Liaison office as permanent establishment depends on substantive business functions, not mere support activities or coordination work.

A liaison office is treated as a permanent establishment in India only if, for the relevant year, the evidence shows substantive business functions beyond preparatory or auxiliary support. On the material described, communication, coordination, market information gathering, and similar support activities were insufficient to show independent business operations or a profit centre, so attribution on an ad hoc basis under Rule 10 could not be sustained. The note also states that interest under section 234B is not leviable on a non-resident payee where the tax was deductible at source but was not withheld by the payer.

---

---

Issues: (i) Whether the liaison office constituted a permanent establishment in India for the relevant year; (ii) whether the profit attributable to the Indian operations could be estimated under Rule 10 of the Income-tax Rules, 1962 on the basis adopted by the revenue; (iii) whether interest under section 234B of the Income-tax Act, 1961 was leviable.

Issue (i): Whether the liaison office constituted a permanent establishment in India for the relevant year.

Analysis: The relevant material had to be tested only for the year under appeal. The documents relied upon by the revenue, including performance review reports and other impounded papers, did not establish that the liaison office was carrying on independent business or taking business decisions in India. The material for the relevant year showed only communication, coordination, market information gathering, and other support functions. The record did not show that the office functioned as a profit centre or that the activities crossed the line from liaisoning into business operations.

Conclusion: The liaison office was not a permanent establishment in India for the relevant year, and the finding was in favour of the assessee.

Issue (ii): Whether the profit attributable to the Indian operations could be estimated under Rule 10 of the Income-tax Rules, 1962 on the basis adopted by the revenue.

Analysis: Once the permanent establishment finding failed, the wider attribution exercise based on the revenue's assumptions could not stand on the same footing. In any event, for the appeal of the revenue, the appellate finding accepting the certified turnover figures and rejecting the ad hoc escalation or reduction method was not shown to be infirm. The estimate of turnover on a formulaic year-to-year basis was not justified on the material accepted for the relevant years, and the adjustment of gross profit rate did not call for interference in the revenue's appeal.

Conclusion: The ad hoc estimation method was not sustained against the assessee, and the revenue's challenge to the appellate view failed.

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

Analysis: The governing principle applied was that where the tax was deductible at source and the payer failed to do so, interest could not be fastened on the non-resident payee for that amount. Following that principle, the levy of interest was not sustainable.

Conclusion: Interest under section 234B was not leviable, and the finding was in favour of the assessee.

Final Conclusion: The assessee succeeded on the principal jurisdictional issue, the revenue's appeal failed, and the remaining reliefs were disposed of accordingly.

Ratio Decidendi: A liaison office constitutes a permanent establishment only if the evidence for the relevant year shows that it carried on substantive business functions beyond preparatory or auxiliary support; absent such evidence, income attribution and related consequential levies cannot be sustained on an ad hoc basis.

---