Global Tax Alert | 13 June 2013
India's Karnataka High Court rules foreign company's sourcing support activities do not create a taxable presence
This Tax Alert summarizes a recent ruling of the Karnataka High Court (HC) in the case of Nike Inc. (Taxpayer)1 on whether sourcing support activities carried out by a Liaison Office (LO) of the Taxpayer in India results in a taxable presence. After reviewing the facts of the case, the HC ruled that the Taxpayer was not carrying on any business in India and no income accrued or arose in India. Further, the Taxpayer's activities undertaken through the LO, for assisting foreign buyers in the purchase of goods from Indian manufacturers would fall under the exclusion provided in the Indian Tax Law (ITL) for the purchase of goods for the purpose of export out of India. Accordingly, the income of Taxpayer was not taxable in India under the ITL.
Under the provisions of the ITL, a non-resident (NR) is taxable on income that accrues or arises in India or income that is deemed to accrue or arise in India. Income from a ”business connection” in India would deem to accrue or arise in India. However, the above excludes any income if the activities of NR are confined to the purchase of goods in India for the purpose of export (Purchase Exclusion).
The Taxpayer, a US Company, is in the business of sale of sports apparel globally through its various subsidiaries and affiliates. The Taxpayer does not have its own manufacturing facilities and it arranges for procurement of such apparels from manufacturers in different countries, who directly dispatch the apparels to its affiliates (buyers) for onward sale to customers.
With a view of expanding its operations, the Taxpayer with the approval of the Reserve Bank of India (RBI), set up an LO in India to act as a communication channel between the Taxpayer, the Indian manufacturers and buyers across the world.
The Taxpayer, acting as an agent for the buyers in India, arranges for procurement of goods from Indian manufacturers. For the above, the following activities were carried out by Taxpayer through its LO in India:
- • Identifying exclusive manufacturer.
- • Designing goods as per specification of the buyers and supervising manufacture of the same.
- • Ensuring quality of goods as specified and timely dispatch of goods; LO proposes and gives opinion on pricing, quality, quantity which is finalized by Taxpayer in US along with the destination/ buyer of the goods. Various personnel were employed in the LO for carrying out the above activities. All expenses of LO are funded by Taxpayer from US.
The goods are directly shipped by the manufacturers to the buyer's location and sale consideration also directly flows to manufacturer from the buyers. The Taxpayer in turn receives commission income in US from the buyers (its affiliates) for providing buying agency services in India.
The Tax Authority alleged that activities carried on in India were beyond the scope of an LO and such income-generating activities amounted to carrying on part of the business of the Taxpayer in India. Thereby, income of 5% of the export value was attributed to tax in India. Such attribution was upheld by the first appellate authority in India. On an appeal by the Taxpayer, the second appellate authority, viz, the Income Tax Appellate Tribunal, ruled in favor of the Taxpayer.2 The Tax Authority then appealed to the HC.
The HC ruled that the Taxpayer is not carrying on any business in India. Activities undertaken through the LO are for assisting buyers in the purchase of goods of a particular specification from Indian manufacturers. The Taxpayer does not have any right in the income of the manufacturers which is directly received from the buyers. Such income cannot be said to be the Taxpayer's “income accruing or arising in India.”
Income of the Taxpayer in the form of consideration received from the buyers is received outside India pursuant to contracts (if any) entered outside India. Such income would accrue or arise to the Taxpayer outside India.
The HC also noted that the Taxpayer does not have a business connection in India which excludes activities done on behalf of buyers which are confined to the purchase function. In the first place, Taxpayer is not purchasing any goods but merely facilitating purchase by the buyers from India. Even assuming goods are purchased by the Taxpayer and onward supplied to the buyers, such transaction would amount to the purchase of goods for the purpose of export falling within the Purchase Exclusion of the ITL.
Considering the objective of the provision of Purchase Exclusion which seeks to encourage exports from India, the Taxpayer's activities would qualify for the exclusion under this provision under the ITL.
Whether sourcing activities undertaken by foreign companies creates a taxable presence has been a subject matter of controversy in India, with the Tax Authority generally adopting a fairly narrow interpretation of the Purchase Exclusion contained in the ITL. While application of the exclusion would depend on the specific facts of each case, this ruling provides a broad and purposive interpretation of the provision, which would be useful for taxpayers with similar activities.
1. CIT (IT) v. Nike Inc. (ITA No. 976 of 2008) [TS-248-HC-2013(KAR)].
2. See EY Tax Alert, Indian Tax Tribunal rules on taxability of procurement activities carried on by a Liaison Office of a Foreign Company, dated 11 June 2008.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), Mumbai
- • Sudhir Kapadia
+91 22 6192 0900
- • Hitesh Sharma
+91 22 6192 0620
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
- • Nachiket Deo
+020 778 30862
EY Solutions LLP, Indian Tax Desk, Singapore
- • Gagan Malik
+65 6309 8524
Ernst & Young LLP, Indian Tax Desk, New York
- • Tejas Mody
+1 212 773 4496
EYG no. CM3514