Karnataka HC Rules On Sourcing Activities Of Foreign Co.

This Tax Alert summarizes a recent ruling of the Karnataka High Court (HC) in the case of Nike Inc. (Taxpayer) on whether sourcing support activities carried out by a Liaison Office (LO) of the Taxpayer in India results in a taxable presence. Having regard to the facts of the case, the HC ruled that the Taxpayer was not carrying on any business in India and no income accrued or arose in India. Further, the Taxpayer's activities undertaken through the LO for assisting foreign buyers in purchase of goods from Indian manufacturers would fall under the exclusion provided in the Indian Tax Laws (ITL) for purchase of goods for the purpose of export out of India. Accordingly, the income of the Taxpayer was not taxable in India under the ITL.

Whether sourcing activities undertaken by foreign companies creates a taxable presence has been a subject matter of controversy in India, with the Tax Authority generally adopting a fairly narrow interpretation of the Purchase Exclusion provision contained in the ITL. While application of the exclusion would depend on the specific facts of each case, this ruling provides a broad and purposive interpretation of the provision, which would be useful for taxpayers with similar activities.

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