Tesco International Services Limited, Bangalore V. D.D.I.T., Bangalore

ITA 1327/BANG/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73367 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 18-12-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 21-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: OM PRAKASH YADAV
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; Double taxation relief; Deemed to accrue or arise in india; Permanent establishment; Advance ruling
• Section: 143(3); 133A; 234B; 147; 148; 144

Judgement Text

ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 1 OF 20 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE ABENCH, BANGALORE BEFORE SHRI N. BARTHVAJASANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K. JUDICIAL MEMBER ITA (IT) NOS.1323 TO 1327 /BANG/2011 (ASSESSMENT YEARS: 2003-04 TO 2007-08) M/S. TESCO INTERNATIONAL SOURCING LIMITED 5 TH FLOOR, TOWER-B, THE MILLENNIA NO.1&2 MURPHY ROAD, ULSOOR, BANGALORE 560008 PAN: AABCT 8487 C VS. DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) CIRCLE 2(1) BANGALORE (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI K.R. VASUDEVAN, ADVOCATE DEPARTMENT BY: SHRI OM PRAKASH YADAV, DR DATE OF HEARING: 18/12/2013 DATE OF PRONOUNCEMENT: 10/01/2014 O R D E R PER BENCH: THESE FIVE APPEALS OF THE ASSESSEE COMPANY ARE DIR ECTED AGAINST THE ORDERS PASSED BY THE AO U/S 143(3) R.W. S. 144 OF THE ACT, DATED 20.10.2011. THE RELEVANT ASSESSMENT YEA RS ARE 2003- 04, 2004-05, 2005-06, 2006-O7 AND 2007-08 RESPECTIVELY. 2. THE ASSESSEE COMPANY HAS, IN ITS MEMORANDUM O F APPEALS FOR ALL THE ASSESSMENT YEARS UNDER CONSIDERATION, R AISED IDENTICAL GROUNDS, EXCEPT FOR VARIANCE IN FIGURE. THEREFORE, GROUNDS RELATING TO AY 2003-04 ARE REPRODUCED BELOW: ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 2 OF 20 1. THE ORDER DATED OCTOBER 20,2011 PASSED BY THE LEARNED DDIT U/S 147 R.W.S 144C OF THE INCOME TAX ACT, 1961 (ACT) IS BAD IN LAW. 2. LO IS A PERMANENT ESTABLISHMENT : A. THE HON'BLE DRP/LEARNED DDIT ERRED IN NOT APPRECIATING THAT: I. THE ACTIVITIES OF THE LIAISON OFFICE (LO) ARE CONFINED TO THE PURCHASE OF GOODS IN INDIA FOR THE PURPOSE OF EXPORTS OUTSIDE INDIA, WHICH ARE COVERED BY THE EXEMPTION PROVIDED UNDER CLAUSE (B), EXPLANATION 1 OF SECTION 9(1)(I) OF THE ACT AND HENCE NO INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA; AND II. THE APPELLANT IS ONLY ACTING AS A COMMUNICATION CHANNEL BETWEEN TESCO GROUP COMPANY (HEAD OFFICE OR TESCO HONG KONG) AND THE VENDOR. B. THE LEARNED DDIT/HON'BLE DRP HAS ERRED IN NOT RELYING ON THE DECISION OF THE JURISDICTIONAL TRIBUNAL DECISION IN THE CASE OF NIKE INC. V. ACIT-125 ITD 35 (BANG.TRI.) 3. ATTRIBUTION OF INCOME : A. THE HON'BLE DRP/LEARNED DDIT ERRED IN ATTRIBUTING PROFITS TO THE LOS OPERATIONS IN INDIA. HE HAS FAILED TO APPRECIATE THE FACT THAT NO INCOME IS ATTRIBUTABLE TO THE ACTIVITIES OF THE APPELLANT IN INDIA. B. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABOVE, THE HON'BLE DRP/LEARNED DDIT FAILED TO APPRECIATE THE FACT THAT THE ACTIVITIES OF THE APPELLANT ARE INSIGNIFICANT ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 3 OF 20 AS COMPARED TO THE ENTIRE CHAIN OF ACTIVITIES PERFORMED BY TESCO HONG KONG AS THE APPELLANT UNDERTAKES ONLY COORDINATION ACTIVITIES. C. THE HON'BLE DRP/LEARNED DDIT WAS NOT JUSTIFIED IN REJECTING THE FUNCTION ASSET RISK ANALYSIS PROVIDED BY THE APPELLANT, WHEREIN THE APPELLANT CONTENDED THAT WITHOUT PREJUDICE TO THE SUBMISSION THAT THERE IS NO INCOME ATTRIBUTABLE TO THE LO, EVEN IF INCOME WERE TO BE ATTRIBUTED, AT THE MOST 1.5% OF THE COMMISSION RECEIVED BY TESCO HONG KONG COULD BE ATTRIBUTED BASED ON THE ACTIVITIES PERFORMED BY THE LO IN INDIA. D. THE HON'BLE DRP/LEARNED DDIT HAS ERRED IN ATTRIBUTING 40% OF THE ENTREPRENEURIAL RISK AND 80% OF THE MANAGERIAL RISK TO THE APPELLANT IN AN ADHOC MANNER WITHOUT ANY BASIS. 4. WITHOUT PREJUDICE TO OUT ABOVE GROUNDS, THE LEARNED DDIT HAS ATTRIBUTED 22,321,863 AS INCOME OF THE LO AND FROM WHICH HE HAS ALLOWED EXPENSES OF RS.22,505,620. THE NET OF THE INCOME MINUS EXPENSES RESULTS ONLY IN A NET LOSS OF 183,757 AS AGAINST THE PROFIT FIGURE OF 183,757 COMPUTED BY THE LEARNED DDIT AND HENCE CONSEQUENTLY NO DEMAND IS PAYABLE. 