Services provided for purchase of goods to be exported from India may not be eligible for exemption provided under Income-tax provisions

Facts

• The applicant, Aramco Overseas Company (AOC) is a Dutch tax resident company. It is a subsidiary of Saudi Arabian Oil Company (Saudi AramCo). AOC provides services in relation to supply chain management, technical support, finance support and administrative support to its holding company and other group companies. For such services, AOC gets remuneration on cost plus 5 percent basis.
• AOC is proposing to set up an office in India to undertake procurement support activities. The Indian office will provide procurement services for export outside India of various goods to Saudi AramCo and other group companies. The Indian office will not undertake any other business function of AOC or of its group company. The expenses of the Indian office will be funded entirely by its head office without any profit element involved therein.
• The issue raised before Authority for Advance Ruling (AAR) is whether the applicant will be taxable in India in respect of support services rendered for purchases made from India.

Contentions of the Applicant

• All the activities proposed to be undertaken by the Indian office will be confined to the purchase of goods to be exported out of India. Therefore, Explanation 1(b) to section 9(1) (i) of the Income-tax Act (^„ITA^?) is applicable, which provides that no income shall be deemed to accrue or arise in India through or from operations which are confined to the purchase of goods in India for the purpose of export. Hence, no part of income of AOC can said to be deemed to accrue or arise in India.

• The mere fact that the purchasing company does not undertake the operations relating to purchase directly, but through a ^„buying agent^? cannot result in denial of aforesaid benefit of cl.(b) of Expl.1 to section 9(1) of the ITA.
• With regards to the specific provision for exclusion, the mark-up of 5% over and above the cost paid by Saudi AramCo to AOC outside India cannot result in taxable income of AOC in India.

Contentions of the Revenue

• The applicant is entitled for income by way of 5 per cent of mark-up on the cost incurred. The fact that the income is received outside India does not affect the applicability of section 5(2) of the ITA which provides for scope of income taxable in India.

Ruling of the AAR

• As per charging section 5(2) of the ITA, the income of the applicant accrues or arises in India.
• The language of the Explanation 1(b) to section 9 (1 )(i) of the ITA cannot be stretched too far so as to extend the benefit to those who do not really act for and on behalf of the non residents but only provide support services in connection with the purchases from India. Any and every person who in some way or the other facilitates purchases by a non-resident for the purpose of export cannot claim benefit of the Explanation 1(b) to section 9(1) (i) of ITA.
• The applicant^’s income is not arising out of the “operations confined to purchase of goods in India for the purpose of export”, but on account of certain support services rendered in connection with purchase by third parties. The mark up is not based on the volume or value of purchases, but is related to the cost incurred by the applicant^’s liaison office for such services. There is no evidence to show that the applicant has acted as an agent of the non-resident buyers.
• Therefore, if the purchasers are non-residents other than the applicant (AOC), the applicant will be liable to pay tax in India on the amount received for the support services rendered through the India office.

Conclusion:- The sourcing activity of non-resident purchaser or an agent of such non-resident purchaser for exports of goods outside India will only be covered by the exclusion clause under deeming provisions of section 9(1 )(i) of ITA. A mere service provider may not be eligible to claim benefit of such an exclusion provision.

Source: Aramco Overseas Company, AAR No. 825/2009 (Authority for Advance Ruling) March 12, 2010