2017 (1) TMI 1367 - HC - Income Tax

Taxability in India - whether the said offices (LOs) could be regarded as PE ? - whether its income from imports in India were not taxable by reason of the Indo-Japan Double Taxation Avoidance Agreement (Indo-Japan DTAA)?- Held that - In the present case, both the CIT(A) and ITAT have found that the four expatriate employees posted in India performed purely preparatory functions identifying a JV partner, negotiating with parties, seeking regulatory approvals and clearances, consulting management experts, lawyers and accountants toward setting up of the JV, towards entering into agreements, etc. They did not even enter into agreements on behalf of the assessee; instead they merely signed them as witnesses. These could not per se or by themselves amount to a business connection as to create a PE in India. The DTAA clearly envisions that offices that perform auxiliary and preparatory services are not to be treated as business connection. In the present context, the expression means carrying on activities, other than the main business functions, that aid and support the assessee. In the context of the contracts in question, where the main business is insurance business - coverage of industries and others who are subject to general insurance policies by entering into contracts of insurance, collecting premia, setting up networks of distributors or offices for that purpose etc., the functions performed by the expatriates in the liaison office were of auxiliary character - an activity which aids and supports the Assessee in carrying on its main business, but not the business itself. The findings of the authorities below, therefore, were warranted and call for no interference. - Decided against the Revenue and in favour of the assessee.

Summary

Issues involved:
1. Whether the liaison office (LO) of a non-resident company in India constitutes a permanent establishment (PE) for tax liability.
2. Whether the income from imports in India by the non-resident company is taxable under the Indo-Japan Double Taxation Avoidance Agreement (Indo-Japan DTAA).

Analysis:

Issue 1: Permanent Establishment (PE)
The case involved a non-resident company that opened a liaison office (LO) in India for assisting in the formation of a joint venture. The Assessing Officer (AO) held that the LO constituted a business connection, leading to a PE and tax liability in India. However, the CIT(A) reversed this finding, which was upheld by the Income Tax Appellate Tribunal (ITAT). The main contention was whether the activities of the LO created a deep and intimate commercial connection between the non-resident company and the foreign entity, establishing it as a PE. The Court analyzed the functions performed by the expatriate officers at the LO, which were found to be preparatory in nature, such as identifying a JV partner, negotiating, seeking regulatory approvals, and consulting experts. The Court referred to relevant legal precedents and emphasized that for a business connection to exist, there must be a real and intimate relationship between the activities outside the taxable territory and those in the taxable territory contributing to profit generation. The Court concluded that the preparatory functions performed by the LO did not amount to a business connection creating a PE in India, in line with the provisions of the Indo-Japan DTAA.

Issue 2: Taxability under Indo-Japan DTAA
The Court examined Article 5 of the Indo-Japan DTAA to determine if the LO's activities resulted in profit or income generation, which would classify it as a PE. The Court noted that the functions performed by the expatriate employees were auxiliary and preparatory in nature, aiding and supporting the non-resident company's main business functions. The Court referred to legal definitions of "auxiliary" and emphasized that such activities do not constitute the main business itself but support the main business operations. The Court upheld the findings of the lower authorities that the functions performed by the LO were of an auxiliary character and did not warrant treating it as a business connection under the DTAA. Consequently, the Court ruled in favor of the assessee, dismissing the appeals raised by the Revenue.

In conclusion, the High Court held that the non-resident company's liaison office in India did not constitute a permanent establishment for tax liability purposes and that the income from imports in India was not taxable under the provisions of the Indo-Japan Double Taxation Avoidance Agreement.