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TMI Blog2010 (11) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... n India on the income attributable to India offices. - However expenses incurred shall be deducted. Regarding interest u/s 234B and 234C - it may be stated that the assessee is a non-resident company, which receives income from another non-resident company outside India. All payments to a non-resident person are liable for deduction of tax at source under section 195 of the Act. Therefore, all receipts of the assessee are liable to tax deduction at source - Since there is no liability to pay advance-tax, there cannot be any reason for charging interest under sections 234B and 234C for failure to pay advance-tax, which was not payable in the first place - Appeal is allowed X X X X Extracts X X X X X X X X Extracts X X X X ..... ining permission from the Reserve Bank of India. These offices are termed as "liaison offices" ('LO' for short) by the RBI and the assessee. Survey operation under section 133A of the Income-tax Act, 1961 ("the Act" for short), was carried out at the Bangalore office on 26.10.2005. In the course of survey, it was found that the office was engaged in the business of management of supply chain of garments, which included providing of multifarious services, such as product design and development, sourcing, merchandising follow-up, quality control, factory evaluation and shipping coordination. Certain documents were also found in the course of survey. In the course of survey and thereafter, statements of Ms. Farah Kadri, Global Sourcing Head, Shri Harish Shenoy, Administrative In-charge of Bangalore office, Shri Narayan Singh, Shri Sandip Seal, Ms. B. Sangeetha, Shri G. Krishna, Shri CM. Kharbanda and Shri Sudhir Nair were recorded. On the basis of the facts discovered in the course of these inquiries, it was concluded that income of this year had escaped assessment. Therefore, notice under section 148 was issued on 14.3.2006, which was responded to by the assessee by filing a return o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or its customers located in the USA, Canada, Australia, Europe and other developed countries from various countries located in Asian region including India. In this connection, it has entered into a service agreement with Linmark International (Hong Kong) Ltd., the assessee, which is engaged in providing facilitation services in connection with buying of goods from various countries in Asia. Under the Agreement, the assessee is to render facilitating services to the buyers, which have been identified by Linmark Development (BVI) Ltd. In other words, the assessee acts as a communication and connecting link between Linmark Development (BVI) Ltd., its buyers and vendors in India. Therefore, the assessee is a conduit between the buyer and seller and it acts on the basis of instructions received from the buyers of Linmark Development (BVI) Ltd. The assessee and its liaison offices in India act only as a coordinating agency. Linmark Development (BVI) Ltd. receives commission from its buyers, calculated on a fixed percentage of the FOB value of the goods exported to its clients outside India. For its services, the assessee is remunerated @ 1% of FOB value of the goods. On these facts, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,38,81,432. 3. Various questions came up before the ld. CIT(A) for determination. The first question is-whether, the assessee is liable to be taxed in India under section 9(1)(i) of the Act? In this connection, the admitted facts are stated to be that Linmark Development (BVI) Ltd. enters into agreements with various customers in UK, the USA, Canada etc. for assisting them in locating suppliers of apparels and garments in India. It sub-contracts this work to the assessee, who has offices in India. The functions of the two parties under the agreement are as under:- a. "Party A has solicited customers in the USA, Canada, Australia, Europe and other developed countries and is principally engaged in the business of acting as a buying agent of export merchandise. b. Party B is working closely with vendors and manufacturers in India and is principally engaged in the business of acting as a sub-agent to provide support and administrative services to buying agent." 3.1 The main responsibility of dealing with overseas buyers rests with Linmark Development(BVI) Ltd. and in particular it has the following responsibilities:- (a) Researching and developing.............. in the develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and charges from the vendors to recover some of the incidental expenses incurred by it on their behalf, such as courier, colour testing, air freight, claims etc. 3.5 It is also mentioned that the admitted facts which emerge from the survey and subsequent enquiries are as under:- That assessee was maintaining offices in Delhi, Bangalore and Tirupur for carrying of business in India. The Bangalore office started operation in year 1994 whereas Delhi office was established in the year 1998. That the business activity of the assessee in India could be classified under following categories:- Factory and product sourcing Product development Factory evaluations Price negotiations Following up of sampling Merchandising following-up Quality control inspections Shipping coordination That clients of Bangalore office are HBC, Mothercare, CK, Metro Jaya, Mydin, Cotton Traders, Edgars, whereas the customers for the Tirupur office are Mothercare, HBC, Jockey, Metro Jaya, Mydin, Cotton Traders and Edgars. That at least 16 factories of vendors in Bangalore and 25 factories of vendors in Tirupur are in the active list of suppliers/vendors. That the assessee was maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of suppliers manufacturing facilities; Communication of requirements of the customer to suppliers of goods in India; Development of sample with close coordination with potential suppliers and approval of samples; Obtaining the proto samples from suppliers and sending it to