Permanent establishment test under India-Japan DTAA: liaison office not taxed as PE absent proof of core business activity.

A liaison office in India will not constitute a permanent establishment under Article 5 of the India-Japan DTAA where its activities remain confined to preparatory or auxiliary functions and there is no positive evidence of substantive business operations. The Tribunal noted that RBI approval, ongoing compliance, and the absence of material showing violation of permitted liaison activities supported the inference that the office operated within its authorised scope. Revenue's reliance on selective correspondence was insufficient to establish that price negotiation or contract formation was in fact carried on through the office. The presumption arising from RBI approval was therefore not rebutted, and the liaison office was not treated as a permanent establishment in India.

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Issues: Whether the assessee's liaison office in India constituted a permanent establishment under Article 5 of the India-Japan DTAA.

Analysis: The liaison office was a fixed place of business, but the decisive question was whether business was being partly carried on through it or whether its functions were confined to preparatory or auxiliary activities. The assessee's RBI approval, annual compliance, and the absence of evidence showing violation of permitted activities supported the inference that the office was intended to function within a liaison role. The Revenue relied on selective correspondence to suggest price negotiation and contract formation, but the material on record did not establish that the office carried on any substantive core business activity. The Tribunal held that the presumption arising from RBI approval was not rebutted by positive evidence of business operations beyond the permitted scope.

Conclusion: The liaison office did not constitute a permanent establishment in India, and the assessee succeeded on the issue.

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