2012 (10) TMI 128 - AT - Income Tax

Appellate Tribunal: Liaison Office not a PE for A.Y. 2006-07 & 2007-08. Profits not attributable.

The Appellate Tribunal ruled in two appeals for A.Y. 2006-07 and 2007-08 that the assessee's Liaison Office in India should not be considered a Permanent ... Liaison Office - CIT(A) hold it not to be considered as a Permanent Establishment in India & no profit accrues or arises in India - Held that:- Circular No. 163 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. Tribunal in assessee’s own case for the assessment years 2004-05 and 2005-06 held that the L.O. of the assessee was performing the activities of assorting of 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 are prior to purchase of the diamonds and not subsequent to the purchases. Therefore, no quality change is brought by the L0 while doing the operation of purchasing in India for export purposes - in favour of assessee. Issues:1. Whether the assessee's Liaison Office can be considered a Permanent Establishment (PE) in India for the relevant assessment years.2. Whether profits can be attributed to the Permanent Establishment based on the activities carried out by the Liaison Office.Issue 1:The Appellate Tribunal considered two appeals, one by the Revenue for A.Y. 2006-07 and the other by the assessee for A.Y. 2007-08, both involving the same issue of the assessee's Liaison Office being treated as a PE in India. The A.O. had attributed profits to the PE based on activities conducted by the office, leading to additions in the assessee's income. The ld. CIT(A), however, relying on previous appellate orders, held that the office cannot be considered a PE in India, thereby deleting the additions made by the A.O.Issue 2:The Revenue challenged the CIT(A)'s decision, contending that profits should be attributed to the PE. The Tribunal analyzed the activities of the Liaison Office, which primarily involved coordinating purchases for the assessee. Referring to relevant legal provisions and circulars, the Tribunal held that the activities of the office did not result in income accruing in India. Citing past decisions and circulars, the Tribunal emphasized that no income arises in India for purchases made for export purposes. The Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's grounds for attributing profits to the PE.Judgment Summary:The Appellate Tribunal, in two appeals for A.Y. 2006-07 and 2007-08, addressed the issue of whether the assessee's Liaison Office should be considered a PE in India and if profits could be attributed to it. The A.O. had added income based on attributing profits to the PE, but the CIT(A) overturned this decision. The Tribunal, following past decisions and circulars, ruled that the activities of the Liaison Office did not result in income accruing in India. Therefore, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal for A.Y. 2006-07 and allowing the assessee's appeal for A.Y. 2007-08.