Liaison office activities beyond mere purchase can create business connection, permanent establishment, and taxable Indian attributable profits.

A liaison office that performed vendor identification, quality control, production monitoring, price review, compliance checks and procurement coordination was held to do more than mere purchase activity. On that basis, its Indian operations were treated as creating a business connection, and income attributable to those operations was regarded as accruing or arising in India. The purchase-only statutory exclusion did not apply because the activities were not confined to buying goods for export. The office was also treated as a permanent establishment under the treaty, since it was a fixed place through which business was carried on and was not limited to preparatory, auxiliary, or information-collection functions; the attributable profits were therefore taxable in India.

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Issues: (i) Whether a portion of the income from the applicant's business accrued or arose in India and whether the liaison office created a business connection in India. (ii) Whether the activities of the liaison office were confined to the purchase of goods in India for the purpose of export so as to fall within the statutory exclusion. (iii) Whether the Indian liaison office constituted a permanent establishment under the treaty and, if so, whether the attributable profits were taxable in India.

Issue (i): Whether a portion of the income from the applicant's business accrued or arose in India and whether the liaison office created a business connection in India.

Analysis: The activities carried on in India were not limited to a bare purchase function. The liaison office was engaged in vendor identification, quality control, production monitoring, price review, compliance checks, and coordination of procurement. Those activities formed part of the business process by which the applicant designed, sourced, manufactured, and marketed its products. On that basis, the business had a sufficient Indian connection and income was attributable to operations carried out in India.

Conclusion: The issue was answered against the assessee and in favour of the Revenue.

Issue (ii): Whether the activities of the liaison office were confined to the purchase of goods in India for the purpose of export so as to fall within the statutory exclusion.

Analysis: The exclusion for operations confined to purchase applies only where the Indian operations are limited to purchase activity. Here, the liaison office did substantially more than purchase: it selected suppliers, ensured quality and compliance, coordinated manufacturing inputs, and carried on related functions in India and also in other countries. The operations therefore could not be treated as confined to purchase within the meaning of the statutory exception.

Conclusion: The issue was answered against the assessee and in favour of the Revenue.

Issue (iii): Whether the Indian liaison office constituted a permanent establishment under the treaty and, if so, whether the attributable profits were taxable in India.

Analysis: The liaison office was a fixed place of business through which part of the applicant's business was carried on. It was not used solely for purchasing goods or collecting information, nor was it confined to preparatory or auxiliary activities. Since it fell within the treaty definition of permanent establishment and did not qualify for the relevant exclusions, the profits attributable to its Indian operations were taxable in India under the treaty framework.

Conclusion: The issue was answered against the assessee and in favour of the Revenue.

Final Conclusion: The ruling held that the liaison office was not sheltered by the purchase-operation exclusion and that profits attributable to its Indian operations were taxable in India.

Ratio Decidendi: Where a liaison office undertakes substantial functions beyond mere purchase, including supplier selection, quality control, and procurement coordination, its activities are not confined to purchase and may constitute a business connection and a permanent establishment, making the income attributable to those Indian operations taxable.

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