 10. The main thrust of the argument of the applicant is that so long as no sale of any product of the applicant takes place in India, no income can be said to be generated in India or deemed to accrue in India by the activities of the applicant or its liaison office in India. The act of purchase only results in expenditure and does not generate any income and all that the applicant incurs in India is expenditure. The act of sale has to be divorced from the act of purchase for the purpose of testing whether any income has accrued to the applicant in India. The decision of the Supreme Court in EDSASSU and Company Limited V. CIT [(26ITR27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quality material, occasionally testing them for quality, conveying of requisite design, picking out of competitive sellers, the ensuring of quality, the ensuring of adherence to the policy of the applicant in the matter of procurement and employment, in the matter of compliance with environmental and other local regulations by the manufacturers - suppliers and in ensuring that the payments made by the applicant reach the suppliers. The applicant is obliviously in the business of designing, manufacturing and selling branded products, brands over which it has exclusive rights. In the matter of manufacturing of products as per design, quality and in implementing policy, the liaison office is actually doing the work of the applicant. The activities of the liaison office are not confined to India. It also facilitates the doing of business by the applicant with entities in Egypt and Bangladesh. A person in the business of designing manufacturing and selling cannot be taken to earn a profit only by a sale of goods. The goods as designed and styled by the applicant cannot be sold without it being got manufactured and procured in the manner designed and contemplated by the applicant. It wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section 1 is certainly included in the words „any other source whatever‟ in sub section 4. So far as relates to these two processes, therefore, their Lordships think that the income was earned and arising and accruing in New South-Wales" 1 [1950] S.C.R. 335; 18 ITR 472 2 (1900 AC 588 13. There is, thus, clear authority for the position that all activities other than the actual sale cannot be divorced from the business of manufacture and sale especially in a case like the present, where the sale is of a branded product, designed and got made by the applicant under supervision, under a brand owned by the applicant. We are, therefore, not in a position to accept the argument on behalf of the applicant that all the activities carried on in India are confined to the purchase of goods in India. 14. It is argued that the decision of the Supreme Court in Anglo-French Textile Company Ltd ( 23 ITR 101) cannot now govern the situation in view of the addition of Explanation I(b) to Section 9(1)(i) of the Income-tax Act, taking out activities of purchase while deeming the accrual of income. The principle laid down by the decision is that in a business of purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited extent of purchase operations undertaken by the non-resident in India for the purpose of export. ......... One cannot get out of the net of taxation altogether by invoking Explanation I(b)". 18. After a detailed discussion of the authorities on the question, this Authority concluded "We may add that the ratio of the decisions referred to supra remain unaffected by the addition of clause (b) to Explanation I in the present Act. The principle enunciated in the decisions will apply with equal vigour, irrespective of Explanation I(b)". 19. We cannot therefore understand Mustaq Ahmed as declaring that the principle recognized in Anglo-French Textiles no more survives. We are satisfied that the principle survives and we respectfully follow that principle. 20. In Angel Garments Ltd (287 ITR 341), this Authority found that admittedly in that case the activities of the liaison office was confined to purchase of goods for export from India and that took the income out of the net under Explanation I(b) of Section 9(1)(i) of the Act. The decision only emphasizes that it would be a finding of fact in each case. 21. In M/s. Armco Overseas Company, BV (AAR No. 825 of 2009) relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into India and are sold only to the applicant in the US. Whether product of the applicant are sold in Egypt and Bangladesh is not clear. Whatever it be, since the activities of the applicant in India takes in, its business in Egypt and Bangladesh, it cannot be stated that the operations of the applicant in India are confined to the purchase of goods in India for the purpose of export. 25. We are therefore inclined to the view that the applicant cannot take shelter under Explanation I (b) to Section 9(1)(i) of the Income-tax Act. 26. Now, we have to consider the relevant articles of the Convention between the Government of the United States of America and the Government of the Republic of India (DTAA). It is the submission of the applicant that under the DTAA, the business income of the applicant is taxable only in the United States and not in India. Under Article 7.1 of the Treaty, the profits of the applicant is taxable only in USA unless it is found that it carries on business in India through a permanent establishment in India and subject to the restrictions imposed therein. A permanent establishment is defined in Article 5 of DTAA as a fixed place of business through which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfied, the only inquiry to be undertaken is to see whether it is one of those establishments excluded by sub-article 3. In construing the exclusion in sub-article 3, it appears to us that the exclusion has to be tested with reference to one or more of the activities referred to therein. We shall therefore consider first whether the liaison office would qualify as a permanent establishment in terms of article 5.1 of the DTAA. 28. There is no dispute that the liaison office has a fixed place of business. It was originally in Chennai and now it is being established in Bangalore. It has 35 employees and it deals with different aspects of the business of the applicant. The business of the applicant is designing, getting manufactured, purchasing and selling of garments based on its research relating to consumer preferences and market conditions. Other than the actual business of selling, the rest of the activities of the applicant are conducted by the liaison office in India at best in part. In other words, a part of the business of the applicant is carried on in India by the liaison office. Not only in India, but also in Egypt and Bangladesh. There cannot be much doubt in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the enterprise, though it may not be established solely for that purpose. 31. Clause (e) speaks of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have preparatory or auxiliary character for the enterprise. Auxiliary means providing extra help and support. Preparatory means done in order to prepare for something. Here again, the liaison office is not solely involved in advertising, for the supply of information for scientific research or other activities which have preparatory or auxiliary character. The liaison office is involved in conducting a substantial part of the business of the applicant which as indicated earlier, takes in a number of activities culminating in designing of apparel or goods with material to the taste of the customers and after adequate research at a competitive price, supervision of the manufacturing process and then sale by the applicant in a brand name. The liaison office is also the conduit for conveying the requirements and the decisions of the applicant to the various manufacturers identified by it and approved by the applicant and for proce ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
