CIT vs. Nike Inc (Karnataka High Court)

S. 5 & 9: No income is attributable to Liaison Office’s activity of sourcing mfgd products from India even if fee for service is received from overseas buyer

The assessee, a USA company, set up a liaison office in India whose main activity was to liaise with Indian manufacturers for purchase of apparels from India by the assessee’s HO and overseas subsidiaries. It employed a large variety of staff whose task was to create awareness amongst the Indian manufacturers of the need to maintain quality control and adhere to standards. The price for each apparel was negotiated with the manufacturer and the samples were forwarded to the US office. The liaison office gave its opinion about the reasonableness of the price and all related issues etc. The US office decided about the price, quality, quantity, to whom to be shipped and billed. The liaison office kept a close watch on the progress, quality, time schedule etc at the manufacturing workshop. The AO held that the activities of the assessee of identifying exclusive manufacturers, designing the products, supervising the manufacture and quality of the and marketing the products were beyond that required by a liaison office and resulted in income accruing or arising in India u/s 5(2) read with s. 9(1)(i). He accordingly held that 5% of the export value of the goods was attributable to India operations and was chargeable to tax. This was upheld by the CIT(A). On appeal, the Tribunal (125 ITD 35 (Bang) held that the activity of the liaison office was merely that of purchasing goods for the purpose of exports as the agent of the buyer and that under Explanation (1)(b) to s. 9, no income can be said to be derived by the assessee in India through the operations of the liaison office. On appeal by the department to the High Court, HELD dismissing the appeal:

(i) U/s 9(1)(i) income accruing or arising from any “business connection” in India is deemed to accrue or arise in India. The expression “business connection” is defined in Explanation 2 to s. 9 to include any business activities carried out by a person who is habitually acting on behalf of the non-resident in India. However, this does not include an authority to conclude contracts on behalf of the non-resident if the activities are limited to the purchase of the goods or merchandise for the non-resident. Under Explanation 1(b) to s. 9(1)(e) a non-resident is not liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even if the non-resident has an office or agency in India for that purpose and the goods are subjected by him to any manufacturing process before being exported from India. The result is that no income is deemed to accrue or arise in India to a non-resident, whether directly or indirectly through or from any “business connection“, if the activities are confined for the purpose of export.

(ii) On facts, the assessee is not carrying any business in India. The object of the liaison office is to identify manufacturers, give them technical know-how and see that they manufacture goods according to the assessee’s specification which would be sold to the assessee’s affiliates. The person who purchases the goods pays money to manufacturer and in the said income, the assessee has no right. The said income cannot be said to be a income arising or accruing in India vis-a-vis the assessee. As the entire operations are confined to the purchase of goods in India for the purpose of export, the income derived therefrom cannot be deemed to accrue or arise in India. The non-resident buyer may in turn pay some consideration to the assessee outside India but as that contract between the assessee and the buyer is entered outside India, that income arises or accrues to the assessee outside India and is not chargeable to tax in India (Anglo-French Textile 23 ITR 101 (SC) & R.D. Agarwal 56 ITR 20 (SC) referred)