WHETHET LIASION OFFICE IN INDIA CAN BE CONSIDERED AS PE (Permanent Establishment ) for Income-Tax Purpose?

WHETHET LIASION OFFICE IN INDIA CAN BE CONSIDERED AS PE (Permanent Establishment ) for Income-Tax Purpose?

 

IT/ILT : LIAISON OFFICEOF FOREIGN COMPANY IN INDIA IS NOT A PE IN INDIAIN VIEW OF ARTICLE 5(6)(E) OF INDO-JAPAN DTAA

Facts

• Assessee-company a tax resident of Japan dealing in steels and steel products.

• Assessee-company had opened a LO in India with the approval of the Reserve Bank of Indiain terms of section 6(6) of the Foreign Exchange Management Act ('FEMA' in short).

• The LO was closed down in the year 2008. The assessee was required to pay fringe benefit tax because of which return was filed in which income was shown at nil.

• The Assessing Officer passed a draft order on 23-12-2010 holding that the LO is a PE, carrying on core business activities. A draft order was passed computing the income of about Rs.35.58 crores. The DRP not only upheld the finding of the Assessing Officer but also enhanced the income. The AO passed final order on 18-10-2011.

• Article5(6)(e) of Indo-Japan DTAA excludes from permanent establishment, the office which carry on activities of "the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any of the activity of a preparatory or auxiliary character". Assessee-company claimed that its LO was covered by article 5(6)(e) and hence not a PE in India while the case of the Revenue was that this office was carrying on the key function of price negotiation leading to formation of contract.

Held

• As per Regulation 2(e)of FEM(Establishment in India of Branch or Office or other Place of Business)Regulations, 2000,'liaison office' means a place of business to act a channelor communication between the principal place of business or HO and entity in India but which does not undertake any commercial, trading, industrial activity, directly or indirectly and maintains itself from remittances received from the abroad through normal banking channels. 
Schedule-II of the said Regulations provides that the permitted activities of LO are: 

(i) representingthe parent company/group companies in India, 

(ii)promoting export/importfrom/to India, 

(iii) promoting technical/financial collaborations betweenparent/group companies and Indian companies, 

(iv) acting as communicationchannel between parent and Indian companies.

• The AO had not brought on record information that the activity was beyond the limit prescribed by the RBI vide the said Regulations.

• The Revenue's contention that India office was engaged in price negotiation was not correct as quotations were made on the basis of instructions from the Head Office.

• Therefore, the presumption can validly be raised in this case that India office does not constitute a PE as no violation was noticed by the RBI. This presumption was not rebutted by the AO by bringing any positive material to show that any substantive businessactivity was carried on by the assessee in India.

• In the result,assessee's appeal allowed.