in the high court of karnataka at bangalore dated...

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IN THE HIGH COURT OF KARNATAKA AT BANGALORE

DATED THIS THE 9TH DAY OF JUNE, 2014

PRESENT

THE HON’BLE Mr. JUSTICE N. KUMAR

AND

THE HON’BLE Mr. JUSTICE B. MANOHAR

I.T.A. NO.204/2010

c/w

I.T.A.Nos.203/2010, 205/2010, 206/2010, 207/2010 &

208/2010

I.T.A.NO.204/2010

BETWEEN:

1. The Director of Income Tax International Taxation Rashtrothana Bhavan Nrupathunga Road Bangalore.

2. The Assistant Commissioner of Income-Tax

International Taxation Circle-19 (1) Rashtrothana Bhavan Nrupathunga Road Bangalore.

...APPELLANTS (BY Sri.K.V.Aravind, Adv.,)

2

AND:

M/s Mondial Orient Ltd., Mallika Building Plot No.74-75 Millers Road Bangalore.

…RESPONDENT (By Sri.Rupesh Jain Adv. For M/s Anandarama Prashanth & Vikram, Advs.)

. . . .

This I.T.A. is filed under Section 260-A of the Income Tax Act, 1961 arising out of order dated 29.01.2010 passed in ITA No.388/Bang/2008, for the assessment year 2005-06, praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in I.T.A. No.388/Bang/2008 dated 29.01.2010 confirming the order of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, International Taxation, Circle-19(1), Bangalore, in the interest of justice and equity. I.T.A.NO.203/2010

BETWEEN:

1. The Director of Income Tax

International Taxation Rashtrothana Bhavan Nrupathunga Road Bangalore.


International Taxation

3

Circle-19 (1) Rashtrothana Bhavan Nrupathunga Road Bangalore.

...APPELLANTS (BY Sri.K.V.Aravind, Adv.,) AND:



. . . . This I.T.A. is filed under Section 260-A of the Income Tax Act, 1961 arising out of order dated 29.01.2010 passed in ITA No.387/Bang/2008, for the assessment year 2005-06, praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in I.T.A. No.387/Bang/2008 dated 29.01.2010 confirming the order of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, International Taxation, Circle-19(1), Bangalore, in the interest of justice and equity. I.T.A.NO.205/2010

BETWEEN:


International Taxation

4

Rashtrothana Bhavan Nrupathunga Road Bangalore.






. . . . This I.T.A. is filed under Section 260-A of the Income Tax Act, 1961 arising out of order dated 29.01.2010 passed in ITA No.383/Bang/2008, for the assessment year 2005-06, praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in I.T.A. No.383/Bang/2008 dated 29.01.2010 confirming the order of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, International Taxation, Circle-19(1), Bangalore, in the interest of justice and equity.

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I.T.A.NO.206/2010

BETWEEN:








. . . . This I.T.A. is filed under Section 260-A of the Income Tax Act, 1961 arising out of order dated 29.01.2010 passed in ITA No.384/Bang/2008, for the assessment year 2005-06, praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in I.T.A.

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No.384/Bang/2008 dated 29.01.2010 confirming the order of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, International Taxation, Circle-19(1), Bangalore, in the interest of justice and equity. I.T.A.NO.207/2010

BETWEEN:








. . . .

7

This I.T.A. is filed under Section 260-A of the Income Tax Act, 1961 arising out of order dated 29.01.2010 passed in ITA No.385/Bang/2008, for the assessment year 2005-06, praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in I.T.A. No.385/Bang/2008 dated 29.01.2010 confirming the order of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, International Taxation, Circle-19(1), Bangalore, in the interest of justice and equity. I.T.A.NO.208/2010

BETWEEN:





...APPELLANTS

(BY Sri.K.V.Aravind, Adv.,) AND:

M/s Mondial Orient Ltd., Mallika Building Plot No.74-75

8

Millers Road Bangalore.


