TaxTMI 
TaxTMI 
2008 (5) TMI 371
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....been grouped together and heard on that basis. 3. Mr. S.E. Dastur along with Mr. P.J. Pardiwalla supported by Mr. K.R. Sekar appeared for the assessee, and for the Department, Mr. P.K. Prasad, CIT, made elaborate submissions and filed paper books. 4. A plea was taken by the assessee for admission of additional evidence, which was in the shape of arrangement between the assessee and its subsidiaries in Europe, Australia, Japan and parts of Asia and New Zealand. The learned senior counsel submitted that the purpose of placing the additional evidence is to ensure that there is no miscarriage of justice by not considering the proper facts. The learned senior counsel, Mr. Dastur, insisted that though they are called as additional evidence, they have found their place in the order of the Commissioner of Income-tax (Appeals) ["CIT(A)" for short) and he has noted the same in his order. He submitted that with a view to appreciate these evidences and their direct connection to the entire facts of the case, it is necessary that he be allowed to make the submissions about the facts of the operation of the assessee in India. 5. He submitted that the assessee is a world known name or br....
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....es directly/indirectly with or without any consideration. The further restriction was that the liaison office will not have signing or commitment powers except that are required for normal functioning as liaison office. 6. The learned senior counsel submitted that based on the above permission, the assessee opened the liaison office and employed persons in various categories defining qualifications for each post and this was with reference to its main activity of purchase or procurement of apparels from India for the purpose of export by those manufacturers directly to the various subsidiaries of the assessee spread at various places in the world. For all these activities in India, the liaison office was receiving funds through banking channels from USA. The liaison office in India has no source of income not only because it, had so committed to RBI and its liaison office did liaison between the manufacturers and its head office in USA to help procurement of various apparels at the instance of the head office in USA for export by the manufacturers through the liaison office or directly to the various subsidiaries spread at various places. 7. He submitted that the assessee car....
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....local manufacturers so that the manufactured product agrees on all counts with the sample that was approved. In the course of supervision many activities are required so that the staff of the manufacturer understands what is required by the USA office and it is only to make them or train them to evaluate and select and use the proper factory, manufacture and so on. It is something that is incidental to the manufacture because the assessee did not have its own manufacturing facilities. 8. The learned senior counsel, Mr. Dastur, submitted that the reading of the assessment order shows that though the reply by the staff managers give an indication about the same, the AO has proceeded by twisting the facts. He submitted that the AO in his order does not state that the assessee has charged or raised bills for services on the manufacturers and that payment is received by them. The AO is also not in dispute that the manufacturers have not raised any bills on the assessee for supply of apparels. The AO is aware that the assessee as agent had booked or placed orders for supply to specified customers abroad, who were billed for the value of the goods and it is from them that the manufactu....
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.... 11. The representative on behalf of the Department was given an opportunity to file the written reply on the application for admission of additional evidence and the same has been filed and has been taken on record. The copy of the same was provided to the assessee as well. The objection of the Department was that the activities that were carried on by the liaison office in India consisted of factory training, product development, factory evaluations, price negotiations, technical services covering fabric testing, garment testing, etc., merchandising follow-up, quality assurance activities and shipping co-ordination. In addition, the Department insisted on the same arguments as were noted by the AO in regard to various staff of liaison office with specialized knowledge of various activities. The further submission was that the assessee is not purchasing the goods from the manufacturers. It accepts the claim of the assessee that the goods are directly exported to various buyers that are subsidiaries of the assessee or affiliates. There is a submission which says, "the assessee Nike Inc. is getting service charges on the FOB value of exports". On this basis, it is submitted that t....
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....e submitted that the Tribunal could only proceed on the basis the liaison office in India is carrying on only such activities as permitted by the RBI and any violation thereof could only be examined by the RBI authorities and it is only those authorities who are empowered to give a conclusion that the activities carried on by the liaison office in India are in excess of the limits. He contended that the authorities had not only travelled beyond the IT Act but had taken upon themselves which is the purview of RBI only. He contended that the IT Act nowhere states that in the course of examination of a case, the authorities including appellate authorities could get extended jurisdiction over other enactments and compliance under those enactments. Therefore, he contended the Tribunal ought to start and limit itself by proceeding on the line that the activities of the liaison office are in line with the permission granted by the RBI and that it has no income whatsoever accruing or arising in India because there are no activities carried on by it other than acting as agent of the USA company. The agency is limited only to obtaining and transmitting information and assisting the office in....
