1991 (10) TMI 95 - AT - Income Tax

Summary

Issues Involved:
1. Permanent Establishment in India
2. Business Connection in India u/s 9(1) of the Income-tax Act

Issue 1: Permanent Establishment in India

The Revenue contended that the assessee company had a 'permanent establishment' in India and thus was not exempt under the Agreement for Avoidance of Double Taxation between India and Japan. The assessee, a foreign non-resident company, maintained that its Indian branches were only engaged in liaison work as permitted by the Reserve Bank of India (RBI) and did not conduct any trading activities, thus not constituting a permanent establishment. The Tribunal had previously ruled in favor of the assessee for the assessment year 1977-78, stating that the Indian branches were only involved in liaison activities. However, for the assessment years 1978-79 and 1979-80, another Tribunal Bench disagreed, citing correspondence that suggested the branches were involved in negotiating and finalizing sales contracts, thus constituting a permanent establishment.

Upon review, the Special Bench found that the Revenue failed to provide new evidence or specific correspondence proving that the branches engaged in business activities beyond liaison work. The Bench concluded that the activities of the Indian branches fell within the scope of sub-clause (iiia) of clause (i) of sub-article (1) of Article II of the Double Taxation Avoidance Agreement, which covers preparatory or auxiliary activities. Consequently, the assessee did not maintain a permanent establishment in India.

Issue 2: Business Connection in India u/s 9(1) of the Income-tax Act

The Assessing Officer argued that the assessee had a business connection in India and thus its income was taxable u/s 9(1)(i) of the Income-tax Act. The Officer estimated the taxable profits based on sales figures and attributed 50% of the profits to selling operations in India. However, the Tribunal had previously ruled that the Indian branches were only involved in liaison work and not in any trading activities, thus not generating taxable income in India.

The Special Bench upheld this view, stating that the activities of the Indian branches did not constitute a business connection under section 9(1) of the Income-tax Act. The Bench noted that the RBI had not found any violations of the conditions imposed on the assessee's Indian branches, further supporting the claim that the branches were only involved in liaison work.

Conclusion

In conclusion, the Special Bench held that the assessee's Indian branches were engaged solely in liaison work and did not constitute a permanent establishment in India. Consequently, the provisions of section 9(1) of the Income-tax Act were not applicable, and no part of the assessee's income was assessable in India. The appeals by the Revenue were dismissed.