Liaison Office (LO) involved merely in purchasing activity is not a Permanent Establishment (PE)

Liaison Office (LO) involved merely in purchasing activity is not a Permanent Establishment (PE) ADIT (IT) Vs Fabrikant & Sons Ltd. (Appeal Nos. 4657 to 4660 and 3342) dated 28 January 2011

The facts and the issues were same for the relevant assessment years i.e.1999-2000 to 2002-03 and 2003-04. A tax survey was carried out in the financial year 2005-06 in the premises of the assessee. The following findings were recorded:

• M Fabrikant and Sons Inc (F&S Inc) was a company based in USA and engaged in the business of sale of loose diamonds and diamond jewellery.

• The India LO of the tax payer was set up in 1980 for purchase of finished loose diamonds from the Indian market.

•  The constituted Attorney of F&S Inc received the requirement details from the principals in USA with reference to size, quality of diamonds, carats and price. The price quoted was only indicative and not the final price at which the principals desired to buy and LO was required to negotiate the price with the suppliers.

• On the receipt of information from the principals:

? LO obtained the right quality, size and carats as per the requirement of F&S Inc and the prices were negotiated by LO with the suppliers to obtain best price.

? The diamonds received from the suppliers were then assorted for getting the right selection and taking out the rejections, and consequent dispatch.

The Assessing Officer (AO) held that the LO would constitute a PE of F&S Inc in India and accordingly, computed the total income of the F&S Inc at the rate of 5% of the value of the diamonds imported through LO for the assessment year 2003-04. The first appellate authority held that LO cannot be considered as PE in India since the LO is not involved in manufacturing or production of any article and is not making any sales. Aggrieved by the order of the first appellate authority, the tax department filed an appeal before the Tribunal.

Issues before the Tribunal

• The issue before the Tribunal was whether the LO cannot be considered as a PE in India and no profits can be attributed to PE as no profits arises or accrues in India.

Ruling of the Tribunal

The Tribunal observed that:

• LO was only part of the purchasing process of the diamonds and did not bring any physical or qualitative change in the goods purchased.

• F&S Inc was purchasing goods through LO and all the activities carried out by the LO were of a basic and preliminary nature in the purchasing process/ operation.

• No quality change was brought in the products by the LO while doing the operation of purchasing in India for export purposes

• Hence, no income could be deemed to accrue or arise in India to F&S Inc by virtue of the purchases made by F&S Inc through the LO for export.

Conclusion

The Tribunal accepted most of the contentions of the assessee. The ruling assumes significance since it has held that selection of right goods and negotiation of price as per the instructions of the Head Office though a part of the purchasing activity, would be considered as being of a preliminary nature.