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TMI Blog2014 (1) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... ce (LO) are confined to the purchase of goods in India for the purpose of exports outside India, which are covered by the exemption provided under clause (b), explanation 1 of section 9(1)(i) of the Act and hence no income is deemed to accrue or arise in India; and ii. The appellant is only acting as a communication channel between Tesco Group Company ("head office or Tesco Hong Kong) and the vendor. b. The learned DDIT/Hon'ble DRP has erred in not relying on the decision of the jurisdictional Tribunal decision in the case of Nike Inc. V. ACIT-125 ITD 35 (Bang.Tri.) 3. Attribution of Income: a. The Hon'ble DRP/learned DDIT erred in attributing profits to the LO's operations in India. He has failed to appreciate the fact that no income is attributable to the activities of the Appellant in India. b. Notwithstanding and without prejudice to the above, the Hon'ble DRP/learned DDIT failed to appreciate the fact that the activities of the Appellant are insignificant as compared to the entire chain of activities performed by Tesco Hong Kong as the Appellant undertakes only coordination activities. c. The Hon'ble DRP/learned DDIT was not justified in rejecting the function asset risk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 148 of the Act dated 26.5.2009, the assessee had filed its returns of income for the AYs under dispute on 2.7.2009, admitting Nil income. After hearing the assessee's version as recorded in the respective assessment orders, the AO summed up that although the assessee maintains that the operations in India are insignificant or negligible but as already discussed above, the operations in India contribute significantly to earning the commission income. The attribution of profit to PE is done based on assigning certain points to different inputs which were essential in earning the profit. He had, thus, arrived at the conclusion that the activities of the LO were not confined to the activities which were related to the purchase of goods in India for the purpose of exports. Further, he concluded that the activities of the LO relate to supply chain management activities for Tesco Hong Kong company and, hence, the activities of the LO were not covered in the exception provided in Explanation 1(b) of s. 9(1) (i) of the Act. Accordingly, the AO passed draft assessment orders, arriving at the total incomes of the assessee, after allowing expenses, at Rs.35,36,553/-, Rs.1,09,64,785/-,Rs.1,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products before production of goods; & (v) tracking the production and delivery including forecasting and scheduling of the order which are covered by the exemption provided under clause (b) Explanation 1 of s. 9(1)(i) of the Act. It was, therefore, contended that no income was deemed to accrue or arise in India and that the assessee was only acting as a communication channel between Tesco Group company ['Head Office or Tesco Hong Kong] and the vendor. It was, further, submitted that the AO as well as DRP had erred in not relying on the decision of the jurisdictional Tribunal in the case of Nike Inc. With regard to the attribution of income, it was the case of the learned AR that the AO and the DRP erred in attributing profits to the LO's operations in India. The authorities below, it was contended, have failed to appreciate the fact that no income was attributable to the activities of the assessee in India. It was, therefore submitted, without prejudice to the above, that both the authorities have failed to appreciate the fact that the activities of the assessee were insignificant as compared to the entire chain of activities performed by Tesco Hong Kong as the assessee undertook ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. We have carefully considered the rival submissions, perused the relevant materials on record and also the case laws on which both the parties have placed reliance. Tesco International Sourcing Limited Hong Kong was established in Hong Kong to act as a buying agent for Tesco Group Companies. Tesco International Sourcing Limited India Liaison Office [LO] established in India in 2001 was acting as a communication channel between Tesco Hong Kong and the manufacturers in sourcing apparels from India. It was the contention of the assessee that it had only performed a small, insignificant part of activities which were confined to the purchase of goods for the purpose of export outside India and, thus, it was entitled to claim exemption under Explanation 1(b) to s. 9(1) (i) of the Act as its activities were limited to procurement of goods for the purpose of export which were specifically exempt under the Act and income cannot be attributed to the LO. Disputing the assessee's claim, the AO, however, took a stand that on the basis of survey proceedings, the activities of the LO were not confined to the activities which were related to the purchase of goods in India for the purpose of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... watch on the time schedule to be followed and rendered such assistance as may be required in the dispatch of the goods including the details of the buyer and the place for export. For all these activities in India, the LO were receiving funds through banking channels from USA. For the relevant AYs, the assessee