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....sidering the reply by the assessee had found that the assessee was not involved in purchase of goods in India for the purpose of export. Purchase means transfer of title of goods purchased from seller to buyer. Since the assessee at no point of time purchased the goods, it cannot be termed as a buyer. It was accordingly concluded that the exemption provided by s. 9(1) is not applicable to the assessee. On that basis, the CIT(A) has proceeded to uphold the order of the AO and had limited the income to 5 per cent. He submitted that the additional evidence in no manner brings or throws any new light. 19. The rival contentions in regard to the above as well as the various materials that have been placed like approval of RBI, statements taken during the course of survey, success profile of the employees, distribution agreement between Nike International Ltd. and Sierra, agreement concerning manufacturing terms between Nike Inc. and Karle agreement, application for additional evidence along with 83 pages of different agreements with 12 parties, reply on the additional evidence by the learned Departmental Representative running to 22 pages, have all been very carefully perused. 20. ....
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....ish to us (on a yearly basis): (a) a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India; (b) details of remittances received from abroad duly supported by inward remittance certificates; (c) certified copy of the audited final accounts of the office in India; and (d) annual report of the work done by the office in India, stating therein the details of actual export or import, if any, effected during period in respect of which the office had rendered liaison services. (c) The number of staff engaged/appointed and duties assigned to each staff. (vii) The liaison office will not render any consultancy or any other services directly/indirectly, with or without any consideration. (viii) The liaison office will not have signing/commitment powers except than those which are required for normal functioning of liaison office on behalf of the head office. 4. In case you desire to open a head office account in the books of your liaison office in India, we hereby grant you our approval to maintain such an account subject to the conditions that the cred....
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....e Inc., who has been granted approval for establishing liaison offices at Bangalore, Mumbai, Chennai and New Delhi, for a period of three years for the purpose of undertaking solely liaison activities viz. to act as a communication channel between head office and parties in India. A copy of the approval letter of RBI bearing number EC.CO.FID(1)/10-1-05-2/4416 (Activity)/1997-98, dt. 18th Oct., 1997 is enclosed for your ready reference and record. The liaison office proposes to carry out the following activities. (a) Donations to private organizations in cash and kind. (b) Donations to non-Government organizations in cash and kind. (c) Purchase of samples in India from funds remitted from outside India in convertible foreign exchange. (d) Distribution free of cost of samples purchased in accordance with (c) above; and (e) Supervising fabric testing on behalf of head office and making payments thereof to third parties in India for fabric testing from funds remitted from outside India in convertible foreign exchange. We may submit that all the aforesaid payments have been made from the amount received by the liaison office....
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....s agreement is being executed by Nike Inc. in furtherance of the buying agency agreements between Nike Inc. and its affiliates, and that this agreement is consistent with those buying agency agreements. 2.2 Manufacturer understands and agrees that Nike Inc.'s affiliates have the right to approve all manufacturers recommended by Nike Inc. for the manufacture of products. In order to induce Nike Inc. and its affiliates to select manufacturer as an approved supplier of products to Nike Inc., affiliate, manufacturer agrees to comply with the terms of this agreement, including without limitation ss. 8, 11 and 16, regardless of whether or not any Nike Inc., affiliate actually elects to purchase products from manufacturer. 2.3 The parties' execution of this agreement shall not obligate Nike Inc. or any Nike Inc. affiliate to order or to purchase any products from manufacturer, nor shall this agreement obligate manufacturer to sell any products to any Nike Inc. affiliate. No obligation to purchase or to sell shall arise until a firm order is placed and accepted in accordance with s. 4 of this agreement. If any Nike Inc. affiliate elects to place a firm order with ....
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....tion to manufacturer. After manufacturer's receipt of such notice, the Nike Inc. affiliate shall have no liability to manufacturer for any promise made or action taken by such designation agent after the date of such receipt. 3.3 Notwithstanding anything to the contrary in this s. 3, no designated agent shall have the authority to take any of the following actions without Nike Inc.'s prior approval, and manufacturer shall not be entitled to rely on a designated agent's representations or actions concerning such matters without written evidences of such approval: (a) Finally settle or compromise any disputes or claims with respect to the products; (b) Amend, modify or waive the application of any provision in this agreement; or (c) Exercise any other right or perform any other obligation that is not specifically granted or delegated to the designated agent in this agreement or by written notice from a Nike Inc. affiliate to manufacturer. 4. Placement and acceptance of firm orders 4.1 As provided in s. 2.3, no Nike Inc. affiliate shall have any obligation to purchase products from manufacturer under this agreement, and....
