By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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On facts, LO purchasing diamonds for export to HO does not constitute PE under India-USA DTAA and it was covered under explaination 1(b) to section 9(1) (i) of Income-tax Act.
Facts:
The assessee was a company based in the USA (‘USCo’). USCo was engaged in the business of sale of diamonds and diamond jewellery. After obtaining approval of RBI, USCo established a Liaison Office (‘LO’) in India for purchase of diamonds for exports to its Head Office (‘HO’). During the course of survey by the tax authority, the following was noted as business model of USCo and its LO in India:
- Upon receipt of information from HO, LO gets the right quality, size and carats from the supplier.
- The prices are then negotiated, by LO with the supplier, in order to obtain best prices, as per HO’s requirement.
- Unassorted diamonds are received; the parcels are assorted with the help of assorters.
- For getting the right selection and chalking out rejections, the assortment, verification and selection of packets is done by various other employees of LO.
- Once right selection of diamonds are obtained, packed and sealed, they are dispatched to the customs office.
- LO has dedicated employee who takes care that the sealed packets are cleared through the approver and examiner at the customs.
- The supplier prepares the invoice which is directly honoured by HO.
It was also noted that USCo had 76% shareholding in another Indian company and that company purchased rough diamonds, got them processed from others and sold the finished diamonds in open market. About 25% of the total purchases of LO were from this company.
Based on the above activity conducted by LO, the tax authority held that LO constituted PE in India of USCo and computed its income @5% of the value of diamonds imported through LO.
USCo contended that as per clause (b) of Explanation 1 to section 9(1)(i), no income could be deemed to accrue or arise in India through or from operations which were confined to the purchase of goods in India for purposes of export. Reliance, in this regard was placed on Circular Nos. 23, dated 23-7-1969 and 163, dated 29-5-1975.
In appeal, CIT held that LO was not involved in manufacture or production and was not selling diamonds. Also, under India-USA DTAA, LO, which was engaged in the purchasing of goods or merchandise, or for collecting information for the HO, could not be considered as PE in India.
Held:
- The activity profile of LO, namely assorting, quality checking and price negotiation, under instructions and specifications of HO are a part of the purchasing of diamonds for export from India. Such process did not result or bring any physical and qualitative change in the diamonds purchased.
- Selection of right goods and negotiation of prices are an essential part of the purchasing activity.
- The case is squarely covered by Explana-tion (1)(b) to section 9(1)(i) of the Income-tax Act. Further, having regard to Circular No. 23 and Circular No. 163 of the CBDT, no income could accrue or arise in India to USCo by virtue of purchase of goods made for purposes of export.