5. THE LEARNED DDIT HAS ERRED IN COMPUTING PROFIT INSTEAD OF LOSS AND BASED ON THE MISTAKEN PROFIT FIGURE, HE HAS LEVIED INTEREST U/S 234A OF THE ACT AMOUNTING TO RS.52,481/-. THE LEVY OF INTEREST U/S 234A OF THE ACT IS CONSEQUENTIAL IN NATURE. 6. THE LEARNED DDIT HAS ERRED IN COMPUTING PROFIT INSTEAD OF LOSS AND BASED ON THE MISTAKEN PROFIT FIGURE, HE HAS LEVIED INTEREST LEVYING INTEREST U/S 234B OF THE ACT AMOUNTING TO RS.80,651/-. THE ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 4 OF 20 LEVY OF INTEREST U/S 234B OF THE ACT IS CONSEQUENTIAL IN NATURE. 3. AS THE ISSUES RAISED IN THESE APPEALS BEI NG IDENTICAL AND PERTAINING TO THE SAME ASSESSEE, FOR THE SAKE OF EX PEDIENCY, THEY WERE HEARD AND DISPOSED OF IN THIS COMMON ORDER. 4. BRIEFLY STATED, THE FACTS OF THE ISSUES ARE AS UNDER: TESCO INTERNATIONAL SOURCING LIMITED, HON G KONG WAS ESTABLISHED IN HONG KONG TO ACT AS A BUYING AGENT F OR THE TESCO GROUP COMPANIES (AFFILIATES). TESCO HONG KONG SOUR CES PRODUCTS FOR THE TESCO GROUP COMPANIES AND ENSURES THAT THE PRICES WERE COMPETITIVE WHILE MAINTAINING THE QUALITY STANDARDS PRESCRIBED BY TESCO GROUP. TESCO INTERNATIONAL SOURCING LIMITE D INDIA LIAISON OFFICE [LO] - THE ASSESSEE COMPANY - WAS ES TABLISHED IN THE YEAR 2001. THE LO ACTS AS A COMMUNICATION CHAN NEL BETWEEN TESCO HONG KONG AND THE MANUFACTURERS IN SO URCING APPARELS FROM INDIA AND UNDERTAKES LIAISING ACTIVIT IES LIKE COORDINATING WITH THE MANUFACTURERS AND HEAD OFFICE . 4.1. THERE WAS A SURVEY OPERATION U/S 133A OF THE ACT ON 5.2.2009 IN THE OFFICE PREMISES OF THE ASSESSEE. I N COMPLIANCE TO THE NOTICES U/S 148 OF THE ACT DATED 26.5.2009, THE ASSESSEE HAD FILED ITS RETURNS OF INCOME FOR THE AYS UNDER DISPU TE ON 2.7.2009, ADMITTING NIL INCOME. AFTER HEARING THE ASSESSEES VERSION AS RECORDED IN THE RESPECTIVE ASSESSMENT ORDERS, THE A O SUMMED UP THAT ALTHOUGH THE ASSESSEE MAINTAINS THAT THE OPERATIONS IN INDIA ARE INSIGNIFICANT OR NEGLIGIBLE BUT AS ALREAD Y DISCUSSED ABOVE, THE OPERATIONS IN INDIA CONTRIBUTE SIGNIFICA NTLY TO EARNING ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 5 OF 20 THE COMMISSION INCOME. THE ATTRIBUTION OF PROFIT T O PE IS DONE BASED ON ASSIGNING CERTAIN POINTS TO DIFFERENT INPU TS WHICH WERE ESSENTIAL IN EARNING THE PROFIT. HE HAD, THUS, ARRIVED AT THE CONCLUSION THAT THE ACTIVITIES OF THE LO WERE NOT C ONFINED TO THE ACTIVITIES WHICH WERE RELATED TO THE PURCHASE OF GO ODS IN INDIA FOR THE PURPOSE OF EXPORTS. FURTHER, HE CONCLUDED THAT THE ACTIVITIES OF THE LO RELATE TO SUPPLY CHAIN MANAGEMENT ACTIVIT IES FOR TESCO HONG KONG COMPANY AND, HENCE, THE ACTIVITIES OF THE LO WERE NOT COVERED IN THE EXCEPTION PROVIDED IN EXPLANATION 1( B) OF S. 9(1) (I) OF THE ACT. ACCORDINGLY, THE AO PASSED DRAFT ASSESS MENT ORDERS, ARRIVING AT THE TOTAL INCOMES OF THE ASSESSEE, AFTE R ALLOWING EXPENSES, AT RS.35,36,553/-, RS.1,09,64,785/-,RS.1, 79,63,445/- RS. 2,69,67,853/- AND RS.4,07,09,500/- FOR THE AYS 2003-04 TO 2007-08 RESPECTIVELY. 5. AGGRIEVED, THE ASSESSEE HAD OBJECTED TO THE DRA FT ASSESSMENT ORDERS OF THE AO FOR THE AYS UNDER CONSI DERATION BEFORE THE DISPUTE RESOLUTION PANEL [DRP]. AFTER D UE CONSIDERATION OF THE ASSESSEES CONTENTIONS, THE DR P HAD CONFIRMED THE VIEW TAKEN BY THE AO FOR THE FOLLOWIN G REASONING: (ON PAGE 3) THE FINDINGS AND DECISIONS GIVEN BY TH E AAR IN THE CASE OF COLUMBIA SPORTS-WARE FULLY APPLY TO THE FACTS OF THE PRESENT CASE. THE ASSESSEE HAS RELIED ON THE DECISIONS OF ITAT, BANGALORE, IN THE CASE OF NIKE INC INDIA LIAISON OFFICE 122 TTJ 201 AND COMPARED THE FACTS OF THE ASSESSEES CASE WITH THE CASE OF NIKE INC. HERE, IT MAY BE APPRECIATED THAT THE DECISION OF ITAT HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND THE SAME IS CONTESTED. IN ANY CASE, THE LATEST DECISION BY THE AAR FULLY SUPPORTS THE V IEW TAKEN BY THE AO. ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 6 OF 20 THE AO HAS DONE A FACTUAL ANALYSIS AND DETERMINED THE PROFIT ATTRIBUTABLE TO THE PE. AFTER GOING THR OUGH THE REASONING GIVEN BY THE AO AND CONSIDERING THE FACTS OF THE CASE, WE ARE OF THE VIEW THAT THE METH OD OF DETERMINING THE PROFIT ATTRIBUTABLE TO THE ASSESSEE IS PROPER AND BASED ON PROPER APPRECIATION OF THE FACT S AND FUNCTIONS PERFORMED BY THE ASSESSEE. THE ASSESSEE HAS, HOWEVER, POINTED OUT THAT BASED ON TH E MECHANISM LAID OUT BY THE DDIT, THE ATTRIBUTION WOR KS OUT TO 60% AND NOT 70%. THE AO HAS STATED THAT 30% OF THE TOTAL INCOME ARISING ACCRUING TO THE ASSESSE E IS ATTRIBUTED TO ITS HONG KONG OFFICE AND 70% IS ATTRIBUTABLE TO INDIA. THE AO HAS NOT GIVEN THE EX ACT WORKING AS TO HOW HE HAS DERIVED THE FIGURE OF 70% UNDER THE ASSUMPTIONS MADE BY HIM REGARDING THE ENTREPRENEURIAL RISK AND MANAGEMENT EXPERTISE. WE, THEREFORE, DIRECT THE AO TO CHECK THE ARITHMETICAL ACCURACY OF HIS COMPUTATION BEFORE FINALIZING THE ASSESSMENT. 