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....firm order. The terms of any proposal, bid or other document submitted by Manufacturer shall become part of the firm order only if expressly incorporated into the firm Order by reference. 4.6 A firm order is revocable at any time prior to acceptance of the firm order by Manufacturer. 4.7 Manufacturer may, but is not required to, accept a firm order. A firm order must be accepted in accordance with the terms of the firm order or, if no terms are specified, the firm order may be accepted by any objective manifestation of Manufacturer's intent to be bound, such as a written confirmation or Manufacturer's commencement of performance. Nike Inc. on behalf of each Nike Inc, affiliate, expressly limits Manufacturer's acceptance of a firm order only to the terms of the firm order and this agreement, and hereby timely objects to any inconsistent, additional or different terms in any prior or subsequent proposal, bid, invoice, acknowledgement, confirmation or other document containing manufacturer's terms of sale. Manufacturer shall be deemed to have accepted the terms of the firm order and this agreement even if manufacturer's invoice, acknowledgement. c....
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....ike Inc. affiliate, or any designated agent, manufacturer shall upon request sell, assign, and transfer all such Nike product designs/technology to the appropriate Nike Inc. affiliates or their licensors, as designated by Nike Inc. in its capacity as buying agent. Manufacturer shall execute and deliver any documents or instruments requested by Nike Inc. to evidence such transfers. Manufacturer and its affiliates shall not at any time, without the prior written consent of Nike Inc. or a Nike Inc. affiliate, manufacture for or sell to anyone, other than Nike Inc., affiliates, goods incorporating any Nike product designs/technology, nor shall manufacturer or any manufacturer affiliate file any intellectual property application or registration relating to Nike product designs/technology. 9. Manufacturing equipment and Nike-specific tooling 9.1 Manufacturer shall pay all costs of acquiring or making all manufacturing equipment, including Nike-specific tooling, required to manufacture the products on a production-basis. Manufacturer shall amortize the cost of Nike-specific tooling over products purchased pursuant to this agreement in a manner to be agreed to by the part....
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....y products bearing the trademarks to any person or entity other than a Nike Inc. affiliate. Manufacturer shall not use any marks confusingly similar to the trademarks, nor shall manufacturer use the trademarks in conjunction with any other mark, without the prior written consent of Nike Inc. in its capacity as buying agent, or a Nike Inc. affiliate. Manufacturer acknowledges Nike Inc.'s affiliates and their respective licensor's ownership of and exclusive right, title and interest in and to the use of each of the trademarks. Manufacturer acknowledges that any prior use or continued use in the future of the trademarks by manufacturer has inured and will continue to inure solely to the benefit of Nike Inc.'s affiliates and their licensors. 12. Sub-contracting. Manufacturer shall obtain Nike Inc.'s written approval before entering into any sub-contracting arrangements in connection with the manufacturing of products (including packaging) or any components of raw materials bearing the trademarks or otherwise identifiable to any Nike Inc. affiliate. Specifically, manufacturer shall provide Nike Inc. with the names, locations and other relevant details of any sub....
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....made by the assessee to bring all these facts to clarify the entire activity before the CIT(A) are in ground Nos. 6 to 8, which are reproduced for the sake of convenience: "Ground No. 6 The learned Asstt. CIT's finding that a very significant part of the entire business of Nike Inc. is done in India is based on mere surmise and conjecture and liable to be quashed. 2.3.1 The appellant wishes to draw the kind attention of the learned CIT(A) to the provisions of s. 5 of the Act. In terms of the said section, a non-resident is taxable in India, inter alia, in respect of income, which accrues or arises or is deemed to accrue or arise in India. 2.3.2 The liaison office is involved in the purchase of goods in India for the purpose of export. The contract for the purchase of goods is entered into directly between Nike Inc., USA and third party manufacturers. The liaison office's activities are restricted to merely identifying the manufacturers and therefore maintaining a communication link with them. The nature of activities involved are not, per se, in the nature of revenue generating activities. In light of this factual position it may be noted....
