2007 (8) TMI 731 - AAR - Income Tax

Whether on the facts and in the circumstances of the case the income derived by the applicant on the purchase in India and export of gold jewellery accrues or arises in India and is taxable in India ? Whether on the facts and in the circumstances of the case the income arising to the applicant on the purchase in India of gold for the purpose of manufacturing gold jewellery in India for export and export of the same accrues or arises in India and is taxable in India ? Whether on the facts and in the circumstances of the case the income arising on the purchase and export of gold jewellery and the purchase of gold for the purpose of manufacturing gold jewellery for export and export of the same by the applicant who is a non-resident would constitute income accruing or arising through or from the operations which are confined to the purchase of goods in India for the purpose of export falling within clauses (a) and (b) of Explanation 1 to section 9(1)(i) and whether such income is taxable in India ?

Issues Involved:
1. Taxability of income derived from the purchase and export of gold jewellery in India.
2. Taxability of income arising from the purchase of gold for manufacturing gold jewellery in India for export.
3. Determination of whether the income arising from these activities falls within the scope of Explanation 1 to section 9(1)(i) of the Income-tax Act and is consequently not taxable in India.
4. Applicability of the proviso to section 245R(2) of the Income-tax Act regarding the pendency of the question before any Income-tax authority.
5. Determination of whether the transaction is designed for the avoidance of Income-tax.

Detailed Analysis:

1. Taxability of Income Derived from the Purchase and Export of Gold Jewellery in India:
The applicant, a non-resident in India and a resident of Singapore, engaged in the purchase, manufacture, and sale of gold jewellery, claimed that income arising from the purchase and export of gold jewellery does not accrue or arise in India under Explanation 1(a) and (b) to section 9(1)(i) of the Income-tax Act. This provision states that income from operations confined to the purchase of goods in India for export does not accrue or arise in India and is therefore not taxable.

2. Taxability of Income Arising from the Purchase of Gold for Manufacturing Gold Jewellery in India for Export:
Similarly, the applicant argued that income arising from purchasing gold in India for manufacturing gold jewellery for export should also be exempt from tax in India under the same statutory provision. The applicant filed revised returns claiming this exemption for the assessment years 2005-06 and 2006-07.

3. Determination of Whether the Income Falls Within Explanation 1 to Section 9(1)(i):
The applicant sought an advance ruling on whether the income from these activities falls within the scope of clauses (a) and (b) of Explanation 1 to section 9(1)(i) and is consequently not taxable in India. The applicant framed five questions for this purpose, later consolidated into three questions, focusing on whether such income accrues or arises in India and is taxable.

4. Applicability of the Proviso to Section 245R(2) Regarding Pendency Before Any Income-tax Authority:
The DIT (International Taxation) argued that the application should be rejected under the proviso to section 245R(2) because the questions raised were already pending before the assessing authority. However, the Authority for Advance Rulings (AAR) determined that the crucial date for deciding the pendency of the question is the date of filing the application (March 26, 2007). Since the claim for exemption was made in the revised return filed on March 30, 2007, no controversy or dispute existed on the date of filing the application. Therefore, the bar under the proviso to section 245R(2) did not apply.

5. Determination of Whether the Transaction is Designed for the Avoidance of Income-tax:
The Departmental Representative's contention that the transaction was designed for the avoidance of Income-tax was dismissed due to a lack of factual foundation. The mere claim of exemption based on a statutory provision does not indicate a design for tax avoidance.

Conclusion:
The application was allowed under section 245R(2) of the Income-tax Act, with the AAR concluding that the bar under the proviso to section 245R(2) was not attracted. The questions were framed to determine the taxability of income from the purchase and export of gold jewellery and the purchase of gold for manufacturing gold jewellery for export, considering the provisions of Explanation 1 to section 9(1)(i). The date of hearing for the advance ruling will be intimated in due course.

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