5.1. ACCORDINGLY, THE AO, BASED ON THE DIRECTION S OF THE DRP (SUPRA), CONCLUDED THE ASSESSMENTS U/S 143(3) R.W.S . 144 C (5) R.W.S. 144C (8) OF THE ACT. 6. AGGRIEVED, THE ASSESSEE HAS COME UP BE FORE US WITH THE PRESENT APPEALS. DURING THE COURSE OF HEARING, THE LEARNED AR SUBMITTED THAT THE ACTIVITIES OF THE LO ARE THAT (I ) IDENTIFICATION OF THE VENDORS IN INDIA; (II) COMMUNICATION OF THE REQ UIREMENTS WITH REGARD TO DESIGN AND SPECIFICATIONS TO THE VENDORS; (III) RECEIVE THE PROTOTYPE FROM THE VENDOR; (IV) QUALITY CHECK FOR T HE PRODUCTS BEFORE PRODUCTION OF GOODS; & (V) TRACKING THE PROD UCTION AND DELIVERY INCLUDING FORECASTING AND SCHEDULING OF TH E ORDER WHICH ARE COVERED BY THE EXEMPTION PROVIDED UNDER CLAUSE (B) EXPLANATION 1 OF S. 9(1)(I) OF THE ACT. IT WAS, TH EREFORE, CONTENDED THAT NO INCOME WAS DEEMED TO ACCRUE OR ARISE IN IND IA AND THAT ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 7 OF 20 THE ASSESSEE WAS ONLY ACTING AS A COMMUNICATION CHA NNEL BETWEEN TESCO GROUP COMPANY [HEAD OFFICE OR TESCO HONG KONG] AND THE VENDOR. IT WAS, FURTHER, SUBMITTED THAT TH E AO AS WELL AS DRP HAD ERRED IN NOT RELYING ON THE DECISION OF THE JURISDICTIONAL TRIBUNAL IN THE CASE OF NIKE INC. WITH REGARD TO TH E ATTRIBUTION OF INCOME, IT WAS THE CASE OF THE LEARNED AR THAT THE AO AND THE DRP ERRED IN ATTRIBUTING PROFITS TO THE LOS OPERAT IONS IN INDIA. THE AUTHORITIES BELOW, IT WAS CONTENDED, HAVE FAILE D TO APPRECIATE THE FACT THAT NO INCOME WAS ATTRIBUTABLE TO THE ACT IVITIES OF THE ASSESSEE IN INDIA. IT WAS, THEREFORE SUBMITTED, WIT HOUT PREJUDICE TO THE ABOVE, THAT BOTH THE AUTHORITIES HAVE FAILED TO APPRECIATE THE FACT THAT THE ACTIVITIES OF THE ASSESSEE WERE I NSIGNIFICANT AS COMPARED TO THE ENTIRE CHAIN OF ACTIVITIES PERFORME D BY TESCO HONG KONG AS THE ASSESSEE UNDERTOOK ONLY CO-ORDINAT ION ACTIVITIES. IT WAS, THEREFORE PLEADED BY THE LEARN ED AR THAT BOTH THE AUTHORITIES WERE NOT JUSTIFIED IN REJECTING THE FUNCTION, ASSET AND RISK ANALYSIS PROVIDED BY THE ASSESSEE WHEREIN IT HAD CONTENDED THAT WITHOUT PREJUDICE TO THE SUBMISSION THAT THERE WAS NO INCOME ATTRIBUTABLE TO THE LO, EVEN IF INCOM E WERE TO BE ATTRIBUTED, AT THE MOST 1.5% OF THE COMMISSION RECE IVED BY TESCO HONG KONG COULD BE ATTRIBUTED BASED ON THE ACTIVITI ES PERFORMED BY THE LO IN INDIA. INVITING THE BENCHS REFERENCE TO THE AOS OBSERVATIONS CONTAINED ON PAGES 13 TO 15 OF THE ASS ESSMENT ORDER, THE LEARNED AR CONTENDED THAT THE FUNCTIONS OF THE LO AS SUBMITTED BY THE ASSESSEE WAS ACCEPTED BY THE AO AN D THAT THE AO HAD NOT GIVEN ANY FINDING THAT THE ASSESSEE WAS DOING ANY FUNCTIONS OTHER THAN WHAT WAS SUBMITTED BY THE ASSE SSEE. IT WAS, FURTHER, SUBMITTED THAT ALL THE FUNCTIONS PERF ORMED BY THE ASSESSEE WAS OPERATION RELATED TO THE ACTIVITIES OF PURCHASE FOR ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 8 OF 20 THE PURPOSE OF EXPORT. PLACING RELIANCE ON EXPLANAT ION 1(B) TO S. 9(1) (I) OF THE ACT, THE LEARNED AR ARGUED THAT THE ASSESSEE ONLY PERFORMS A SMALL, INSIGNIFICANT PART OF ACTIVITIES WHICH ARE CONFINED TO THE PURCHASE OF GOODS FOR THE PURPOSE O F EXPORT OUTSIDE INDIA AND, THUS, THE LO IS ENTITLED TO CLAI M EXEMPTION UNDER EXPLANATION 1(B) TO S. 9(1)(I) OF THE ACT. FO R THIS PROPOSITION, HE HAD PLACED RELIANCE ON THE FOLLOWIN G CASE LAWS, NAMELY: I) CIT (INTL. TAXATION) V. NIKE INC. (2013) 34 TAXMANN.COM 170(KAR); II) NIKE INC V. ACIT (INTL. TAXATION) (2010) 125 ITD 35 (BANG); & III) ADIT V. M.FABRIKANT AND SONS LTD (2011) 9 TAXMANN.COM 286(MUM) 6.1. DISPUTING THE DRPS STAND IN RELYING ON THE DECISION OF THE AAR IN THE CASE OF COLUMBIA SPORTSWEAR WHILE CO NFIRMING THE ORDERS OF THE AO, THE LEARNED AR ARGUED THAT THE FA CTS OF THE PRESENT CASE IS ENTIRELY DIFFERENT FROM THE FACTS O F COLUMBIA SPORTSWEAR AND, THUS, IT IS CLEARLY DISTINGUISHABLE . 