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....e by Nike Inc. directly from the third party manufacturers and the sales made in India. The purchases made in India are solely for the purpose of export. 2.3.6 It is therefore submitted that the appellant does not have any right to receive any income for the functions performed by it. In the circumstances, it cannot be said that any income is either received by the liaison office in India accrues or arises to the liaison office in India. 2.3.7 The appellant also wishes to draw the kind attention of the learned CIT(A) to p. 15 of the order passed by the learned Asstt. CIT. At para 5, the learned Asstt. CIT has concluded thus: 'Thus, assessee company gets the goods manufactured through various factories.... Thus, a part of the entire business (and a very significant part) is done in India, more specifically by apparel product integrity department and the quality checks through the India liaison office." 2.3.8 The learned CIT(A) will appreciate that all parties who have been identified as manufacturers and with whom Nike Inc. has contracted are third parties. For your reference, we have listed out such parties below: * Gokuldas Export ....
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.... of the Act do not apply. 2.3.15 In this regard, the appellant wishes to draw the kind attention of the learned CIT(A) to cl. (b) of Expln. 1 to s. 9(1)(i) of the Act, which states as follows: '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.' 2.3.16 The appellant also wishes to invite the kind attention of the learned CIT(A) to Circular No. 23, dt. 23rd July, 1969 issued by the CBDT, wherein it has been reinforced that a non-resident will not be taxable in India, on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident has an office or an agency in India for this purpose. 2.3.17 It is humbly submitted that the activities of the appellant of purchase of goods in India for the purpose of export that is eventually undertaken by independent third party manufacturers under a contract that is entered into directly between Nike Inc. and such parties, are squarely covered by the exclusion envisaged in cl. (b) of Expln. 1 to s. 9(1)(i) ....
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....arel product integrity department and the quality checks through the India liaison office.' 2.5.2 The appellant humbly submits that its activities involve identification of third party manufacturers and maintaining a communication link between the head office and such third parties on an ongoing basis. 2.5.3 Nike Inc., USA enters into independent contracts with such third parties. The contracts are entered into on a principal-to-principal basis, for the sale and purchase of specified products. 2.5.4 It is therefore submitted that the contract for sale of goods is between Nike Inc. and the third party with the liaison office in no way involved. Nike Inc. does not get goods 'manufactured through various factories' but merely buys manufactured goods from independent third parties. This can be evidenced from the fact in the normal course of trade, independent third party manufacturers dispatch goods to main foreign customers. Certain consignments are checked for quality by the customers outside India and for various reasons may be rejected by them. Sample evidences of such rejections are attached herewith as Annex. 6. It is humbly submitted that h....
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....includes especially: (a) a place of management ..... YES (b) a branch ..... YES (c) an office ..... YES (d) a factory ..... NO (e) a workshop ..... NO (f) a mine, an oil or gas well .... NO (g) (h) (i) (j) (k) (l) the furnishing of services, other than included services as defined in art. 12 (royalties and fees for included services), within a Contracting State by an enterprise through employees or other personnel, but only if....... NO (i) activities of that nature continue within that State for a period of periods aggregating to more than 90 days within any 12 month ..... YES (ii) the services are performed within that State for a related enterprise (within the meaning of para 1 of art. 9 (associated enterprise) ..... NO Hence the work of M/s Nike Inc. is as PE in India.' 2.6.4 It is humbly submitted that the learned Asstt. CIT has no understanding of the provisions of the Double Taxation Avoidance Agreement ('DTAA' or 'Treaty') and has merely applied his own interpretation to reach the above conclusions. 2.6.....
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....es of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how contract, if such activities have a preparatory or auxiliary character.' 2.6.11 The Commentary goes on to state in para 24 that 'It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Each individual case will have to be examined on its own merits. In any case, a fixed place of business whose general purpose is one which is identical to the general purpose of the whole enterprise, does not exercise a preparatory or auxiliary activity.' 2.6.12 Your kind self will appreciate that the activities carried on by the liaison office are relatively insignificant to the larger business of Nike Inc. and therefore squarely fall within this exception as explained in the OECD Model Commentary. It is therefore humbly submitted that the liaison office cannot b....
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....from Ms. Kirti Chaturvedi' business analyst, part of apparel product integrity team of liaison office ...... Q.6 Please state do you deal with any of the finished products produced by the suppliers according to the purchase order placed on them? Ans: We (apparel product integrity team of the liaison office) do not involve any in any of the activity relating to purchase of goods from the factories like floating tenders, placing purchase orders on the suppliers, taking custody of the products, etc. All these activities are directly done by home office. We do not know anything relating to these activities. However, our team members take random samples from the products purchased by the suppliers, as per the purchase orders placed by the home office on the suppliers, for collection of data. Even at this stage, we are authorized only to collect' data but not to reject or approve products based on random samples. 3. Sample copy of the commercial invoice (Enclosed as Annex. 1) clearly shows that it was the manufacturer of garments who was exporting goods and not the liaison office. Further, any activity involving transfer of ownership over the goods for ....
