Purchase-related liaison office activities for export do not create Indian taxable income or attributable profit.

A non-resident's Indian liaison office was held to be confined to purchase-related and preparatory activities for export, including assorting diamonds, checking quality and negotiating price before completion of purchase. Those activities did not amount to a physical or qualitative transformation of the goods and remained incidental to procurement. On that basis, the operations fell within the exemption in Explanation 1(b) to section 9(1)(i) of the Income-tax Act, so no income was deemed to accrue or arise in India. The treaty position also barred attribution of profit merely because purchases were made through the alleged PE, and no taxable profit was attributable in India.

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Issues: Whether the assessee's liaison office constituted a permanent establishment in India and whether any income or profits were taxable in India from purchases made through that office for export.

Analysis: The liaison office was found to be engaged in assorting diamonds, checking quality, and negotiating price as part of the purchase process, but these activities were only preliminary and incidental to procurement for export. They did not bring about any physical or qualitative change in the goods, and they occurred before completion of purchase. On that basis, the operations were confined to purchase of goods in India for export and fell within the exemption in Explanation 1(b) to Section 9(1)(i) of the Income-tax Act, 1961. The Board circulars also clarified that no income is deemed to accrue or arise in India where the non-resident's activities are confined to purchase of goods for export, even if an office or agency exists in India. The treaty provisions likewise prevented attribution of profit merely because of purchases by the alleged PE.

Conclusion: The liaison office could not be treated as giving rise to taxable income in India from the purchase operations, and no profit was attributable in India on that account.

Ratio Decidendi: Where a non-resident's Indian office performs only purchase-related and preparatory activities confined to procuring goods for export, no income is deemed to accrue or arise in India and no profit can be attributed merely on the basis of such purchase operations.

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