ADIT (IT)-3(2), MUMBAI v. M/s. FABRIKANT & SONS LTD., MUMBAI

ITA 3342/MUM/2007 | 2003-2004
Pronouncement Date: 28-01-2011 | Result: Dismissed

Appeal Details

RSA Number 334219914 RSA 2007
Assessee PAN AADCM7925N
Bench Mumbai
Appeal Number ITA 3342/MUM/2007
Duration Of Justice 3 year(s) 8 month(s) 27 day(s)
Appellant ADIT (IT)-3(2), MUMBAI
Respondent M/s. FABRIKANT & SONS LTD., MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 28-01-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted L
Tribunal Order Date 28-01-2011
Date Of Final Hearing 11-01-2011
Next Hearing Date 11-01-2011
Assessment Year 2003-2004
Appeal Filed On 01-05-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L MUMBAI BEFORE SHRI J SUDHAKAR REDDY ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO JUDICIAL MEMBER ITA NO. 4657 TO 4660 AND 3342/MUM/2007 (ASSESSMENT YEARS : 1999-2000 TO 2002-03 AND 2003-0 4) ADIT(IT) CIRCLE 3(2) ROOM NO.132 SCINDIA HOUSE 1 ST FL BALLARD ESTATE N M ROAD MUMBAI-400038 APPELLANT VS M.FABRIKANT AND SONS LTD 414 PANCHRATRA OPERA HOUSE QUEENS ROAD MUMBAI-400004. PAN: AADCM7925N RESPONDENT APPELLANT BY : SHRI NARENDER SINGH RESPONDENT BY : SHRI ARVIND SONDE O R D E R PER VIJAY PAL RAO JM THESE APPEALS BY THE REVENUE ARE DIRECTED AGAINST THE DIFFERENT ORDERS OF CIT(A) XXXIII MUMBAI FOR THE ASSESSMENT YEARS 1999-2000 TO 2002-03 AND 2003-04. 2. THE REVENUE HAS RAISED THE FOLLOWING COMMON GROU NDS IN THESE APPEALS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN HOLDING THA T ITA NO. 4657 TO 4660 AND 3342/MUM/2007 2 THE ASSESSEES LIAISON OFFICE CAN NOT BE CONSIDERE D AS A PERMANENT ESTABLISHMENT IN INDIA AND NO PROFIT S CAN BE ATTRIBUTED TO THE PERMANENT ESTABLISHMENT A S 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 T HE ENTIRE ADDITION MADE BY THE AO OF RS.26 32 87 542 3.1 SINCE THE FACTS IN ALL THE CASES ARE SAME THER EFORE 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 20.01 .2006 IN THE PREMISES OF THE ASSESSEE. THE SURVEY PARTY HA S RECORDED THE 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 LOOS E DIAMONDS AND DIAMOND JEWELLERY. THE INDIA LIASON 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 T HE LO MOST VIA-E-MAILS OR SOMETIME THROUGH TELEPHONE. ONE MR. SHAILESH JHAVERI IS THE CONSTITUTED ATTOR NEY OF M/S FABRIKANT AND SONS INC. AND IS THE MAIN PERSON IN CHARGE. HE RECEIVES THE REQUIREMENT OF PRINCIPALS. THE REQUIREMENT CONTAINS DETAILS OF SI ZE AND QUALITY OF DIAMONDS THE CARATS AND THE PRICE IN US DOLLARS. THE PRICE QUOTED IS NOT THE FINAL PRIC E AT WHICH THE PRINCIPALS WANT TO BUY BUT IS INDICATIVE AND THE LO HAS TO NEGOTIATE THE PRICE. MR. SHAILE SH JHAVERI HAS BEEN GIVEN THE POWER TO NEGOTIATE THE PRICE UP TO A CERTAIN LEVEL. THIS FACT IS ESTABLI SHED BY THE