filed its returns of income declaring nil income with a claim that its activities were to carry on activities which were ancillary and auxiliary to the activities of its HO and other group companies and to act as a communication channel between the HO and the parties in India. It was, further, contended that in terms of Explanation 1(b) to s. 9(1)(i) of the Act, no income shall be deemed to accrue or arise in India to a non-resident from operations which were confined to the purchase of goods in India for the purpose of export. However, the AO took a stand that the activities of the assessee were actually beyond its activities as required as a LO. Thus, a part of the entire business was done in India through the LO and, therefore, the income had accrued or arisen or deemed to have accrued or arisen to the assessee in India in view of clause (b) of sub-section (2) of s.5. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch includes any business activities carried out by a person who, acting on behalf of the non-resident, has and habitually exercises in India, an authority to conclude contracts on behalf of non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident. If the said definition is read with Explanation 1(b) to section 9(1)(i), in the case of a non-resident, no income shall be deemed to accrue or arise in India to him whether directly or indirectly through or from any business connection, which is confined for the purpose of export. In the first place, the assessee is not purchasing any goods. 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 confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssues etc., the US office decides the price, quality, quantity to whom to be shipped/billed LO gives it opinion of reasonability of price/issues etc., the Hong Kong office decides the price, quality, quantity to whom to be shipped/billed based on the discussions with the group companies Price of each apparel and quality aspects are monitored by LO in India based on the directions of group companies through Head Office Price of each apparel and quality aspects are monitored by LO in India based on the directions of group companies through Tesco Hong Kong Samples of apparels to be forwarded to US Office Samples of apparels to be forwarded to Hong Kong Office LO monitors the progress, quality etc., at the manufacturing workshop, besides the time schedule to be followed and assistance in the dispatch of goods LO monitors the progress, quality etc., at the manufacturing workshop, besides the time schedule to be followed and assistance in the dispatch of goods LO sources the goods from India for export and, hence, Explanation to s. 9(1)(i) of the Act is applicable LO sources the goods from India for export and, hence, Explanation to s. 9(1)(i) of the Act is applicable Nike Inc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds and did not bring any physical or qualitative change in the goods purchased. Even otherwise, the function of the LO as mentioned above are prior to purchase of the diamonds and not subsequent to the purchases. Therefore, no quality change is brought by the LO while doing the operation of purchasing in India for export purposes. It is a case of purchase of goods through LO and all the activities carried out by the LO are basic and preliminary requirement of the purchasing process/operation. Selection of right goods and negotiations of price as per the instructions of the assessee are essential part of the purchasing activity. Thus, the case is fully covered by the clause (b) of Explanation (1) to section 9(1) (i) of the Act....." 7.3.1 In the instant case, all the activities of the LO, such as liaisoning between the manufacturer and the assessee, opines of reasonability of prices, monitoring the progress and quality at the manufacturing end etc, are activities of LO prior to purchase of good by the Tesco Hong Kong. 7.4. The DRP, while giving directions to the AO u/s 144 (5) r.w.s. 144C (8) of the Act, relied on the decision of the AAR in the case of Columbia Sportswear (supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Price Is Agreed By Both. : LO Opines Only The Reasonability Of Price And Hong Kong Office Decides The Price/Quality/Quantity/To Whom To Be Shipped And Billed Based On The Discussion With The Group Companies. : Rate/Price/Quality Will Be Monitored By The LO In India As Per The Directions Of Group Companies Through THK. :LO keeps a watch on the progress/quality/time schedule at the manufacturing spot. 7.5. We have, with due respects, perused the judgment of the Hon'ble jurisdictional High Court in the case of Jebon Corporation India v. CIT (Intl. Taxation) reported in (2012) 19 Taxmann.com 119 (Kar) as relied on by the learned DR. The Hon'ble Court has held, among others, that 'It is clear from the material on record that the finding recorded by the Tribunal is based on legal evidence and that the finding that the liaison office is a permanent establishment as defined under article 5 of DTAA and, therefore, the business profits earned in India through this liaison office is liable for tax.' However, in the present case, there is no evidence on record to suggest that the LO had indulged in carrying on commercial activities and that it was, in fact, a 'permanent establishment' so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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