9911796707
TMI Blog2010 (11) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Indian LO was engaged in carrying out almost all the functions of the commission business in India on behalf of the appellant. 3. That the ld. CIT(A) has erred in facts in attributing 72%of commission income on FOB value of exports to the operations of Indian LO without giving cognizance to the fact that the Indian LO was not involved in the main commission activity of the appellant. 4. That the ld. CIT(A) was not justified in not accepting the functional analysis and risk analysis furnished by the appellant providing weightage to all the functions performed by each entity and instead assigning his own weights to such functions and arriving at a higher attribution to the Indian LO then as submitted by the appellant. That the ld. CIT(A) erred in facts in holding that the attribution to Indian LO on the basis of functions performed and risk assumed is 86% and 44% respectively without considering the submissions made by the appellant that the attribution to India on the basis of functions performed and risk assumed is 33% and 15% respectively. 5. That the ld. CIT(A) was not justified in law and on facts in directing the Assessing Officer to veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under:- Interaction with clients (purchasers) to find out product specifications; Vendor development i.e., finding out who can manufacture the clients' requirement; Visiting factories of different suppliers, studying their product design, developing the designs and showcasing the same to the foreign clients, getting such products designs approved after modifications, in the process helping the client as well as the vendors; Finalization of vendor (supplier), booking of order; Day-To-Day Control Over Production Quality, Process Quality; Preparation and approval of samples; Price Negotiations through e-mail and with international meetings between clients, Linmark and suppliers; Maintaining break-up of cost into component so as to source at the cheapest for the client; Order Tracking involving sample and fabric approval, pre-production approvals Lab testing and control over production; Production/Process control from fabric selection to cutting to shipping of the goods; Factory Reporting for child labour and other HR related issues/particulars to purchases from US/Europe; Middle Line Q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment (BVI) Ltd. is a non-functional entity, in as much as it does not play any role in the goods sourced from India. The employees of the assessee in India directly correspond with the clients and vendors without involvement of any other person. He referred to the details available on the website of Linmark Group, Hong Kong, which mentions that it is one stop global sourcing and supply chain management solutions provider for leading retail chain operators, well known brands, whole sellers, mail order houses and departmental stores in the USA, Canada, Europe, South Africa, Asia and Australia, the global sourcing network encompassing presence in 36 cities across 25 countries and territories. It focuses on ensuring the quality and timely delivery of products to the clients. It offers a modular range of services precisely tailored to the needs of each client, emphasizing on management of their brands. The services include product development, designing, sourcing, merchandising follow-up, factory evaluation, quality control, social compliance auditing and shipping coordination. He also referred to the letter dated 5.12.2005 written by Shri CM. Kharbanda to the Assistant Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with buyers and ensuring good business relationship to maintain buyers interest in using the services of party A and party B and in particular, dealing with any problems or complaints arising from the relationship; (e) Communicating all problems raised by buyers promptly to party B for the purposes of having them resolved by party B and the manufacturer; (f) Providing personal services to buyers travelling to India to assist them in negotiations in India; (g) Co-ordinating all matters relating to internal buying operations; and (h) Securing international market information as to buying trends, competitive activities, economic forecasts etc. in the developed countries. 3.2 The assessee is responsible for dealings with the vendors in India. It has the following responsibilities:- (a) Sourcing of manufactured merchandise suitable for export from India; (b) Assisting buyers to find the appropriate manufacturer and aiding in negotiations on specifications, quality, quantity, delivery and all incidental matters; (c) Supervising manufacture and inspecting merchandise and providing quality-control services; (d) Assist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrolled conditions. The strength of quality approval department in Bangalore and Tirupur was seven and ten in numbers. It was disclosed during survey that due to exclusive QA platform the assessee was able to improve the quality of merchandise by 350% as compared to earlier years. That assessee has a fabric technical team responsible for all fabric issues in India and the unit is supervised by Mr. Carlos. That the copies of inspection reports found during the course of survey have revealed that assessee's quality assurance team checks each consignment material, accessories cutting, critical construction check point, washing, finishing, pressing, packing, critical measurement. That in respect of each customer and vendor, the LO office of assessee prepares a status report which contains detailed information in respect of all customers, their respective vendors, total shipped quantity and total shipped FOB value in US$. It also contains information about total claim made by customers and other proposed corrective actions. That assessee arranges textile testing and lab instruments testing for all the supplies and incurs expenditure for the lab testing c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rting for child labour and other HR related issues particularly purchase from USA and Europe. 