Taxability of income received by foreign company for procurement support services rendered by its Indian office to other foreign company

AAR held that income received by a foreign company for procurement support services rendered by its Indian office in connection with purchase operations undertaken by other foreign company in India, is taxable in India.

Recently, the Authority for Advance Ruling (AAR) in the case of Aramco Overseas Company BV [2010-TIOL-14-ARA-IT] held that a non resident, who is neither the purchaser of the goods nor an agent of such purchaser purchasing goods for the purpose of export to the holding company outside India would be liable to tax in India. It was held that clause (b) of the explanation 1 to section 9(1 )(i) of the Income-tax Act, 1961 (the Act) does not apply to the applicant where it is provided that no income shall be deemed to accrue or arise in India to the non resident through or from the operations which are confined to the purchase of goods in India for the purpose of export.

The AAR made an important observation that if the applicant itself is the purchaser of goods exported from India, the applicant can claim the benefit of clause (b) of explanation 1 to section 9(1)(i) of the Act.

Facts of the case

• The applicant, a tax resident of Netherlands, is a subsidiary of Saudi Arabian Oil Company (SAOC). The applicant has offices in many parts of the world. The applicant is engaged in providing services in relation to supply chain management, technical support, finance support and administrative support to SAOC and its group companies. In return the applicant will get a consideration on cost plus 5 percentage mark-up basis.
• The applicant proposes to set up an office in India to provide similar services to its head office and / or SAOC. The applicant proposes to undertake procurement support services for the purpose of export outside India of various goods/ products required by SAOC for eg. steel pipes, pipe fittings, steel valves, process vessels, heat transfer equipment, electrical equipment, etc. These products will be utilised by SACO in its business as fixed assets or as consumables.
• The Indian office will not undertake any other business function of the applicant or any of its group companies. The Indian office will be funded entirely by reimbursements received by it from its head office without any profit element thereon and the Indian supplier will be paid directly by the head office or SACO, as the case may be.

Issue before the AAR

• Whether applicant will be taxable in India, in respect of support services rendered by its Indian office for purchases made by the applicant and its group company, in light of the provisions of the Act?

Contentions of the applicant

• The applicant contended that the clause (b) of explanation 1 to section 9(1)(i) of the Act is squarely applicable to the present case since the activities proposed to be undertaken by the Indian office are for the purpose of and in connection with the purchase of goods to be exported out of India. Therefore, the mark-up of 5 percent over and above the cost paid to the applicant by SACO in Netherlands on each transaction cannot be treated as taxable income of the applicant in India.
• If the claim of the applicant falls within the ambit of clause (b) of explanation 1 to section 9(1)(i) of the Act, resort to general charging section i.e. section 5(2) of the Act is impermissible. The legislature does not intend to tax the income arising out of the activity of purchase of goods for the purpose of export by a non resident and it does not matter even if the purchaser is some other non-resident. If the test of actual accrual as laid down in section 5(2) is to be applied even in a situation governed by clause (b) of explanation 1 to section 9(1)(i) then the said clause would virtually become superfluous.
• Further, mere fact that the purchasing company does not undertake the operations relating to purchases directly, but through a ‘buying agent’ cannot result in denial of benefit provided under the provisions of the Act.
• The applicant relied on various cases (Refer Note-1 for list)  to contend that the benefits provided by clause (b) of explanation 1 to section 9(1 )(i) of the Act is available and therefore, it was not liable to pay tax on the income earned in India.

AAR’s ruling

• The AAR observed that under the provisions of the Act the purchases made by the non-resident directly or through its agent for the purpose of export is not taxable in India.
• As per section 5(2) of the Act, it was very clear that since the transaction of procurement activities and the costs are rendered / incurred in India, the income of the applicant was accrued or arises in India. The fact that the income is received outside India does not affect the applicability of section 5(2) of the Act.
• The AAR after relying on its own ruling in the case of Mustaq Ahmed [2008] 307 ITR 401 (AAR) and the purpose behind the insertion of clause (b) to explanation 1 observed that the language of the explanation 1 of section 9(1 )(i) of the Act 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 in the purchase transactions, but only provide certain support services to the non-residents in connection with the purchases made by them.
• Any and every person who is neither the purchaser of goods to be exported nor an agent of such purchaser does not fit into the clause (b) of the above referred explanation. The whole object to introduce that clause is to ensure that no attribution of income shall be made to the purchase operations if a non-resident makes such purchases for the purpose of export. Further, the AAR observed that the rulings relied by the applicant were distinguishable on facts.
• The AAR observed that the applicant did not file any documents evidencing a typical transaction with details such as the placement of purchase order, the Indian supplier and the consignee abroad, the exact manner in which the applicant’s Indian office dealt with the Indian supplier and its head office or some other affiliates, etc. However, from the facts available it appears that the support services performed by the Indian office extended not only to the purchases by SACO but also by other undisclosed group companies.
• The AAR held that when the applicability of the provisions of section 9 of the Act is excluded from consideration, there is no denial of the fact that section 5(2) of the Act is squarely applicable and therefore, the applicant was liable to pay tax in India on account of the support services rendered in India for its affiliate entities.
• The AAR also made an important observation that if the applicant itself is the purchaser of goods exported from India, the applicant can claim the benefit of clause (b) of explanation 1 to section 9(1)(i) of the Act. If the purchasers are non-residents other than the applicant, the applicant is liable to pay tax in India on the amount received by it for the support services rendered through the branch office in India.

Our Comments

The AAR, based on the facts of this case held that the benefit of exception given under section 9(1 )(i) with respect to purchase of goods for the export purpose was not available to the applicant because it was neither purchaser of goods nor an agent of such purchaser.

This decision is important from the perspective that it reiterate the importance of structuring of purchase arrangement and other related support services.

It is pertinent to note that an AAR ruling is binding on the applicant, in respect of transaction in relation to which the ruling is sought and on the tax authorities. However, it carries persuasive value before the tax tribunals / courts.

Note- 1

• Ikea Trading (Hong Kong) Ltd. [2008] 308 ITR 422 (AAR)
• Nike Inc. Vs. ACIT[2008] 122 TTJ 201 (Bang)
• Angel Garments Ltd. [2006] 287 ITR 341 (AAR)

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