customer in USA, U.K., Canada for its approval; Fabrics and accessories bookings; Holding price negotiation through E-mail or international muting with customer at time in presence of suppliers; Maintaining break-up of cost of component so as to source the merchandise at the cheapest rate for client; Holding pre-production meetings with the suppliers with respect of quality related issues; Order trading which involve sample, fabric approval, pre-production approval lab testing and control order production; Production/process control from fabric selection to cutting to shipping of the goods; Inspection and control over production of merchandise; quality control work through quality assurance teams and quality control facilities and instrument at Bangalore, Tripur and Delhi; product development; timely dispatch of goods, shipping and shipping coordination; factory reporting for child la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The first part of the analysis is in respect of the functions performed by the Linmark Development BVI; the head office of the assessee and the branch offices of the assessee. The assessee broke up the functions in 20 parts and thereafter attributed 60% of the functions to Linmark Development BVI, 2% to the head office of the assessee, 33% to the permanent establishment of the assessee in India and 5% to the others. The second part of the analysis comprised of the assets used. It was represented that out of assets used for the purpose of the business, 50% belonged to Linmark Development BVI, 32% to the head office of the assessee company and 18% to the permanent establishment of the assessee in India. The third and the last part was the risk analysis. It was held out that 94% of the risk was borne by Linmark Development BVI, 3% by the head office of the assessee company and 3% by the offices of the assessee in India. 3.10 The ld. CIT(A) considered the analysis furnished by the assessee company. He also considered the facts discovered in the course of survey and in the assessment proceedings. The assessee had broken up the overall functions into 20 activities and attributed them t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of business. 3.13 Finally, he came to the conclusion that 86% of the activities were carried out in India and 44% of the risks pertained to the Indian offices. All Indian assets were used for the purpose of business. Therefore, he came to the conclusion that 72% of the commission earned by Linmark Development (BVI) Ltd., is attributable to the activities carried out in India. 3.14 The last question before him in this connection was whether expenditure incurred by Indian offices is deductible in computing the income attributed to the Indian offices? The AO had allowed the expenditure in assessment year 2005-06, but did not allow the same in earlier years. The ld. CIT(A) was of the view that the expenditure incurred in India is in respect of the income attributed to Indian offices and, therefore, the same is deductible in computing the income. Further, he was of the view that what is chargeable to tax is income (profits) and not gross receipts. Therefore, he allowed the expenditure after making some adjustments. Thus, the expenditure allowed in various years was worked out as under:- S. No. A.Y. Expenditure of LO office from April to March 1. 1999-00 1,81,55,763 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .K. Jain (1993) 206 ITR 692. Further, reliance has been placed on the decision of Bangalore Bench of the Tribunal in the case of Mondial Orient Ltd. v. ACIT (2010) 129 TTJ 560. Reliance has also been placed on the decision of Bangalore Bench of the Tribunal in the case of Nike Inc. v. ACIT (2009) 122 TTJ 201 and the Ruling of the Authority for Advance Ruling in the case of Aramco Overseas Company BV (2010) 322 ITR 612. It is also submitted that earlier a part of the profit was attributed to and was deemed to arise from purchase of goods in British India by way of purchase of cloth, as held in the case of Anglo-French Textile Co. Ltd. v. CIT (1953) 23 ITR 101 and Bikaner Textile Mercantile Merchandise Ltd. v. CIT (1965) 58 ITR 169 (Rajasthan), but due to specific provision incorporated in section 9 subsequently, as discussed above, and Board Circular No. 20 dated 7-7-1964, the ratio laid down in these cases longer represents the position of law now. Accordingly, it has been argued that no income can be deemed to accrue or arise in India. 4.2 In this connection, the ld. counsel was also requested to state his case of non-taxability of income in India under section 5(2)(b), under wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have considered the facts of the case and the submissions made before us. The first question before us is whether, any income accrues or arose to the assessee in this and other years? Section 5(2)(b) of the Act brings to tax any income from whatever source derived which accrues or arises or is deemed to accrue or arise to a non-resident person in India during the year. This provision has two components, (a) income which accrues or arise in India; and (b) is deemed to accrue or arise in India. The second component of this provision is amplified in section 9 regarding "income deemed to accrue or arise in India". The primary case of the assessee is built upon section 9 i.e., the second component of the provision contained in section 5(2)(b). Further, the assessee is a buying agent of the Linmark Development (BVI) Ltd. and it is not the exporter of goods and merchandise. It receives commission @1% of the FOB value of the goods exported by the vendors in India to the customers of that company. The question whether any income accrues or arises or is deemed to accrue or arise to the assessee in India has to be seen from the stand point of its business and not the business of Linmark Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offices were engaged in business of supply chain management of garments which included services like product design and development, sourcing, merchandising follow up, quality