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TMI Blog2011 (2) TMI 1233X X X X Extracts X X X X X X X X Extracts X X X X ..... urther period of three years i.e. up to 04.08.2002. The RBI acceded to the request of the assessee for setting up an additional liaison office at New Delhi vide approval dated 01.12.2001 on similar terms and conditions. The permission was extended by the RBI periodically upto 04.08.2008. The case of the assessee is that, it is engaged solely in liaison activities as permitted by the RBI i.e., acting as a communication channel between the Head Office at Korea and the parties in India by communicating technical specifications, commercial terms and bridging the language barrier. Following the repeal of the Foreign Exchange Regulation Act, 1973 and the enactment of the Foreign Exchange Management Act, 1999, the regulations governing a liaison office are similar to those under the former. The liaison office comprised five employees and their role was limited to finding out prospective buyers for the assessee's products, obtaining enquiries in that regard and passing it on to the Head Office in Korea. After obtaining the quotations for the products from the Head Office, the liaison office would communicate the same to the intending buyers. At times, the Head Office would indicate a pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided at the Indian end without reference to the South Korean end. The margin of the liaison office is decided by the liaison office itself. This incidentally is the only variable element, while other components of the price viz., purchase price, freight, etc., are fixed and non-negotiable. The conclusion of the contract is done exclusively by the liaison office sales personnel. The South Korea office plays no role whatsoever in determining the actual price of the product. It simply obtains the purchase price from the supplier and leaves the actual price determination, negotiation and conclusion of the deal to the liaison office. There would have been no sales targets, unless actual sales were being done. Thus, the liaison office undertakes actual sales. The sales personnel of the liaison office are involved at all stages of procurement and supply. Though the South Korea office receives the payment, the entire process is constantly monitored and followed up by the liaison office. Therefore, from the aforesaid material the Assessing Authority held that the Indian liaison office is seen to be virtually running its own ship, both on a day to day basis, as also for the purpose of fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment orders prior to assessment year 2004-05, there is a business connection in respect of source of income in India of the non-resident assessee and therefore, the income from such activity is deemed to accrue or arise and will therefore, be taxable in India. It also held that the business profit of the South Korea company can be taxed in India in case the South Korea company is having a permanent establishment. After referring to the terms of DTAA in particular Article 5 and the statements of Sri. V. Natarajan held that the liaison office is engaged in promotion of import in India by procuring purchase orders after negotiating the deal and therefore the Assessing Officer was justified in holding that the liaison office is a permanent establishment and therefore, the income attributable to the liaison office will be taxable as per Article 7 of the DTAA. Thus the appeal was allowed and the order of the Appellate Authority was set aside. The assessment orders were restored. Aggrieved by the said order of the tribunal, the assessee is in appeal. 3. The learned Senior counsel Sri. K.P. Kumar, assailing the impugned order passed by the tribunal contended that the liaison office was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment" shall include especially: (a) a place of management ; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop ; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 3. The term 'permanent establishment" likewise encompasses a building site, a construction assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than nine months. 4. Notwithstanding the preceding provisions of this Article, the terms 'permanent establishment" shall be deemed not to include ; (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of a fixed place of business solely fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to your establishing a liaison office at Mumbai and Bangalore initially for a period of three years for the purpose of undertaking solely liaison activities viz., to act as a communication channel between Head Office and parties in India. Please note that this permission has been granted subject to the following conditions. (i) Except the proposed liaison work, the office in India will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without our prior permission. (ii) No Commission/fees will be charged or any other remuneration received/ income earned by the office in India for the liaison activities/services rendered by it or otherwise in India. (iii) The entire expenses of the office in India will be met exclusively out of the funds received from abroad through normal banking channels. (iv) The Liaison office in India shall no borrow or land any money from/to any person in India without our prior permission. (v) The office in India shall not acquire, hold, (otherwise than by way of lease for a period not exceeding five years) transfer or dispose of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or industrial nature nor have they entered into any business contract in their names. They have not charged any commission or any remuneration and they have no earned any such amount in India for liaison activities. The entire existence of the office in India is made exclusive out of the funds of the Head Office and they have not borrowed any money. They have not acquired any properties. They have no direct commitment with the customers and therefore, it was contended that the liaison office in Bangalore cannot be considered as a permanent establishment so as to attract the provisions of the Act. It is in this background, we have to see what was unearthed in the course of investigation by an Investigating Agency. 9. The liaison office of the assessee was opened in 1988. The operations of the assessee at Bangalore were carried out pursuant to the approval by the RBI. The liaison office has five employees in all. The south Korean based company is a trader in semi-conductor components manufactured by various companies across the world. In the course of the said survey and investigation, the authorities have recorded the statement of one Sri. V Natarajan, the Country Manager. He has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the goods are ready, they will be inspected by the Quality control Team at the head quarters to ensure that the specifications are properly met. After that the goods are packed and shipped to the freight forwarder appointed by the customer. The same will be shipped directly to the customer by the first available flight or ship. The Head Office will send a copy of the commercial invoice, packing list and airway bill/bill of landing to the liaison office at Bangalore by email/fax. They in turn send these three documents to the customer. Then the responsibility of getting the goods cleared lies with the customers. The payments will be made by the customer through telegraphic transfer through bank to the Head Office account at Korea. Their work also involves following up of payments from the customers and offer sales support, if necessary. He has also deposed that they have cent percent freedom in deciding the margin or selling price provided they are not incurring any loss. It was stated that the marketing man is given the liberty to sell the goods on profit within a band margin of profit and in case any discount is asked then he has to revert back to the Head Office. Hence, only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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