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Liaison Office of foreign MNC established in India for sourcing goods for exports

Liaison Office of foreign MNC established in India for sourcing goods for exports to its overseas customers as per their requirements will not be treated as PE under the DTAA between India-USA.

Columbia Sportswear Company v. DIT(IT) W.P. NO. 39548 OF 2012 [AP HC] Date of Decision: September 03, 2015

Facts of the case

The petitioner is a company incorporated in the USA and is a tax resident of the USA and it is a multinational company engaged in the business of designing, developing, marketing and distributing outdoor apparel with operations in North America, Europe and Asia.

They do not distribute or retail its products in India. The designing of all products is exclusively undertaken from outside India as by its very nature, the activity is based on customer/user requirement arising from market place and as nothing specific to place of manufacturing.

The petitioner’s centralized sourcing group located outside India is responsible for all key purchase functions including

(a) choosing the producing country;

(b) Vendor Selection

(c) Co-ordination of global production management and planning and

(d) global quality assurance and strategy and policy development.

With the permission of the Reserve Bank of India, the petitioner established a liaison office in Chennai in 1995 for undertaking liaison activities in connection with purchase of goods from India.

The petitioner purchases products from third party Indian Vendors on principal to principal basis.

The Indian liaison office is involved only in activities relating to purchase coordination for the petitioner. As part of these activities, the India liaison office is engaged in vendor identification, review of causing data, uploading of material prices into the Internal Product Data Management (PDM) system of the petitioner, vendor recommendation and quality control.

It also monitors vendors for compliance with petitioner’s policies, procedures and standards related to quality, delivery, pricing and Labour practices.

It does not supervise, direct or control the production facilities of the Indian Vendors. Consistent with the RBI approval, accorded to it, the India liaison office does not undertake any activity of trading, Commercial or Industrial nature. It has no revenue streams and it does not source products to be sold locally in India.

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Decision of the Court 

The Andhra Pradesh High Court held that if the petitioner has to purchase goods for the purpose of export, an obligation is cast on the petitioner to see that the goods, which are purchased in India for export outside India is acceptable to the customer outside India.

To carry on that business effectively, some steps (i.e. the petitioner identifies a competent manufacturer, negotiates a competitive price, helps in choosing the material to be used, ensures compliance with the quality of the material, acts as go-between, between the petitioner and the seller or the manufacturer, seller of the goods and even gets the material tested to ensure quality in addition to ensuring compliance with its policies.

the relevant laws of India by the suppliers) are to be taken by the seller, lest, the goods, which are purchased in India, may not find a customer outside India.

Therefore, these acts didn’t involve all the activities connected with the business, except the actual sale of the products outside the country.

In our considered information, all these acts are necessary to be performed by the petitioner before export of goods. Consequently, the liaison office in question wouldn’t qualify to be a permanent establishment in terms of Article 5 of the DTAA.

The liaison office is established only for the purpose of carrying on business of purchasing goods for the purpose of export and all that activity also falls within the meaning of the words “collecting information” for the enterprise

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