TaxTMI 
TaxTMI 
2013 (8) TMI 194
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....procurement by manufacture from the manufacturer, who directly dispatches the apparels to the various subsidiaries spread all over the world. The assessee with a view to spread its wings mainly from the point of view of procurement of various apparels by manufacture with the assistance of various manufacturers from the various parts of the world approached the Reserve Bank of India to allow it to open a liaison office in India. In the application for permission by the RBI, the assessee had categorically stated that the liaison office will not undertake any activity of trading, commercial or any industrial nature or enter into any business contracts in its own name without the previous approval of the RBI. It was also committed that the assessee will not charge commission or fees or remuneration in regard to any of the services rendered by it in India. The third commitment was that the entire expenditure of liaison office in India will be borne by the assessee from US by sending funds through regular banking channels to India. It was also undertaken that the liaison office in India shall not borrow or lend without the prior approval of RBI. The RBI granted permission to the assessee....
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....with its subsidiaries for purchasing the manufactured goods directly and pay for the same to the respective manufacturers. With a view to ensure quality of its various products in India through its liaison office, it employed various people like merchandiser, product analyst, quality engineer, apparel product integrity manager, fabric controller, transport specialist, etc. In order that from every point of view the quality is maintained, supply of the merchandise is made as per schedule as are concerned with the selection of the fabric, mixture of threads, manufacturing process, cleanliness, cleaning and many more, the various staff attached to the liaison office create awareness in the staff of the manufacturer. The rate or price for each apparel is negotiated with manufacturer. The quality of each apparel is also indicated. The samples so developed are forwarded to the US office. The liaison office only proposes and gives its opinion about the reasonability of the price and all related issues etc., the US office decides about the price, quality, quantity, to whom to be shipped and billed. The local manufacturer in India is conveyed of the decision by the office in USA and once it....
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....e. The assessee Company gets the goods manufactured through various factories by providing various data like the availability of raw materials, list of suppliers of raw materials, cost of raw materials etc., helps the factories/contractors in getting the work done by its audit/quality checks, sends the goods directly to the place of consumption (not necessarily USA). Thus, a part of the entire business is done in India, more specifically by Apparel Product Integrity Department and the quality checks, through the India Liaison office. Therefore, the income accrues or arises or deemed to arise in India in view of Clause (b) of Sub-Section (2) of Section 5 of the Act and therefore, he concluded by holding that the income of the assessee is chargeable to tax to the extent of income, which is attributable to the activities done in India or accruing or arising in India on its behalf by its Liaison office. Then, proceeded to levy tax at 5% of the export value and he concluded that 5% of the export value could reasonably be considered as income attributable to India operation i.e., income accruing or arising in India to the assessee. Aggrieved by the said order, the assessee preferred an a....
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....e was exempted as per Clause (b) of Explanation 1 to Section 9(1)(i) of the Act? 8. The learned counsel appearing for the Revenue, assailing the impugned order contends that the nature of activity carried on by the liaison office of the assessee in India extended the scope of a liaison office and contravened the terms of the licence granted by the RBI. It is the assessee, who identified the manufacturers in India, who placed orders, who sent their experts to train the employees in India, procured raw material for manufacturing the goods agreed to their specification and then their affiliates were supplied the manufactured goods. Therefore, the income accrued or deemed to accrue to the assessee in India is within the meaning of clause (b) of Sub-Section (2) of Section 5 of the Act. To be eligible for exemption under Clause (b) of Sub-Section (1) of Section 9 of the Act, the assessee should have purchased the goods in India for the purpose of export which is not done. Therefore, the Tribunal committed a serious error in holding that the purchase of goods by the affiliates, amounts to purchase of goods by the assessee and that the said purchase is for the purpose of export, the ass....
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.... 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. 11. Section 9 of the Act deals with deemed income, which is accrued or arisen in India which reads as under: 9. (1) The following incomes shall be deemed to accrue or arise in India : - (i) all income 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 is reasonably attributable to the operations carried out in India ; &nb....
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....perty in India; or (iii) through or from any asset or source of income in India; or (iv) through the transfer of a capital asset situated in India. 12. In the instant case, we are concerned with the income accruing or arising from business connection. Till 2004, the word business connection had not been defined. However, by Finance Act, 2003, explanation (2) was inserted which came into effect from 01.04.2004. However, as is clear from the opening words of explanation (2), it was inserted for removal of doubts. In other words, it is clarificatory in nature and it is brought into statute by way of insertion and therefore, it is retrospective in nature as it is only explaining the meaning of the word 'business connection', which is found in Clause (i) of Sub-Section (1) of Section 9 of the Act. 13. The explanation (1) to Sub-Section 2 of Section 5 of the Act explains what the Legislature meant when they introduced a deeming provision regarding accrual or arising of income in India. It categorically states that the income accruing or arising outside India shall not be deemed to be accrued in India within the meaning of the ....
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....ression "business" is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression "business connection" and its precise connotation is vague and indefinite. The expression "business connection" undoubtedly means something more than "business". A business connection in Section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories : a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms : it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that bu....
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....ntered outside India. Therefore, even if any income arises or accrues to the assessee, it is outside India. Therefore, explanation (1) to sub-section (2) of Section 5 expressly states income accruing or arising outside India shall not be deemed to be received in India within the meaning of the Section. However, under Section 9, all income accruing or arising whether directly or indirectly through or from any "business connection" shall be deemed to be accrued or arises in India. Now by Explanation (2) "business connection" has been explained which includes any business activities carried out by a person who acting on behalf of the non-resident as an habitual exercise in India. An authority to conclude Contracts on behalf of non-resident unless his activities are limited to the purchase of the goods or merchandise for the non-resident. If the said definition is read with Clause (b) of Explanation 1 to Sub-Section (1) of Section 9 in the case of a non-resident, no income shall be deemed to accrue or arise in India to him whether directly or indirectly through or from any "business connection", which are confined for the purpose of export. In the first place, the assessee is not purch....