Wednesday, June 13, 2012

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

• Assessee-company a tax resident of Japan dealing in steels and steel products.
• Assessee-company hadopened a LO in India with theapproval of the Reserve Bank of Indiain terms of section 6(6) of the Foreign Exchange Management Act ('FEMA' inshort).
• The LO was closed downin the year 2008. The assessee was required to pay fringe benefit tax becauseof which return was filed in which income was shown at nil.
• The Assessing Officerpassed a draft order on 23-12-2010 holding that the LO is a PE, carrying oncore business activities. A draft order was passed computing the income ofabout Rs.35.58 crores. The DRP not only upheld the finding of the AssessingOfficer 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 officewhich carry on activities of "the maintenance of a fixed place ofbusiness solely for the purpose of carrying on, for the enterprise, any otheractivity of a preparatory or auxiliary character". Assessee-companyclaimed that its LO was covered by article 5(6)(e) and hence not a PE in India while thecase of the Revenue was that this office was carrying on the key function ofprice negotiation leading to formation of contract.
• 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, industrialactivity, directly or indirectly and maintains itself from remittances receivedfrom the abroad through normal banking channels.
Schedule-II of the saidRegulations 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 theRBI vide the said Regulations.

• The Revenue'scontention 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 aPE as no violation was noticed by the RBI. This presumption was not rebutted bythe 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.

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