Activities Relating to Purchase of Goods from India by a Liaison Office

The scope of the phrase “operations which are confined to the purchase of goods in India” has been a subject matter of controversy, with the Tax Department generally adopting a fairly narrow interpretation. In this feature the authors analyse the various judicial pronouncements in this regard.

Issue for consideration

An income of a foreign company or part thereof, attributable to its operations in India, is taxable in India provided such operations or activities are construed to be a ‘business connection’ within the meaning of the term as defined in Explanation 2 to section 9(1) of the Income-tax Act. Such an income is deemed to accrue or arise in India where it is found to be through or from any business connection in India, whether directly or indirectly. The said Explanation 2 provides that a business connection shall inter alia include any business activity, carried out through a person who habitually exercises an authority to conclude contracts in India on behalf of the non-resident, unless his activity is limited to the purchase of goods or merchandise for the non-resident.

Explanation 1(b) provides that income shall not be deemed to accrue or arise in India, where operations are confined to purchase of goods in India for the purpose of export.

An issue has arisen in cases where an Indian liaison office of a foreign company purchases goods from India for its head office and carries out several activities incidental thereto. The courts have been asked, under the circumstances, to define the true meaning of the term ‘confined to purchase of goods in India’ and explain whether the activities that are carried out for effecting purchase of goods in India could be considered as an independent activity or as an integral part of the purchase of goods in India. In case of the latter, the activity shall not attract Indian taxation and in case of the earlier, it may expose the income attributable to such activity to taxation in India. Recently, the Karnataka High Court has held that such activities constitute purchase of goods in India, while the Authority for Advance Ruling has held the same to be not forming part of purchase.

Columbia Sportswear Co.’s case

The issue arose before the Authority for Advance Rulings In Re Columbia Sportswear Co, 12 taxmann. com 349. The company in this case was incorporated under the laws of the USA, a multinational wholesaler and retailer of outdoors apparel with global operations. It conducted research and development to develop marketable products outside India. In the year 1995, the company established a liaison office in Chennai for undertaking liaison activities, in connection with purchase of goods in India, which activities had subsequently been expanded to Bangladesh and Egypt. Besides coordinating purchase of goods from India, the Indian liaison office also assisted the company in purchase of goods from Egypt and Bangladesh and engaged in quality monitoring and production monitoring of goods purchased from these countries. The goods procured from Egypt and Bangladesh were directly sold to the company in the United States from those countries. In the year 2000, a support office was opened by the Indian liaison office in Bangalore with the approval of the Reserve Bank of India.

The company claimed that;

• its products were produced by independent suppliers worldwide including India.

• the Indian liaison office was involved in activities relating to purchase functions for the company and incidentally was engaged in vendor identification, review of costing data, vendor recommendation, quality control and uploading of material prices into the internal product data management system of the company besides monitoring vendors for compliance with its policies, procedures and standards related to quality, delivery, pricing and labour practices.

• the Indian liaison office did not have any revenue streams; it did not source products to be sold locally in India.

• it did not sell any goods in India and therefore no income arose from its Indian operations.

• no income could be deemed to have accrued or arose in India within the meaning of section 9(1) of the Act.

• its case was covered by Explanation 1(b) of s.9(1) (i) and could not be construed as a case of business connection.

• it did not undertake any activity of trading, commercial or industrial in nature in India.

• the expenditure of the liaison office was entirely met by remittances made by the company.

On these facts, the company approached the Authority seeking a ruling on the question whether, given the nature of the activities carried on by the liaison office, any income accrues or arises in India as per section 5(2)(b) of the Act? Whether the applicant can be said to have a business connection in India as per the provisions of section 9(1)(i) of Act read with Explanation 2? Whether various activities carried out by the India LO, as listed in the Statement of relevant facts (Annexure-III), are covered under the phrase, ‘through or from operations which are confined to the purchase of goods in India for the purpose of export’ as stated in part (b) of Explanation 1 to section 9(1)(i) of the Act?