6.2. ON THE OTHER HAND, THE LEARNED DR SUPP ORTED THE STAND OF THE AUTHORITIES BELOW IN COMING TO A CONCLUSION THAT 30% OF THE TOTAL INCOME ARISING OR ACCRUING TO THE ASSESSE E WAS ATTRIBUTED TO ITS HONG KONG OFFICE AND 70% WAS ATTR IBUTABLE TO INDIA WHICH WAS IN CONFORMITY WITH THE RULING OF TH E AUTHORITY FOR ADVANCE RULING IN THE CASE OF COLUMBIA SPORTSWEAR C OMPANY IN AAR NO.862 OF 2009. IT WAS, THEREFORE, PLEADED THA T THE APPEALS FILED BY THE ASSESSEE REQUIRE TO BE DISMISSED. ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 9 OF 20 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMI SSIONS, PERUSED THE RELEVANT MATERIALS ON RECORD AND ALSO T HE CASE LAWS ON WHICH BOTH THE PARTIES HAVE PLACED RELIANCE. TE SCO INTERNATIONAL SOURCING LIMITED HONG KONG WAS ESTABL ISHED IN HONG KONG TO ACT AS A BUYING AGENT FOR TESCO GROUP COMPANIES. TESCO INTERNATIONAL SOURCING LIMITED INDIA LIAISON OFFICE [LO] ESTABLISHED IN INDIA IN 2001 WAS ACTING AS A COMMUN ICATION CHANNEL BETWEEN TESCO HONG KONG AND THE MANUFACTURE RS IN SOURCING APPARELS FROM INDIA. IT WAS THE CONTENTIO N OF THE ASSESSEE THAT IT HAD ONLY PERFORMED A SMALL, INSIGN IFICANT PART OF ACTIVITIES WHICH WERE CONFINED TO THE PURCHASE OF G OODS FOR THE PURPOSE OF EXPORT OUTSIDE INDIA AND, THUS, IT WAS E NTITLED TO CLAIM EXEMPTION UNDER EXPLANATION 1(B) TO S. 9(1) ( I) OF THE ACT AS ITS ACTIVITIES WERE LIMITED TO PROCUREMENT OF GOODS FOR THE PURPOSE OF EXPORT WHICH WERE SPECIFICALLY EXEMPT UN DER THE ACT AND INCOME CANNOT BE ATTRIBUTED TO THE LO. DISPUTI NG THE ASSESSEES CLAIM, THE AO, HOWEVER, TOOK A STAND THA T ON THE BASIS OF SURVEY PROCEEDINGS, THE ACTIVITIES OF THE LO WER E NOT CONFINED TO THE ACTIVITIES WHICH WERE RELATED TO THE PURCHAS E OF GOODS IN INDIA FOR THE PURPOSE OF EXPORTS. ACCORDINGLY, HE WAS OF THE VIEW THAT THE ACTIVITIES OF LO RELATE TO SUPPLY CHAIN MA NAGEMENT ACTIVITIES FOR TESCO HONG KONG COMPANY AND, THUS, S UCH ACTIVITIES OF THE LO WERE NOT COVERED IN THE EXCEPT ION PROVIDED IN EXPLANATION 1(B) OF S. 9(1) (I) OF THE ACT. WHEN TH E ISSUE WENT BEFORE THE DRP FOR DIRECTIONS, THE DRP TOOK A STAND , AMONG OTHERS, THAT THE DECISION OF THE AAR IN THE CASE OF COLUMBIA SPORTSWEAR (SUPRA) WAS SQUARELY APPLICABLE TO THE F ACTS OF THE ASSESSEES CASE AND, ACCORDINGLY, UPHELD THE AOS A CTION. IT HAD ALSO REJECTED THE ASSESSEES CONTENTION THAT ITS CA SE WAS ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 10 OF 20 COMPARABLE WITH THE FINDINGS OF THE EARLIER BENCH O F THIS TRIBUNAL IN THE CASE OF NIKE INC. (SUPRA) ON THE PREMISE THA T THE FINDINGS OF THE TRIBUNAL HAS SINCE BEEN CONTESTED BY THE DEP ARTMENT BEFORE THE HONBLE HIGH COURT. 7.1. AT THIS JUNCTURE, WE REFER TO THE RULI NG OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF NIKE INC. (SUPRA). AS THE ISSUE BEFORE THE HONBLE COURT WAS SIMILAR TO THAT OF THE ISSUE UNDER DISPUTE, WE ARE OF THE VIEW THAT IT IS APPROP RIATE TO ANALYZE THE RULING OF THE HONBLE COURT. BRIEFLY, THE FACTS OF CASE CONSIDER ED BY THE HON'BLE HIGH COURT WERE THAT THE ASSESSEE WAS ENGAGED IN TH E BUSINESS OF SPORTS APPARELS. IT HAD MAIN OFFICE IN USA AND ALSO VARIOUS ASSOCIATED ENTERPRISES OR SUBSIDIARIES IN VARIOUS P ARTS OF THE WORLD. FROM THE OFFICE IN USA, THE ASSESSEE ARRANG ED FOR ALL ITS SUBSIDIARIES THE VARIOUS BRANDS OF SPORTS APPARELS FOR SALE TO THE VARIOUS CUSTOMERS. IT DID NOT CARRY ON ANY MANUFAC TURE BY ITSELF, BUT, ENGAGED VARIOUS MANUFACTURERS ALL OVER GLOBE O N A JOB TO JOB BASIS AND MADE ARRANGEMENTS WITH ITS SUBSIDIARIES F OR PURCHASING THE MANUFACTURED GOODS DIRECTLY AND PAY FOR THE SAME TO THE RESPECTIVE MANUFACTURERS. WITH A VIEW TO SPREAD ITS WINGS MAINLY FROM THE POINT OF VIEW OF PROCUREMENT OF VARIOUS APPARELS FROM MANUFACTURERS, IT OPENED A LIAISON OF FICE IN INDIA. THE RATE OR PRICE OF EACH APPAREL WAS NEGOTIATED BY THE LO WITH MANUFACTURERS AND THE QUALITY OF EACH APPAREL WAS A LSO INDICATED. THE LO ONLY PROPOSED AND GAVE ITS OPINI ON ABOUT THE REASONABILITY OF THE PRICE ETC., AND THE US OFFICE DECIDED ABOUT THE PRICE, QUALITY, QUANTITY, TO WHOM TO BE SHIPPED , BILLED ETC. ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 11 OF 20 THE LOCAL MANUFACTURER IN INDIA WAS CONVEYED THE DE CISION OF THE USA OFFICE AND ONCE IT WAS ACCEPTED, THE LOCAL MANU FACTURER CARRIED ON HIS ACTIVITY. THE LO KEPT A CLOSE WATCH ON THE TIME SCHEDULE TO BE FOLLOWED AND RENDERED SUCH ASSISTANC E AS MAY BE REQUIRED IN THE DISPATCH OF THE GOODS INCLUDING THE DETAILS OF THE BUYER AND THE PLACE FOR EXPORT. FOR ALL THESE ACTI VITIES IN INDIA, THE LO WERE RECEIVING FUNDS THROUGH BANKING CHANNEL S FROM USA. FOR THE RELEVANT AYS, THE ASSESSEE FILED ITS RETURNS OF INCOME DECLARING NIL INCOME WITH A CLAIM THAT ITS A CTIVITIES WERE TO CARRY ON ACTIVITIES WHICH WERE ANCILLARY AND AUX ILIARY TO THE ACTIVITIES OF ITS HO AND OTHER GROUP COMPANIES AND TO ACT AS A COMMUNICATION CHANNEL BETWEEN THE HO AND THE PARTIE S IN INDIA. IT WAS, FURTHER, CONTENDED THAT IN TERMS O F EXPLANATION 1(B) TO S. 9(1)(I) OF THE ACT, NO INCOME SHALL BE D EEMED TO ACCRUE OR ARISE IN INDIA TO A NON-RESIDENT FROM OPERATIONS WHICH WERE CONFINED TO THE PURCHASE OF GOODS IN INDIA FOR THE PURPOSE OF EXPORT. HOWEVER, THE AO TOOK A STAND THAT THE ACTI VITIES OF THE ASSESSEE WERE ACTUALLY BEYOND ITS ACTIVITIES AS REQ UIRED AS A LO. THUS, A PART OF THE ENTIRE BUSINESS WAS DONE IN IND IA THROUGH THE LO AND, THEREFORE, THE INCOME HAD ACCRUED OR ARISEN OR DEEMED TO HAVE ACCRUED OR ARISEN TO THE ASSESSEE IN INDIA IN VIEW OF CLAUSE (B) OF SUB-SECTION (2) OF S.5. ACCORDINGLY, HE HELD THAT THE INCOME OF THE ASSESSEE WAS CHARGED TO TAX TO THE EX TENT OF INCOME WHICH WAS ATTRIBUTABLE TO THE ACTIVITIES DON E IN INDIA OR ACCRUING OR ARISING IN INDIA ON ITS BEHALF BY THE L O. HE HAD, FURTHER, HELD THAT 5% OF THE EXPORT VALUE COULD REA SONABLY BE CONSIDERED AS INCOME ATTRIBUTABLE TO INDIA OPERATIO N. ON APPEAL, THE CIT (A) UPHELD THE ORDER OF THE AO. WHEN THE I SSUE WENT BEFORE THE TRIBUNAL, IT TOOK A VIEW THAT IT WAS A C ASE OF ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 12 OF 20 PURCHASING THE GOODS FOR THE PURPOSE OF EXPORT. IN THE ABSENCE OF THERE BEING ANY PRIMA FACIE CONTRACT BETWEEN THE ASSESSEE AND THE LOCAL MANUFACTURER, THE ONLY RELATIONSHIP W AS THAT OF BUYERS AGENT AND THE LOCAL MANUFACTURER KNEW THE A SSESSEE ONLY AS THE AGENT OF THE BUYER. THE LOCAL MANUFACTU RER KNEW THAT THE AGENT OF THE BUYER I.E., THE ASSESSEE HAD PLACED THE ORDERS ON IT WITH A VIEW TO BUY THE GOODS IN THE CO URSE OF EXPORT AND AS DIRECTED EXPORT IT TO VARIOUS AFFILIA TES OF THE ASSESSEE. THEREFORE, THE EXPLANATION 1(B) TO S. 9( 1)(I) OF THE ACT WOULD CLEARLY APPLY TO THE ASSESSEE. ON APPEAL, THE HONBLE COURT HAD HELD AS UNDER: IN THE INSTANT CASE, THE ASSESSEE IS NOT CARRYING ANY BUSINESS IN INDIA. IT HAS ESTABLISHED A LIAISON OF FICE. THE OBJECT OF ESTABLISHING THE SAID OFFICE IS TO ID ENTIFY THE MANUFACTURERS, GIVE THEM THE TECHNICAL KNOW- HOW AND SEE THAT THEY MANUFACTURE GOODS ACCORDING TO ITS SPECIFICATION WHICH WOULD BE SOLD TO ITS AFFILIATES. THE PERSON WHO PURCHASES THE GOODS PAY S THE MONEY TO THE MANUFACTURER. IN THE SAID INCOME THE ASSESSEE HAS NO RIGHT. THE SAID INCOME CANNOT BE SAID TO BE AN INCOME ARISING OR ACCRUING IN THE TAX TERRITORIES VIS--VIS THE ASSESSEE. IN FACT, THE EVIDENCE ON RECORD SHOWS THAT THE ASSESSEE BEARS THE ENTIRE EXPENSES OF THE LIAISON OFFICE. THE BUY ER WHO IS A NON-RESIDENT MAY IN TURN PAY SOME CONSIDERATION TO THE ASSESSEE OUTSIDE INDIA. THEREFORE, EVEN IF ANY INCOME ARISES OR ACCRUES TO THE ASSESSEE, IT IS OUTSIDE INDIA. EXPLANATION 1 SUB- SECTION (2) OF SECTION 5 EXPRESSLY STATES INCOME ACCRUING OR ARISING OUTSIDE INDIA SHALL NOT BE DEEM ED TO BE RECEIVED IN INDIA WITHIN THE MEANING OF THE SECTION. HOWEVER, UNDER SECTION 9(1)(I) ALL INCOM E ACCRUING OR ARISING WHETHER DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. NOW BY EXPLANATION 2 TO SECTION 9(1)(I) BUSINESS CONNECTIO N ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 13 OF 20 HAS BEEN EXPLAINED, WHICH INCLUDES ANY BUSINESS ACTIVITIES CARRIED OUT BY A PERSON WHO, ACTING ON BEHALF OF THE NON-RESIDENT, HAS AND HABITUALLY EXERCISES IN INDIA, AN AUTHORITY TO CONCLUDE CONTRA CTS ON BEHALF OF NON-RESIDENT, UNLESS HIS ACTIVITIES AR E LIMITED TO THE PURCHASE OF GOODS OR MERCHANDISE FOR THE NON-RESIDENT. IF THE SAID DEFINITION IS READ W ITH EXPLANATION 1(B) TO SECTION 9(1)(I), IN THE CASE OF A NON-RESIDENT, NO INCOME SHALL BE DEEMED TO ACCRUE O R ARISE IN INDIA TO HIM WHETHER DIRECTLY OR INDIRECTL Y THROUGH OR FROM ANY BUSINESS CONNECTION, WHICH IS CONFINED FOR THE PURPOSE OF EXPORT. IN THE FIRST P LACE, THE ASSESSEE IS NOT PURCHASING ANY GOODS. THE ASSESSEE IS ENABLING THE MANUFACTURER TO PURCHASE GOODS OF A PARTICULAR SPECIFICATION WHICH IS