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TMI Blog2008 (12) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hong Kong and is a tax resident of Hong Kong. 2. The applicant has established a liaison office in New Delhi for the purpose of undertaking liaisoning activities in connection with purchase of goods from India. 3. The commercial transactions work in the following way: (i) The Ikea Group ('Ikea') is a multi-national retailer of furniture and home furnishing products under the brand name IKEA. (ii) Ikea purchases its products from suppliers worldwide including India. (iii) Determination of range of products to be sold at retail Ikea outlets around the world is centralized to Ikea of Sweden AB (IOS). The research development activities, design, determination of range of products, quality and functionality etc. are also centralized to IOS. (iv) Ikea trading companies throughout the world have been granted the right to purchase products in the IKEA range from suppliers in different geographic markets. For India, this right is vested in the applicant i.e. Ikea Trading (Hong Kong) Limited [w.e.f. 1-9-2006] The Ikea trading agents select those suppliers that fulfill the quality, delivery security, price and production capacity requirements specified by IOS. (v) The appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed approval to open a liaison office in India with a condition that "excepting the liaison work, the office in India will not undertake any other activities of a trading, commercial or industrial nature nor shall it enter into business contracts in its own name without prior permission". Another condition is that no commission / fee will be charged or any other income earned by the office in India for the liaison activities / services rendered by it in India. The entire expenses of the office in India will be met exclusively out of the funds received from abroad through normal banking channels. It is further stated in the rejoinder that the applicant is sharing the accounting and administrative facilities with Ikea Trading (India) Pvt. Ltd., which is another Ikea Group company. It appears that the applicant runs the liaison office from the same premises of Ikea Trading (India) Pvt. Ltd. It is stated that Ikea Trading (India) Pvt. Ltd. is engaged in the business of buying and selling the products and earns income from export sales mainly to Ikea Group Companies. The said company is an assessee under the Income-tax Act 1961. The applicant states that the purchased items are invoiced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that Section 5(2) has no application. If at all, it is Section 9(1)(i) that applies by virtue of business connection in India and the deemed income under section 9(1)(i) gets excluded on account of clause (b)(i) to Explanation 1. 6. The relevant provisions viz. Section 5(2) and Section 9(1) are extracted below: Section 5. Scope of total income (1) xx xx xx xx (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1: Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2: For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts the supplier and will ensure that the quality, delivery schedule etc. is maintained. According to the Revenue, the role of the applicant is that of a procurement agent for which it might be receiving remuneration in the nature of commission. The omission by the applicant to file the agreements between the applicant and other Ikea Group companies which ultimately purchase the goods sent from India and the non-disclosure of the details relating to accounting between the applicant and those companies in various countries is adversely commented upon by the Revenue. It is also commented that 'trading agency' agreement has not been produced. Thus, the modus operandi of the transactions, as set out by the applicant, are doubted by the Revenue. This doubt is based mainly on two factors apart from the omission to furnish the documents referred to above. One is, the Ikea Group company in India, namely, Ikea (India) Pvt. Ltd. is in the business of buying and exporting the products and the income derived by it from the export sales is being returned in India and therefore it is doubtful whether another Ikea company based in Hong Kong (applicant) would engage itself in the business of purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treasury' and "payments to various third parties are remitted by Ikea Switzerland and get debited correspondingly to the respective entities". In the Purchase Agreement entered into between Delux International and the Applicant, under the column "terms of delivery", FCA Bombay is mentioned. Terms of Payment column reads : "within 30 days after receipt of invoice". 10. As the few documents furnished by the applicant did not give clear picture of the pattern of transactions subsequent to the dispatch of goods by the Indian seller, we suggested to the learned counsel to furnish better particulars drawing support from the relevant documents pertaining to the invoice brought on record. The applicant then filed a booklet on 3-12-2008 purporting to clarify the factual position with reference to some other transaction. As regards the invoice of Deluxe International, no further documents were filed. The applicant has in the said booklet furnished certain documents relating to the sale by Continental Home Furnishings (CHF), Okhla indl.area, taking it as a typical transaction together with an explanatory note. Le us now advert to the details that emerge therefrom. 10.1. The invoice st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution Centre, Efert, Germany. 10.4. Whereas in the rejoinder filed earlier, the applicant stated that Ikea Handles AG carries out the functions of Central Treasury and makes payments to the third parties on behalf of the applicant, in the subsequent clarificatory note filed on 5th December, 2008, the applicant refers to the role of Ikea Handles AG as a buyer from the applicant. At the same time, there is an averment to the effect that IHAG makes the payment to Indian exporter on behalf of the applicant with a view to manage the forex risk and charges a fee from the applicant towards the services as per the Payment Agreement in Annexure VI. Moreover, the applicant also refers to another company i.e., Ikea Supply AG, Switzerland which is said to be a whole-saler to whom the goods are sold "through Ikea Handles AG". A tripartite agreement between the applicant, IHAG and Ikea Supply AG is filed as Annexure V. Ikea Supply AG is shown as the 'last buyer' in the invoice of the applicant, as noticed earlier. The 'Consignee' is said to be an Ikea retail Company. 11. The picture that emerges is that clarity and consistency is lacking in some respects in regard to the narration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfined to the purchase of goods which are exported by the Indian vendors to the applicant or its nominees. Admittedly, the applicant does not effect any sales in India. Thus, no income accrues or arises in India. The next point is, no income can be attributed to the purchase operations in India by resorting to the deeming fiction under Section 9(1)(i) because the Explanation thereto excludes such attribution. In the case of Mushtaq Ahmed (307 ITR 401), this Authority interpreted cl.(b) of Explanation 1 to Section 9(1)(i) and set out the purpose and legislative background of this provision. Cl.(b) of Explanation 1 acts as an embargo against attributing any income to the purchase operations carried out in India, if such purchases are for the purpose of export. In other words, while arriving at the deemed income accruing or arising directly or indirectly through a business connection in India, no part of the income shall be attributed to the operations limited to the purchase of goods for the purpose of export. In the instant case, the activities set out by the applicant are all in relation to and integrally connected with purchases and hence fall within clause (b) of Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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