STATEMENTS OF APPROVERS/ASSORTERS RECORDED DURING THE COURSE OF SURVEY. AFTER RECEIPTS OF REQUIREMENTS FROM THE PRINCIPALS THE SAME IS DISPLAYED BY THE LO AT THE OFFICE BOARD WHICH IS PLACED OUTSIDE THE MAIN ENTRANCE OF THE LO. THIS CONTAINS THE SIZE QUALITY AND CARATS OF DIAMONDS REQUIRED ALONG WITH THE PRICE RANGE AT WHICH THE ITA NO. 4657 TO 4660 AND 3342/MUM/2007 3 DIAMONDS ARE DESIRED TO BE BOUGHT. THE SIZE QUAL ITY AND CARATS ARE WRITTEN EXACTLY AS PER THE REQUIREM ENT FROM THE PRINCIPALS BUT AS REGARDS TO THEPRICE A R ANGE IS GIVEN SO THAT THE DESIRED PRICE OF PURCHASED IS NOT DISCLOSED. ON THE BASIS OF THIS INFORMATION THE L OCAL SUPPLIERS SEND THEIR PARCELS TO THE LO. THESE PARCELS CONTAIN DIAMONDS AS PER THE DETAILS GIVEN A ND THE SAME ARE ACCOMPANIED BY DELIVERY MEMOS/JHANJAD SLIPS ON WHICH THE PERSON RECEIVING THE DIAMONDS IN THE LO HAS TO SIGN. ON RECEIPT OF DIAMONDS. THE PRELIMINARY CHECK REGARDING QUALITY SIZE AND CARAT ES IS DONE BY MR. SHAILESH JHAVERI. IF IN PRELIMIN ARY EXAMINATION THE DIAMONDS ARE FOUND TO BE OF DESIRE D STANDARDS THEN MR. SHAILESH JHAVERI NEGOTIATES TH E PRICE WITH THE SUPPLIER AND IF THE SUPPLIER AGREES TO SALE THE DIAMONDS AT THE PRICE THAT CAN BE NEGOTIA TED BY MR. SHAILESH JHAVERI THEN THE DEAL IS STRUCK. BUT EVEN AFTER THE NEGOTIATIONS IF THE SUPPLIER DOES N OT AGREES TO SELL AT THE DESIRED PRICE AND THEN SHRI JHAVERI HAS TO CONTACT THE PRINCIPLES TO TAKE THEIR APPROVAL BEFORE FINALIZING THE DEAL . ONCE THE DESI RED PRICE HAS BEEN AGREED UPON THE PARCEL OF DIAMONDS IS HANDED OVER TO JUNIOR APPROVERS WHO VERIFY THE QUALITY AND SIZE AND WITH THE HELP OF ASSORTERS SELECTS THE REQUIRED DIAMONDS AND THE REJECT THAT IS GIVEN BACK TO THE SUPPLIER IS KEPT BY THE LO. NORMALLY THE SELECTED DIAMONDS AND 30-40% OF THE TOTAL PARCEL. THE SELECTED DIAMONDS ARE THEN PACKE D AND SEALED BY THE LO AND ARE HANDED OVER TO COURI ER AGENT WHO TAKES IT TO CUSTOMS OFFICE FOR FURTHER PROCESSING. AN INTIMATION IS SEND TO THE SUPPLIER REGARDING THE SIZE QUALITY AND CARATS OF DIAMOND T HAT ARE SELECTED AND ARE KEPT IN THE PARCEL ON THE BAS IS OF WHICH THE SUPPLIER PREPARES THE INVOICE. THE SUPPLIER ALSO REACHES THE CUSTOMS HOUSE ALONG WIT H 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 DIRECT LY 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 AN D ITA NO. 4657 TO 4660 AND 3342/MUM/2007 4 CARATS FROM THE SUPPLIER AFTER THIS THE PRICES A RE 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 TH E REJECTIONS. THE LO HAS ONE MORE PREMISES ON THE THIRD FLOOR OF THE SAME BUILDING WHEREIN SOME OF T HE ASSORTERS ARE STATIONED. THE JUNIOR APPROVERS WHO ARE INVOLVED IN THE PROCESS OF EXAMINATION OF DIAMONDS ARE EXPERTS IN THEIR RESPECTIVE FIELDS E. MS. BLANCH FERNANDES JUNIOR APPROVER IS