M/S. Aramco Overseas Company Vs. Director of Income-tax,(international Taxation)-i, New Delhi - Court Judgment

(By Honble Chairman)

1. This application is filed under Section 245Q(1) of the Income Tax Act by AramCo Overseas Company B.V. (hereinafter referred to as the ‘applicant or AOC). It is a Company incorporated under the laws of the Netherlands in 1989. It is stated to be a tax-resident of the Netherlands.

2. The following facts are stated in the application:

AOC is a subsidiary of the Saudi Arabian Oil Company (Saudi AramCo). It operates through it offices in Europe, Asia, Australia and Africa to render services in relation to supply chain management, technical support, finance support and administrative support to Saudi AramCo and its group companies. In consideration, AOC is paid the cost plus 5% mark-up by Saudi AramCo, which is received in the Netherlands.

AOC proposes to establish an office in India (‘Indian office) for undertaking procurement support activities for its head office and/or Saudi AramCo. The Indian office will undertake procurement support services for the purpose of export outside India of various goods/products required by Saudi AramCo e.g. steel pipes, pipe fittings, steel valves, process vessels, heat transfer equipments, electrical equipments etc. These products will be utilized by Saudi AramCo in its business as fixed assets or as consumables.

Indian office proposes to render the following services in relation to procurement of goods from India:

* Assistance in collection and dissemination of market intelligence on products and prospective suppliers.

* Giving opinion on reasonability of prices.

* Social audit of the supplier to ensure that they adhere to various environmental and other regulations.

* Checks to confirm whether the suppliers adhere to quality parameters.

* Coordinating and acting as a channel of communication with the suppliers.

The Indian office will not undertake any other business function of AOC 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.

The Indian supplier will be paid directly by the head office or Saudi AramCo, as the case may be.

3. The question on which the applicant sought advance ruling is the following:

“Whether AramCo Overseas Company BV (‘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 Income-tax Act, 1961?”

4. The case of the applicant rests on cl.(b) to Explanation (1) of Section 9(1) of the Income-tax Act 1961 hereafter referred to as the ‘Act. Section 9(1) specifies the incomes which shall be deemed to accrue or arise in India. The relevant part of Section 9(1) is extracted below :

“Section 9(1 ): The following incomes shall be deemed to accrue or arise in India:

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of capital asset situate in India.

Explanation 1 - For the purposes of this clause –

(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;

(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;”

Section 5(2) may also be noted:

Section 5: Scope of total income

(1) xx xx xx xx xx xx xx xx

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which –

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1: Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2: For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

5. It is the contention of the applicant that all 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 and therefore Explanation 1(b) to Section 9(1)(i) is squarely applicable to the present case. Hence it is contended that no part of the income of the applicant will be taxable in India. The mark-up of 5% over and above the cost paid to the applicant by Saudi AramCo in Netherlands on each transaction cannot be treated as taxable income of the applicant in India having regard to the said specific provision.

6. In the statement of facts extracted above, the applicant has stated that its Indian office undertakes procurement support activities for its head-office and/or Saudi AramCo (jointly referred to hereinafter as ‘buyers). It is not clear, which is the H.O. that the applicant is referring to. Then under the caption ‘Business Model of the applicant, it is stated in the rejoinder that the procurement support services detailed therein “form part of the purchasing function of the affiliates of the applicant company”. We presume that the term ‘affiliates applies to Saudi AramCo and some other Companies in which Saudi AramCo has controlling interest. The names of those ‘affiliates have not been disclosed. In the course of arguments, the learned Sr. counsel for the applicant has stated that the Indian suppliers directly sell to Saudi AramCo and in this connection, the Liaison Office in India render the services mentioned in the application. It was also clarified that the applicant is a global service provider for Saudi Aramco. It was stated that Saudi AramCo which is the ultimate buyer of goods compensates the applicant by paying the actual cost of services plus 5 per cent ‘mark-up. However, on a reading of the re-joinder and even the original application it appears that the support services performed by the Indian office extend not only to the purchases by Saudi AramCo but also by other undisclosed group companies.

6.1 We may also point out at this stage that the applicant has not filed any documents evidencing a typical transaction with details such as the placement of purchase order, the Indian supplier and the consignee abroad, the payment received by the Indian supplier and the source and modality of payment, the documents showing the realization of cost plus mark-up and above all the exact manner in which the applicants Indian office dealt with the Indian supplier and its head office or some other affiliates.

7. There is one more aspect which we would like to point out. The Revenue has stated in its comments dated 9^th October, 2009 that the applicant has not enclosed the agreement with Saudi AramCo under which it is authorized to provide the services. The applicant then filed a copy of the Service Agreement between “AramCo Overseas Co. (the applicant) and the Indian branch office located in Gurgaon. This agreement has not been referred to in the main application. Moreover, we do not find the date of the agreement in that document. We are, therefore, not inclined to refer to or rely on that document for any purpose. Whether any such formal agreement will be entered into between a head office and liaison/branch office is also doubtful.