. . . . This I.T.A. is filed under Section 260-A of the Income Tax Act, 1961 arising out of order dated 29.01.2010 passed in ITA No.386/Bang/2008, for the assessment year 2005-06, praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in I.T.A. No.386/Bang/2008 dated 29.01.2010 confirming the order of the Appellate Commissioner and confirm the order passed by the Assistant Commissioner of Income Tax, International Taxation, Circle-19(1), Bangalore, in the interest of justice and equity. These I.T.As coming on for admission, this day, N.Kumar J., delivered the following:

JUDGMENT

These appeals are by the Revenue challenging a

common order passed by the Income Tax Appellate

Tribunal, Bangalore branch holding that the assessee’s

income is exempted under Section 9(i) Explanation 1(b) of

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the Income Tax Act, 1961 (for short hereinafter referred to

as ‘the Act’).

2. The assessee is a Hong-Kong based company,

which has established a branch office in India, having

three branches at Bangalore, Tirupur & Delhi. For the

assessment years 2003-04, 2004-05 & 2005-06, the

assessee filed the returns disclosing ‘nil’ income. The

assessing Officer noticed that the assessee claimed

exemption under Section 9 (1) (i) (b) on the ground that

the assessee carried out its operations in India, which

were confined to purchase of goods in India, for the

purpose of exports and therefore, no income was deemed

to have accrued or arisen in India. However, on verifying

the profit and loss account of the Branch, the Assessing

Officer formed an opinion that in fact, the Branch office is

not involved in any purchase activity in India. Therefore,

he concluded that the Branch office has not exported any

goods from India. According to him, the Branch office is

actually engaged in the business of supply chain

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management for garments, which include services like

product design & development, sourcing, merchandising,

follow up, quality control, factory evaluation and shipping

coordination. All the branches of the company in India

were actually engaged in similar activities only.

Therefore, a survey action under Section 133A of the Act

was initiated on 12.01.2006. During the course of survey

and also post survey, statements were recorded from the

officials of the assessee, which led to the conclusion that

the assessee is not carrying out liaison activities, but in

fact was carrying out business activities under the guise

of liaison office.

3. A notice under Section 148 of the Act was issued

and served on the assessee. In response to the notice,

the assessee filed the return on 22.05.2006 showing ‘nil’

income. The assessing officer recorded the statement of

one Sri. Lalith Fernando, Country Manager on

16.01.2006 in respect of the details about the

organization and activity of the Branch located at

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Bangalore. He also recorded the statements of Mr.

P.J.Vora, Accounts Supervisor, Mondial Orient Ltd., of

Indian Branch, Mr.Nihal Mudalige, Quality Managr, India

sub-continent on 12.01.2006 and Mr.David D’Souza, MD

of Garden City Fashions P.Ltd., was also recorded on

08.12.2006.

4. On consideration of the aforesaid material the

assessing officer held that the assessee’s activities were

not confined to liaison activities alone, but it consisted of

substantial business activities also. The Indian Branch

Office was doing the quality inspection services as per the

agreement entered into between the assessee and the

Indian Office. The assessee was only receiving cost + 5%

on the services rendered to the Branch offices in India.

The Branch office in India was reimbursed for the cost of

administration expenditure incurred by it. The assessee

was only rendering certain services and certain quality

inputs and received charges for the same for the services

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rendered. The said receipt is attributable to the activity

in India and accordingly, taxable in India. Aggrieved by

the said order, the assessee preferred an appeal before

the Commissioner of Income Tax (Appeals).

5. The Appellate Commissioner came to the

conclusion that the activities of the assessee Branch in

India including the authority to enter into negotiations

with local exporters/manufacturers would constitute

course of dealing or continuity of relationship, which can

be said to contribute directly or indirectly to the earning

of income by the assessee outside India. Consequently,

this activity of the Branch would tantamount to a

“business connection” in India. It is not a casual

connection or a stray nexus comprising of a few isolated

transactions. It is rather a real and intimate relation,

which contributes directly or indirectly to the earning of

income by the assessee in its business. This is a regular

course of dealing or relationship between the business of

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the assessee outside India and the activities of branch

office in India. Therefore, the income would have deemed

to accrue or arise through the Branch office in India and

therefore, it is taxable under Section 9 1 (i) (b) of the Act,

in India.