The Authority in paragraph 8 of the decision noted the following facts surrounding the activities of the LO;

“The liaison office of the applicant in India is engaged in vendor identification, review of costing data, vendor recommendation, quality control and uploading of material prices into the internal product data management system of the applicant. The liaison office monitors vendors for compliance with its policies, procedures and standards related to quality, delivery, pricing and labour practices. The liaison office is engaged in quality monitoring and production monitoring for goods purchased from Egypt and Bangladesh. It coordinates, ascertains, monitors and verifies with the vendors to develop the material in line with the quality and aesthetic requirements of the product as provided by the applicant’s product design team. It undertakes laboratory testing of fabrics/garments in India in addition to inspecting the quality of the products. It reviews production and quality assurance including the monitoring of the labour practices compliance and periodic performance reviews. It conveys the orders placed by the applicant on to the suppliers and interacts with the suppliers in relation to capacity utilisation, quality assurance, on-time delivery performance and so on. The role of the quality control team in the liaison office includes executing pre-sourcing factory evaluations to determine the vendor’s ability to manufacture the product to the expectations of the applicant. The quality control team also gives quality training to the newly selected vendors and is responsible for communicating the quality processes of the applicant and expectations to suppliers. The team also ensures that standard methods, tools, machinery and layouts are used. The liaison office also summarises seasonal vendor quality performance for the consideration of the applicant. The liaison office also ensures compliance with the quality process including seeking to ensure that the targeted defect percentage is maintained. It also ensures that the requirements of environmental laws and labour laws of the country are obeyed by the suppliers.”

The Authority concluded that the applicant could not take benefit of Explanation 1(b) to section 9(1) (i) as, in its opinion, the activities carried out by the assessee were not confined to purchase of goods in India. The following findings and observations of the Authority are pertinent;

•    The liaison office had about 35 employees divided into 5 teams dealing with material management, merchandising, production management, quality control and administration support, constituting teams from finance, human resources and information systems.

•    Activities carried on by the liaison office related to ensuring the choosing of quality material, occasionally testing them for quality, conveying of requisite design, picking out of competitive sellers, the ensuring of quality, the ensuring of adherence to the policy of the applicant in the matter of procurement and employment, in the matter of compliance with environmental and other local regulations by the manufacturers – suppliers and in ensuring that the payments made by the applicant reach the suppliers.

•    In the matter of manufacturing of products as per design, quality and in implementing policy, the liaison office was actually doing the work of the applicant, which actually was in the business of designing, manufacturing and selling branded products, brands over which it had exclusive right.

•    The activities of the liaison office were not confined to India. It also facilitated the doing of business by the applicant with entities in Egypt and Bangladesh.

•    A person in the business of designing, manufactur-ing and selling could not be taken to earn a profit only by a sale of goods. The goods as designed and styled by the applicant could not be sold without it being got manufactured and procured in the manner designed and contemplated by the applicant.

•    It would be unrealistic to take the view that all the activities other than the actual sale of the goods are not an integral part of the business of the applicant and have no role in the profit being made by the applicant by the sale of its branded products. It was difficult to accept the argument that what was done in India by the liaison office of the applicant was only to expend money and all its income accrued outside India by the sale of the products.

•    All activities other than the actual sale could not be divorced from the business of manufacture and sale especially in a case like that of the applicant, where the sale was of a branded product, designed and got made by the applicant under supervision, under a brand owned by the applicant. Therefore, the argument on behalf of the applicant that all the activities carried on in India were confined to the purchase of goods in India, could not be accepted.

•    ‘Confined’ meant, ‘limited, restricted’. ‘Purchase’ meant ‘get by payment, buy’.

The Authority observed that what section 9(1)(i), Explanation 1(b) deemed in the case of a non-resident, was that no income arose in India to a person through or from operations which were confined to the purchase of goods in India for the purpose of export but, in the case before it, the activities of the liaison office of the applicant in India were not confined to the purchase of goods in India for the purpose of export. It further observed that the applicant, in fact, transacted in India its business of designing, quality controlling, getting manufactured consistent with its policy and the laws, the branded products it sold elsewhere and that those activities could not be understood as activities confined to purchase of goods in India for export from India.

Income resulting from manufacture, purchase and sale, in the opinion of the Authority, could not be compartmentalised and confined to one arising out of a sale only, and that the whole process of procurement and sale had to be completed to generate income. Getting manufactured and purchasing formed integral parts of the process of generating income and the liaison office acted as the arm of the applicant regarding that part of the activity, and its functions were not confined to purchase or mere purchase.

Another aspect that influenced the Authority’s decision was the fact that the activities of the liaison office of the applicant in India, was not confined to India but extended to Egypt and Bangladesh. Since the activities of the applicant in India included its business in Egypt and Bangladesh, it could not be stated that the operations of the applicant in India were confined to the purchase of goods in India for the purpose of export.

