TaxTMI 
TaxTMI 
2010 (11) TMI 681
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....has erred in facts and in law in holding that the Indian LO was engaged in carrying out almost all the functions of the commission business in India on behalf of the appellant. 3. That the ld. CIT(A) has erred in facts in attributing 72%of commission income on FOB value of exports to the operations of Indian LO without giving cognizance to the fact that the Indian LO was not involved in the main commission activity of the appellant. 4. That the ld. CIT(A) was not justified in not accepting the functional analysis and risk analysis furnished by the appellant providing weightage to all the functions performed by each entity and instead assigning his own weights to such functions and arriving at a higher attribution to the Indian LO then as submitted by the appellant. That the ld. CIT(A) erred in facts in holding that the attribution to Indian LO on the basis of functions performed and risk assumed is 86% and 44% respectively without considering the submissions made by the appellant that the attribution to India on the basis of functions performed and risk assumed is 33% and 15% respectively. 5. That the ld. CIT(A) was not justified in law and o....
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....in India offices. These activities have been summarized as under:- Interaction with clients (purchasers) to find out product specifications; Vendor development i.e., finding out who can manufacture the clients' requirement; Visiting factories of different suppliers, studying their product design, developing the designs and showcasing the same to the foreign clients, getting such products designs approved after modifications, in the process helping the client as well as the vendors; Finalization of vendor (supplier), booking of order; Day-To-Day Control Over Production Quality, Process Quality; Preparation and approval of samples; Price Negotiations through e-mail and with international meetings between clients, Linmark and suppliers; Maintaining break-up of cost into component so as to source at the cheapest for the client; Order Tracking involving sample and fabric approval, pre-production approvals Lab testing and control over production; Production/Process control from fabric selection to cutting to shipping of the goods; Factory Reporting for child labour and other HR r....
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.... the AO was not satisfied with this Explanation. He was of the view that Linmark Development (BVI) Ltd. is a non-functional entity, in as much as it does not play any role in the goods sourced from India. The employees of the assessee in India directly correspond with the clients and vendors without involvement of any other person. He referred to the details available on the website of Linmark Group, Hong Kong, which mentions that it is one stop global sourcing and supply chain management solutions provider for leading retail chain operators, well known brands, whole sellers, mail order houses and departmental stores in the USA, Canada, Europe, South Africa, Asia and Australia, the global sourcing network encompassing presence in 36 cities across 25 countries and territories. It focuses on ensuring the quality and timely delivery of products to the clients. It offers a modular range of services precisely tailored to the needs of each client, emphasizing on management of their brands. The services include product development, designing, sourcing, merchandising follow-up, factory evaluation, quality control, social compliance auditing and shipping coordination. He also referred to th....
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....rs either on a specific basis or under a General Buying Agreement; (d) Making contracts with buyers and ensuring good business relationship to maintain buyers interest in using the services of party A and party B and in particular, dealing with any problems or complaints arising from the relationship; (e) Communicating all problems raised by buyers promptly to party B for the purposes of having them resolved by party B and the manufacturer; (f) Providing personal services to buyers travelling to India to assist them in negotiations in India; (g) Co-ordinating all matters relating to internal buying operations; and (h) Securing international market information as to buying trends, competitive activities, economic forecasts etc. in the developed countries. 3.2 The assessee is responsible for dealings with the vendors in India. It has the following responsibilities:- (a) Sourcing of manufactured merchandise suitable for export from India; (b) Assisting buyers to find the appropriate manufacturer and aiding in negotiations on specifications, quality, quantity, delivery and all incidental matters; ....
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.... the assessee was maintaining quality control department in Bangalore and Tirupur wherein third party audit and inspection has been carried out under controlled conditions. The strength of quality approval department in Bangalore and Tirupur was seven and ten in numbers. It was disclosed during survey that due to exclusive QA platform the assessee was able to improve the quality of merchandise by 350% as compared to earlier years. That assessee has a fabric technical team responsible for all fabric issues in India and the unit is supervised by Mr. Carlos. That the copies of inspection reports found during the course of survey have revealed that assessee's quality assurance team checks each consignment material, accessories cutting, critical construction check point, washing, finishing, pressing, packing, critical measurement. That in respect of each customer and vendor, the LO office of assessee prepares a status report which contains detailed information in respect of all customers, their respective vendors, total shipped quantity and total shipped FOB value in US$. It also contains information about total claim made by customers and other proposed co....
