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2011 (1) TMI 158 - AT - Income TaxAddition of income -circular no. 23 and 163 - M/s M Fabrikant and Sons Inc is a company based in USA and is in the business of sale of loose diamonds and diamond jewellery the India Liaison office (LO) has been opened in 1980 for purchase of finished loose diamonds from Indian Market - The AO issued a SCN to show why the Indian Liaison Office should not be treated as PE in India - It is a case of purchase of goods through LO and all the activities carried out by the LO are basic and preliminary requirement of the purchasing process/operation - the case is fully covered by the clause (b) of explanation (1) to section 9(1)(i) of the Act Appeal of revenue are dismissed
Issues Involved:
1. Whether the assessee's Liaison Office (LO) in India constitutes a Permanent Establishment (PE). 2. Whether profits can be attributed to the LO in India. 3. Whether the CIT(A) erred in deleting the addition made by the AO of Rs. 26,32,87,542. Issue-wise Detailed Analysis: 1. Whether the assessee's Liaison Office (LO) in India constitutes a Permanent Establishment (PE): The revenue contended that the LO in India should be considered a PE based on the activities carried out, which included preliminary checking of diamonds, negotiation of prices, assorting, packing, and delivery to the customs office. The Assessing Officer (AO) argued that these activities went beyond mere liaison and constituted a business presence in India, thereby qualifying as a PE under Article 5(3)(d) of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The CIT(A), however, held that the LO was not involved in sales or manufacturing and thus did not constitute a PE in India. This conclusion was supported by Board Circular No. 29 dated 7.7.1964, which clarified that activities confined to the purchase of goods for export do not create a taxable presence. 2. Whether profits can be attributed to the LO in India: The AO computed the total income of the assessee at 5% of the value of diamonds imported through the LO, arguing that the LO's activities added value to the goods. The AO's assessment was based on the premise that the LO's functions, such as price negotiation and quality checking, contributed to the overall value of the diamonds, thus generating income in India. The CIT(A) disagreed, citing that the LO's activities were confined to the purchase of goods for export, which under clause (b) of Explanation 1 to Section 9(1)(i) of the Income Tax Act, does not result in income accruing in India. This position was further supported by Circulars No. 23 and 163, which state that non-residents are not liable to tax in India on income attributable to operations confined to the purchase of goods for export. 3. Whether the CIT(A) erred in deleting the addition made by the AO of Rs. 26,32,87,542: The revenue's appeal against the deletion of the addition by the CIT(A) was based on the argument that the LO's activities constituted a business presence and generated taxable income in India. The CIT(A) had deleted the addition, holding that the LO's activities did not result in any profit accruing or arising in India. The Tribunal upheld the CIT(A)'s decision, emphasizing that the LO's functions were integral to the purchasing process and did not bring about any physical or qualitative change in the goods. The Tribunal concluded that the LO's activities were essential parts of the purchasing operation and did not generate taxable income in India. The Tribunal also noted that the LO had been operating under the approval of the Reserve Bank of India since 1978, which stipulated that no income would accrue from its liaison activities. Conclusion: The Tribunal dismissed the revenue's appeals, affirming that the LO did not constitute a PE in India and that no income accrued or arose in India from the LO's activities. The Tribunal's decision was based on the provisions of the Income Tax Act, relevant DTAA articles, and supporting Board Circulars, which collectively clarified that operations confined to the purchase of goods for export do not result in taxable income in India. Order Pronounced: The appeals of the revenue were dismissed, and the order was pronounced in the open court on 28.1.2011.
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