Karnataka HC rules that sourcing support activities carried on by a foreign company is entitled to “purchase exclusion” provision

We are pleased to release a Tax Alert which summarizes a recent ruling of the Karnataka High Court (HC) in the case of Mondial Orient Ltd. (Taxpayer) on the issue of whether benefit of purchase exclusion provision i.e., the exclusion provided in the Indian Tax Laws (ITL) for purchase of merchandise for the purpose of export out of India, is available for sourcing support activities of the Taxpayer in India. Having regard to the facts of the case, the HC
ruled that the Taxpayer’s activities for assisting foreign buyers (FBs) in purchase of merchandise from Indian manufacturers/suppliers (Indian Vendors) would fall under the purchase exclusion provision. Accordingly, the Taxpayer’s income was not taxable in India under the ITL.

Whether sourcing activities undertaken by foreign companies creates a taxable presence has been a subject matter of controversy in India, with the Tax Authority generally adopting a fairly narrow interpretation of the purchase exclusion provision contained in the ITL. While application of the exclusion would depend on the specific facts of each case, this ruling provides a broad and purposive interpretation of the purchase exclusion provision, which would be useful for taxpayers with similar activities.