Thursday, June 13, 2013

Income can’t be attributed to LO in India if its operations are confined to assisting manufacturers for export orders

Where assessee-foreign company’s presence in India was limited to its liaison office (‘LO’) which assisted Indian manufacturers to manufacture goods according to specification for export to buyers in other countries (which were subsidiaries of assessee), it could be said that activities of NR assessee were confined in India to purchase of goods for export and hence income derived therefrom would not be deemed to accrue or arise in India and entitled to exemption under Explanation 1(b) to section 9(1)(ii)


1) Assessee, a world known brand in sports apparels (i.e. Nike), had a main office in USA, which arranged for all its subsidiaries, spread all over the world, various sports apparels for sale to various customers;

2) Arrangement was through procurement by manufacturer who directly dispatched the apparels to the subsidiaries;

3) The assessee engaged various manufacturers all over the world on a job basis and made arrangements with its subsidiaries for purchasing the manufactured goods directly and pay for the same to the respective manufacturers;

4) With a view to ensure quality of its products in India through its liaison office, it employed professionals like merchandiser, product analyst, quality engineer, etc.;

5) Assessing Authority brought to tax 5% of the export value of goods as income deemed to accrue or arise in India. On appeal, the ITAT allowed assessee’s appeal. Thus, the instant appeal was filed by revenue against ITAT’s decision.

The High Court held in favour of assessee as under:

1) The assessee was not carrying out any business in India and it had established a LO in India, whose object was to identify the manufacturers, gave them the technical know-how and see that they manufactured goods according to the specification which would be sold to their affiliates;

2) The person who purchases the goods would pay the money to the manufacturer, in the said income, the assessee has no right. The said income couldn’t be deemed to be a income arising or accruing in the Tax Territories vis-à-vis the assessee;

3) As per Explanation 1(b) to Sec. 9(1) in the case of a NR, no income would be deemed to accrue or arise in India whether directly or indirectly through or from any ‘business connection, which are confined for the purpose of export;

4) The assessee was not purchasing any goods and it was enabling the manufacturers to manufacture goods of a particular specification which was required by a foreign buyer to whom the goods were sold;

5) The whole object of the instant transaction was to purchase goods for the purpose of export. Once the entire operations are confined to the purchase of goods in India for the purpose of export, the income derived therefrom shall not be deemed to accrue or arise in India and it shall not be deemed to be an income under section 9. In this process, the assessee was not earning any income in India;

6) If assessee was earning income outside India under a contract which was entered outside India, no part of its income could be taxed in India either under Section 5 or Section 9 of the Act – CIT (International Taxation) v. Nike Inc. [2013] 34 170 (Karnataka)