8. Now we shall proceed to discuss the question framed by the applicant. In ultimate analysis, it comes to this: whether 5 per cent mark-up received by the applicant from Saudi AramCo for the service/operations rendered through its Indian branch is taxable under the Income Tax Act, 1961 (hereafter referred to as ‘Act).

8.1 Going by the charging Section-5(2), there is no doubt that the income accrues or arises in India. Procurement activities are rendered in India and the costs are incurred in India. The Mark-up is based on cost - howsoever it is calculated. As pointed out by the Revenue, the applicant is entitled of income by way of 5 per cent of mark-up the moment cost is incurred on specified activities. The fact that the income is received outside India does not affect the applicability of Section 5(2). However, the sheet-anchor of the applicants case rests on clause (b) of Explanation 1 to Section 9(1)(i) of the Act. It is the case of the applicant that if the claim of the applicant falls within the ambit of clause (b) of Explanation 1, the applicant is entitled to relief and in a case where clause (b) of Explanation 1 applies, resort to section 5(2) which is the general charging section is impermissible. It is contended that where the activities of a non-resident in India are directed towards the purchase of goods for the purpose of export, the legislature does not intend to tax the income arising out of the said activities 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, the said clause would virtually become superfluous, it is contended. In this context, we may point out that the argument that section 5(2) should be kept out of bounds in a case covered by clause (b) of Explanation 1 is prime facie contrary to the view expressed by this Authority in the case of Mustaq Ahmed (307 ITR 401). However, leaving apart section 5(2) from consideration, we would like to examine whether the applicants case falls within the fold and ambit of clause (b) of Explanation 1. In our view, the applicant is not eligible to invoke the benefit of clause (b) of Explanation 1 for the reasons to follow.

8.2 The legislative background in which cl.(b) of Explanation 1 to Section 9(1)(i) was enacted and the object of that provision was discussed by this Authority in the case of Mustaq Ahmed (307 ITR 401). The following extracts from the said ruling throw light on this aspect:

“Section 9(1)(i) of the present Act broadly corresponds to section 42(1) of the old Act without its provisos. Clause (a) of Explanation 1 to section 9(1)(i) is similar to section 42(3) of the old Act. A provision similar to clause (b) of Explanation 1 with which we are more concerned was not there in the old Act.

There were decisions to the effect that even if the operations in British India were confined to purchase of goods, a portion of the profits can be reasonably attributed to such acts of purchase under section 42(3). In the case of Anglo-French Textile Co.Ltd. vs. CIT (No.2) [1953] 23 ITR 101 decided by the Supreme Court, two questions arose (page 106):

“(i) Is mere purchase of raw material an ‘operation within the meaning of section 42(3) of the Act?

(ii) Can any profit arise out of mere purchase of raw material?”

The raw materials were purchased in British India. The manufacture and sales took place outside British India. The questions were answered in the affirmative by the High Court. The High Court held (page 106) :

“It is clear that the purchase of raw material by a firm of manufacturers is one of the processes or operations which contributes to an appreciable degree to the ultimate profit which is realized on the sale of manufactured articles.”

This view of the High Court was upheld by the Supreme Court with the qualification that it is not every business activity of a manufacturer that comes within the expression “operations to which the provisions of section 42(3) are attracted”. Activities of a casual or isolated character would not ordinarily fall within the ambit of business operations It was then observed (page 108):

“In this case the raw materials were purchased systematically and habitually through an established agency having special skill and competency and such activity amounted to ‘operation as contemplated by section 42(3) of the Act.”

The ultimate conclusion was that it was reasonable to attribute a portion of the profits to such purchases in British India. So also, it was held in the case of Bikaner Textile Mercantile Merchants Ltd. vs. CIT [1965] 58 ITR 169 (Raj) that a part of the profits was attributable to and should be deemed to arise from the purchase of goods in British India though the purchased cloth was imported into Bikaner State (which was not part of British India) and then sold there. Being aware of this legal position, obviously the Legislature felt that it would not be in the economic interest of the country to attribute notional income to the mere purchase of goods in India, though they were meant to be exported and sold outside the country.”

8.3 Keeping in view this background and the purpose behind the insertion of cl.(b) of Explanation 1, that provision has to be interpreted. But the language of cl.(b) of Explanation 1 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.

9. A service provider who is neither the purchaser of goods to be exported nor an agent of such purchaser does not fit into the clause on which the applicant relies. Any and every person who in someway or the other facilitates purchases by a non-resident for the purpose of export cannot be brought within the ambit of cl.(b) of Expl.1. The whole object of cl.(b) 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 ex port. The non-resident may effect purchases directly or through the media of an authorized representative such as an agent.