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....ecame director of the liaison office. I have completed totally about 6 years of service in liaison office, in Bangalore. Q. 1 Please identify yourself. Ans: I am Kirti Chaturvedi, aged 25 years, D/o Sri C.K. Chaturvedi residing at 306, Purva Park Apt., Cox Town, Bangalore-05. I have done Bachelor of Home Science, PG Diploma in Garment Manufacturing Technology. I have been working in the liaison office of Nike Inc. as business analyst with apparel product integrity team, for the last 4 years. I have been offered employment based on my above qualification by the director of the liaison office. I report to the apparel product integrity manager. Q. 1 Please identify yourself. Ans: I am Joyeeta Sircar, aged 31 years, D/o Sri Jaydeep Sircar, residing at 11, Ahoka Road, Bangalore-84. I have done B.Sc. (Economics). I have done a PG course in National Institute of Fashion Technology from Calcutta. I have been working in the liaison office of Nike Inc. for the last 6 years, initially, as a merchandiser and since two years' as a product manager. Three merchandisers are reporting to me in regard to discharge of their duties as merchandisers...... ....
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....ecified 15 per cent quality standards are met 30% -Hire develop and train the classification team ... 15% Copies of success profiles of other categories of employees are enclosed as Annex.-II. 8. From the above, it is apparent that the activities of the liaison office are primarily in the nature on main business activity of the company, M/s Nike Inc., and further the activities of the liaison office are not just related or confined to at as a communication channel between the home office and manufacturers or suppliers. 9. Designation of the employees (Annex.-3 enclosed indicating designation) and the job roles of the employees the liaison office as mandated in success profiles, success of the liaison office being rated as moderately successful which medium execution zone, performance targets set for the employees of the liaison office, monthly meetings and weekly meetings conducted by various teams of the liaison office, merchandising team and quality control team of liaison office amounting to about 60 per cent of the total manpower, organizational setup of the liaison office (Annex.-4) training of the factory auditors and other personnel etc. a....
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....ctory auditors regarding Nike's quality specifications and standards, performance targets set for the employees of the liaison office regarding quality control, success profiles of the quality team etc. corroborate the contents of the above para of the agreement regarding the extent of revenue receipts in the hands of M/s Nike Inc. relatable to the quality control activities of the liaison office. 14. Activity of the liaison office relating to quality control itself to be charged at 6.5 per cent of the purchase price to the distributor. Purchase price offered to distributor by Nike Inc. includes purchase price for Nike and additional margin added by Nike. Therefore, standard charge for quality control as percentage of purchase price of goods purchased by Nike Inc. would be much more than 6.5 per cent 15. From the above statements recorded from various categories of employees and from the director of the liaison office who accepted that what were stated by the employees were true, it is apparent that the activities of the liaison office not only represent core business activities of the company but also constitute substantial business activity of the company. ....
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....e is precisely towards a direct question on whether the liaison office carries on any purchase activity like: -Placing purchase orders on manufacturer of garments; -Making payments to manufacturer; -Collecting garments for custody; -Transportation of garments before customs clearance; and -Insuring the garments, etc. There is no doubt that the liaison office or 'any personnel of the liaison office do not engage in any of the above activities. Their activities are confined to communicating and coordination of purchase and not to be part of the contract of purchase itself. All of the above activities are activities specific to the carrying out of the specific terms of the contract. The contract, being directly between Nike Inc. and the third party manufacturers, specific provisions of the purchase contract would be undertaken by the respective parties themselves. However, the director has clearly stated in his statement that they do forward the purchase order that the home office issues; such an activity can be considered not only as an operation confined to the purchase of goods but can also be clearly classified as an activi....