6. However it is held that the Assessing Authority

should have brought to tax the income of the appellant

from rendering of service of supply chain management

earned by the assessee at cost + 5% as specified in the

agreement between the assessee and the MSL. Therefore

the Assessing Authority was directed to re-compute the

income of the assessee on the basis of cost + 5% as per

the agreement between the parties and accordingly

allowed the appeal in part. Aggrieved by the said order

both the assessee as well as the revenue preferred

appeals. That is how there are six appeals relating to

three assessment years.

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7. The Tribunal, on re-appreciation of the entire

material on record, after taking note of the judgments on

which reliance was placed, after interpreting Section 9(1)

and explanation (1) held that it is not necessary that an

assessee who directly export if the non-resident operates

through assessee but confined to purchase of goods for

the purpose of export is exempted. Therefore, purchase

per se for the purpose of export is not the requirement of

the Section. A careful reading of the Section will make it

clear that first of all there is nothing in the Section to say

that the assessee cannot purchase on behalf of any other

party. The assessee should directly purchase and export

it. In the case of a non-resident no income shall be

deemed to accrue or arise in India to him (to such non-

resident) through or from operations which are confined

to the purchase of goods in India actually for the purpose

of exports. In other words not only the purchase of goods

as such but if the assessee does the operations which are

limited to the purchase of goods in India for the purpose

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of export is exempted. Then they referred to explanation 3

of Section 9(1)(i) of the Act and held that income earned

by the assessee is exempted from tax and accordingly

allowed the appeal of the assessee, dismissed the appeal

of the revenue. Aggrieved by the said order the revenue

has preferred these appeals.

8. The appeals are admitted to consider the

following substantial question of law.

Whether the Tribunal was correct in

holding that the activity of a. Trading of most

reliable, qualified suppliers of Textile

products, b. Checking and expediting the

production of merchandise, c. Attending upon

buyers and other representatives of the

buyers, d. To follow-up of orders, e. To

provide quality assurance, f. To arrange for

inspection and g. To arrange for logistics and

export as contended by the assessee, would

amount to purchase of goods in India for the

purpose of export and therefore as per

Explanation to Section 9(1)(i)(b) of the Act the

income earned was not liable to tax in India?

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9. The learned counsel for the revenue assailing the

impugned order contended that in the instant case

neither the assessee nor it branch offices at India placed

any orders for purchase of garment with the

manufacturers. They are rendering services such as

tracing of most reliable, qualified suppliers of textile

products, checking and exporting, production of

merchandise, attending upon buyers and other

representatives of the buyers, to follow up the orders, to

provide quality assurance, to arrange for inspection and

to arrange for logistics and export. It is for the services

which they render they are paid for. When they are not

making purchase for the purpose of exporting goods

explanation 1(b) is not attracted and the income accrued

to the assessee for the services so rendered to the non-

resident buyer cannot be exempted from payment of tax.

10. Per contra learned counsel appearing for the

assessee supporting the impugned order contended that

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admittedly the foreign buyer do not approach the Indian

manufacturer directly. He approaches the assessee,

inform him about his requirements and also the price

which he is willing to pay for the merchandise. It is

thereafter the assessee approaches the Indian

manufacturer, negotiates with him the price and when

once the contract is concluded the assessee provides the

necessary expertise for manufactured goods according to

the specifications and see that the standards are

maintained and thereafter the goods are exported outside

the Country to the buyer. Therefore the income which

arises in India to the assessee is on account of purchase

and export of merchandise and therefore falls under

Section 9(1)(i)(b) and the Tribunal rightly upheld the

contention of the assessee. Therefore he submits that no

case for interference is made out.

