No Tax Liability in India for Liaison Office Facilitating Export Purchases

Ikea Trading (Hong Kong) Ltd. In re.,

Ikea Trading (Hong Kong) Ltd. In re., - [2009] 308 ITR 422 (AAR) Issues Involved:
1. Whether any income would accrue or arise or be deemed to accrue or arise in India under section 5(2)(b) of the Income Tax Act, 1961.
2. Whether the applicant has a business connection in India as per section 9(1)(i) read with its Explanation 2.
3. Whether the activities of the liaison office in India fall under the phrase 'through or from operations which are confined to the purchase of goods in India for the purpose of export' as per Explanation 1(b) to Section 9(1)(i).
4. If income is deemed to accrue or arise in India, whether the whole or any part of the applicant's income is liable to be taxed in India.

Issue-wise Detailed Analysis:

1. Income Accrual or Deemed Accrual in India (Section 5(2)(b))

The applicant, a foreign company with a liaison office in India, argued that its activities in India are confined to facilitating the purchase of goods for export. According to the applicant, no income accrues or arises in India as the goods are sold outside India, and the sale price is received outside India. The Revenue contended that the applicant acts as a service provider or procurement agent for other Ikea Group companies and receives remuneration for these services, which should be taxable in India. However, the Authority concluded that the applicant's activities are confined to the purchase of goods meant for export, and no income accrues or arises in India. Therefore, the first question was answered in the negative.

2. Business Connection in India (Section 9(1)(i) and Explanation 2)

The Authority did not find it necessary to record an answer to the second question due to the conclusion reached on the first issue. The applicant's liaison office activities, being confined to the purchase of goods for export, do not establish a business connection in India that results in taxable income.

3. Operations Confined to Purchase of Goods for Export (Explanation 1(b) to Section 9(1)(i))

The applicant argued that its operations in India are confined to the purchase of goods for export, which should exempt it from being deemed to accrue or arise income in India under Explanation 1(b) to Section 9(1)(i). The Authority agreed with the applicant, stating that the activities of the liaison office are integrally connected with purchases for export and fall within the scope of Explanation 1(b). Therefore, the third question was answered in the affirmative, accepting the applicant's contention.

4. Tax Liability of Applicant's Income in India

Given the negative answer to the first question, the Authority found it unnecessary to address the fourth question regarding the tax liability of the applicant's income in India.

Ruling:

1. No income accrues or arises or is deemed to accrue or arise in India to the applicant.
2. Unnecessary to record an answer to the second question.
3. The activities of the liaison office are covered under the phrase 'through or from operations which are confined to the purchase of goods in India for the purpose of export'.
4. The answer to the fourth question is not called for in view of the answer to the first question.

Conclusion:

The Authority ruled that the applicant's liaison office activities in India, being confined to the purchase of goods for export, do not result in any income accruing or arising in India. Consequently, the applicant is not liable to be taxed in India under the Income-tax Act, 1961. The ruling was pronounced on December 23, 2008.