REQUIR ED BY A FOREIGN BUYER TO WHOM THE MANUFACTURER SELLS. AS THE ORDERS ARE PLACED BY THE ASSESSEE WITH THE MANUFACTURER AND THE GOODS ARE MANUFACTURED ACCORDING TO ITS SPECIFICATION WHICH IS THE REQUIREMENT OF THE BUYER AND EVEN IF IT IS HELD, THOUGH THE GOODS ARE SUPPLIED TO THE BUYER, IT IS DEEMED TO BE SUPPLIED TO THE ASSESSEE, THE WHOLE OBJECT OF THIS TRANSACTION IS TO PURCHASE GOODS FOR THE PURPOSE OF EXPORT. ONCE THE ENTIRE OPERATIONS ARE CONFINED TO THE PURCHASE OF GOODS IN INDIA FOR THE PURPOSE OF EXPORT, THE INCOME DERIVED THERE FROM SHALL NOT BE DEEMED TO ACCRUE OR ARISE IN INDIA AND IT SHALL NOT BE DEEMED TO BE AN INCOME UNDER SECTION 9 . IF ONE KEEPS THE OBJECT WITH WHICH THE PROVISO TO CLAUSE (B) OF EXPLANATION 1 TO SECTION 9(1)(I) WAS DELETED, THE OBJECT IS TO ENCOURAGE EXPORTS THEREBY THE COUNTRY CAN EARN FOREIGN EXCHANGE. THE ACTIVIT IES OF THE ASSESSEE IS ASSISTING THE INDIAN MANUFACTURE R TO MANUFACTURE THE GOODS ACCORDING TO ITS SPECIFICATION IS TO SEE THAT THE SAID GOODS MANUFACTURED HAS AN INTERNATIONAL MARKET, THEREFORE , IT COULD BE EXPORTED. IN THE PROCESS, THE ASSESSEE IS NOT EARNING ANY INCOME IN INDIA. IF AT ALL IT IS E ARNING INCOME OUTSIDE INDIA UNDER A CONTRACT WHICH IS ENTERED OUTSIDE INDIA, NO PART OF ITS INCOME COULD BE TAXED IN INDIA EITHER UNDER SECTION 5 OR SECTION 9 ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 14 OF 20 7.2. TO STRENGTHEN OUR VIEW THAT THE FACTS OF THE NIKE INC CASE ARE SIMILAR TO THE ISSUE UNDER CONSIDERATION, WE VENTURE TO PROVIDE THE ANALYSIS OF COMPARISON OF BOTH THE CASE S AS UNDER: IN THE CASE OF NIKE INC. IN THE CASE OF THE ASSESSE E IT HAD AN ARRANGEMENT WITH ITS GROUP COMPANIES FOR SOURCING OF THE PRODUCTS IT HAD ALSO AN ARRANGEMENT WITH ITS GROUP COMPANIES FOR SOURCING OF THE PRODUCTS HAD A LO IN INDIA FOR CARRYING OUT THE PROCUREMENT ACTIVITIES TESCO HONG KONG HAD A LO IN INDIA FOR CARRYING OUT THE PROCUREMENT ACTIVITIES THE ENTIRE EXPENSES OF LO IN INDIA WAS BORNE BY NIKE INC FROM USA THROUGH REGULAR BANKING CHANNELS TO INDIA THE ENTIRE EXPENSES OF LO IN INDIA WAS BORNE BY TESCO HONG KONG THROUGH REGULAR BANKING CHANNELS TO INDIA LO HAD NO POWERS FOR SIGNING/COMMITMENT EXCEPT WHICH WERE REQUIRED FOR NORMAL FUNCTIONING AS LO LO HAD NO POWERS FOR SIGNING/COMMITMENT EXCEPT WHICH WERE REQUIRED FOR NORMAL FUNCTIONING AS LO LO WAS PROCURING FOR THE PURPOSE OF EXPORT BY THOSE MANUFACTURERS/SUPPLIERS DIRECTLY TO VARIOUS SUBSIDIARIES OF NIKE INC AROUND THE GLOBE LO WAS PROCURING FOR THE PURPOSE OF EXPORT BY THE MANUFACTURERS/SUPPLIERS DIRECTLY TO TESCO GROUP COMPANY ONE THE LOCAL MANUFACTURER IN INDIA WAS CONVEYED OF THE DECISION OF THE USA OFFICE, THE LOCAL MANUFACTURER CARRIES ON ITS ACTIVITY ONE THE LOCAL MANUFACTURER IN INDIA WAS CONVEYED OF THE DECISION OF THE HONG KONG OFFICE, THE LOCAL MANUFACTURER CARRIES ON ITS ACTIVITY THE LO GIVES IT OPINION OF REASONABILITY OF PRICE/ISSUES ETC., THE US OFFICE DECIDES THE PRICE, QUALITY, QUANTITY TO WHOM TO BE SHIPPED/BILLED LO GIVES IT OPINION OF REASONABILITY OF PRICE/ISSUES ETC., THE HONG KONG OFFICE DECIDES THE PRICE, QUALITY, QUANTITY TO WHOM TO BE SHIPPED/BILLED BASED ON THE DISCUSSIONS WITH THE GROUP COMPANIES PRICE OF EACH APPAREL AND QUALITY ASPECTS ARE MONITORED BY LO IN INDIA BASED ON THE DIRECTIONS OF GROUP COMPANIES THROUGH HEAD OFFICE PRICE OF EACH APPAREL AND QUALITY ASPECTS ARE MONITORED BY LO IN INDIA BASED ON THE DIRECTIONS OF GROUP COMPANIES THROUGH TESCO HONG KONG SAMPLES OF APPARELS TO BE FORWARDED TO US OFFICE SAMPLES OF APPARELS TO BE FORWARDED TO HONG KONG OFFICE ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 15 OF 20 LO MONITORS THE PROGRESS, QUALITY ETC., AT THE MANUFACTURING WORKSHOP, BESIDES THE TIME SCHEDULE TO BE FOLLOWED AND ASSISTANCE IN THE DISPATCH OF GOODS LO MONITORS THE PROGRESS, QUALITY ETC., AT THE MANUFACTURING WORKSHOP, BESIDES THE TIME SCHEDULE TO BE FOLLOWED AND ASSISTANCE IN THE DISPATCH OF GOODS LO SOURCES THE GOODS FROM INDIA FOR EXPORT AND, HENCE, EXPLANATION TO S. 9(1)(I) OF THE ACT IS APPLICABLE LO SOURCES THE GOODS FROM INDIA FOR EXPORT AND, HENCE, EXPLANATION TO S. 9(1)(I) OF THE ACT IS APPLICABLE NIKE INC. ACTS AS A SOURCING AGENT FOR THE AFFILIATES OF NIKE. NIKE LO SOURCES GOODS FOR THE AFFILIATES FROM INDIA AS GOODS WERE PURCHASED BY THE AFFILIATES DIRECTLY FROM THE VENDOR