AN EXPERT IN CHECKING TTLB AND TTBNT CATEGORY OF DIAMONDS AND WHEN ANY REQUIREMENTS IS RECEIVED REGARDING THIS QUALITY OF DIAMONDS SHE EXAMINES DIAMONDS AFTER PRELIMINARY CHECK BY SHRI JHAVERI AND ADVISES MR . SHAILESH JHAVERI REGARDING THE PRICE AT WHICH SUCH DIAMONDS SHOULD BE PURCHASED. AFTER THE RIGHTS PRIC E IS OBTAINED FROM THE SUPPLIER THE DIAMONDS ARE ASSORTED AND THE RIGHT SELECTION IS TAKEN AND REJEC TION IS BEING BACK TO THE SUPPLIER. III) ONCE RIGHT SELECTION HAS BEEN OBTAINED THEN THE THIRD STEP IS TAKEN THAT IS PACKING AND SEALIN G OF THE SELECTED DIAMONDS AND DISPATCH TO CUSTOMS OFFIC E. THE LO HAS A DEDICATED EMPLOYEE. MR. SUBASH SHAH FOR THIS JOB WHO TAKES CARE THAT THE SEALED PACKET GETS CLEARED THROUGH THE APPROVER AND EXAMINER AT THE CUSTOMS. (IV) THESE ACTIVITIES CLEAR INDICATE THAT THE LO IS NOT MERELY ACTING AS A LO BUT IS INVOLVED IN OTHER ACTIVITIES ALSO LIKE NEGOTIATING PRICES AND PROCESS ING OF DIAMONDS; V) DURING THE COURSE OF SURVEY IT WAS FOUND THAT MRE. SHAILESH JHAVERI IS ALSO A DIRECTOR IN A COMPA NY NAMED AZND STYULED AS M/S FABRIKANT TRADING INDIA P LTD (FTIPL). THE PRINCIPALS I.E. M/S FABRICANT AND SONS INC. USA HAS 76% LSHARESHOLDING IN THIS COMPANY AND THE BALANCE SHARES ARE WITH MR.SHAILESH JHAVERI M/S FTIPL IS HAVING ITS OFFIC E IN THE SAME BUILDING AND IS INVOLVED IN THE BUSINESS O F DIAMOND I.E. SELLING OF DIAMONDS. M/S FTIPL PURCHASE ROUGH DIAMONDS AND GETS IT PROCESSED FROM ITA NO. 4657 TO 4660 AND 3342/MUM/2007 5 OUTSIDE PARTIES AND THE FINISHED DIAMONDS ARE SOLD IN OPEN MARKET. IT ALSO RECEIVES FINISHED DIAMONDS FR OM OTHER COMPANIES OF M/S FABRICANT GROUP WHICH IS PROCESSES AND ASSORTS AND SHIP IT BACK WITH 5.5-6 % VALUE ADDITION. M/S FTIPL ALSO SELL DIAMONDS TO M /S M FABRIKANT AND SONS INC THROUGH THE LO AND ROUGHLY 25% OF THE TOTAL PURCHASERS OF THE PRINCIP ALS THROUGH THE LO ARE FROM M/S FTIPL 3.2 THE AO ISSUED A SHOW CAUSE NOTICE TO THE ASSESS EE CALLING UPON IT TO SHOW AS TO WHY THE INDIAN LIAS ON OFFICE SHOULD NOT BE TREATED AS PERMANENT ESTABLISHMENT I N INDIA. THE ASSESSEE HAS CONTENDED THAT THE LIASON OFFICE C ANNOT BE TREATED AS PE AND NO INCOME IS ASSESSABLE IN INDIA . IT WAS ALSO CONTENDED THAT THE LO IS IN OPERATION ONLY D URING THE PERIOD OF PURCHASE AND THEREFORE THERE IS NO BUSINE SS ACTIVITY IN INDIA. THE AO WAS OF THE VIEW THAT THE LO IS A CTUALLY INVOLVED IN OTHER ACTIVITIES AND BUSINESS OF PREL IMINARY CHECK OF DIAMONDS NEGOTIATION OF PRICE ASSORTION OF DIA MONDS STORAGE OF DIAMONDS AND DELIVERY OF THE DIAMONDS TO THE CUSTOM HOUSE ETC. AND THEREFORE PERMANENT ESTABLI SHMENT EXISTS IN THIS PLACE. THE AO RECORDED THE STATEME NT 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 ASSESSM ENT YEAR 2003-04. IN VIEW OF THE SURVEY THE AO HAS ALSO REOPENED THE ASSESSMENT FOR THE ASSESSMENT YEARS 1999-2000 T O 2002- ITA NO. 4657 TO 4660 AND 3342/MUM/2007 6 03 AND COMPLETED THE RE-ASSESSMENT ON SIMILAR LINE AS FOR THE ASSESSMENT YEAR 2003-04. 