The Authority therefore took the view that the activities of the liaison office gave rise to taxable income in India, not being exempt under explanation 1(b) to section 9(1)(i).

Nike Inc.’s case

The issue recently came up for consideration before the Karnataka High Court in the case of CIT vs. Nike Inc., 34 taxmann.com 170. The company in this case was engaged in the business of sports apparel with its main office in the USA and had globally located associated enterprises or subsidiaries. From its office in the USA, the company arranged for all its subsidiaries the supply of various brands of sports apparel for sale to various customers. It did not carry on any manufacture by itself. It engaged various manufacturers all over the world on a job-to-job basis and made arrangements with its subsidiaries for purchase of the manufactured goods directly and payment for the same to the respective manufacturers.

With a view to procure various apparel from manufacturers from various parts of the world, the company opened a liaison office in India and;

•    employed persons in various categories.

•    the rate or price for each apparel was negotiated by the liaison office with the manufacturer.

•    the quality of each apparel was also indicated and the samples so developed were forwarded to the US office.

•    the liaison office proposed and gave its opinion about the reasonability of the price, etc. and the US office decided about the price, quality, quantity, to whom to be shipped and billed.

•    the local manufacturer in India was conveyed of the decision by the office in the USA and once it was accepted, the local manufacturer carried on his activity.

•    the liaison office kept a close watch on the progress, quality, etc. at the manufacturing workshop and also kept a watch on the time schedule to be followed and rendered such assistance as may be required in the dispatch of the goods, including the actual buyer and the place for export.

For all these activities in India, the liaison office was receiving funds through banking channels from the USA.

For the relevant assessment years, the company filed returns of income declaring nil income. It contended that its activities were to carry on activities that were ancillary and auxiliary to the activities of its head office and other group companies and to act as a communication channel between the head office and parties in India. It claimed that in terms of Explanation 1(b) to section 9(1)(i), no income shall be deemed to accrue or arise in India to a non-resident from operations which were confined to the purchase of goods in India for the purposes of export. In terms of Circular No. 20, dated 7-7-1964, a non-resident would not be liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident had an office or an agency in India for the purpose, or the goods were subjected to any manufacturing process before being exported from India. Therefore, no income shall be deemed to accrue or arise in India to it, as its operations were restricted to purchase of goods in India for the purpose of export, even though it had a liaison office to facilitate sourcing of products from Indian suppliers.

The Assessing Officer held that the activities of the company were actually beyond its activities required as a liaison office and a part of the entire business was done in India through the liaison office and therefore, the income had accrued or arisen or deemed to have accrued or arisen to the company in India in view of clause (b) of s/s. (2) of section 5. He, therefore, held that the income of the company was chargeable to tax to the extent of income, which was attributable to the activities done in India or accruing or arising in India on its behalf by its liaison office. He further held that 5% of the export value could reasonably be considered as income attributable to India operations, i.e., income accruing or arising in India to the company.

On appeal, the Commissioner (Appeals) held that it was an admitted fact that the company was not involved in the purchase of goods in India for the purpose of export, which would have involved transfer of title of goods purchased from the seller to the purchaser and as no purchase took place in the name of the liaison office, it was not entitled to the exemption enumerated in section 9(1). He, therefore, upheld the order of the Assessing Officer.

On second appeal, the tribunal held that the case before it was a case of purchase of the goods for the purpose of export by the assessee. It observed that in the absence of there being any prima facie contract between the assessee and the local manufacturer, the status of the liaison office was that of buyer’s agent, more so when the local manufacturer knew it only as the agent of the buyer i.e., the company had placed the orders on it with a view to buy the goods in the course of export and, as directed, export it to various affiliates of the company. It held that the Explanation 1(b) to section 9(1)(i) clearly applied to the company and hence, no income was derived by the company in India through its operations of the liaison office in India. It accordingly, set aside the orders of the lower authorities and granted relief to the company.

On appeal to the High Court by Revenue, the Karnataka High Court upheld the decision of the tribunal and held that the activities of the assesssee were confined to purchase of goods in India and could not be construed to represent any business connection nor could it be said that it resulted in any deemed accrual or arising of any income in India.

In the context of the income accruing or arising from ‘business connection’, the court observed that till 2004, the word ‘business connection’ had not been defined. However, by the Finance Act, 2003, Explanation 2 was inserted in section 9(1)(i), which, though it came into effect from o1-04-2004, was clarificatory in nature. It further took note of the deletion of the Proviso to Explanation 1(b) to section 9(1)(i) by the Finance Act, 1964, with effect from 01-04 -1964, which deletion had the effect of exempting a non-resident from tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident had an office or agency in India for the purpose, or even though the goods were subjected by him to any manufacturing process before being exported from India.

