Post on 10-Aug-2020
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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.
2. The Assistant Commissioner of Income-Tax
International Taxation
3
Circle-19 (1) Rashtrothana Bhavan Nrupathunga Road Bangalore.
...APPELLANTS (BY Sri.K.V.Aravind, Adv.,) 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.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:
1. The Director of Income Tax
International Taxation
4
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.,) 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.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.
5
I.T.A.NO.206/2010
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.,) 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.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:
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.,) 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.)
. . . .
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:
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.,) AND:
M/s Mondial Orient Ltd., Mallika Building Plot No.74-75
8
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.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
10
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
12
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
13
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
15
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
19
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
20
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
23
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
25
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
26
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
27
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
28
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
29
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.