3.3 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 O F ARTICLE 5(3)(D) OF DTTA BETWEEN INDIA AND USA THE APPELL ANTS LIASON OFFICE IN INDIA CANNOT BE CONSIDERED AS PE IN INDIA. 3.4 BEFORE US THE LEARNED DR HAS REFERRED THE FIN DING OF THE SURVEY PARTY AND SUBMITTED THAT THE LO IS NOT DOING MERELY THE ACTIVITY OF PURCHASE ON BEHALF OF THE P RINCIPAL BUT IT WAS DOING THE ACTIVITIES OF PRELIMINARY CHECK OF DI AMONDS NEGOTIATION OF PRICE ASSORTION OF DIAMONDS PACKIN G OF DIAMONDS AND STORAGE OF DIAMONDS AND DELIVERY OF T HE DIAMONDS TO THE CUSTOM HOUSE ETC. HE HAS POINTED OUT THAT THE LO HAS AROUND 63 ASSORTERS WHO ARE ASSORTING T HE DIAMONDS RECEIVED FROM THE SUPPLIERS FOR GETTING T HE RIGHTS SELECTION AND TAKING OUT THE REJECTIONS. THUS TH E LO INVOLVED IN THE SERIES OF PROCESS BEFORE SUPPLYING THE DIAM ONDS TO THE ASSESSEE. HE HAS SUBMITTED THAT ONCE LO INVOLVED IN THE NEGOTIATION OF PRICE AND OTHER SELECTION ACTIVITY OF THE ITA NO. 4657 TO 4660 AND 3342/MUM/2007 7 DIAMONDS THEN THE INCOME ON THE IMPORTS MADE BY THE ASSESSEE THROUGH THE LO ARISED ACCRUED IN INDIA. T HE LO CONSTITUTES PE OF THE ASSESSEE IN VIEW OF THE NATUR E OF THE ACTIVITIES CARRIED OUT BY LO. THUS THE ENTIRE PRO CESS AND ACTIVITIES CARRIED OUT BY THE LO ATTRIBUTES THE VA LUE ADDITION TO THE GOODS IMPORTED BY THE ASSESSEE. HE HAS SUBMIT TED THAT THE AO HAS GIVEN A FINDING THAT 5% OF THE VALUE AD DITION ON THE BASIS THAT M/S FABRIKANT AND SONS LTD IS SUBSI DIARY OF THE ASSESSEE SUPPLY THE DIAMONDS WITH 5.5 TO 6% VALUE ADDITION. IN THE SHARE HELD. IN THE SAID STATEMENT RECORDE D U/S 131 SHRI SHAILESH ZHAVERI WHO IS AUTHORIZED PERSON AND CONSTITUTED ATTORNEY OF THE ASSESSEE IN THE LO AN D ALSO A DIRECTOR OF THE SUBSIDIARY COMPANY HAS STATED THAT THE SUBSIDIARY COMPANY PURCHASES THE ROUGH DIAMONDS AN D GET IT PROCESSED FROM OUTSIDE PARTY AND FINISHED DIAMONDS ARE SOLD IN OPEN MARKET. IT ALSO RECEIVED ROUGH DIAMONDS FR OM OTHER COMPANIES OF THE ASSESSEE GROUP THEN IT PROCESS AND SELL IT BACK AFTER 5.5 TO 6% VALUE ADDITION. THE ASSESS EE PURCHASE AROUND 25% OF THE TOTAL PURCHASES FROM ITS SUBSIDIA RY THROUGH LO. THUS THE LEARNED DR HAS SUBMITTED THAT THE LO IS ALSO DOING THE SAME ACTIVITIES WHICH ARE BEING DONE BY THE SUBSIDIARY COMPANY AND ACCORDINGLY THERE IS A VALU E ADDITION OF 5.5 TO 6% IN THE DIAMONDS PURCHASED BY THE ASS ESSEE THROUGH LO. HE HAS RELIED UPON THE ORDER OF THE A O. ITA NO. 4657 TO 4660 AND 3342/MUM/2007 8 3.5 ON THE OTHER HAND THE LEARNED AR HA SUBMITTED THAT AS PER CLAUSE (B) OF EXPLANATION 1 TO SECTION 9(1)(I) OF THE ACT NO INCOME SHALL BE DEEMED TO BE ACCRUED IN INDIA TO NON- RESIDENT THROUGH OR FROM OPERATION WHICH ARE CONFIN ED TO THE PURCHASE OF GOODS IN INDIA FOR THE PURPOSE OF EXPOR TS. 