11. In order to appreciate the rival contentions first

let us look at the undisputed facts. The assessee is a

Hongkong based company which is a non-resident. It has

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branches in India at 3 places. According to the statement

of Sri. Lalith Fernando, Country Manager each branch

has four departments – merchandising, quality control,

administration and shipping. The activities of the branch

offices include evaluating correct

manufacturers/suppliers and assessing their suitability

to clients/buyers. Most of the times the suppliers

approach the assessee through email or letters.

Depending on information of suppliers, the quality

technicians of the assessee and the merchandiser visit

the factory premises and gives a report to the Office

Manager. The Office Manager thereafter discusses with

the Country Manager. After evaluation by the Country

Manager, if found proper and suitable, the information is

passed on to the Sourcing Product Manager who cross-

verifies the information with the merchandiser and

depending on client’s requirements, the supplier is either

approved or rejected or kept in the panel for future

reference and use. Thereafter when the buyer makes an

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enquiry either with the SPM or with the merchandiser the

merchandising team of the branch office will decide on

the appropriate supplier for the client, discuss the price

and delivery period with the supplier and communicate

the same either directing to the buyer with the copy

marked to the SPM. If the terms are accepted, order is

confirmed to the supplier. At this stage the order

placement is completed. After this the merchandiser

follows up the order to ensure that the delivery date is

met. In the meantime the quality technicians obtain the

approved samples from the suppliers and after checking

send it to the buyer for final approval. If the product is

approved then pre-production meetings are held by the

quality department – inspectors with the production team

of the supplier. Decisions taken at these meetings are

binding on the buyer and the supplier. After this, in-line

inspection meetings are held when goods are under

production the quality technicians visits the supplier

premises to check the quality of goods and the

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proceedings are discussed in these in-line inspection

meetings. This is a meeting between the quality

technicians of the company with the production staff of

the supplier to ensure to quality parameters of the

products are met. After the goods are ready, Inspectors

carry out the final inspection of the products. During the

in-line inspection stage, if there are defects found, the

supplier is given an opportunity to correct these defects

before the final inspection. If by chance the defects are

found in the final inspection stage then a random sample

is selected and sent to the buyer for final acceptance. The

buyer reserves the right to refuse or reject the order at

this stage or accept the order with a price negotiation. If

the goods are found according to the required standard,

then the supplier will hand over the goods to the shipping

forwarder of the company who will coordinate the

shipment. If the price is different from the target then

price negotiations are made with the supplier by the

assessee and the information is passed on to the buyer.

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The final say of price rests with the buyer and the

assessee will not have any influence over it.

12. From the aforesaid facts it is clear that it is true

that the assessee is not placing any orders with the

manufacturers. The assessee is not purchasing the

merchandise and the assessee is not exporting the

merchandise but the fact remains that the entire effort

put forth by the assessee results in a valid buyer placing

orders with an Indian manufacturer and after the goods

are manufactured according to the specifications, they

are exported out of the Country. No foreign buyer is

approaching an Indian manufacturer directly. They are

approaching the assessee, giving him their requirements,

informing him about the price which they are willing to

pay and the assessee takes the responsibility of finding

out the manufacturer, getting the merchandise

manufactured according to the specifications and they

also assure the quality of the goods manufactured and in

the end, they also take the responsibility of seeing that

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the goods reach the destination. It is for these services

the asessee is paid by the foreign buyer. It is in this

background let us look at Section 9 of the Act which deals

with the income deemed to accrue or arise in India. It

reads as under:

Income deemed to accrue or arise in India

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

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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;

b) in the case of a non-resident, no

income shall be deemed to accrue

or arise in India to him through or

from operations which are

confined to the purchase of goods

in India for the purpose of export

c) in the case of a non-resident,

being a person engaged in the

business of running a news

agency or of publishing

newspapers, magazines or

journals, no income shall be

deemed to accrue or arise in India

to him through or from activities

which are confined to the

collection of news and views in

India for transmission out of

India;

d) in the case of a non-resident,

being-

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1. an individual who is not a

citizen of India; or

2. a firm which does not have

any partner who is a citizen of India

or who is resident in India; or

3. a company which does not

have any shareholder who is a

citizen of India or who is resident in

India, no income shall be deemed to

accrue or arise in India to such

individual, firm or company through

or from operations which are

confined to the shooting of any

cinematograph film in India.]