IN INDIA. AS SUCH, NIKE INC. DOESNT PURCHASE BY ITSELF AND MAKES THE SALES TO ITS SUBSIDIARIES, BUT, ARRANGES FOR THE PURCHASE BY NIKE AFFILIATES FROM INDIA IN THE PRESENT CASE HOWEVER, TESCO HONG KONG IS INVOICED FOR THE GOODS AND RE-INVOICES THE GOODS TO THE BUYER WITHOUT ANY MARK UP. TESCO HHONG KONG CHARGES 5% COMMISSION ON PRODUCTS SOURCED . THE LO FACILITATES SOURCING OF GOODS BY TESCO GROUP RETAIL GROUP COMPANIES. THEREFORE, IN THE PRESENT CASE, THE FACTS SATISFY THE CONDITION FOR THE PURPOSE OF EXPORT MORE PRECISELY THAN THE FACTS OF THE NIKE CASE.. NIKE LO UNDERTAKES THE FOLLOWING ACTIVITIES: LIAISONING BETWEEN THE MANUFACTURERS AND THE ASSESSEE. GIVING OPINION ON REASONABILITY OF PRICES CLOSE WATCH ON THE PROGRESS AND QUALITY AT THE MANUFACTURING WORKSHOP TRAINING THE MANUFACTURERS ON QUALITY TRACKING DELIVERY DATES SHIPMENT TRACKING THE LO ALSO UNDERTAKES THE SAME ACTIVITIES AS THE NIKE LO, EXCEPT FOR THE FACT THAT IN CONNECTION WITH THE PRICES, LO RECEIVES A PRICE BAND FROM TESCO GROUP COMPANY WHICH IS COMMUNICATED TO THE VENDOR. IF THE VENDOR IS NOT SATISFIED WITH THE PRICE, HE COMMUNICATES THE SAME TO LO WHICH IN TURN COMMUNICATES THE SAME TO THE TESCO GROUP COMPANY. A REVISED PRICE BAND IS GIVEN TO THE LO WHICH COMMUNICATES THE SAME TO THE VENDOR. THIS PROCESS GOES ON TILL THE PRICE IS AGREED BY THE TESCO GROUP COMPANY AND THE VENDOR. FINALLY, THE PRICE IS COMMUNICATED TO TESCO HONG KONG FOR FINAL APPROVAL. ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 16 OF 20 7.3. FURTHER, THE HONBLE MUMBAI BENCH OF THE TRIB UNAL IN THE CASE OF ADIT V. M. FABRIKANT AND SONS LTD (S UPRA) HAD CONSIDERED THE MEANING OF PURCHASE OF GOODS IN IND IA FOR THE PURPOSE OF EXPORT. THE TRIBUNAL HELD THAT WHEN ACT IVITIES OF LO ARE CONFINED TO PRIOR TO THE PURCHASES AND NOT SUBS EQUENT, THE CASE IS FULLY COVERED BY THE CLAUSE (B) OF EXPLANAT ION (1) TO 9(1)(I) OF THE ACT. THE RELEVANT FINDING OF THE TRIBUNAL RE AD AS FOLLOWS: 3.8UNDISPUTEDLY, THE LO OF THE ASSESSEE WAS PERFORMING THE ACTIVITIES OF ASSORTING OF DIAMONDS, CHECKING OF THE RIGHT QUALITY OF DIAMONDS AND PRICE NEGOTIATION AS PER THE INSTRUCTIONS AND SPECIFICATION OF THE ASSESSEE. THESE ACTIVITIES OF THE LO IS ONLY PART OF THE PURCHASING PROCESS OF THE DIAMONDS AND DID NOT BRING ANY PHYSICAL OR QUALITATIVE CHANGE IN THE GOODS PURCHASED. EVEN OTHERWISE, THE FUNCTION OF THE LO AS MENTIONED ABOV E ARE PRIOR TO PURCHASE OF THE DIAMONDS AND NOT SUBSEQUENT TO THE PURCHASES. THEREFORE, NO QUALITY CHANGE IS BROUGHT BY THE LO WHILE DOING THE OPERATION OF PURCHASING IN INDIA FOR EXPORT PURPOSE S. IT IS A CASE OF PURCHASE OF GOODS THROUGH LO AND AL L THE ACTIVITIES CARRIED OUT BY THE LO ARE BASIC AND PRELIMINARY REQUIREMENT OF THE PURCHASING PROCESS/OPERATION. SELECTION OF RIGHT GOODS AND NEGOTIATIONS OF PRICE AS PER THE INSTRUCTIONS OF TH E ASSESSEE ARE ESSENTIAL PART OF THE PURCHASING ACTIVITY. THUS, THE CASE IS FULLY COVERED BY THE C LAUSE (B) OF EXPLANATION (1) TO SECTION 9(1) (I) OF THE A CT.. 7.3.1 IN THE INSTANT CASE, ALL THE ACTIVITIES OF THE LO, SUCH AS LIAISONING BETWEEN THE MANUFACTURER AND THE ASSE SSEE, OPINES OF REASONABILITY OF PRICES, MONITORING THE PROGRESS AND QUALITY AT THE MANUFACTURING END ETC, ARE ACTIVITIES OF LO PRI OR TO PURCHASE OF GOOD BY THE TESCO HONG KONG. ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 17 OF 20 7.4. THE DRP, WHILE GIVING DIRECTIONS TO THE AO U/S 144 (5) R.W.S. 144C (8) OF THE ACT, RELIED ON THE DECISION OF THE AAR IN THE CASE OF COLUMBIA SPORTSWEAR (SUPRA). HOWEVER, IT I S OBSERVED THAT THE FACTS OF THE CASE IN THE REFERRED CASE ARE ON THE DIFFERENT FOOTINGS FROM THE FACTS OF THE CASE UNDER DISPUTE A ND, THUS, CLEARLY DISTINGUISHABLE. TO ILLUSTRATE FURTHER, TH E COMPARISON OF FACTS TO THE RULING OF AAR IN THE CASE OF COLUMBIA SPORTSWEAR AND THAT OF THE PRESENT CASE ARE AS UNDER: COLUMBIA SPORTSWEAR TESCO HONG KONG [THK] : A COMPANY INCORPORATED UNDER THE LAWS OF USA, IS A MULTINATIONAL WHOLE SALE AND RETAILER OF ACTIVE OUTDOORS APPARELS WITH OPERATIONS IN NORTH AMERICA, EUROPE AND ASIA. : ENGAGED IN CREATING INNOVATIVE PRODUCTS AFTER UNDERTAKING RESEARCH AND DEVELOPMENT TO DEVELOP MARKETABLE PRODUCTS, PERFORMS MARKET RESEARCH AROUND CUSTOMER PREFERENCES/PRODUCT PRICING. : ENGAGED IN DEVELOPING MARKETING CONTENT AND IMPLEMENTING STRATEGIES/UNDERTAKES INVENTORY MANAGEMENT. : SELLS BRANDED PRODUCTS, BRANDS OVER WHICH IT HAS EXCLUSIVE RIGHTS. : A LIMITED LIABILITY COMPANY ACTS AS A BUYING AGENT FOR GROUP COMPANIES. : HAS AN ARRANGEMENT WITH ITS GROUP COMPANIES FOR SOURCING PRODUCTS. : PROVIDES SOURCING ASSISTANCE IN SEEKING/MANAGING/ARRANGING DELIVERY OF DESIRED MERCHANDISE FOR SALE BY TESCO GROUP COMPANIES IN ITS BUSINESS. ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 18 OF 20 : ESTABLISHED A LO IN CHENNAI FOR UNDERTAKING LIAISON ACTIVITIES FOR PURCHASE OF GOODS IN INDIA : ESTABLISHED LO FOR CARRYING OUT THE PROCUREMENT ACTIVITIES IN INDIA. : ENTIRE EXPENSES OF LO IN INDIA BORNE BY THK THROUGH BANKING CHANNELS TO INDIA : LO IDENTIFIES MANUFACTURER, NEGOTIATES PRICE, HELP IN CHOOSING MATERIAL TO BE USED, ENSURING QUALITY OF MATERIALS/ COMPLIANCE AND ACTS AS A GO- BETWEEN MANUFACTURER AND COLUMBIA. : LO PROVIDES DESIGNS/ SPECIFICATIONS PREPARED AND OWNED BY COLUMBIA TO MANUFACTURER. MANUFACTURER USES THIS TO MANUFACTURE PRODUCTS. : QUALITY CONTROLS ARE UNDERTAKEN THROUGH TESTING. LO HAD NO SIGNING/ COMMITMENT POWER. LO IS PROCURING FOR THE PURPOSE OF EXPORT BY THOSE MANUFACTURERS /SUPPLIERS DIRECTLY TO TESCO GROUP COMPANY REQUESTING THE PRODUCTS. : THE LOCAL MANUFACTURER IN INDIA IS CONVEYED OF THE DECISION OF ACCEPTANCE BY THE OFFICE IN HONG KONG, THE MANUFACTURER CARRIES ON ITS ACTIVITY. : LO RECEIVES A PRICE BAND FROM TESCO GROUP CO WHICH IS COMMUNICATED TO THE VENDOR. IF THE VENDOR IS UNSATISFIED WITH THE PRICE TAG, HE COMMUNICATES TO THE LO WHICH IN TURN INFORM TO THE TESCO GROUP CO. REVISED PRICE WILL REACH THE VENDOR THROUGH LO AND THE PROCESS WILL CEASE ONCE THE PRICE IS AGREED BY BOTH. : LO OPINES ONLY THE REASONABILITY OF PRICE AND HONG KONG OFFICE DECIDES THE PRICE/QUALITY/QUANTITY/TO WHOM TO BE SHIPPED AND BILLED BASED ON THE DISCUSSION WITH THE GROUP COMPANIES. ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 19 OF 20 : RATE/PRICE/QUALITY WILL BE MONITORED BY THE LO IN INDIA AS PER THE DIRECTIONS OF GROUP COMPANIES THROUGH THK. :LO KEEPS A WATCH ON THE PROGRESS/QUALITY/TIME SCHEDULE AT THE MANUFACTURING SPOT. 7.5. WE HAVE, WITH DUE RESPECTS, PERUSED THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F JEBON CORPORATION INDIA V. CIT (INTL. TAXATION) REPORTED IN (2012) 19 TAXMANN.COM 119 (KAR) AS RELIED ON BY THE LEARNED DR. THE HONBLE COURT HAS HELD, AMONG OTHERS, THAT IT IS CLEAR FROM THE MATERIAL ON RECORD THAT THE FINDING RECORDED BY THE TRIBUNAL IS BASED ON LEGAL EVIDENCE AND THAT THE FINDING THAT T HE LIAISON OFFICE IS A PERMANENT ESTABLISHMENT AS DEFINED UNDE R ARTICLE 5 OF DTAA AND, THEREFORE, THE BUSINESS PROFITS EARNED IN INDIA THROUGH THIS LIAISON OFFICE IS LIABLE FOR TAX . HOWEVER, IN THE PRESENT CASE, THERE IS NO EVIDENCE ON RECORD TO SUG GEST THAT THE LO HAD INDULGED IN CARRYING ON COMMERCIAL ACTIVITIE S AND THAT IT WAS, IN FACT, A PERMANENT ESTABLISHMENT SO AS TO CLASSIFY THAT IT DOESNT FALL WITHIN THE AMBIT OF EXPLANATION 1(B) T O SECTION 9(1) (I) OF THE ACT. WE ARE, THEREFORE, OF THE VIEW THAT TH E CASE LAW RELIED ON BY THE DR IS ON A DIFFERENT FOOTING AND, THUS, IT CANNOT BE EQUATED WITH THE CASE UNDER DISPUTE. 7.6 TAKING INTO ACCOUNT ALL THE ASPECTS OF T HE FACTS AND CIRCUMSTANCES OF THE ISSUE AS DELIBERATED UPON ABOV E AND ALSO IN CONSONANCE WITH THE JUDICIAL VIEWS (SUPRA), WE ARE OF THE VIEW THAT EXPLANATION 1(B) TO S. 9(1)(I) OF THE ACT IS C LEARLY APPLICABLE TO THE ASSESSEES CASE AND, THUS, NO INC OME WAS ITA NOS.1323 TO 1327 OF 2011TESCO INTERNATIONAL SO URCING LTD BANGALORE PAGE 20 OF 20 DERIVED BY THE ASSESSEE IN INDIA THROUGH ITS OPERAT IONS AS LO IN INDIA. IT IS ORDERED ACCORDINGLY. 7.7. WE HAVE SINCE DECIDED THAT NO INCOME WAS DERIVED BY THE ASSESSEE IN INDIA THROUGH ITS OPERATIONS OF THE LO IN INDIA (SUPRA), THE ASSESSEES GRIEVANCE OF ATTRIBUTION OF INCOME TO LO AT 60% OF TOTAL COMMISSION AND CHARGING OF INTEREST U/ S 234A AND 234B OF THE ACT FOR ALL THE AYS BECOMES SUPERFLUOUS . IT IS ORDERED ACCORDINGLY. 8. IN THE RESULT, THE ASSESSEES APPEALS F OR THE AY'S 2003-04 TO 2007-08 ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH JANUARY, 2014. SD/- SD/- (N. BARTHVAJASANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER BANGALORE DATED 10 TH JANUARY, 2014. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCHES, BANGALORE