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 EXPL ANATION (1) OF SECTION 9(1)(I) NO INCOME SHALL BE DEEMED TO ACCRU E IN INDIA FROM THE ACTIVITIES OF PURCHASE OF GOODS. HE HA S REFERRED THE APPROVAL OF RESERVE BANK OF INDIA DATED 26.7 .1978 WHICH IS AT PAGES 1 AND 2 OF THE PAPER BOOK AND SUB MITTED THAT THE ASSESSEE IS HAVING ITS LO SINCE 1978 AND IT HAS BEEN CLEARLY MENTIONED IN THE SAID APPROVAL THAT THE EN TIRE EXPENSES OF HE OFFICE IN INDIA WILL BE MET EXCLUSIV ELY OUT OF REMITTANCES RECEIVED FROM ABROAD THROUGH NORMAL BAN KING CHANNELS AND NO COMMISSION/FEE WILL BE CHARGED OR A NY 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. THU S THE LO OF THE ASSESSEE IS ONLY MEANT FOR PURCHASE ACTIVITIES. HE HAS REFERRED THE CIRCULAR NO.23 DATED 23.7.1969 AND SU BMITTED THAT ITA NO. 4657 TO 4660 AND 3342/MUM/2007 9 AS PER PARAGRAPHS 5 AND 7 OF THE SAID CIRCULAR IT H AS BEEN CLARIFIED BY THE BOARD THAT NON-RESIDENT WILL NOT BE LIABLE TO TAX IN INDIA ON ANY INCOME ATTRIBUTABLE TO OPERATIO NS CONFINED TO PURCHASE OF GOODS IN INDIA FOR EXPORT EVEN THOU GH THE NON- RESIDENT HAS AN OFFICE OR AN AGENCY IN INDIA FOR TH IS PURPOSE. FURTHER AS PER PARAGRAPH 7 OF THE SAID CIRCULAR SEC TION 9 DOES NOT SEEK TO BRING INTO TAX THE NET THE PROFITS OF A NON-RESIDENT WHICH CANNOT REASONABLY BE ATTRIBUTED TO OPERATIONS CARRIED OUT IN INDIA. THUS EVEN IF THERE BE A BUSINESS CO NNECTION IN INDIA ONLY THAT PORTION OF THE PROFIT WHICH CAN RE ASONABLY BE ATTRIBUTED TO THE OPERATIONS OF THE BUSINESS CARRIE D OUT IN INDIA WILL BE DEEMED TO BE ACCRUED OR ARISES IN INDIA AN D LIABLE TO INCOME-TAX. 3.6 THE LEARNED AR HAS FURTHER REFERRED THE CIRCUL AR NO. 163 ON THE ISSUE AND SUBMITTED THAT THE BOARD HAS FURTH ER CLARIFIED IN THE SAID CIRCULARS THAT BY VIRTUE OF CLAUSE (B) OF EXPLANATION TO SECTION 9(1)(I) THE CORRECT LEGAL POSITION IS TH AT IN A CASE OF NON-RESIDENT NO INCOME SHALL BE ACCRUED OR ARISES IN INDIA THROUGH OR FROM OPERATION WHICH ARE CONFINED TO PU RCHASE OF GOODS IN INDIA FOR THE PURPOSE OF EXPORT. ACCORDIN GLY MERE EXISTENCE OF AN AGENCY ESTABLISHED BY A NON-RESIDEN T IN INDIA IS NOT SUFFICIENT TO MAKE THE NON-RESIDENT LIABLE TO TAX IF THE SOLE FUNCTION OF THE AGENCY IS TO PURCHASE GOODS F OR EXPORT. ITA NO. 4657 TO 4660 AND 3342/MUM/2007 10 3.7 THE LEARNED AR HAS REFERRED THE ARTICLE 7(4) O F THE DTAA BETWEEN INDIA AND US AND SUBMITTED THAT AS PE R ARTICLE 7 NO PROFIT SHALL BE ATTRIBUTABLE TO PE BY REASONI NG OF THE MERE PURCHASES BY THAT PE OF GOODS OR MERCHANDISE F OR THE ENTERPRISE. THEN THE LEARNED AR HAS POINTED OUT T HAT AS PER