TaxTMI 
TaxTMI 
2010 (3) TMI 118
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....AramCo, which is received in the Netherlands. AOC proposes to establish an office in India ('Indian office') for undertaking procurement support activities for its head office and/or Saudi Aram Co. The Indian office will undertake procurement support services for the purpose of export outside India of various goods/products required by Saudi AramCo e.g. steel pipes, pipe fittings, steel valves, process vessels, heat transfer equipments, electrical equipments etc. These products will be utilized by Saudi AramCo in its business as fixed assets or as consumables. Indian office proposes to render the following services in relation to procurement of goods from India: * Assistance in collection and dissemination of market intelligence on products and prospective suppliers. * Giving opinion on reasonability of prices. * Social audit of the supplier to ensure that they adhere to various environmental and other regulations. * Checks to confirm whether the suppliers adhere to quality parameters. * Coordinating and acting as a channel of communication with the suppliers. The Indian office will not undertake any other business function of AOC or any of its group compani....
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....act 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 it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. 5. It is the contention of the applicant that all the activities proposed to be undertaken by the Indian office are for the purpose of and in connection with the purchase of goods to be exported out of India and therefore Explanation 1(b) to Section 9(1)(i) is squarely applicable to the present case. Hence it is contended that no part of the income of the applicant will be taxable in India. The mark-up of 5% over and above the cost paid to the applicant by Saudi AramCo in Netherlands on each transaction cannot be treated as taxable income of the applicant in India having regard to the said specific provision. 6. In the statement of facts extracted above, the applicant has stated that its Indian office undertakes procurement support activities for its head-office and/or Saudi AramCo....
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....her any such formal agreement will be entered into between a head office and liaison/branch office is also doubtful. 8. Now we shall proceed to discuss the question framed by the applicant. In ultimate analysis, it comes to this: whether 5 per cent mark-up received by the applicant from Saudi AramCo for the service/operations rendered through its Indian branch is taxable under the Income Tax Act, 1961 (hereafter referred to as 'Act'). 8.1 Going by the charging Section-5(2), there is no doubt that the income accrues or arises in India. Procurement activities are rendered in India and the costs are incurred in India. The Mark-up is based on cost - howsoever it is calculated. As pointed out by the Revenue, the applicant is entitled of income by way of 5 per cent of mark-up the moment cost is incurred on specified activities. The fact that the income is received outside India does not affect the applicability of Section 5(2). However, the sheet-anchor of the applicant's case rests on clause (b) of Explanation 1 to Section 9(1)(i) of the Act. It is the case of the applicant that if the claim of the applicant falls within the ambit of clause (b) of Explanation 1, the applicant is e....
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....ture and sales took place outside British India. The questions were answered in the affirmative by the High Court. The High Court held (page 106): "It is clear that the purchase of raw material by a firm of manufacturers is one of the processes or operations which contributes to an appreciable degree to the ultimate profit which is realized on the sale of manufactured articles." This view of the High Court was upheld by the Supreme Court with the qualification that it is not every business activity of a manufacturer that comes within the expression "operations to which the provisions of section 42(3) are attracted". Activities of a casual or isolated character would not ordinarily fall within the ambit of business operations It was then observed (page 108): "In this case the raw materials were purchased systematically and habitually through an established agency having special skill and competency and such activity amounted to 'operation' as contemplated by section 42(3) of the Act." The ultimate conclusion was that it was reasonable to attribute a portion of the profits to such purchases in British India. So also, it was held in the case of Bikaner Textile Mercantile M....
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....sing Company? Did the applicant account for the actual cost incurred or was there any agreement regarding the modalities of ascertaining the cost? Was the purchasing company (it may be Saudi AramCo. or some other 'affiliate' Company) in contact with and receiving informations from the applicant regarding the purchase transactions in India? There are no averments in the application. A bald averment that too in the rejoinder that the applicant acting through its Indian branch office plays the role of a 'buying agent' cannot be accepted on its face value. It seems to us that the theory of agency has been set up by the applicant without factual formulation only to call in aid the ratio of the decisions relied on by the applicant. An advance ruling cannot be given on hypothetical facts and pleas. 9.2 The applicant has sought to place reliance on the ruling of this Authority in Ikea Trading (Hong Kong) Ltd.[ 308 ITR 422 (AAR)] The benefit of cl(b) of Explanation to S.9(1) was extended to the applicant in that case who was engaged in the dual function of buying the goods and at the same time acting as an agent on behalf of its group companies. In that case, the applicant itself was the....