In the instant case, the court noted that the as-sessee was not carrying on any business in India though it had established a liaison office in India whose object was to identify the manufacturers, give them the technical know-how and see that they manufactured goods according to its specifications, which would be sold to its affiliates. It further noted that the person who purchased the goods paid the money to the manufacturer and in the said income the assessee had no right; the said income could not be said to be an income arising or accruing in India vis-à-vis the assessee; the evidence on record showed that the assessee paid the entire expenses of the liaison office.

According to the court, the payment by the non-resident buyer of some consideration to the assessee outside India, as per the contract between the as-sessee and the buyer entered outside India, was an irrelevant factor in deciding the accrual of income in India and in any case, even if any income arose or accrued to the assessee, it was outside India.

Noting the provisions contained in Explanation 2 to section 9(1)(i) concerning the business connection and that the saving for the activities was limited to the purchase of goods or merchandise, the court observed that no income should be deemed to ac-crue or arise in India. The court observed that once the entire operations were confined to the purchase of goods in India for the purpose of export, the income derived therefrom should not be deemed to accrue or arise in India u/s. 9. It also observed that the activities of the assessee in assisting the Indian manufacturer to manufacture the goods according to its specification was to see that the said goods manufactured had an international market, and could therefore be exported. The Court concluded that the assessee was not earning any income in India, and, if at all it was earning an income outside India under a contract which was entered into outside India, no part of its income could be taxed in India either u/s. 5 or section 9.

In arriving at the conclusion in favour of the assessee, the court was guided by the decisions of the Supreme Court in the cases of Anglo-French Textile Co. Ltd. vs. CIT ,23 ITR 101 (SC) (para 15) and CIT vs. R.D. Agarwal & Co. 56 ITR 20 (SC).

Observations

Clause (b) of Explanation 1 to section 9(1)(i) clarifies that no income shall be deemed to accrue or arise in India, in the case of a non-resident, through or from operations which are confined to the purchase of goods in India for the purpose of export. It clearly conveys that a non-resident can carry an activity in India and such activity may signify a business connection so however the income through or from such activity, if confined to purchase, shall not be deemed to accrue or arise in India.

An activity that travels beyond purchase of goods in India shall expose the income, pertaining to such an activity, to taxation in India under the deeming fiction contained in section 9(1)(i) of the Act. Such an activity may be carried out by a non-resident himself or through his agent or a liaison office.

It therefore is essential, for an exemption from tax, that the activity is confined to purchase of goods for export. The term ‘confined’ to is not defined in the Act and, as has been seen, has been the subject matter of intense conflict. One view of the matter is that the term ‘purchase’ signifies placing of an order for purchase of such goods that are exported. The other view is that the term connotes carrying out all such activities that lead to placing an order of purchase of goods for export, i.e., all activities that precede the placement of an order are ‘purchase’. In the narrowest possible view of the term ’purchase’, the activity is restricted to placing the purchase order, while taking a broader view, even the activities leading to placing an order for purchase of goods shall be included in ‘purchase’ of goods.

The term ‘confined’, in the context, is defined to mean “restrict within certain limits of scope” by the Oxford Dictionary. An activity or activities whose scope is restricted to purchase of goods can be said to be confined under the meaning supplied by the Oxford Dictionary. A plain reading explains that the dictionary does not narrow down or limit a ‘purchase’ to the activity of placing the order of purchase. Isolating activities leading to purchase from its scope is not even implied.

The important thing is to ascertain that can an order for purchase be placed without necessarily undertaking the activities that lead to such an order, such as; identifying the product and its quality, short-listing a vendor, giving product specifications, negotiating the price and fixing it, defining the logistics and specifying the delivery schedule? If the answer, in the context of clause(b) is no, then carrying on the pre- purchase activities shall not result in any deemed accrual of income.

The dictionary meaning of the term ‘purchase’ is to acquire on payment or for a consideration. It needs to be appreciated that an acquisition is not limited to placing an order of purchase but involves the series of acts carried out to successfully acquire a thing and includes the act of payment effected, post purchase, for an acquisition. It is significant to note that the word ‘purchase’ is preceded by the word ’to’, collectively reading ‘to purchase’ and so read, it sets any doubts to rest about the true un-derstanding of the law. To purchase without doubt, shall rope in all activities that enables the placement of a purchase order leading in turn to purchase or acquisition of goods.