ARTICLE 5 OF INDO-US TREATY THE PE SHALL DEEMED N OT TO INCLUDE INTER-ALIA THE MAINTENANCE OF FIXED PLACE O F BUSINESS AND SOLELY FOR THE PURPOSE OF PURCHASE OF GOODS OR MERCHANDISE TO COLLECTING INFORMATION FOR THE ENTER PRISE. THUS THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT NO INCOME ARISEN OR ACCRUED IN INDIA FROM THE ACTIVIT IES OR OPERATION OF THE PURCHASES MADE BY THE ASSESSEE TH ROUGH ITS LO. FURTHER THE LO FOR THE PURPOSE OF PURCHASING G OODS OR MERCHANDISE OR COLLECTING THE INFORMATION DOES NOT CONSTITUTES PE. HE HAS RELIED UPON THE DECISION IN THE CASE O F CIT V/S M K JAIN REPORTED IN 206 ITR 592 AND THE DECISION IN THE CASE OF NIKE INC V/S ACIT REPORTED IN 122 TTJ 201 (BANG) 3.8 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE RELEVANT RECORD. UNDISPUTEDLY THE LO OF THE ASSESSEE WAS PERFORMING THE ACTIVITIES OF ASSORTING OF DIAMO NDS CHECKING OF THE RIGHT QUALITY OF DIAMONDS AND PRICE NEGOTIATION ITA NO. 4657 TO 4660 AND 3342/MUM/2007 11 AS PER THE INSTRUCTIONS AND SPECIFICATION OF THE AS SESSEE. THESE ACTIVITIES OF THE LO IS ONLY PART OF THE PURC HASING PROCESS OF THE DIAMONDS AND DID NOT BRING ANY PHYSI CAL OR QUALITATIVE CHANGE IN THE GOODS PURCHASED. EVEN O THERWISE 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 FO R EXPORT PURPOSES. IT IS A CASE OF PURCHASE OF GOODS THROU GH 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 A S PER THE INSTRUCTIONS OF THE ASSESSEE ARE ESSENTIAL PART OF THE PURCHASING ACTIVITY. THUS THE CASE IS FULLY COVER ED BY THE CLAUSE (B) OF EXPLANATION (1) TO SEXTON 9(1)(I) OF THE ACT. FURTHER IN VIEW OF THE CIRCULAR NOS. 23 AND 163 TH E 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 OPERATIO NS CONFINED TO PURCHASE OF GOODS IN INDIA FOR EXPORT EVEN THOUGH THE NON-RESIDENT HAS AN OFFICE OR AN AGENCY IN INDIA FOR THIS PURPOSE. WHERE A RESIDENT PERSON AC TS IN THE ORDINARY COURSE OF HIS BUSINESS IN MAKING PURCHASES FOR A NON-RESIDENT PARTY HE WOULD NOT ITA NO. 4657 TO 4660 AND 3342/MUM/2007 12 NORMALLY BE REGARDED AS AN AGENT OF THE NON-RESIDEN T UNDER SECTION 163. BUT WHERE THE RESIDENT PERSON IS CLOSELY CONNECTED WITH THE NON-RESIDENT PURCHASER A ND THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE RESIDENT PERSON GETS NO PROFITS OR LESS TH AN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARI SE IN THAT BUSINESS THE INCOME-TAX OFFICER IS EMPOWER ED TO DETERMINE THE AMOUNT OF PROFITS WHICH MAY REASONABLY BE DEEMED TO HAVE BEEN DERIVED BY THE RESIDENT PERSON FROM THAT BUSINESS AND INCLUDE SUCH AMOUNT IN THE TOTAL INCOME OF THE RESIDENT PERSON. (6) .. (7) EXTENT OF THE PROFIT ASSESSABLE UNDER SECTION 9 - SECTION 9 DOES NOT SEEK TO BRING INTO THE TAX NET THE PROFITS OF A NON-RESIDENT WHIC H CANNOT REASONABLY BE ATTRIBUTED TO