3.7 On these facts, he did not agree with the assessee that the offices in India are carrying on preliminary or auxiliary activities only. On the other hand, it was held that these offices were carrying on substantial activities pertaining to the business of the assessee. Therefore, it had also business connection in India. These offices were also the Permanent Establishment of the assessee in India. Accordingly, it was also held that the assessee was liable to be taxed in India on the income attributable to India offices. 3.8 The second question before him is whether, the AO was justified in computing the income @ 6% of the FOB value of the goods shipped from India to the clients of Linmark Development (BVI) Ltd.? The submissions of the assessee were that the rate of commission paid to Linmark Development (BVI) varied from customer to customer and it ranged between 4.4% to 8% of the FOB value. Therefore, a uniform rate of 8% cannot be applied. The rate of commission earned from each customer was available and the income can be computed accordingly. In this connection, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functions into 20 activities and attributed them to one or the other entity or branch thereof. The ld. CIT(A) was of the view that items mentioned in column Nos. 2, 3, 5, 6, 7, 9, 10, 11, 12, 13 etc. Were attributed to Linmark Development (BVI) Ltd. but, in fact, performed by the offices of the assessee in India. Further, he was of the view that certain functions performed by the Indian offices, namely, product development, price negotiations and day-to-day control over production at the factories of the vendors were not considered as core functions of the business. He was also of the view that Linmark Development (BVI) Ltd. identified customers in overseas markets and signed Master Buying Agreements with them. Most of the customers are old. Therefore, weightage of 10% was given to this activity in the overall activities. He was also of the view that at the time of finalisation of the master-buying agreement, the most appropriate geographical area in sourcing the goods was also identified. Therefore, he assigned 2% weightage to this function in this year. Looking to statements of various employees, he was of the view that the head office conducted only tri-monthly meeting for coord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. Expenditure of LO office from April to March 1. 1999-00 1,81,55,763 2. 2000-01 2,08,70,236 3. 2001-02 3,56,94,251 4. 2002-03 4,85,18,639 5. 2003-04 5,64,75,186 6. 2004-05 6,55,24,922 7. 2005-06 6,79,03,325 4. Before us, the ld. counsel for the assessee summarized the facts of the case. It has been submitted that the assessee had three offices in Bangalore, Tirpur and Delhi. Survey under section 133A of the Act was conducted at the Bangalore office in October, 2005, and statements of various employees were recorded. The offices in Bangalore, Tirpur and Delhi have been designated as liaison office ("LO" for short) by the Reserve Bank of India. In view of one of the conditions imposed for opening these LOs, the assessee has been furnishing year-wise accounts and certificates to the RBI. The central bank, entrusted with the regulatory responsibilities, has not found any fault with the accounts. The offices in India have been selecting the garments to be supplied to the customers of Linmark Development (BVI) Ltd. abroad. The orders are directly placed by the customers with the vendors. The goods are shipped by the Indian vendors directly to the customers. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested to state his case of non-taxability of income in India under section 5(2)(b), under which the total income of a non-resident person inter-alia includes income which accrues or arises to him in India in any previous year. His submission is that no income accrues or arises to the assessee as discussed earlier. Further, section 9 deals with the situation obtained in the case of the assessee. This is a specific provision and, thus, the aforesaid provision is not applicable to its case. In the alternative, it has been submitted that if it is held that income accrues or arises to the assessee, then, the working submitted by the assessee before the ld. CIT(A) regarding attribution of income to the operations carried out in India may be accepted. 5. In reply, the ld. CIT, DR submitted that the assessee is carrying on a host of activities in India through the three branches. In the FAR analysis submitted by the assessee, 33% of the activities have been attributed to the Indian offices, which leads to a clear inference that income accrues to the assessee in India. In such a situation, there is no necessity to go to the provision contained in section 9(1)(i) and the Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise to the assessee in India has to be seen from the stand point of its business and not the business of Linmark Development (BVI) Ltd. 6.1 In the case of N.K. Jain (supra), the facts are that the assessee is a non-resident person carrying on business in ready-made garments in Japan. He has an arrangement with a commission agent in India to purchase readymade garments on his