IN THE ITAT MUMBAI BENCH ‘L’
Deputy Director of Income-tax (International Taxation)
M. Fabricant & Sons Inc.
IT APPEAL NOS. 2760 (MUM.) OF 2009 & 7514 (MUM.) OF 2010
[ASSESSMENT YEARs 2006-07 & 2007-08]
JULY 31, 2012
1. The appeal in ITA No. 2760/Mum/2009 preferred by the Revenue is directed against the order dtd. 31-1-2007 passed by the ld. CIT(A) for A.Y. 2006-07 and the appeal in ITA No. 7514/Mum/2010 preferred by the assessee for the A.Y. 2007-08 is directed against the order dtd. 8-9-2010 passed by the A.O. in pursuance to the direction of the Dispute Resolution Panel (DRP) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act). Since the facts are identical and the issue involved is common, both these appeals are disposed by this common order for the sake of convenience.
2. Briefly stated facts of the case extracted from ITA No. 2760/Mum/2009 for A.Y. 2006-07 are that the assessee is a non-resident company and deals in cut and polished diamonds and diamond studded jewellery. In this case a survey u/s 133A of the Act was carried out on 20-1-2006 by ITO (IT) (OSD)-III, Mumbai. The A.O. on the basis of the finding recorded by the survey party appearing in para 2.1 and 2.2 of the assessment order issued a show cause notice to the assessee as to why the Indian Liaison Office should not be treated as Permanent Establishment (PE) in India of the Principals, M/s M. Fabrikant & Sons Inc., USA. In reply, the assessee filed written submission which has been summarized by the A.O. in the assessment order as under (Para 3) :
“(i) There is no business connection and no income can be said to arise/accrue to the Liaison Office.
(ii) Liaison Office does not constitute Permanent Establishment.
(iii) The Liaison Office only carried out the activity of coordinating purchases for the assessee and purchase activities are outside the purview of section 9(1) and Article 7 of Double Taxation Avoidance Agreement between India and USA, does not applicable to the assessee.”
The A.O. after considering the assessee’s objections, provisions of section 9(1), the decision of the Hon’ble Supreme Court in CIT v. R.D. Agarwal & Co.  56 ITR 20, OECD commentary, E-Mails and other material on record including the statement of Mr. Shailesh Jhaveri who is Director in M/s Fabrikant Trading (India) Pvt. Ltd. (FTIPL), a subsidiary Company in India and also in-charge of the activities of the Liaison Office (LO) in India, held that the Permanent Establishment generates the revenue @ 5% of the value of the purchases and, hence, he has taken the attribution of the profit to the PE at 5% of the value of the purchases made by the assessee company through Liaison Office and accordingly computed the income at Rs. 14,73,15,724/- and after deducting expenses pertaining to PE Rs. 2,22,32,983/- determined the assessee’s income at Rs. 12,50,82,741/- vide assessment order passed dtd. 10-12-2008 u/s 143(3) of the Act.
3. On appeal the ld. CIT(A) following the appellate orders for the assessment years 2003-04, 2004-05 and 2005-06 while distinguishing the decision relied on by the A.O. of the Authority for Advance Rulings in the case of UAE Exchange Centre, In re  268 ITR 9 held that the appellant’s office in India cannot be considered as a PE in India and no profits can be attributed to the PE and accordingly deleted the addition made by the A.O.
4. Being aggrieved by the order of the ld. CIT(A) the Revenue is in appeal before us taking the following grounds:-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in holding that the assessee’s Liaison Office cannot be considered as a Permanent Establishment in India and no profits can be attributed to the Permanent Establishment as no profit accrues or arises in India.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in directing the Assessing Officer to delete the entire addition of Rs. 12,50,82,741/-.
3. The appellant prays that the order of the Ld. CIT(A), Mumbai on the above grounds be set aside and the order of the Assessing Officer be restored.”
5. At the time of hearing the ld. D.R. supports the order of the A.O.
6. On the other hand the ld. counsel for the assessee submits that the issue involved is squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case in ITA Nos. 4657 to 4660 and 3342/Mum/2007 for assessment years 1999-2000 to 2003-04 dtd. 28-1-2011 and ITA Nos. 3055 & 3056/Mum/2008 for assessment years 2004-05 & 2005-06 dtd. 31-3-2011. He also placed on record a copies of the said orders of the Tribunal. He, therefore, submits that the issue may be decided accordingly.