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.... quality control facilities and instrument at Bangalore, Tripur and Delhi; product development; timely dispatch of goods, shipping and shipping coordination; factory reporting for child labour and other HR related issues particularly purchase from USA and Europe. 3.7 On these facts, he did not agree with the assessee that the offices in India are carrying on preliminary or auxiliary activities only. On the other hand, it was held that these offices were carrying on substantial activities pertaining to the business of the assessee. Therefore, it had also business connection in India. These offices were also the Permanent Establishment of the assessee in India. Accordingly, it was also held that the assessee was liable to be taxed in India on the income attributable to India offices. 3.8 The second question before him is whether, the AO was justified in computing the income @ 6% of the FOB value of the goods shipped from India to the clients of Linmark Development (BVI) Ltd.? The submissions of the assessee were that the rate of commission paid to Linmark Development (BVI) varied from customer to customer and it ranged between 4.4% to....
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....offices of the assessee in India. 3.10 The ld. CIT(A) considered the analysis furnished by the assessee company. He also considered the facts discovered in the course of survey and in the assessment proceedings. The assessee had broken up the overall functions into 20 activities and attributed them to one or the other entity or branch thereof. The ld. CIT(A) was of the view that items mentioned in column Nos. 2, 3, 5, 6, 7, 9, 10, 11, 12, 13 etc. Were attributed to Linmark Development (BVI) Ltd. but, in fact, performed by the offices of the assessee in India. Further, he was of the view that certain functions performed by the Indian offices, namely, product development, price negotiations and day-to-day control over production at the factories of the vendors were not considered as core functions of the business. He was also of the view that Linmark Development (BVI) Ltd. identified customers in overseas markets and signed Master Buying Agreements with them. Most of the customers are old. Therefore, weightage of 10% was given to this activity in the overall activities. He was also of the view that at the time of finalisation of the master-buying agreement, the most appropr....
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....e income. Further, he was of the view that what is chargeable to tax is income (profits) and not gross receipts. Therefore, he allowed the expenditure after making some adjustments. Thus, the expenditure allowed in various years was worked out as under:- S. No. A.Y. Expenditure of LO office from April to March 1. 1999-00 1,81,55,763 2. 2000-01 2,08,70,236 3. 2001-02 3,56,94,251 4. 2002-03 4,85,18,639 5. 2003-04 5,64,75,186 6. 2004-05 6,55,24,922 7. 2005-06 6,79,03,325 4. Before us, the ld. counsel for the assessee summarized the facts of the case. It has been submitted that the assessee had three offices in Bangalore, Tirpur and Delhi. Survey under section 133A of the Act was conducted at the Bangalore office in October, 2005, and statements of various employees were recorded. The offices in Bangalore, Tirpur and Delhi have been designated as liaison office ("LO" for short) by the Reserve Bank of India. In view of one of the conditions imposed for opening these LOs, the assessee has been furnishing year-wise accounts and certificates to the RBI. The central bank, entrusted with the regulatory responsi....
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....ed in section 9 subsequently, as discussed above, and Board Circular No. 20 dated 7-7-1964, the ratio laid down in these cases longer represents the position of law now. Accordingly, it has been argued that no income can be deemed to accrue or arise in India. 4.2 In this connection, the ld. counsel was also requested to state his case of non-taxability of income in India under section 5(2)(b), under which the total income of a non-resident person inter-alia includes income which accrues or arises to him in India in any previous year. His submission is that no income accrues or arises to the assessee as discussed earlier. Further, section 9 deals with the situation obtained in the case of the assessee. This is a specific provision and, thus, the aforesaid provision is not applicable to its case. In the alternative, it has been submitted that if it is held that income accrues or arises to the assessee, then, the working submitted by the assessee before the ld. CIT(A) regarding attribution of income to the operations carried out in India may be accepted. 5. In reply, the ld. CIT, DR submitted that the assessee is carrying on a host of activities in India through th....