12. The aforesaid provisions makes it clear what

are the incomes which are deemed to accrue or arise in

India for the purpose of levying tax. However, explanation

(1)(a) introduces a deeming clause, i.e., though income

accrues or arises in India as mentioned in the aforesaid

provisions, for the purpose of this clause which shall be

deemed not to have accrue or arise in India, i.e., the

income earned by an assessee through or from operations

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which are confined to the purchase of goods in India for

the purpose of export. In other words, if an assessee

earns income through or from operations out of purchase

of goods in India for the purpose of export only it is

deemed not to accrue or arise in India. The argument is,

for attracting this provision the assessee must be a

purchaser of goods and after such purchase he should

export the goods. Then only he can have the benefit of

this provision. Nowhere in this section it is mentioned

that the assessee should purchase the goods in India for

the purpose of export. On the contrary it is expressly

mentioned any income accruing or arising in India to him

through or from operations which are confined to

purchase of goods in India for the purpose of export alone

is exempt from payment of tax. In other words if an

assessee carries on operations which results in purchase

of goods in India for the purpose of export and the income

so accrued or arising out of such transactions are

exempted from payment of income tax. The whole object

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of this provision being to encourage export of

merchandise from India which enables Indian

manufacturer to earn and when it is exported the country

would earn foreign export. An incentive is given to a non-

resident to carry on business in India. Otherwise the

explanation would have no meaning and that is precisely

what the Tribunal has held.

13. Reliance is placed on a judgment of this Court

in the case of Commissioner of Income Tax International

Taxation Vs. Nike Inc reported in (2013) 217 Taxman 1

(Karnataka) where a non-resident assessee was placing

order with an Indian customer for purchase of goods

which were supplied by the Indian manufacturer not to

the non-resident assessee but to its affiliates. It was

contended that the benefit of this provision was given

because the non-resident assessee was placing orders

directly for purchase of goods. In the instant case as there

is no order placed for purchase of goods by the non-

resident assessee he is not entitled to the said benefit. We

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do not find any substance in the said contention. In the

aforesaid judgment it has been held that if the 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 purchasing any

goods. The assessee is enabling the manufacturers to

purchase goods of a particular specification which are

required by a foreign buyer to whom the manufacturer

sells. As the orders are placed by the assessee with the

manufacturer and the goods are manufactured according

to their specification which is the requirement of the

buyer and even if it is held, though the goods are supplied

to the buyer, it is deemed to be supplied to the assessee,

the whole object of this transaction is to purchase goods

for the purpose of export. Once the entire operations are

confined to the purchase of goods in India, for the

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purpose of export, the income derived therefrom shall not

be deemed to accrue or arise in India and it shall not be

deemed to be an income under Section 9 of the Act. The

object is to encourage exports thereby the Country can

earn foreign exchange. The activities of the assessee in

assisting the Indian manufacturer to manufacture the

goods according to their specification is to see that the

said goods manufactured has an international market,

therefore, it could be exported. In the instant case also

the whole object of the respondent assessee is giving its

services both to the foreign buyer and the Indian

purchaser is to export the merchandise to the foreign

buyer which results in earning foreign exchange. Merely

because the assessee do not place orders for purchase, in

law it makes no difference. Without placing an order in its

name the assessee is enabling a foreign buyer to place

order directly with the manufacturer after the assessee

approves the manufacturer and requirement and the

assessee takes the responsibility of maintaining quality

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and dispatch of the goods to the destination. The

purchase and export of merchandise takes place and

therefore the object with which the said provision is

inserted is achieved. Therefore the assessee is entitled to

the benefit of exemption.

14. In that view of the matter we do not see any

error committed by the Tribunal in passing the impugned

order. The substantial question of law accordingly is

answered in favour of the assessee and against the

revenue.

SD/- JUDGE. SD/- JUDGE. SS/LRS.

in the high court of karnataka at bangalore dated...

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