INCOME OF SOURCING ARM OF NRI-NOT TAXABLE

`Sourcing arms of NRIs not to pay tax`
Raghuvir Badrinath / Bangalore June 10, 2008, 0:25 IST
In a landmark decision, the Bangalore Tribunal has ruled that the income arising from non-resident Indians' (NRIs') sourcing operations through liaison offices in India is not taxable.
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The liaison offices have of late come under the scanner of the revenue department. The tax authorities are of the view that sourcing goods from India through agents is a revenue-generating activity and so income from it should be taxed.
The ruling is a breather for NRIs buying goods through agents in India for exports. The ruling is also important as it sets a principle that the purchase activity is not taxable in India, irrespective of whether the goods are purchased by the principal or the agent.
The tribunal had last week ruled this in favour of a global sports apparel firm headquartered in the US. "It has affiliates in various countries. The assessee assists its affiliates in procuring goods from manufacturers in many parts of the world as a buying agent and gets remuneration on a commission basis," said an official involved in the process.
The assessee has entered into an agreement with manufacturers in India for procurement of goods, which are directly shipped to the affiliate's location. The assessee had set up a liaison office in the country with the approval of the Reserve Bank of India (RBI). The activities included giving opinion on prices and supervising progress and quality at the manufacturing workshop.
The revenue authorities said the activities of the liaison office extended beyond the RBI approval. They further argued that the exclusion to business connection in respect of "purchase of goods by a non-resident for the purpose of export" would not apply to the assessee since it does not take title to the goods. A percentage of the value of exports was considered as income attributable to the India operations.
The Bangalore Tribunal held that irrespective of whether the principal purchased directly or through an agent, the activity would be excluded from the gamut of business connection so long as the purchase is exports-related. Hence, no income is accrued or deemed to accrue or arise in India. This was confirmed by KR Sekar, partner, Deloitte Haskins & Sells.
The tribunal also observed that the assessee is not representing the manufacturer but is an agent of the affiliates. The liaison office only ensures and supervises the manufacturing activity as an agent of the affiliates. The manufacturer does not receive any services from the liaison office or the assessee. The activities of the liaison office were well within the limits prescribed by the RBI, it said.