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....rther, the assessee is a buying agent of the Linmark Development (BVI) Ltd. and it is not the exporter of goods and merchandise. It receives commission @1% of the FOB value of the goods exported by the vendors in India to the customers of that company. The question whether any income accrues or arises or is deemed to accrue or arise to the assessee in India has to be seen from the stand point of its business and not the business of Linmark Development (BVI) Ltd. 6.1 In the case of N.K. Jain (supra), the facts are that the assessee is a non-resident person carrying on business in ready-made garments in Japan. He has an arrangement with a commission agent in India to purchase readymade garments on his behalf and to export them to him. The agent also purchases dress material on the instruction of the assessee and gets it stitched into garments through the tailoring establishments in India and exports such garments to the assessee. The assessee is registered with Handloom Export Promotion Council as a merchant-exporter. The Hon'ble Court held that the case of the assessee is fairly covered by clause (b) of the Explanation to section 9(1)(i). It is immaterial whether the asses....
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....ds as such but also in respect of operations which are limited to purchase of goods in India for the purpose of export. Therefore, it was held that no income can be deemed to accrue or arise to the assessee in India. The facts of this case are also distinguishable. Actually, the revenue tried to distinguish between the head office of the assessee and its branches in India, which are only parts of the same entity. The services were rendered by Indian branches in respect of export of goods outside India. However, in this case the Indian vendors are the exporter of goods. Even if it is assumed that the facts of the case are not distinguishable, what can be said is that no income can be deemed to accrue or arise to the assessee in India from the operations of rendering services to Linmark Development (BVI) Ltd. The question of applicability of section 5(2)(b) is still open. 6.3 The facts of the case of Nike Inc. (supra) are that it is a world known name or brand in sports apparels. It has its main office in the USA and associated enterprises or subsidiaries in various parts of the world. The head office in USA arranges for all its subsidiaries various brands of sports apparel....
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....e is also based on interpretation of section 9 of the Income-tax Act. 6.4 In the case of Angel Garment Ltd. (supra), the ld. AAR mentioned that a plain reading of the provision contained in clause (b) of Explanation 1 would show that no income shall be deemed to accrue or arise to a non-resident person through or from operations which are confined to purchase of goods in India for the purpose of exports. The admitted position is that activities carried on by the liaison office are confined to purchase of goods for the purpose of exports. It is immaterial whether the export of goods is to Hong Kong or to any other country as the provision does not specify that the export should only be to the country of which the applicant is a resident. Accordingly, it was held that from the nature of proposed activity to be carried on by and the nature of powers of the liaison office which is proposed to be set up in India by the assessee, a non-resident company, it cannot be said that the applicant could earn any income taxable in India under the provisions of the Income-tax Act, 1961. It may be mentioned here that the ld. AAR considered only the provisions contained in section 9 and th....
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.... accrues or arises to the assessee in India. 6.6 In this connection, we may refer to the activities carried on by the Indian offices, as mentioned by the ld. CIT(A) and enumerated by us in paragraph 2.6 (supra). By no stretch of imagination, it can be said that these activities are not in the normal course of business of the assessee as a commission agent. The Indian offices practically carry out all operations of the business of the commission agent except the formation of the contract between the vendors and the buyers, which in any case cannot be done by a commission agent. While carrying out FAR analysis, the assessee attributed 33% of the business functions to the Indian offices. 18% of the assets employed in the business belong to the Indian offices. It is also admitted that 3% of the risk was taken by Indian offices. It may be mentioned that the corresponding figures, arrived at by the ld. CIT(Appeals) are much higher than these percentages. Nonetheless, it remains a fact admitted by the assessee that substantial part of business operations of commission agent is carried out in India by the Indian offices. In such a situation, it cannot be argued that no income acc....
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....ncerned, having regard to their scarcity in the market, was the main thing, and, therefore, we have no hesitation in holding that a part of the profits was certainly attributable to, and should be deemed to arise, on the mere purchase of the goods in British India and we would answer question No. (4) in the affirmative." 6.8 Thus, it is held that income accrues or arises to the assessee from its Indian operations. 7. In regard to the computation of the commission income of Linmark Development (BVI) Ltd., no particular argument has been made by the ld. counsel. We find that the ld. CIT(A) had computed this commission income on the basis of master buying agreements provided by the assessee. No error has been pointed out by the ld. counsel in this computation. Therefore, we do not find any reason to interfere with the computation of commission income of various years earned by Linmark Development (BVI) Ltd. from Indian operations. 8. Coming to the question of attributation of income, it is seen that the ld. CIT(A) has examined the allocation of functions, assets used and risks taken by Linmark Development (BVI) Ltd., the head office of the assessee compan....