September 2008
S. 9(1)(i) — Liaison office of USCO acting as buyer’s agent for exports by independent manufacturers to associates of USCO, covered by exclusion
By Ashok Dhere, Jagdish D. Shah, Chartered Accountants
Reading Time 4 mins
fiogf49gjkf0d
New Page 118 Nike Inc. India Liaison Office
v. ACIT
(2008) TIOL 255 Bang.
S. 9(1)(i) of the Act
India-USA Treaty
A.Ys. : 1999-2000 to 2002-03. Dated : 28-5-2008
Issue :
Liaison office of a US Company, which is acting as
buyer’s agent in respect of exports made by independent manufacturers to the
associates of USCO is covered by exclusion provided in terms of Explanation to
S. 9(1)(b) of the Act.
.
Facts :
Nike Inc., (USCO) is a company incorporated in USA.
It is a world-known name and brand in sports apparels. It has its main office in
the USA with AEs, subsidiaries (associates) in various parts of the world. The
associates distribute goods in various countries.
From its office in the USA, the USCO arranges
sourcing of goods for all its subsidiaries and associates (being sports
apparels, accessories) from independent manufacturers spread across the globe.
The associates establish direct privity with independent manufacturers. The USCO
acts as procurement and liaisoning agent and provides diverse services to the
associates enabling them to procure the goods. The associates pay
commission/fees to the assessee company for providing assistance in procurement
and purchase of goods from the independent manufactures.
In respect of procurements from India, USCO set up
a liaison office in India with approval of RBI. The approval was obtained for
acting as a communication channel between the manufacturers in India, the H.O.
and the associates. The activities of the Indian liaison office involved the
following functions :
1. Liaisoning with manufacturers. For this
purpose, the liaison office employed merchandisers, product analysts, quality
engineers, fabric controllers, etc.
2. Giving opinion on reasonableness of rates to
be negotiated with independent manufacturers.
3. Getting the samples of products approved by
the H.O. or the associate and ensuring that the final product matched with the
approved sample.
4. Providing training to personnel of the
manufacturers, undertake evaluation of the factory, etc.
5. Supervising the production schedule and
activities of the manufacturer.
6. Undertaking fabric testing, garment testing
and generally to do quality assurance activities.
7. Keeping tab on delivery schedule and shipments
for ensuring timely delivery to the concerned purchaser.
In a nutshell, as a buying agent of its associates,
the USCO assisted by liasoning with the manufacturers, assisting in selection of
goods, supervising production, scheduling, quality control and managing
transportation and logistics of shipment, etc.
The USCO, as a buying agent for the associates, had
entered into agreement with the manufacturers on behalf of the associates. The
agreement with the manufacturers defined their obligations, including the
obligation to purchase equipments required specifically for production of
apparels on which the brand ‘Nike’ was put.
It was a common ground that there was direct
privity between the manufacturers and the associates. USCO earned commission
from associates for performing buying agency services.
The goods which were procured from India
constituted less than a fraction of one percent i.e., about 0.22% of the
overall goods procured the world over, in respect of which USCO earned
commission income from the associates.
The Tax Department held that the liaison office in
India had transgressed the scope of RBI-permitted functions and had indulged in
income earning activity. The Department assessed 5% of the global income as
attributable to the operations of liaison office in India. The Tax Department
rejected contention of USCO that the operations carried out by the liaison
office in India were preparatory and auxiliary and were confined to export of
goods from India and hence no part of income was taxable having regard to
provisions of Explanation to S. 9(1)(b).
To support its contention that the operations of
the assessee were not limited to that of facilitating export and were involved
functions, the Tax Department relied on statements of the employees and the job
profile of the employees employed by the liaison office. The Department
contended that as per the statements of the employees, the employees indulged in
the activities of designing, providing suggestions on manufacturing, verifying
the receipt of raw materials, commercial negotiations of pricing with the
manufacturers, etc. These activities, according to the Department, were part of
core income-earning activity. The Department also contended that exclusion from
taxation in respect of purchase of goods by a non-resident for the purpose of
export would not apply to the buying agent and was limited only to the person
who actually purchased the goods.
Held :
The Tribunal noted that the role of USCO and its
liaison office in India was restricted to provide assistance to the associates
in the matter of procuring goods from India and that USCO/Liaison office had not
acted as an agent of manufacturers and had not received any remuneration or
commission from the manufacturers. The only source of income for the USCO was
buying agent’s commission that it received from its associates.
