Case nº A.A.R. No. 862 of 2009 of Authority for Advance Rulings, August 08, 2011 (case Columbia Sportswear Company Vs Director of Income-tax (International Taxation))

President:V.K. Shridhar, Member and P.K. Balasubramanyan, Chairman
Defense:Income Tax Act
Resolution Date:August 08, 2011
 
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Judgment:

  1. The applicant is a company incorporated under the laws of United States of America. It is a tax resident of USA. It is a multinational wholesaler and retailer of active outdoors apparel with operations in North America, Europe and Asia. It has earned an international reputation for quality, performance, functionality and value. It is one of the largest outerwear manufacturers in the world as well as a leading seller of skiwear in the USA. The applicant is engaged in creating innovative products and undertakes research and development to develop marketable products. This is done outside India.

  2. In the year 1995, the applicant established a liaison office in Chennai for undertaking liaison activities in connection with purchase of goods in India. The liaison activities have subsequently been expanded to Bangladesh and Egypt. Besides coordinating purchase of goods from India, the Indian liaison office also assists the applicant in purchase of goods from Egypt and Bangladesh and engages in quality monitoring and production monitoring of goods purchased from these countries. The goods procured from Egypt and Bangladesh do not come to India but are directly sold to the applicant in the United States. In the year 2000, a support office was opened by the Indian liaison office in Bangalore with the approval of the Reserve Bank of India. The applicant will be moving its liaison office in India to Bangalore. The Indian liaison office of the applicant has about 35 employees including 5 administrative staff. The liaison office is principally divided into 5 teams:

    (i) Material management

    (ii) Merchandising

    (iii) Production Management

    (iv) Quality control

    (v) Administrative support constituting teams from finance, human resources and information systems.

    According to the applicant, the products of the applicant are produced by Independent suppliers worldwide including in India. The Indian liaison office is involved in activities relating to purchase functions for the applicant. The Indian liaison office is engaged in vendor identification, review of costing data, vendor recommendation, quality control and uploading of material prices into the internal product data management system of the applicant. The liaison office also monitors vendors for compliance with its policies, procedures and standards related to quality, delivery, pricing and labour practices. The applicant has summarized the activities of the Indian liaison office in its application under the four following broad heads:

    (a) Inquiry into, consideration of potential suppliers and interaction with existing suppliers for purchase of Columbia product range.

    (b) Collecting information and samples of various items from manufacturers with regard to various materials available in India.

    (c) Quality check of various products at laboratories to see whether it adheres to the costing and quality parameters as prescribed by the applicant.

    (d) Coordinate and act as a channel of communication between the applicant and the Indian vendors.

  3. The applicant has gone on to explain what the activities under the four broad heads entail. The applicant has asserted that the Indian liaison office does not have any revenue streams; it does not source products to be sold locally in India. It does not undertake any activity of trading, commercial or industrial in nature in India. The expenditure of the liaison office are entirely met by remittances made by the applicant.

  4. On these facts the applicant approached this Authority essentially seeking a ruling on the question whether in the nature of the activities carried on by the liaison office it could be understood as a permanent establishment of the applicant and whether any income can be said to accrue or arise in India to the applicant, liable to be taxed in India.

  5. By order dated 2.3.2010 while admitting the application for a ruling this Authority framed the following questions for rendering advance ruling:

  6. Whether based on the nature of activities carried on by the Liaison Office ("India LO?) of the applicant in India, listed in the Statement of relevant facts (annexure-III), any income accrues or arises in India as per Section 5(2)(b) of the Act?

  7. Whether based on the nature of activities carried on by the India LO, as listed in the Statement of relevant facts (annexure-III), the applicant can be said to have a business connection in India as per the provisions of Section 9(1)(i) of Act read with its Explanation 2?

  8. If the answer to Query 2 is in the affirmative, whether various activities carried out by the India LO, as listed in the Statement of relevant facts (annexure-III), are covered under the phrase "through or from operations which are confined to the purchase of goods in India for the purpose of export? as stated in part (b) of Explanation 1 to Section 9(1)(i) of the Act?

  9. If the answer to Query 3 is in the negative, how would profits attributable to the "operations in India? be determined and what would be the broad principles to be borne in mind for attributing income to the India LO?

  10. Whether the India LO creates a permanent establishment ("PE?) for the applicant in India under Article 5(1) of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and capital gains entered into between the Government of Republic of India and the Government of the United States of America ("Treaty?) read with the PE exclusion available for purchase function in terms of paragraph 3(d) of the Treaty?

  11. If the answer to Query 5 is in the affirmative, how would the profits attributable to the PE in India be determined and what would be the broad principles to be borne in mind for attributing income to India LO under the Treaty?

  12. According to the applicant, it is a wholesaler and retailer of active out door apparel engaged in buying and selling of goods to different customers. The products are produced by independent suppliers worldwide including in India. But, the products are sold only outside India. No product is sold in India. A liaison office in India was established for the purpose of undertaking liaison activities in connection with purchase of goods in India. Purchases are invoiced by the Indian suppliers directly to the applicant who in turn sells, the same to wholesale/retail customers. The sales are made by the applicant to customers wholly outside India. The sale price is received by the applicant from the customers outside India. What the applicant does in India relates to a source of expenditure and not a source of income. The activity of purchase is one that involves expenditure and is in no way related to generation of revenue. No revenue generating activity takes place in India and consequently there can be no question of any right to receive income arising in India. As the source of Revenue lies in sales effected outside India, no income accrues or arises in India under Section 5(2) of the Income-tax Act. The activities of the Indian liaison office are only those permitted by the Reserve Bank of India while permitting the establishment of the liaison office. The applicant has not undertaken any business activity and thus no income has been earned or can accrue to the applicant in India. It is further submitted that the applicant also could not be said to have a business connection in India since the liaison office acts only as a communication link between the applicant and the parties in India. The liaison office does not have any right to conclude contracts and certainly no right to conclude contracts habitually with Indian suppliers. That right solely rests with the applicant. Since the activities performed by the liaison office are an integral part of the purchase function, a business connection will not exist as per explanation (2) to Section 9(1)(i) of the Income-tax Act. Clauses (b) and (c) of Explanation (2) to Section 9(1)(i) of the Act are not applicable given the nature of activities performed by the Indian liaison office. The liaison office does not maintain in India any stock of goods or merchandise from which it regularly delivers goods or merchandise on behalf of the applicant. The liaison office only assists the applicant by undertaking liaison activities in connection with purchase of goods from India and does not secure or solicit any sale order in India. It is also submitted that the Indian liaison office cannot be considered to be a permanent establishment of the applicant in...

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