9.1 The applicant contends that the 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 under cl.(b) of Expl.1 This contention begs the question whether the applicant can be regarded as buying agent of Saudi AramCo. and its group Companies. The answer to that question depends on many facts and factors. For instance, what is the Agreement between the applicant and Saudi AramCo. and its affiliates? Did the applicant come face to face with those purchasing entities and communicate with them from time to time? Did the so-called agent (the applicant or its Indian branch) act according to instructions or the guidelines spelt out by the Purchasing Company? Did the applicant account for the actual cost incurred or was there any agreement regarding the modalities of ascertaining the cost? Was the purchasing company (it may be Saudi AramCo. or some other ‘affiliate Company) in contact with and receiving informations from the applicant regarding the purchase transactions in India? There are no averments in the application. A bald averment that too in the rejoinder that the applicant acting through its Indian branch office plays the role of a ‘buying agent cannot be accepted on its face value. It seems to us that the theory of agency has been set up by the applicant without factual formulation only to call in aid the ratio of the decisions relied on by the applicant. An advance ruling cannot be given on hypothetical facts and pleas.

9.2 The applicant has sought to place reliance on the ruling of this Authority in Ikea Trading (Hong Kong) Ltd. (308 ITR 422 (AAR))The benefit of cl(b) of Explanation to S.9(1) was extended to the applicant in that case who was engaged in the dual function of buying the goods and at the same time acting as an agent on behalf of its group companies. In that case, the applicant itself was the buyer of goods in India and the invoice was raised directly by the Indian suppliers on the applicant. The applicant in turn sold the goods and received sale profits from its group companies outside India. It was in that context that the AAR observed that the activities of the applicant were integrally connected with the purchases and fell within the scope of cl.(b) of Explanation 1. It was observed : “the fact that the actual export was done by the Indian seller does not detract from the position that the goods purchased by the applicant through the aegis of its regional office were meant to be exported.” Thus, the liaison office in that case mainly facilitated the purchases made by the applicant itself. Therefore, that case is clearly distinguishable.

9.3 The applicants counsel also placed reliance on the decision of Bangalore Bench of ITAT in Nike Inc. vs. ACIT ((2008) 122 TTJ 201). In that case too, the appellant set up an office in India. It acted as a buying agent for its affiliates and even placed orders on the Indian suppliers specifying the quantity, the price, the name of the consignee and the destination and the name of the company on whom the bill had to be raised. Every invoice made by the Indian supplier contained a reference to the assessee as the agent of affiliate and the goods were shipped at the price agreed to by the assessee subject to its approval and instructions. The Tribunal found on a consideration of the evidence on record that the assessee acted as an agent of various affiliates. It is pertinent to note that the assessee received commission from its affiliates on the basis of quantum of purchase made (vide paragraph 12 of the order). It is apparent that the facts of the case on hand stands on a different footing. The ratio of that decision cannot be pressed into service to support the contention of the applicant. As stated earlier, the applicant is neither a purchaser nor is there evidence to show that it acts as an agent of the non-resident buyers for the purpose of purchase of goods to be exported. The applicants income is not coming out of the “operations confined to the purchase of goods in India for the purpose of export”, but on account of certain support services rendered in connection with the purchases 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 applicants liaison office for such services.

9.4 We may also refer to one more decision cited by the applicant i.e., the ruling of this Authority in Angel Garments Ltd (287 ITR 341 (AAR)). The fact situation in that case also is quite different. The non-resident applicant purchased the goods from Indian exporters and it set up a liaison office in India to coordinate and act as a channel of communication between the applicant and the Indian exporters and to ensure timely exports of goods. It was held that the activities of the liaison office were confined to the purchase of goods in India by the applicant for the purpose of export. We do not see how that ruling is of any help to the applicant.

10. For the reasons aforesaid, we are of the view that the applicant is not eligible to seek the aid of cl.(b) of Explanation 1 to Section 9(1)(i) to nullify the accrual or arising of income in India. When cl.(b) of the Explanation is excluded from consideration, there is no denial of the fact that Section 5(2) squarely applies in order to fasten the tax liability on the applicant in respect of the income by way of mark-up received on account of the support services rendered in India for its affiliate entities.

Answer to the Question :

11. Although in the question framed by the applicant, the purchases made by the applicant are referred to, the application as well as the arguments proceeded on the basis that the purchaser will be Saudi AramCo or some other Group Company. If the applicant itself is the purchaser of goods exported from India, the applicant can claim the benefit of cl.(b) of Explanation 1 to Section 9(1)(i) of the Act. Otherwise, it cannot. In other words, 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. The question is thus answered partly in affirmative and partly in negative.

Accordingly, ruling is given and pronounced on this the 12^th day of March, 2010.