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....itional 'services' which are necessary in a logical conclusion to the contract. 2. Para 1.3 states that the products supplied by the seller shall be furnished in accordance with all terms and conditions of this agreement and any subsequent engineering change orders in relation to the purchase from the buyer shall be entertained by the seller, subject to the conditions of the agreement. This postulates the situation where there could be communication back and forth between the seller and the buyer on various specifications or other aspects related to the goods. 3. Para 6.1 states the fact that a buyer from time to time may direct changes in design specifications relating to any order for products. 4. Para 6.2 restricts the rights of the seller in not changing the design of the product affecting form, fit, function, spares, specifications, or manufacturing processes specified with respect to the manufacture of any product, which changes shall or may have an adverse impact on the manufacturing or performance specifications for the product, without the prior written consent of the purchasing department of buyer. 5. Specific clause on quality ....
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....vity as purchase activity. Your Honour will agree with us that this conclusion is incorrect. It is nobody's case to say that for an activity or operation to be related to the purchase of goods in India, transfer of ownership of the goods must be effected in India and that to, by the liaison office. Generally, all parties purchasing goods in India through their office or agents will not have the office or agent take possession of the goods, much less have the agent of the office taken ownership in the goods. The third party manufacturers have contracted only with Nike Inc. as per terms of the contract, dispatch the goods directly to them. The learned AO has duly noted that the liaison office has not, at any point in time, owned the goods. As regards, involvement in other activity incidental to the purchase activity, this has already been dealt with at length, both, earlier and in this written submission. 2. Applicability of cl. (a) of Expln. 1 to s. 9(1)(i). The learned AO, having erroneously concluded that no activity in relation to purchase is carried out, has taken refuge in cl. (a) of Expln. 1 by concluding (in para 8 that the activities of the liaison offi....
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....cturing companies in India, it would only be appropriate to send a specialized person for technical discussion to be able to grasp the right information that needs to be extracted and then transmitted to the head office. It would not make business sense in recruiting persons who will not be in a position to understand the specialized specs of the business. We, therefore, humbly submit that the statement made by the learned AO warrants no merit. In para 12 of the remand report, the learned AO referred to a distribution agreement between M/s Nike International Ltd. and M/s Sierra Enterprises (P). Ltd. We would like to reiterate the facts that the liaison office is involved in purchase activities only and is not, in any way, connected with the said agreement. A detailed explanation to this effect was also made via our written submissions dt. 13th Oct., 2005 to the learned AO (in response to the learned AO's letter dt. 10th Oct., 2005). A copy of the said letter is appended herewith as Annex. 3. However, for the benefit of Your Honour, we would like to reiterate that the liaison office has no connection whatsoever with the sale and distribution function. The agree....
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....inting and dispatching of cash drafts to addresses in India. As this is part of the main activity of the exchange, the authority had no hesitation in ruling that there was a business connection as, in the view of the Authority, there existed a real relation between the business carried on by the applicant for which it receives commission in UAE and the activities of the liaison office to the extent of printing and preparation of cheques/drafts and sending the same to the beneficiaries that contribute directly or indirectly to the earning of such commissions. It seems obvious from the above that the Authority has reached this conclusion based on the specific facts of the particular case and taking a general reference of the case and applying the ratio to our case does not stand to reason. This is also apparent from the fact that the same Authority has, in the case of AAR No. 634 of 2004, vide their order dt. 28th Sept., 2005 has ruled that as long as the liaison office does not enter into negotiations with customers in India, it attracts no tax liability. In this case, the facts center around a liaison office set up to disseminate information about the product of t....
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.... manufacturers. This is also clear from the documentary evidence provided to the learned AO vide our written submissions of 6th Oct., 2005 (in response to his letter of 3rd October). The documents included certain sample evidences to demonstrate how liaison office personnel merely communicate and forward information received from abroad to third party manufacturers. We attach herewith as Annex. 6, a copy of the said submission, together with the specific document evidencing the communication, for Your Honour's consideration. It is therefore submitted that even if a business connection is established, the activities are solely for the purpose of purchasing goods or merchandise, or of collecting information or for other activities which have a preparatory and auxiliary character and would therefore qualify for the beneficial provisions as envisaged in art. 5(3)(d)(e) of the DTAA between India and the USA. In this regard, we also wish to draw your kind attention to the recent Model Tax Convention on Income and Capital published by the OECD (2005). In the Commentary on art. 5, the OECD has discussed the concept of activities that have a preparatory or auxiliary character. ....
