Facts:
HKCo was a company incorporated in Hong Kong and a member of an international Group of companies. HKCo acted as a sourcing channel for the entire Group. It sourced products internationally at competitive prices and of quality standard prescribed by the Group and resold goods to the affiliates. HKCo had established a Liaison Office (“LO”) in India for acting as a communication channel between HKCo and apparels manufacturers in India. Indian suppliers raised invoice on HKCo and HKCo, in turn, raised invoice on the buyer entities without any mark up. HKCo charged 5% commission to the buyer on the invoice value. LO also monitored the progress, quality, etc., at the manufacturing facilities and also the time schedule.
The AO concluded that the activities of LO pertained to supply chain management activities of HKCo. Hence, the exclusion in Explanation 1(b) to section 9(1)(i) of the Act did not apply and passed draft assessment order accordingly. Relying on the decision in Columbia Sportswear Company, In re, [2011] 12 taxmann.com 349 (AAR), the DRP accepted the conclusion of the AO and directed him to make the assessment.
Held:
The LO was engaged in (i) identification of the vendors in India; (ii) communication of the requirements with regard to design and specifications to the vendors; (iii) receipt of the prototype from the vendor; (iv) quality check for the products before production of goods; and (v) tracking the production and delivery including forecasting and scheduling of the order.
Considering the activities carried on by the LO of HKCo, the activities squarely fall within the ambit of explanation 1(b) to section 9(1)(i) of the Act. Further, there is no evidence to suggest that LO had indulged in commercial activities. In arriving at the conclusion of non taxability, strong reliance is placed on the decision of the Karnataka High Court in Nike Inc. (34 taxmann. com 170).