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2013 Supreme(Kar) 1052
IN THE HIGH COURT OF KARNATAKA AT BANGALORE
N. Kumar and B. Manohar, JJ.
Commissioner of Income Tax and The Assistant Commissioner of Income Tax —Appellant
Vs.
Nike Inc. —Respondent
Income Tax Appeal No. 976 of 2008
Decided on : 07-03-2013
Advocate Appeared:
K.V. Arvind, for the Appellant
Sri Kumar, for the Respondent
The main legal point established in the judgment is that income derived from activities confined to the purchase of goods in India for the purpose of export is not deemed to accrue or arise in India under the Income Tax Act.
Headnote:
Income Tax - Liaison Office - Foreign Exchange Regulation Act - Section 29(1)(a) - Income Tax Act, 1961 - Section 133A - Section 147 - Section 148 - Section 5(2)(b) - Section 9(1)(i) - Explanation 1(b) - Business Connection - Purchase of Goods for Export
Fact of the Case:
The assessee, a world-renowned sports apparel brand, opened a liaison office in India to facilitate procurement of goods for export. The Revenue conducted a survey and issued a notice under Section 148 of the Income Tax Act, contending that the income accrued in India and was chargeable to tax. The assessing authority levied tax at 5% of the export value. The appellate authority upheld the order, but the Tribunal ruled in favor of the assessee, stating that no income accrued in India through its liaison office.
Finding of the Court:
The Tribunal found that the assessee's activities constituted purchasing goods for export, and therefore, no income accrued in India. The court upheld the Tribunal's decision, dismissing the Revenue's appeals.
Issues: The main issue was whether the activities of the assessee's liaison office in India constituted income accruing or arising in India under the Income Tax Act.
Ratio Decidendi: The court held that the assessee's activities, focused on purchasing goods for export, did not result in income accruing in India. The court emphasized that the entire operations were confined to the purchase of goods in India for the purpose of export, and therefore, the income derived therefrom was not deemed to accrue or arise in India.
Final Decision: The court dismissed the appeals, upholding the Tribunal's decision that no income accrued in India through the assessee's liaison office.
N. Kumar, J.—The Revenue has preferred these appeals challenging the order dated 28.05.2008 passed by Income Tax Appellate Tribunal, Bangalore allowing the appeal filed by the assessee. These eight appeals are taken up for consideration together as a common question of law is involved between the same parties but in respect of different assessment years and therefore, they are disposed of by this common order.
2. The assessee is a world known name or brand in sports apparels. It has its main office in USA. It has various associated enterprises or subsidiaries in various parts of the world. The assessee from its office in USA arranges for all its subsidiaries all over the world the various brands of sports apparels for sale to the various customers. The arrangement is through 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 under Section 29(1)(a) of the Foreign Exchange Regulation Act for opening of a liaison office in India. The RBI in its permission issued on 16.10.1997 had clearly indicated the restrictions on the functioning as a liaison office as per the commitments submitted by the assessee to the RBI. In its approval the RBI had directed the assessee to file an annual certificate from the auditors that it had not earned any income in India, details of remittances received from abroad supported by inward remittance certificates, certified copy of the audited final accounts of the office in India, annual report of the work done by the office in India giving details of actual export or import and the number of staff engaged/appointed etc. along with their duties. The restrictions further were that the liaison office will not render any consultancy or any other services directly/indirectly with or without any consideration. The further restriction was that the liaison office will not have signing or commitment powers except that are required for normal functioning as liaison office. Accordingly, the assessee opened the liaison office and employed persons in various categories defining qualifications for each post and this was with reference to its main activity of purchase or procurement of apparels from India for the purpose of export by those manufacturers directly to the various subsidiaries of the assessee spread at various places in the world. For all these activities in India, the liaison office was receiving funds through banking channels from USA. The liaison office in India has no source of income not only because it had so committed to RBI and its liaison office did liaison between the manufacturers and its Head Office in USA to help procurement of various apparels at the instance of the Head Office in USA for export by the manufacturers through the liaison office or directly to the various subsidiaries spread at various places. The assessee carried all the activities such as de
