This Article summarises a recent ruling of the Authority for Advance Rulings (A.A.R. No. 825 of 2009) in the case of Aramco Overseas Company B.V. (Applicant) on the issue of taxation of procurement support services rendered by the Indian liaison office (Indian office) of the Applicant.
The AAR ruled that the Applicant would be taxable in India in respect of income received by it for the procurement support services rendered by its Indian office in connection with purchase operations undertaken by other non-residents in India. The AAR further ruled that, in respect of the above income, the Applicant cannot claim exclusion from taxation in India if it did not undertake any purchase operations on its own account or act as a purchase agent of other non-residents.
Facts of the case and background
The Applicant, a company incorporated in the Netherlands, is a subsidiary of Saudi Arabian Oil Company (Saudi Aramco). It is a tax resident of the Netherlands. The principal business of the Applicant is to render services in relation to supply chain management and provide technical, financial and administrative support to Saudi Aramco and its group companies. The Applicant is remunerated at a mark-up of 5% on the cost incurred for rendering the aforementioned services, which is received in the Netherlands.
The Applicant has an Indian office for undertaking the following procurement support activities for its head office (HO) and other group companies in connection with the purchase operations undertaken by them:
Collect and disseminate market intelligence on products as well as prospective suppliers.
Provide opinion on reason ability of prices. Conduct social audits of suppliers to ensure adherence to various environmental and other regulations.
Perform quality control checks on goods received from suppliers.
Co-ordinate and act as a channel of communication with the suppliers of goods.
Under the provisions of the Indian Tax Law (ITL), a non-resident is taxable in India in respect of income attributable to business operations carried on in India. However, a nonresident is not liable to tax in respect of operations confined to purchase of goods in India for the purpose of export.
Issue for consideration:-Whether the Applicant is taxable in India in respect of income arising on account of procurement support services rendered by the Indian office in connection with purchases made for export from India by the Applicant’s HO and other non-resident group companies.
Contentions of the Applicant:-The procurement support activities undertaken by the Indian office for its group companies are in respect of operations confined to purchase of goods in India by them for the purpose of export and, hence, not liable to tax under the ITL.
The procurement support activities undertaken by the Indian office form part of the purchase function of the group companies.
The exclusion from taxation under the ITL is not confined to procurement support activities undertaken by a non-resident in respect of purchase operations undertaken for its HO. Even if such activities are undertaken in respect of purchase operations of any other nonresident, income would not be liable to tax in India under the ITL.
As the activities of the Applicant in India are directed towards purchase of goods for the purpose of export, the ITL exempts income arising from such activities even if purchaser is any other non-resident.
Ruling of the AAR
Under the ITL, operations that are confined to purchase of goods in India for the purpose of export are excluded from taxation in India.
A non-resident may effect purchases directly or through its agent. The exemption under the ITL is not available if a service provider is neither the purchaser of goods for export nor an agent of such purchaser. Any and every person who, in some way or the other, facilitates purchases made by a non-resident for export is not exempted.
The Applicant has failed to file any documents to support that it acted as an agent of a nonresident. The Applicant failed to give evidence of its operations such as agreement with group companies, manner of dealings between the Indian supplier and its group companies including instructions/ guidelines received from the purchaser, manner of placement of purchase order, details of Indian suppliers and the consignee abroad, source and modality of payments received by such suppliers etc. (The AAR noted that the Applicant is unable to factually substantiate that it rendered the procurement support services as an agent of its group companies).
The Applicant’s income does not arise in India from purchase operations undertaken for the purpose of export, but arises on account of certain support services rendered in connection with the purchases by third parties. Further, such income is based on a mark- up allowed on the costs incurred by the Indian office and not on the volume or value of purchases made by the group companies.
As the purchase operations are not undertaken by the Applicant on its own account or as an agent of the group companies, the Applicant would be taxable in respect of the income arising from the procurement support activities rendered by its Indian office.
Comments:- Under the provisions of the ITL, a non-resident is taxable in India in respect of income attributable to business operations carried on in India, subject to certain specific exclusions. One of such exclusions provides that a non-resident is not liable to tax in respect of operations confined to purchase of goods in India for the purpose of export. The present ruling fortifies that income attributable to such purchase operations carried on in India would not be taxable if such operations are confined to purchases made for export by a non-resident on its own account or as an agent of another non-resident.
A ruling by the AAR is binding only on the Applicant, in respect of transaction in relation to which the ruling is sought and on the Tax Authority, in respect of the Applicant and the said transaction. However, it does have persuasive value and the Indian Courts, the Tax Authority and the appellate authorities do recognise the principles and ratios laid down by the AAR, while deciding similar cases.
|A.A.R. No. 825 of 2009
|Name & address of the applicant||M/s. Aramco Overseas Company, BV
Schuttersveld 14, P.O. Box 222, 2300 AE Leiden The Netherlands
Director of Income-tax (International Taxation)– I,
|Present for the Applicant||Mr. N. Venkataraman, Sr. Advocate
Mr. Achin Goel, Advocate
Mr. Akhil Sanbhar, ACA
Mr. Gaurav Singhal, ACA
Mr. Gaurav Gupta, ACA
|Present for the Department||Mr. Ashish Kumar, Addl.DIT, R-1,New Delhi|
|Date of Judgement:||12th Day of March, 2010|