Liaison office PE test: preparatory or auxiliary functions under head office control do not create a treaty permanent establishment.

A liaison office is treated as a permanent establishment under the India-Japan tax treaty only where the record shows independent business operations or authority to negotiate and conclude contracts in India; where it performs only preparatory, auxiliary, liaison, or representative functions under head office instructions, no permanent establishment arises. On the facts discussed, no independent material established that the office exceeded its permitted role, so the treaty PE test was not met. Interest under section 234B was also held not sustainable, following earlier year precedent. The assessee therefore succeeded on the substantive treaty issue and the revenue's related challenges became academic.

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Issues: (i) Whether the assessee's liaison office constituted a permanent establishment in India under the India-Japan tax treaty and whether its India-related activities were only preparatory or auxiliary in nature; (ii) whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Issue (i): Whether the assessee's liaison office constituted a permanent establishment in India under the India-Japan tax treaty and whether its India-related activities were only preparatory or auxiliary in nature.

Analysis: The determination had to be made on the basis of material relatable to each assessment year, and the survey material could not be mechanically applied to later years without supporting evidence. For the relevant years, no independent material was brought on record to show that the liaison office negotiated and concluded contracts on its own, acted as an independent profit centre, or made business decisions apart from instructions of the head office. The office was permitted by RBI only to carry on liaison and representative functions, and the record supported the conclusion that its role remained limited to support, communication, and other auxiliary functions. On that footing, the treaty concept of permanent establishment was not attracted.

Conclusion: The liaison office did not constitute a permanent establishment in India, and this issue was decided in favour of the assessee.

Issue (ii): Whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Analysis: The levy had already been considered in the assessee's favour in an earlier year following binding precedent, and the same approach was applied for the year under consideration.

Conclusion: The levy of interest under section 234B was not sustainable, and this issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the substantive treaty issue, the revenue's computational challenges became academic, and the assessee's appeal was allowed while the revenue's appeals were dismissed.

Ratio Decidendi: A liaison office constitutes a permanent establishment only when the record shows independent business operations or contract-concluding authority in India; where the office merely performs preparatory or auxiliary functions under the direction of the head office, no permanent establishment arises.

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