control, factory evaluation and shipping coordination. Therefore, it was held that substantive business transactions were being undertaken in India. On the other hand, the assessee relied on the decision in the case of N.K. Jain and claimed that it was entitled to the benefit of clause (b) of Explanation 1 to section 9(1)(i). The Tribunal did not accept the argument of the revenue that the assessee is not purchasing the goods but it is only rendering services on behalf of its head office. The provision is applicable not only in respect of purchase of goods as such but also in respect of operations which are limited to purchase of goods in India for the purpose of export. Therefore, it was held that no income can be deemed to accrue or arise to the assessee in India. The facts of this case are also distinguishable. Actually, the revenue tried to distinguish between the head office of the assessee and its branches in India, which are only parts of the same entity. The services were rendered by Indian branches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over. The purchase of goods for the purpose of exports need not necessarily mean purchase by the ultimate user, but include purchase of goods combined with its export out of India, which is achieved by placing orders in India with manufacturers, who export it out of India. The manufacturers receive consideration for the export in foreign currency. Therefore, all the services that are rendered by the non-resident company through its liaison office are for purchases for export, and hence, no income is earned in India. In other words, clause (b) of Explanation 1 regarding purchase for purpose of export applies to the assessee. Hence, no income is derived by it through its operations of the liaison office in India. This case is also based on interpretation of section 9 of the Income-tax Act. 6.4 In the case of Angel Garment Ltd. (supra), the ld. AAR mentioned that a plain reading of the provision contained in clause (b) of Explanation 1 would show that no income shall be deemed to accrue or arise to a non-resident person through or from operations which are confined to purchase of goods in India for the purpose of exports. The admitted position is that activities carried on by the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Court also mentioned that the question whether a certain income accrues or arise in India within the meaning of section 5(2) is a question of fact, which should be looked at and decided in the light of common sense and plain thinking. In that case, the assessee had copyright in certain western musical discs. On payment of royalty, the All India Radio broadcast the music from its stations and the question was whether, the royalties received by the assessee were taxable in India? The question was decided in favour of the revenue and against the assessee. Therefore, in spite of the decisions cited by the assessee, most of which are distinguishable on facts, it has still to be decided whether income accrues or arises to the assessee in India. 6.6 In this connection, we may refer to the activities carried on by the Indian offices, as mentioned by the ld. CIT(A) and enumerated by us in paragraph 2.6 (supra). By no stretch of imagination, it can be said that these activities are not in the normal course of business of the assessee as a commission agent. The Indian offices practically carry out all operations of the business of the commission agent except the formation of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business by a person or firm which manufactures carpets and that the purchase contributes to an appreciable degree to the ultimate profit which is realized on the sale of the manufactured articles. The learned judges further observed that a wise purchase of raw materials must contribute to a considerable extent to the profits realized on the sale of manufactured products and one way in which this can be brought about is by the manufacturers' direct purchase of raw materials in the countries where they are best available. There can be no doubt that the present case stands on a much higher footing. The acquisition of goods which were manufactured at the time with which we are concerned, having regard to their scarcity in the market, was the main thing, and, therefore, we have no hesitation in holding that a part of the profits was certainly attributable to, and should be deemed to arise, on the mere purchase of the goods in British India and we would answer question No. (4) in the affirmative." 6.8 Thus, it is held that income accrues or arises to the assessee from its Indian operations. 7. In regard to the computation of the commission income of Linmark Development (BVI) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds have also become of academic interest. Nonetheless, it may be stated that the assessee is a non-resident company, which receives income from another non-resident company outside India. All payments to a non-resident person are liable for deduction of tax at source under section 195 of the Act. Therefore, all receipts of the assessee are liable to tax deduction at source. It is also a matter of fact that since payments are made by a non-resident company, the enforcement of the provision contained in section 195 becomes difficult if not impossible. However, as the whole income is liable for deduction of tax at source at appropriate rate, the advance-tax payable by the assessee can be computed only at nil. Since there is no liability to pay advance-tax, there cannot be any reason for charging interest under sections 234B and 234C for failure to pay advance-tax, which was not payable in the first place. The assessee has quoted a number of decided cases in the matter, which may not be repeated here as the issue is otherwise clear from statutory language contained in section 209. 11.1 Thus, this ground is allowed. 12. The facts and grounds of all other years are stated to be simi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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