Liaison office activities confined to export sourcing fell within the purchase exemption, so no income was deemed to arise in India.

A liaison office that only coordinated sourcing, supplier identification, specification negotiation, quality monitoring and dispatch for export purchases fell within the exclusion in Explanation 1(b) to section 9(1)(i) of the Income-tax Act, 1961. Because the Indian operations did not amount to the assessee trading in India, taking custody of goods, making payments to manufacturers or rendering invoiced services in India, they were treated as part of the purchase operation for export rather than a separate income-earning business. On those facts, no income was deemed to accrue or arise in India under section 9(1)(i).

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Issues: Whether the liaison office operations in India were confined to the purchase of goods for export so as to fall within the exclusion in Explanation 1(b) to section 9(1)(i) of the Income-tax Act, 1961, and consequently no income could be deemed to accrue or arise in India.

Analysis: The liaison office acted as the communication and coordination channel for the assessee's overseas affiliates in sourcing goods from Indian manufacturers. The material on record showed that the assessee did not itself purchase the goods as a trader in India, did not make payments to manufacturers, did not take delivery or custody of the goods, and did not raise invoices for any services rendered in India. The arrangements with the manufacturers and buyers showed that the Indian operations were directed to identifying suppliers, negotiating specifications, monitoring quality, coordinating dispatch and ensuring that the goods were exported to the foreign affiliates. On these facts, the activities were held to be part of the purchase operation for export and not a separate revenue-generating business carried on in India. The alternative basis of taxing part of the income under section 9(1)(i) was therefore not attracted, and the reasoning treating the liaison office as carrying on taxable operations in India was not accepted.

Conclusion: The operations were covered by the exclusion in Explanation 1(b) to section 9(1)(i) of the Income-tax Act, 1961, and no income was taxable in India on that basis.

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