Preparatory and auxiliary liaison office activities do not create a permanent establishment or business connection in India.

A liaison office used to identify a joint venture partner, negotiate with parties, and engage consultants for setting up the venture was held not to create a permanent establishment or business connection in India under the Indo-Japan DTAA. The activities of expatriate employees were found to be purely preparatory and auxiliary; they did not enter into contracts on behalf of the non-resident, but only witnessed agreements. Such functions did not amount to carrying on the main business in India, and mere incurrence of expenditure was insufficient to establish the required real and intimate connection for taxation in India.

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Issues: Whether the liaison office constituted a permanent establishment or business connection in India so as to render the non-resident assessee liable to tax, and whether the activities undertaken were merely preparatory and auxiliary within the meaning of the Indo-Japan DTAA.

Analysis: Article 5 of the Indo-Japan DTAA governed the controversy. The office in India was found to have been used for identifying a joint venture partner, negotiating with parties, and engaging consultants, lawyers and accountants for setting up the joint venture and obtaining regulatory clearances. The evidence concurrently showed that the expatriate employees performed only preparatory functions and did not enter into contracts on behalf of the assessee, but merely witnessed the agreements. Such activities did not amount to the carrying on of the main business in India and, by themselves, did not establish the real and intimate relationship required for a business connection or permanent establishment. Incurrence of expenditure was not sufficient in itself to satisfy that test.

Conclusion: The liaison office was not a permanent establishment or business connection in India, and the income was not taxable on that basis. The issue was decided in favour of the assessee and against the Revenue.

Ratio Decidendi: Activities that are purely preparatory or auxiliary, and do not directly or indirectly contribute to the earning of profits in the taxable territory, do not constitute a business connection or permanent establishment for tax purposes.

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