In the facts of the case, procurement activity of USCO undertaken by Indian Liaison Office (LO) is not confined only to the purchase of goods in India for purposes of export. As a result, USCO is not entitled to benefit of exclusion available for income earned from business connection relevant to ‘purchases for export’ operations.

•  Vendor identification.

•  Uploading material prices to the internal product data management system.

•  Ensuring vendor compliance with policies, procedures and standards relating to quality, delivery, pricing and labour practices.

•  Inquiry of potential suppliers and interaction with existing suppliers for purchase of USCO’s product range.

•  Collection of samples from vendors with regard to various materials available in India.

•  Quality check at laboratories to ensure adherence to quality parameters.

•  Acting as communication channel with vendors. USCO approached AAR, seeking ruling on taxability of its presence and the benefit it has of the following:

•  LO operations in India were confined to purchase of goods in India for purpose of export and therefore it should be protected from tax liability in terms of ‘purchase for export’ exception available under Explanation 1(b) to section 9(1)(i).

•   Under DTAA, no PE emerges if the activities carried out through PE are confined to preparatory and auxiliary activities or relate to purchase of goods or collection of information. Also, no part of PE profit is taxable if the profit is attributed to purchase of goods or merchandise for the enterprise. In support of its contention USCO stated that:

•  Purchases were invoiced by Indian vendors directly to it, who in turn sells such goods to customers outside India. The sale consideration was received outside India. Further activities carried on by LO were also approved by RBI under relevant regulations.

•  The activity of LO relates to a source of expenditure and not source of income. It does not relate to generation of income of USCO in India.

•  LO cannot be considered to be PE in India, on account of specific exclusions applicable for preparatory/auxiliary functions or to functions which are confined to purchase.

Tax Authority contended that the activities carried out by LO are not merely confined to purchase of goods for purpose of export and therefore, the ‘purchase exclusion’ should not be available. The activities of LO constitute business connection under the Income-tax Act and are not in the nature of preparatory and auxiliary activities. AAR Ruling On accrual of income on account of purchase function The goods as designed and styled by USCO cannot be sold without being manufactured and procured in the manner desired by USCO. The LO is responsible for getting products manufactured as per design and specification.

Getting goods manufactured and purchased forms integral part of income generation activity of USCO. LO acts as an important arm of USCO in relation to the prescribed activity. SC decision in the case of Anglo French Textile Company Ltd.1 supports that activities other than actual sale should also be considered while attributing profits to various business operations. It is hence wrong to suggest that no profits can be attributed to purchases or LO activities merely involve expenditure. The decision though rendered in pre-exclusion clause period, lays down principle that in a business of purchase and sale, activity of purchase cannot be divorced from activity of sale which leads to income. Availability of the Income-tax Act purchase exclusion Activities of LO are not merely confined to purchase of goods in India for purpose of export. USCO transacts in India, its business of designing, quality control and manufacturing in consistence with its policy.

All activities of LO cannot be understood to be only confined to purchase of goods in India for export. LO also undertakes identical activities in Egypt and Bangladesh. Thus, since activities of USCO in India also include its business in other countries, it cannot be stated that the operations are confined to purchase of goods in India. PE and Income attribution under DTAA Other than the actual sale of goods, all other activities of LO are carried are conducted by LO of USCO in India.

In other words part of business of USCO is carried on in India. Therefore LO constitutes fixed base PE of USCO in India. Article 5(3) of DTAA, excludes a fixed place of business from the ambit of PE if the activity is solely for the purpose of purchasing goods or for collecting information for the enterprise. The activities carried out by LO are not used solely for purchasing goods/ collecting information but also for other functions such as identifying manufacturers, negotiating prices, quality control, etc. The LO is involved in all activities except actual sale. Hence preparatory and auxiliary exclusion would also not be available to USCO. A portion of income of business of designing, manufacturing and selling products accrues to USCO in India and is accordingly taxable.