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TMI Blog2015 (10) TMI 1768X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of global production management and planning and (d) global quality assurance and strategy and policy development. 2. With the permission of the Reserve Bank of India, the petitioner established a liaison office in Chennai in 1995 for undertaking liaison activities in connection with purchase of goods from India. The petitioner purchases products from third party Indian Vendors on principal to principal basis. The Indian liaison office is involved only in activities relating to purchase coordination for the petitioner. As part of these activities, the India liaison office is engaged in vendor identification, review of causing data, uploading of material prices into the Internal Product Data Management (PDM) system of the petitioner, vendor recommendation and quality control. It also monitors vendors for compliance with petitioner's policies, procedures and standards related to quality, delivery, pricing and Labour practices. It does not supervise, direct or control the production facilities of the Indian Vendors. Consistent with the RBI approval, accorded to it, the India liaison office does not undertake any activity of trading, Commercial or Industrial nature. It has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaty. 5. The petitioner and the Revenue authority by the impugned order proceeded on the presumption that designing and manufacturing were obviously carried out by the petitioner itself in India in relation to products purchased by them in India and therefore, opined that a portion of the income relating thereto accrued to the petitioner in India. Further they held that the India liaison office constitutes a permanent establishment of the petitioner in India under Article 5 of the Treaty and that in terms of Article 7 of the Treaty, income is attributable to the India liaison office from activities and that the same would be taxable in India. Challenging the aforesaid order, this writ petition is filed. 6. The learned counsel for the petitioner assailing the impugned order contended that in view of Section 9(1)(i) explanation (1)(b) of the Income tax Act, in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export. Therefore, it carves out an exception to Section 9, which deals with income deemed to have been accrued or arisen in India. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors co-operation of global production management and planning and equitable quality assurance strategy, quality development and is liable to tax? 9. The aforesaid substantial questions of law arose for consideration before this Court couple of times. In the case of The Commissioner of Income-tax and another V/s. Nike Inc in ITA No.976/2008 and connected matters decided on 7th March, 2013, after referring to Sections 5, 9 and several judgments of the Apex Court on the point has held as under: 16. In the background of this legal position when we examine the facts of this case, the assessee is not carrying any business in India. They have established a liaison office. The object of establishing the said office is to identify the manufacturers, give them the technical know-how and see that they manufacture goods according to their specification which would be sold to their affiliates. The person who purchases the goods pays the money to the manufacturer, in the said income, the assessee has no right. The said income cannot be said to be a income arising or accruing in the Tax Territories vis-a-vis the assessee. In fact, the evidence on record shows that Nike, USA bears the entire ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities of the assessee in assisting the Indian manufacturer to manufacture the goods according to their specification is to see that the said goods manufactured has an international market, therefore, it could be exported. In the process, the assessee is not earning any income in India. If at all he is earning income outside India under a contract which is entered outside India, no part of their income could be taxed in India either under Section 5 or Section 9 of the Act. In that view of the matter, the order passed by the Tribunal does not suffer from any infirmities, which calls for interference. Therefore, the substantial question of law framed in this case is answered in favour of the assessee and against the Revenue. 10. Again in the case of Director of Income Tax and another v. M/s. Mondial Orient Ltd., in I.T.A. No.204/2010 and other connected matters decided on 9th June, 2013, this Court held as under: 12. The aforesaid provisions makes it clear what are the incomes which are deemed to accrue or arise in India for the purpose of levying tax. However, explanation (1)(a) introduces a deeming clause, i.e., though income accrues or arises in India as mentioned in the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport, no income accrues or arises in India for such non-resident for it to be taxed. 12. Article 7(1) of the Tax Convention with the Republic of India and the USA reads as under: "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment. 13. A reading of the aforesaid provision makes it clear that if a permanent establishment carries on business of sales in India or other business activities of the same or similar kind through that permanent establishment, then only, the profits of the enterprise will be taxed. Therefore, there is no tax liability if pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner. Otherwise, the goods, which are purchased in India may not find a customer outside India and therefore, the authority was not justified in recording a finding that those acts amounts to involvement in all the activities connected with the business except the actual sale of the products outside the country. In our considered information, all those acts are necessary to be performed by the petitioner - assessee before export of goods. Consequently, the reasoning of the authority that for the same reasons, the liaison office in question would qualify to be a permanent establishment in terms of Article 5 of the DTAA is also erroneous. That liaison office is established only for the purpose of carrying on business of purchasing goods for the purpose of export and all that activity also falls within the meaning of the words "collecting information" for the enterprise. In that view of the matter, we are of the view that the impugned order is unsustainable. Hence, we pass the following order: (a) Writ petition is allowed. (b) The impugned order passed by the authority is hereby quashed. (c) The substantial question of law framed is answered in favour of the assessee/pet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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