The Authority in Columbia Sportswear Co.’s case has refused to appreciate that the activities considered by it to be constituting a business nonetheless were part of an activity of purchase without which it was not possible to purchase goods, and in that view of the mater, such activities were confined to purchase of goods alone and that they were not to be isolated from the purchase of goods as was being represented by the revenue authority.

In contrast, the Karnataka High Court in Nike Inc.’s case took a pragmatic view by holding that the pre-purchase activities were activities that were part of purchase of goods and carrying on such activities did not amount to travelling beyond the scope of the exemption contained in clause (b).

One needs to appreciate that the Reserve Bank of India while permitting a foreign company to set up a liaison office in India ensures that the operations of such an office are restricted in its scope and does not include carrying on of the business in which case, the company shall be required to set up a branch in India. In fact, carrying on of the pre- purchase activities by a liaison office is within the scope of the permission of the Reserve Bank of India.

Another aspect that requires appreciation is that pre-purchase activities and purchase represent an expenditure and not an income and therefore, even on this account, it is difficult to hold that these activities by themselves can lead to any income or even a deemed income. A right must have emerged to enable the assessee to demand and receive an income before it can be taxed in the hands of the assessee. No such right can be said to have emerged for carrying out pre-purchase activities. The Supreme court in the case of Anglo-French Textiles Co. Ltd., 23 ITR 101(SC) held that no profit could be said to have arisen on mere purchase of goods in India. For some incoherent reason this aspect was not appreciated by the Authority. Secondly, for the purpose of bringing even a deemed income to taxation, it is essential that the income pertaining to such an activity is defined and it is only then that a deemed income could be brought to taxation, as was held by the Supreme Court in the case of Anglo-French Textiles Co. Ltd., 25 ITR 27(SC). The principle so laid down by the apex court has a legislative acceptance in the form of clause (a) of Explanation 1 to section 9(1)(i) of the Act. In the said case, the court held that distribution of profits over different business operations or activities ought only to be made for sufficient and cogent reasons. The principle was reiterated in the case of R.D. Agarwala & Co. 56 ITR 20 and was expressly relied upon by the Karnataka High Court in Nike Inc.’s case and was ignored in Columbia Sportswear co’s case by the Authority.

The following observations and findings of the court in Nike Inc.’s case are helpful in appreciating the intent of the lawmakers; “If we keep the object with which the proviso to clause (b) of Explanation 1 to s/s. (1)(i) of section 9 of the Act was deleted, the object is to encourage exports thereby the Country can earn foreign exchange. The activities of the assessee in assisting the Indian manufacturer to manufacture the goods according to their specification is to see that the said goods manufactured has an international market, therefore, it could be exported. In the process, the assessee is not earning any income in India. If at all he is earning income outside India under a contract which is entered outside India, no part of their income could be taxed in India either u/s. 5 or section 9 of the Act.”

The Authority seems to have been largely influenced by the fact that the Indian office of the foreign company undertook activities of similar nature in Egypt and Bangladesh which in its opinion was outside the scope of exemption granted under clause(b) of Explanation 1 of section 9(1)(i) of the Act. This is clear from the following observations and findings; ‘There is another aspect. The activities of the liaison office of the applicant in India, is not confined to India. It also takes up the identical activities as in India, in Egypt and Bangladesh. The applicant has only pleaded that the goods procured from Egypt and Bangladesh are not imported into India and are sold only to the applicant in the US. Whether products of the applicant are sold in Egypt and Bangladesh is not clear. Whatever it be, since the activities of the applicant in India takes in, its busi-ness in Egypt and Bangladesh, it cannot be stated that the operations of the applicant in India are confined to the purchase of goods in India for the purpose of export.”

The very same Authority in IKEA Trading (Hong Kong) Ltd., 176 Taxman 344 held that re-purchase activities were a part of the purchase of goods and did not take away the benefit of clause (b) of the said Explanation. It however chose not to follow the ratio of the said decision by observing that it was delivered on the facts of that case. In that case, on a finding that the applicant therein, a foreign com-pany having a liaison office in India was engaged only in purchase operations in India for export, it was held that no income was generated by such an activity in India to be taxed in India either from the standpoint of section 5(2) or section 9(1)(i) read with Explanation 1(b) of the Income-tax Act. The AAR in Columbia Sportswear co.’s case confirmed that it was true that the activities undertaken by the applicant therein included some of the activities undertaken by the applicant before it.

