Case of Authority for Advance Rulings, March 12, 2010 (case Aramco Overseas Company, BV Vs Director of Income-tax, (International Taxation)-I)

PresidentP.V. Reddi, J. (Chairman) and J. Khosla, Member
Resolution DateMarch 12, 2010


P.V. Reddi, J. (Chairman), (New Delhi)

  1. This application is filed under Section 245Q(1) of the Income Tax Act by AramCo Overseas Company B.V. (hereinafter referred to as the 'applicant' or AOC). It is a Company incorporated under the laws of the Netherlands in 1989. It is stated to be a tax-resident of the Netherlands.

  2. The following facts are stated in the application:

    AOC is a subsidiary of the Saudi Arabian Oil Company (Saudi AramCo). It operates through it offices in Europe, Asia, Australia and Africa to render services in relation to supply chain management, technical support, finance support and administrative support to Saudi AramCo and its group companies. In consideration, AOC is paid the cost plus 5% mark-up by Saudi AramCo, which is received in the Netherlands.

    AOC proposes to establish an office in India ('Indian office') for undertaking procurement support activities for its head office and/or Saudi AramCo. The Indian office will undertake procurement support services for the purpose of export outside India of various goods/products required by Saudi AramCo e.g. steel pipes, pipe fittings, steel valves, process vessels, heat transfer equipments, electrical equipments etc. These products will be utilized by Saudi AramCo in its business as fixed assets or as consumables. Indian office proposes to render the following services in relation to procurement of goods from India:

    • Assistance in collection and dissemination of market intelligence on products and prospective suppliers.

    • Giving opinion on reasonability of prices.

    • Social audit of the supplier to ensure that they adhere to various environmental and other regulations.

    • Checks to confirm whether the suppliers adhere to quality parameters.

    • Coordinating and acting as a channel of communication with the suppliers.

    The Indian office will not undertake any other business function of AOC or any of its group companies. The Indian office will be funded entirely by reimbursements received by it from its head office without any profit element thereon.

    The Indian supplier will be paid directly by the head office or Saudi AramCo, as the case may be.

  3. The question on which the applicant sought advance ruling is the following:

    Whether AramCo Overseas Company BV ('applicant') will be taxable in India, in respect of support services rendered by its Indian office for purchases made by the applicant and its group company, in light of the provisions of the Income-tax Act, 1961?

  4. The case of the applicant rests on clause (b) to Explanation (1) of Section 9(1) of the Income-tax Act 1961 hereafter referred to as the 'Act'. Section 9(1) specifies the incomes which shall be deemed to accrue or arise in India. The relevant part of Section 9(1) is extracted below:

    Section 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 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 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.

    Section 5(2) may also be noted:

    Section 5: Scope of total income

    (1) xx xx xx xx xx xx xx xx

    (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which -

    (a) is received or is deemed to be received in India in such year by or on behalf of such person; or

    (b) accrues or arises or is deemed to accrue or arise to him in India during such year.

    Explanation 1: Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

    Explanation 2: For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

  5. It is the contention of the applicant that all the activities proposed to be undertaken by the Indian office are for the purpose of and in connection with the purchase of goods to be exported out of India and therefore Explanation 1(b) to Section 9(1)(i) is squarely applicable to the present case. Hence it is contended that no part of the income of the applicant will be taxable in India. The mark-up of 5% over and above the cost paid to the applicant by Saudi AramCo in Netherlands on each transaction cannot be treated as taxable income of the applicant in India having regard to the said specific provision.

  6. In the statement of facts extracted above, the applicant has stated that its Indian office undertakes procurement support activities for its head-office and/or Saudi AramCo (jointly referred to hereinafter as 'buyers'). It is not clear, which is the H.O. that the applicant is referring to. Then under the caption 'Business Model of the applicant', it is stated in the rejoinder that the procurement support services detailed therein "form part of the purchasing function of the affiliates of the applicant company". We presume that the term 'affiliates' applies to Saudi AramCo and some other Companies in which Saudi AramCo has controlling interest. The names of those 'affiliates' have not been disclosed. In the course of arguments, the learned Sr. counsel for the applicant has stated that the Indian suppliers directly sell to Saudi AramCo and in this connection, the Liaison Office in India render the services mentioned in the application. It was also clarified that the applicant is a global service provider for Saudi Aramco. It was stated that Saudi AramCo which is the ultimate buyer of goods compensates the applicant by paying the actual cost of services plus 5 per cent 'mark-up'. However, on a reading of the re-joinder and even the original application it appears that the support services performed by the Indian office extend not only to the purchases by Saudi AramCo but also by other undisclosed group companies.

    6.1 We may also point out at this stage that the applicant has not filed any documents evidencing a typical transaction with details such as the placement of purchase order, the Indian supplier and the consignee abroad, the payment received by the Indian supplier and the source and modality of payment, the documents showing the realization of cost plus mark-up and above all the exact manner in which the applicant's Indian office dealt with the Indian supplier and its head office or some other affiliates.

  7. There is one more aspect which we would like to point out. The Revenue has stated in its comments dated 9th October, 2009 that the applicant has not enclosed the agreement with Saudi AramCo under which it is authorized to provide the services. The applicant then filed a copy of the Service Agreement between "AramCo Overseas Co. (the applicant) and the Indian branch office located in Gurgaon. This agreement has not been referred to in the main application. Moreover, we do not find the date of the agreement in that document. We are, therefore, not inclined to refer to or rely on that document for any purpose. Whether any such formal agreement will be entered into between a head office and liaison/branch office is also doubtful.

  8. Now we shall proceed to discuss the question framed by the applicant. In ultimate analysis, it comes to this: whether 5 per cent mark-up received by the applicant from Saudi AramCo for the service/operations rendered through its Indian branch is taxable under the Income Tax Act, 1961 (hereafter referred to as 'Act').

    8.1 Going by the charging Section-5(2), there is no doubt that the income accrues or arises in India. Procurement activities are rendered in India and the costs are incurred in India. The Mark-up is based on cost - howsoever it is calculated. As pointed out by the Revenue, the applicant is entitled of income by way of 5 per cent of mark-up the moment cost is incurred on specified activities. The fact that the income is received outside India does not affect the applicability of Section 5(2). However, the sheet-anchor of the applicant's case rests on Clause (b) of Explanation 1 to Section 9(1)(i) of the Act. It is the case of the applicant that if the claim of the applicant falls within the ambit of Clause (b) of Explanation 1, the applicant is entitled to relief and in a case where Clause (b) of Explanation 1 applies, resort to Section 5(2) which is the general charging section is impermissible. It is contended that where the activities of a non-resident in India are directed towards the purchase of goods for the purpose of export, the legislature does not intend to tax the income arising out of the said activities and it does not matter even if the purchaser is some other non-resident. If the test of actual...

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