behalf and to export them to him. The agent also purchases dress material on the instruction of the assessee and gets it stitched into garments through the tailoring establishments in India and exports such garments to the assessee. The assessee is registered with Handloom Export Promotion Council as a merchant-exporter. The Hon'ble Court held that the case of the assessee is fairly covered by clause (b) of the Explanation to section 9(1)(i). It is immaterial whether the assessee had an agent or an office in India or whether he carried out any manufacturing process here. The assessee is entitled to exemption from the operation of section 9(1)(i) as long as it could be assumed that his case is covered by Circular No. 20 dated 7-7-1964. Thus, no income shall be deemed to accrue or arise to a non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and its branches in India, which are only parts of the same entity. The services were rendered by Indian branches in respect of export of goods outside India. However, in this case the Indian vendors are the exporter of goods. Even if it is assumed that the facts of the case are not distinguishable, what can be said is that no income can be deemed to accrue or arise to the assessee in India from the operations of rendering services to Linmark Development (BVI) Ltd. The question of applicability of section 5(2)(b) is still open. 6.3 The facts of the case of Nike Inc. (supra) are that it is a world known name or brand in sports apparels. It has its main office in the USA and associated enterprises or subsidiaries in various parts of the world. The head office in USA arranges for all its subsidiaries various brands of sports apparels for sale to various customers. The arrangement is through procurement by manufacture from manufacturers who directly dispatch the apparels to various subsidiaries all over the world. From the point of view of procurement of various apparels by manufacture with the assistance of various manufacturers from various parts of the world, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which are confined to purchase of goods in India for the purpose of exports. The admitted position is that activities carried on by the liaison office are confined to purchase of goods for the purpose of exports. It is immaterial whether the export of goods is to Hong Kong or to any other country as the provision does not specify that the export should only be to the country of which the applicant is a resident. Accordingly, it was held that from the nature of proposed activity to be carried on by and the nature of powers of the liaison office which is proposed to be set up in India by the assessee, a non-resident company, it cannot be said that the applicant could earn any income taxable in India under the provisions of the Income-tax Act, 1961. It may be mentioned here that the ld. AAR considered only the provisions contained in section 9 and thereafter made a sweeping statement that it cannot be held to have earned any income taxable in India under the provisions of the Income-tax Act, 1961, as if all other provisions had also been considered, which is not the case. 6.5 On the other hand, the case of Performing Right Society Ltd. v. CIT (1977) 106 ITR 11 (SC) was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee as a commission agent. The Indian offices practically carry out all operations of the business of the commission agent except the formation of the contract between the vendors and the buyers, which in any case cannot be done by a commission agent. While carrying out FAR analysis, the assessee attributed 33% of the business functions to the Indian offices. 18% of the assets employed in the business belong to the Indian offices. It is also admitted that 3% of the risk was taken by Indian offices. It may be mentioned that the corresponding figures, arrived at by the ld. CIT(Appeals) are much higher than these percentages. Nonetheless, it remains a fact admitted by the assessee that substantial part of business operations of commission agent is carried out in India by the Indian offices. In such a situation, it cannot be argued that no income accrues or arises in India from the commission to which the Linmark Development (BVI) Ltd. is entitled to. Accordingly, relying on the decision in the case of Performing Right Society Ltd. (supra), it is held that notwithstanding the nomenclature of liaison office, the Indian offices are carrying out real and substantive business operations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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., no particular argument has been made by the ld. counsel. We find that the ld. CIT(A) had computed this commission income on the basis of master buying agreements provided by the assessee. No error has been pointed out by the ld. counsel in this computation. Therefore, we do not find any reason to interfere with the computation of commission income of various years earned by Linmark Development (BVI) Ltd. from Indian operations. 8. Coming to the question of attributation of income, it is seen that the ld. CIT(A) has examined the allocation of functions, assets used and risks taken by Linmark Development (BVI) Ltd., the head office of the assessee company and the Indian offices. No particular error has been pointed out in various charts prepared by the ld. CIT(A) in regard to allocation of business activities and risks taken. However, it is agitated that in the computation of the assessee, allocation of 33% of the commission received by Linmark Development (BVI) Ltd. to the Indian operations may be a ..... 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