The Authority, with respect, was unduly swayed by the proposition that all activities other than the actual sale cannot be divorced from the business of manufacture and sale especially in a case where the sale is of a branded product, designed and got made by the applicant under supervision, under a brand owned by the applicant. What the Authority failed to appreciate is that while what was stated by it was otherwise true but was rendered irrelevant, in the context, by virtue of clause (b) of Explanation 1 to section 9(1)(i) of the Act, which clause specifically excluded an activity of purchase from being labeled as business connection. In that view of the matter, the conclusion of the authority based on the decisions delivered without the benefit of analysing the said clause(b) cannot, with respect, be said to be laying down a good law. It was incorrect to have rejected the contention of the applicant that the decision of the Supreme Court in Anglo-French Textile Co. Ltd’s case (supra) did not govern the situation, anymore, in view of the addition of Expla-nation 1(b) to section 9(1)(i) of the Income-tax Act, taking out activities of purchase while deeming the accrual of income.

The Authority, instead of appreciating the change in law, went on to hold that the activity of purchase cannot be totally divorced from the activity of sale leading to income and this principle, in its opinion, is not affected by the Explanation which only seeks to exclude income from activities limited to purchase of goods in India for the purpose of export. The principle that a purchase of raw material, getting goods manufactured and selling the product form an integral activity remains unshaken in the opinion of the Authority and hence a deemed income arose in the hands of the applicant even on purchase of goods for export form India.

The decisions in the cases of CIT vs. N.K. Jain, 206 ITR 692 (Del.) and Mustaq Ahmed, In 307 ITR 401 (AAR) were also relied on by the applicant in Columbia Sportswear co.’s case to argue that the effect of the Explanation as understood therein supported the position adopted by the applicant. These decisions in our opinion are relevant to the issue being considered here in as much as the issue in those cases was about what constituted a business conncection in cases where the Indian arm of the non-resident was carrying out activities that preceded placing an order for purchasing goods. The Authority, however, chose to ignore these decisions on the ground that can be best explained by reproducing the words of the Authority; “There was no argument based on the decision of the Supreme Court before the High Court. There was no reference to that decision and there was no consideration of an argument that a purchase could not be totally divorced from a sale in such cases. There is no ra-tio emerging that by virtue of the addition of the Explanation, the principle set down by the Supreme Court in Anglo-French Textile Co. Ltd.’s case (supra) is no more relevant or binding.”

The Authority rather relied upon the decision In Mustaq Ahmed’s case (supra), to hold that the Authority, in that case, after noting the decision of the Supreme Court in Anglo-French Textiles’ case and the history of the Explanation to section 9(1) (i)    of the Act, confirmed after a detailed discussion on the question, that the ratio of the decision in that case remained unaffected by the addition of clause (b) to Explanation 1 in the present Act and the principle enunciated in the decision applied with equal vigour, irrespective of Explanation 1(b). Yet another decision relied upon by the applicant In Angel Garment Ltd., In 287 ITR 341, concerning the purchase of goods by a liaison office was held by the Authority to be delivered on the facts of that case and was not applied.

It is true that the activity of purchase contributes to eventual profit and therefore it may not be correct to say that such an activity does not contribute to any income. But what is needed to be appreciated is that the income attributable to such activity of purchase has been specifically excluded from the purview of taxation by the legislature on insertion of clause(b). It is this fact which appears to have been missed by the Authority when it relied on the decision in the Anglo-French Textiles’ case that was rendered on a law that did not have any such exclusion. The whole process of procurement and sale has to be completed to generate income and surely purchasing goods forms an integral part of the process of generating income, but the income, if any, pertaining to such an activity requires to be excluded by the law contained in clause(b) of Explanation 1 to section 9(1).

It is our considered view that the conflict on the issue discussed is not only avoidable but should be avoided by the Revenue by taking a pragmatic stand to include the activities leading to placing an order for purchase of goods in purchase of goods for export. In our opinion, the term purchase of goods is wide enough and should be so construed, in the present days, to include even manufacturing of goods for export out of India, more so when such goods are used for captive consumption by a non-resident.

The discussion here is valid in the context of the provisions of the Income tax Act. The taxation of the assessees governed by a Double Tax Avoidance Agreement will be determined largely by the provisions of such agreement.