March 23, 2010
Dutch company held taxable in India on account of goods purchased by Indian office
The Authority for Advance Rulings (“Authority”) has recently held, in the case of M/s AramCo Overseas Company, BV (“Applicant”) that a non-resident engaged in procurement support services to its group entities through an Indian office would be liable to pay tax in India in respect of the income generated there from. The Authority held that the Applicant would not be eligible to the exemption contained in section 9(1) of the Indian Income Tax Act, 1961 (“Act”) applicable to activities connected with the purchase of goods for export from India.
The Applicant, a Netherlands based company, is the subsidiary of the Saudi Arabian Oil Company (“Saudi AramCo”). It is engaged in the business of providing various services to Saudi AramCo including supply chain management, technical support, finance support and administrative support, for which it receives consideration of cost plus a markup of 5%. The Applicant intends to set up an office in India, which would undertake procurement support activities for the Applicant and Saudi AramCo. The Indian office would provide various services relating to the export of goods/products to Saudi AramCo, including: collection and dissemination of market intelligence on products and prospective suppliers, conducting audits and acting as a channel of communication with the suppliers. The Indian suppliers of goods / products would be paid directly by the Applicant or Saudi AramCo, as applicable. The Indian office would undertake no other business for the Applicant or otherwise; and the Indian office would be funded by reimbursements from the Applicant without any profit element.
The issue before the Authority was whether there should be any tax implications for the Applicant in India under the Act, on account of the procurement support services rendered and purchases made by the Indian office, and specifically whether the 5% markup received by the Applicant could be subject to tax in India on account of activities of the Indian office.
Section 5(2) and Section 9 of the Act were the relevant provisions under consideration by the Authority in this case. Section 5(2) of the Act lays down the scope of total income for non-residents and includes income that is received, accrued or arises in India. Section 9 on the other hand, creates a legal fiction, whereby certain kinds of income are deemed to accrue and arise in India and are thus subject to tax in India.
The Authority held that income would accrue or arise in India under section 5(2) of the ITA, as the procurement activities are rendered in India and costs incurred in India. It was held that, as the markup earned by the Applicant would be contingent on the Indian office’s cost, the mere fact that the Applicant received payments outside India would not alter the taxability of the receipt. In this regard, it was argued by the Applicant that section 5(2) should not apply where an exemption was sought to be claimed under the deeming provision contained in section 9(1). However, the Authority placed reliance on the ruling in the case of Mustaq Ahmed1 to reject this argument and went on to independently examine the applicability of section 9(1) to the Applicant.
With regard to the applicability of the deeming provision contained in section 9(1), it was argued by the Applicant that Explanation 1(b) to Section 9(1) of the Act exempts non-residents from tax when the operations in India are confined to the purchase of goods for the purpose of export. The Applicant also placed reliance on rulings such as Ikea Trading (Hong Kong) Ltd2 and Nike Inc. v. ACIT3, where similar questions were decided in favour of the taxpayer. The Authority distinguished both rulings on the grounds that the Indian office in this case was neither the purchaser of goods nor the agent of the purchaser. It was held that the Indian office merely facilitated purchases made by the Applicant itself and that the benefit of the section 9(1) exemption could not be extended to such purchases. The Authority relied on the rulings of Mustaq Ahmed4 and the Supreme Court ruling in the case of Anglo-French Textile Co. Ltd V. CIT5 to reach its conclusions, and also observed that, the Applicant had not provided documents evidencing the details of purchase by Indian office and export to the Applicant / Saudi AramCo to support its submissions in favour of exemption.
With regard to the discussion on provisions of the Act, this ruling reiterates the importance of structuring cross-border purchase arrangements and other logistics support arrangements in an appropriate manner. In a situation where there was documentary support to establish the position of the Indian office as a buying agent of the Applicant, it may have been possible to obtain the benefits of the exemption contained in section 9(1). However, on account of failure to provide documentation, the Authority did not accept the submission that the Indian office was in fact a buying agent for the Applicant and its group companies, thus resulting in Indian tax implications for the Applicant.