OPERATIONS CARRI ED OUT IN INDIA. EVEN IF THERE BE A BUSINESS CONNECTI ON IN INDIA THE WHOLE OF THE PROFIT ACCRUING OR ARISI NG FROM THE BUSINESS CONNECTION IS NOT DEEMED TO ACCRU E OR ARISE IN INDIA. IT IS ONLY THAT PORTION OF THE PROFIT WHICH CAN REASONABLY BE ATTRIBUTED TO THE OPERATION S OF THE BUSINESS CARRIED OUT IN INDIA WHICH IS LIAB LE TO INCOME-TAX. TO CONSTITUTE A BUSINESS CONNECTION SOME CONTINUIT Y OF RELATIONSHIP BETWEEN THE PERSON IN INDIA WHO HE LPS TO MAKE THE PROFITS AND THE PERSON OUTSIDE INDIA WH O RECEIVES OR REALISES THE PROFITS IS NECESSARY. WH ERE ALL WHAT HAS HAPPENED IS THAT A FEW TRANSACTIONS OF PURCHASES OF RAW MATERIALS HAVE TAKEN PLACE IN INDI A AND THE MANUFACTURE AND SALE OF GOODS HAVE TAKEN PLACE OUTSIDE INDIA THE PROFITS ARISING FROM SUCH SALES CANNOT BE CONSIDERED TO HAVE ARISEN OUT OF A BUSINE SS CONNECTION IN INDIA. WHERE HOWEVER THERE IS A REGULAR AGENCY ESTABLISHED IN INDIA FOR THE PURCHAS E OF THE ENTIRE RAW MATERIALS REQUIRED FOR THE PURPOSE O F MANUFACTURE AND SALE ABROAD AND THE AGENT IS CHOSEN BY REASON OF HIS SKILL REPUTATION AND EXPERIENCE I N THE LINE OF TRADE IT CAN BE SAID THAT THERE IS A BUSIN ESS CONNECTION IN INDIA SO THAT A PORTION OF THE PROFIT S ATTRIBUTABLE TO THE PURCHASE OF RAW MATERIALS IN IN DIA CAN BE APPORTIONED UNDER EXPLANATION (A) TO SECTION 9(1)(I 1 ). [THE TAXABILITY OF SUCH PORTION OF THE PROFITS WILL HOWEVER BE SUBJECT TO THE EXEMPTION PROVIDED IN CLAUSE (B) OF THE EXPLANATION TO SECTION 9(1)(J).] ITA NO. 4657 TO 4660 AND 3342/MUM/2007 13 CIRCULAR NO.163 2. THE ABOVE SENTENCE MAY CONVEY THE IMPRESSION THAT A NON-RESIDENT IS LIABLE TO BE TAXED ON A PORT ION 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 T HIS 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 T O ACCRUE OR ARISE IN INDIA THROUGH OR FROM OPERATIONS WHICH ARE CONFINED TO PURCHASE OF GOODS IN INDIA FO R THE PURPOSE OF EXPORT. ACCORDINGLY THE MERE EXISTENCE OF AN AGENCY ESTABLISHED BY A NON-RESIDEN T IN INDIA WILL NOT BE SUFFICIENT TO MAKE THE NON-RES IDENT LIABLE TO TAX IF THE SOLE FUNCTION OF THE AGENCY I S TO PURCHASE GOODS FOR EXPORT. THIS LEGAL POSITION HAS ALSO BEEN EXPLAINED IN PARA 3(5) OF THE BOARDS PUBL IC CIRCULAR CITED ABOVE. 3.9 IN VIEW OF THE ABOVE DISCUSSIONS AND FACTS AN D CIRCUMSTANCES OF THE CASE AS WELL AS THE DECISIONS CITED SUPRA WE HOLD THAT NO INCOME ARISES OR ACCRUED IN INDIA TO THE ASSESSEE BY VIRTUE OF THE PURCHASES MADE BY THE ASSESSEE FOR EXPORT. 4. THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.01.2011 SD SD (J.SUDHAKAR REDDY) (V IJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ON THIS 28 TH DAY OF JAN 2011 SRL:20111 ITA NO. 4657 TO 4660 AND 3342/MUM/2007 14 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR ITAT MUMBAI