7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the issue involved has been discussed by the Tribunal in detail in assessee’s own case for the assessment years 1999-2000 to 2003-04 (supra). It has been held by the Tribunal vide para 3.8 and 3.9 of the order as under:-
“3.8 We have heard the rival contentions and perused the relevant record. Undisputedly, 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 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 for export purposes. It is a case of purchase of goods through 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 as per the instructions of the assessee are essential part of the purchasing activity. Thus, the case is fully covered by the clause (b) of Explanation (1) to section 9(1)(i) of the Act. Further in view of the circular Nos. 23 and 163, the 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 operations 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 acts in the ordinary course of his business in making purchases for a non-resident party, he would not normally be regarded as an agent of the non-resident under section 163. But, where the resident person is closely connected with the non-resident purchaser and the course of business between them is so arranged that the resident person gets no profits or less than the ordinary profits which might be expected to arise in that business, the Income-tax Officer is empowered 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.
(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 which cannot reasonably be attributed to operations carried out in India. Even if there be a business connection in India, the whole of the profit accruing or arising from the business connection is not deemed to accrue or arise in India. It is only that portion of the profit which can reasonably be attributed to the operations of the business carried out in India, which is liable to income-tax.
To constitute a business connection, some continuity of relationship, between the person in India who helps to make the profits and the person outside India who receives or realises the profits, is necessary. Where all what has happened is that a few transactions of purchases of raw materials have taken place in India 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 business connection in India. Where, however, there is a regular agency established in India for the purchase of the entire raw materials required for the purpose of manufacture and sale abroad and the agent is chosen by reason of his skill, reputation and experience in the line of trade, it can be said that there is a business connection in India so that a portion of the profits attributable to the purchase of raw materials in India can be apportioned under Explanation (a) to section 9(1)(ii) [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)(i)]’
‘Circular No. 163:
“2. The above sentence may 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. Accordingly, the mere existence of an agency established by a non-resident in India will not be sufficient to make the non-resident liable to tax, if the sole function of the agency is to purchase goods for export. This legal position has also been explained in para 3(5) of the Boards Public Circular cited above.”
3.9 In view of the above discussions and facts and 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.”
8. The similar view has been followed by the Tribunal in assessee’s own case for the assessment years 2004-05 and 2005-06 (supra).
9. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the decision of the co-ordinate Bench of the Tribunal (supra) uphold the order passed by the ld. CIT(A) in holding that the appellant’s office in India cannot be considered as PE in India and no profits can be attributed to the PE, and, accordingly, the grounds raised by the Revenue are rejected.
ITA 7514/Mum/2010 (By the assessee for A.Y.2007-08.)
10. The summarized ground taken by the assessee reads as under:-
“On the facts and circumstances of the case and law the Learned Assessing Officer ought to have held that the assessee’s Liaison Office cannot be considered as a permanent establishment in India and no profit can be attributed to the permanent establishment as no profit accrued or arises in India.”
11. Brief facts of the above issue are that the A.O. in view of the finding recorded in the assessment order for the A.Y. 2006-07 has computed the income at Rs. 41,77,648/- and after allowing expenses Rs. 2,26,42,946/- but restricted up to the income at Rs. 41,77,648/- assessed the income at Rs. ‘Nil’ vide draft assessment order dtd. 3-12-2009 passed u/s 144-C r.w.s. 143(3) of the Act. The assessee filed objections before the DRP. The DRP while observing that the Department has not accepted the order of the ld. CIT(A) and the matter has been taken before the Tribunal for further judicial proceeding held that no interference is required in the A.O.’s action and directed the A.O. to proceed as per draft assessment order and accordingly the A.O. passed the assessment order at the same income of Rs. ‘Nil’ vide order dtd. 8-9-2010 passed u/s 143(3) r.w.s. 144-C(13) of the Act.
12. At the time of hearing both the parties have agreed that the facts of the issue involved in this appeal are the same as in the Revenue’s appeal for the A.Y. 2006-07, therefore, the plea taken by them in that appeal may be considered while deciding the assessee’s appeal for A.Y. 2007-08.
13. We have carefully considered the submissions of the rival parties and perused the material available on record. In the absence of any distinguishing feature brought on record by the Revenue, we keeping in view of our finding recorded in the Revenue’s appeal for the A.Y. 2006-07 in paras 7,8 and 9 of this order, delete the addition made by the A.O. and accordingly the summarized ground taken by the assessee is allowed.
14. In the result, the Revenue’s appeal for A.Y. 2006-07 stands dismissed and the assessee’s appeal for A.Y. 2007-08 is allowed.