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2009 (5) TMI 37 - AAR - Income TaxDraft Reciprocal Carrier Services Agreement between K.T. Corporation, Korea and Vodafone Essar South Limited - Whether the Liaison Office of K.T. Corporation in New Delhi constitute a Permanent Establishment - L.O. was set up to act only as a communication channel and it became functional within the restrictions imposed by R.B.I - L.O. is, no doubt, a fixed place of business (i.e. an office) maintained exclusively for the purpose of collecting information for the applicant which is in the nature of preparatory and auxiliary character for the enterprise. Facts being so, L.O. cannot be regarded as PE of the applicant as per the exclusionary provision of Article 5(4) of the Treaty
Issues Involved:
1. Whether the Liaison Office (L.O.) of K.T. Corporation in New Delhi constitutes a Permanent Establishment (P.E.) under the Reciprocal Carrier Services Agreement with Vodafone Essar South Limited (VESL). Detailed Analysis: Issue 1: Permanent Establishment (P.E.) Status of Liaison Office (L.O.) Background and Arguments: - Applicant's Position: K.T. Corporation, a foreign company, opened a Liaison Office (L.O.) in New Delhi with RBI's permission solely for liaison activities, acting as a communication channel between its Head Office and Indian companies. The L.O. does not engage in any trading, commercial, or industrial activities. - Revenue's Position: The Revenue questioned whether the L.O. constitutes a P.E. under the Double Taxation Avoidance Agreement (DTAA) between India and Korea, emphasizing the need for detailed information about the L.O.'s role in pre-bid surveys, feasibility reports, and technical analysis. Legal Framework: - Article 5 of the DTAA: Defines a P.E. as a "fixed place of business through which the business of an enterprise is wholly or partly carried on." It includes places like a place of management, branch, office, etc., but excludes activities of a preparatory or auxiliary character, such as collecting information or advertising. Applicant's Activities: - The L.O. was established to act as a communication channel and perform preparatory or auxiliary activities, such as holding seminars, receiving trade inquiries, and collecting feedback. It did not engage in trading activities, enter into business contracts, or perform technical analysis related to the agreement with VESL. Regulatory Compliance: - The L.O. adhered to RBI's restrictive conditions, including not undertaking any commercial or industrial activities, not earning income from liaison activities, and meeting expenses exclusively through funds received from abroad. Precedents and Commentary: - OECD Model Commentary: Activities of a preparatory or auxiliary character carried out at a fixed place of business do not constitute a P.E. if they do not form an essential and significant part of the enterprise's main business. - Supreme Court and Delhi High Court Rulings: Activities that are subsidiary or in aid of the main business fall within the exclusionary clauses of Article 5(4) of the DTAA and do not constitute a P.E. Conclusion: - The L.O.'s activities are limited to preparatory and auxiliary functions, such as collecting information and acting as a communication channel, which fall within the exclusionary clauses (d), (e), and (f) of Article 5(4) of the DTAA. - The L.O. does not constitute a P.E. under the DTAA between India and Korea, as it does not engage in core business activities or enter into business contracts on behalf of the Head Office. Ruling: - Based on the facts and legal provisions, the Authority ruled that the L.O. of K.T. Corporation in New Delhi does not constitute a Permanent Establishment (P.E.) under the DTAA between India and Korea, as its activities are preparatory or auxiliary in nature. Caveat: - The ruling is based on the current facts presented by the applicant. If the L.O.'s activities expand beyond the parameters set by RBI or if new evidence arises, the Revenue Department may take appropriate legal action. Final Pronouncement: - The Authority answered the question in the negative, ruling that the L.O. does not constitute a P.E., as contended by the applicant. (Pronounced by the Authority on this 29th day of May 2009.)
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