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TMI Blog2009 (5) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Act (in short the Act) in the prescribed form No.34-C. The applicant is a foreign company registered in Korea. 2. The applicant states that it has opened a liaison office (in short L.O.) situated at Suite No.311, Ashoka Hotel, Chanakyapuri, New Delhi, India, with the permission of the Reserve Bank of India (RBI) vide letter No.FE.CO.FID-10.1.05.02/6034 (Activity7)/2003-2004 dated 10th June, 2004. The L.O. has been, as stated, opened for the sole purpose of liaisoning activities i.e. to act as a communication channel, between the Head Office of the applicant and the concerned parties i.e. Indian companies, within the parameters listed out by the RBI. The application has been signed by the General Manager of the L.O., namely Mr. Siung-Yong Shin, who has, reportedly, been directed by the Head Office to obtain the ruling on behalf of the applicant. 3. Details filed along with the application further reveal that pursuant to the opening of the L.O. in 2004, the applicant entered into a Reciprocal Carrier Service Agreement (in short RCSA), dated 13.8.2007, with Vodafone Essar South Ltd. (in short VESL) which is an Indian company registered in India with the address at C-48, O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al analysis of the project? And (iv) is the L.O. involved either in the technical analysis of the project or the execution of any part of the contract? The Revenue has, accordingly, emphasized the fact that answer to these and similar other queries are essential to find out whether the L.O. constitutes a Permanent Establishment of the applicant in terms of clause 2(b) of Annexure 'A' of the said agreement vis-à-vis the provisions of the Treaty. In the absence of these details the Revenue contends that it is not possible to conclude whether L.O. constitutes a PE of the applicant. Independent of the question whether L.O. will constitute a PE or not as sought by the applicant, the payments received by the applicant from VESL under the above agreement may be taxable in terms of section 5(2) read with section 9(1)(vi), 9(1)(vii) of the Act and Article 13 of the DTAA, avers the Revenue. 6. In the supplementary statement of facts filed on 24.2.09, the applicant has given the details of activities undertaken by the L.O. in India. It has been stated that the L.O. was set up in India to act only as a communication channel and it became functional within the restrictions imposed by the R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia 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 office in India shall not borrow or lend 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 any immovable property in India without obtaining prior permission of the Reserve Bank of India under the Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000. (vi) The office in India will furnish to our Regional Office (on an yearly basis) a certificate from the auditor that the office has complied with the terms and conditions stipulated in the letter of approval issued by the Reserve Bank of India and that all the expenses are met by way of inward remittances. In the case of winding up of the office, you may approach Regional Office with the documents as required in terms of Regulations 6(1)(iii) of Notification No. FEMA.13/RB-2000 dated 3rd May ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproval letter as referred to above. The General Manager has also solemnly affirmed that the L.O. was, in no way, involved in the Pre-Bid Survey, preparation of feasibility report or any technical analysis of the project. 11. In the given set of facts as stated above by the applicant, the question to be decided is whether the impugned Liaison Office can be regarded as a Permanent Establishment in light of the activities performed vis-a-vis the provisions of the Treaty. It is also important here to note that the actual activities carried out by the Liaison Office in India need to be examined in each case to determine whether the activities would fall within the ambit of preparatory or auxiliary activities. 12. To appreciate the point at issue, it would be quite apposite to advert, first, to paras 1,2, 4, which are relevant for our purpose, of Article 5 of the Treaty between India Korea (165 ITR (St) 191) which is as under:- Article 5: Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whatever name called and entities in India but which does not undertake any commercial/trading/industrial activity, directly or indirectly and maintains itself out of inward remittances received from abroad through normal banking channel" Further, schedule II to the FEMA read with Regulation 6(1) gives the following list of activities, which can be carried on, through a Liaison Office:- (i) "Representing the parent company/ group companies in India. (ii) Promoting export/ import from/ to India. (iii) Promoting technical /financial collaboration between parent/ group companies and Indian companies. (iv) Acting as communication channel between parent and Indian companies." Also, the RBI generally lays down restrictive conditions, as referred to in preceding para, at the time of granting permission for the opening of a Liaison Office. 15. From the above, it is evident that even as per statutory provisions, the activities of a Liaison Office are much restricted and it cannot legally venture into securing orders from the customers in any manner either directly or indirectly. No doubt, the Liaison Office is a fixed place and the activities conducted by it are seemingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are not permanent establishments, even if the activity is carried on through a fixed place of business. The common feature of these activities is that they are, in general, preparatory or auxiliary activities. This is laid down explicitly in the case of the exception mentioned in subparagraph e), which actually amounts to a general restriction of the scope of the definition contained in paragraph 1. Moreover sub paragraph f) provides that combinations of activities mentioned in subparagraphs a) to e) in the same fixed place of business shall be deemed not to be a permanent establishment, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. Thus the provisions of paragraph 4 are designed to prevent an enterprise of one State from being taxed in the other State, if it carries on in that other State, activities of a purely preparatory or auxiliary character. 23. …. To a considerable degree it limits that definition and excludes from its rather wide scope a number of forms of business organizations which, although they are carried on through a fixed place of business, should not be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diting security refunds, income tax refunds, insurance claims and Govt. refunds to the bank account of the Liaison Office. However, for remittance of these amounts, specific permission of Reserve Bank of India will be necessary. Further in case of sale of assets at a profit, the Liaison Office has to take prior permission for the sale." 19. From the facts made available, it has emerged that the liaison office, in this case, has not performed any 'core business activity' and has confined itself to preparatory and auxiliary activities only. In fact, all that seems to have been done by the L.O. fall within the parameters of supplying information which is preparatory to and auxiliary to the formation of the final contracts entered into by the applicant with VESL. Plainly to our minds, the instant activities viz. preparation of reports dealing with India's market scenario in Mobile as well as broadband segments etc. are in 'aid' or 'support' of the main activities and accordingly rest in the realm of preparatory and auxiliary activities. The liaison office is very much covered within the exclusionary clause (e) and (f) of Article 5(4) of the Treaty and consequently can't be regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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