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TMI Blog2011 (1) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that the assessee's Liaison office cannot be considered as a permanent establishment in India and no profits can be attributed to the permanent establishment as no profit accrues or arises in India, 2. on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the entire addition made by the AO of Rs. 26,32,87,542 3. Since the facts in all the cases are same, therefore, the fact emerged from the record of the assessment year 2003-04 have been taken for consideration and adjudication of the issue for the sake of convenience. The controversy are that a survey u/s 133A of the Act was carried out on 20.1.2006 in the premises of the assessee. The survey party has recorded he findings as under : 3.1 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 Principals in the USA send their requirements to the LO most via-e-mails or sometime through telephone. One Mr. Shailesh Jhaveri is the Constituted Attorney of M/s Fabrikant and Sons Inc. and is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uality and carats of diamond that are selected and are kept in the parcel, on the basis of which the supplier prepares the invoice. The supplier also reaches the customs house along with a copy of invoice, which is kept with the parcel. Mr. Subhash Shah, employee from LO, reaches the customs house to get the parcel approver and examined by the Approver and examiner at customs and then the same is exported. The supplier directly receives the payment from the principals as stated by the assessee. 3.2 During the course of survey, it was found that the LO is involved in the following activities : (i) one the receipt of information from the principals, the LO gets the rights quality, size and carats from the supplier, After this, the prices are negotiated to obtain the best price as per the requirement and to get the best price negotiations with supplier are done; (ii) after negotiating the price, the parcel is assorted. The LO has almost 63 assorters, who are assorting the diamonds received from the suppliers for getting the rights selection and taking out the rejections. The LO has one more premises on the third floor of the same building wherein some of the assorters are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd therefore there is no business activity in India. The AO was of the view that the LO is actually involved in other activities and business of preliminary check of diamonds, negotiation of price, assortion of diamonds, storage of diamonds and delivery of the diamonds to the custom house etc. and therefore, permanent establishment exists in this place. The AO recorded the statement of Shri Shailesh Jhavery u/s 131. Accordingly, the AO has computed the total income of the assessee at the rate of 5% of the value of the diamonds imported through LO for the assessment year 2003-04. In view of the survey, the AO has also reopened the assessment for the assessment years 1999-2000 to 2002-03 and completed the re-assessment on similar line as for the assessment year 2003-04. 3.2 On appeal, the CIT(A) held that the LO is not making sale or involved in the manufacturing or production of article, therefore, no profit accrued or arises in India. He has relied upon the Board Circular No. 29 dated 7.7.1964. The CIT(A) has further held that in view of the provisions of Article 5(3)(d) of DTAA between India and USA, the appellant's Liaison office in India cannot be considered as PE in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase of goods in India for the purpose of exports. He has thus submitted that without prejudice to the other contentions of the assessee, even if, it is presumed that the LO is treated as PE, in view of the clause (b) of explanation (1) of section 9(1)(i) no income shall be deemed to accrue in India from the activities of purchase of goods. He has referred the approval of Reserve Bank of India dated 26.7.1978 which is at pages 1 and 2 of the paper book and submitted that the assessee is having its LO since 1978 and it has been clearly mentioned in the said approval that the entire expenses of the office in India will be met exclusively out of remittances received from abroad through normal banking channels and no commission/fee will be charged or any other remuneration received for the liaison activities to be undertaken by the office. The LO shall not enter into any contract relating to the export from India. Thus, the LO of the assessee is only meant for purchase activities. He has referred the circular No. 23 dated 23.7.1969 and submitted that as per paragraphs 5 and 7 of the said circular it has been clarified by the Board that non-resident will not be liable to tax in India on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f diamonds, checking of the right quality of diamonds and price negotiation as per the instructions and specification of the assessee. These activities of the LO is only part of the purchasing process of the diamonds and did not bring any physical or qualitative change in the goods purchased. Even otherwise, the function of the LO as mentioned above are prior to purchase of the diamonds and not subsequent to the purchases. Therefore, no quality change is brought by the LO while doing the operation of purchasing in India for export purposes. 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. Selection of right goods and negotiation of price as per the instructions of the assessee are essential part of the purchasing activity. Thus, the case is fully covered by the clause (b) of explanation (1) to section 9(1)(i) of the Act. Further in view of the circular nos. 23 and 163, the board has clarified as under : Circular No. 23 "(5) NON-RESIDENT PERSON PURCHASING GOODS IN INDIA - A non-resident will not be liable to tax in India on any income attributable to operations con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill, however, be subject to the exemption provided in clause (b) of the Explanation to section 9(1)(j).]" Circular No. 163 "2. The above sentence may convey the impression that a non-resident is liable to be taxed on a portion of the profits attributable to the purchase of raw materials required for the purposes of manufacture and sale abroad, if the purchases are made in India through a regular agency established in India for this purpose. By virtue of clause (b) of the Explanation to section 9(1)(i) , the correct legal position is that in the case of a non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to purchase of goods in India for the purpose of export. Accordingly, the mere existence of an agency established by a non-resident in India will not be sufficient to make the non-resident liable to tax, if the sole function of the agency is to purchase goods for export. This legal position has also been explained in para 3(5) of the Boards Public Circular cited above." 3.8 In view of the above discussions and facts and circumstances of the case as well as the decisions cited supra, we hold that no income arises o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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