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....e laws of United States of America has established a liaison office in India for the purposes of undertaking solely the liaison activities viz., to act as a communication channel between the head office and parties in India. Nike Inc. had also obtained approvals from the RBI to establish a liaison office." 29. The AO then noticed that consequent to a survey, he was of the opinion that the assessee has income which has escaped assessment. The assessee submitted during these proceedings, "the activity of Nike Inc., India, liaison office is to carry on activities that are ancillary and auxiliary to the activities of its head office and other group companies and to act as a communication channel between the head office and parties in India." It was then insisted that since the entire activity is one of purchase, there is no income generated in India. The AO, however, proceeds with the process of analyzing with the submissions of the director of the company. We reproduce questions 3, 5, & 6 as well as the answers. "Q. 3. Please tell me role played by apparel product integrity team. A. 3. Apparel product integrity job function is to train factories and certify audito....
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....actories, certify auditors at the factory, provide training to the employees of contractors factory as something in addition to the RBI permitting them to do so. It was explained that the materials manager was to assist in sourcing of materials for the purpose of conversion into garments. The materials manager was further to negotiate the price of the garment manufacture, delivery time, minimum quantity with the ultimate buyers which is communicated to USA for its final approval. It was also stated that the merchandise manager was to evaluate the sample, get the sample approved and then inform the manufacturer to go ahead and ensure that the manufactured items are in accordance with the samples. The AO considered all these reply and finding that there were about 40 employees came to the conclusion that a buying unit does not require 40 employees and that too, to train persons. He accordingly concluded that the assessee's liaison office was apparently carrying on more activity than what was allowed by the RBI. The AO in his order nowhere mentions that the assessee is deriving any income in India on the basis of any bills or other source of raising income. The AO was of the view ....
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....ious factories in India that supplied apparels, it had raised any bills and was paid by the Indian manufacturers. The AO did not think it necessary because he felt that the assessee in USA earning its commission income from its affiliates as their purchasing agents is income earned on operations in India. This conclusion he had come to because the liaison office is in India. In order to strengthen his conclusion, he has treated the services that are related to purchases, which, any purchaser requiring regular large supply would carry out. The AO by this conclusion has not only misconceived the facts but also proceeded as if the liaison office in India is the agent of the local manufacturers. 32. The CIT(A) in his very short order rejecting the claim of the appellant had held that the assessee has not bought the goods itself and therefore there is no purchase activity. In the written submissions objecting to the admission of the additional evidence, the submissions made are as under: "2.1 Nike Group is the world's leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness acti....
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....portance of the aforementioned activities of liaison offices or branch offices in the overall context of the Nike's business. 2.5 Thus Nike India office (assessee) is one among many of such offices that were set up wherein 44 personnel are working. 2.6 Nike India office has three main operational divisions namely, materials, merchandising and quality assurance, materials and merchandising teams basically involve in product development involving third party contract manufacturers. They also involve in factory evaluation and price negotiations. Apparel product integrity team involves in ensuring quality aspects of the Nike products." 33. The activities carried on by the liaison office in India have been summarized in para 3.1 of the written submissions and the same is reproduced below: - Factory training - Product development - Factory evaluations - Price negotiations - Technical services viz. fabric testing, garment testing, etc. - Merchandising follow up. - Quality assurance activities - Shipping co-ordination. 34. The question is had the assessee been able to explain its activity to....
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....s below, in our opinion, had gone wrong in holding that the assessee did not buy the goods for export and exemption is not applicable under s. 9(1)(i) on the reasoning that it is applicable only to the actual buyer. 35. We will now read s. 9(1)(i): "9(1) The following incomes shall be deemed to accrue or arise in India-(i) all incomes accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation 1: For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as it is reasonably attributable to the operations carried out in India; (b) 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; (c) in the case of a....
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....sales outlets, it is the affiliates. The affiliates have purchased the goods with the help of its agent, the assessee. The purchase by the agent for its principal is always an activity of purchase by the principal only. The emphasis is on the purchase of goods in India for the purpose of export by the non-resident. Therefore, purchase by principal directly or through an agent results in purchase only and hence, in our view, both situations would equally be covered by this provision. 39. The assessee derives its agency income by helping its affiliates to procure goods for the purpose of sale. The assessee as an agent of these affiliates is paid for service charges or commission by those affiliates. The assessee has not in any way communicated with the manufacturers other than ensuring that they may manufacture in accordance with the samples etc. provided and approved by it and the liaison office only ensures and supervises the manufacturing operations as an agent of affiliates. The assessee is not in any way representing the local manufacturer and is not an agent of the local manufacturer. The activity of the liaison office therefore being well within the limits prescribed by the....