Permanent establishment test under treaty fails where liaison and project offices perform only preparatory or auxiliary functions.

The Revenue bore the burden of proving that the liaison office and project offices in India were fixed places of business through which the non-resident carried on business. Mere liaison activity, overlapping supervision, alleged storage of records, or a share of telephone costs was insufficient. The factual findings accepted by the CIT(A) and Tribunal showed that the liaison office performed only liaison and information-gathering functions, while the project offices were treated as separate taxable units; these activities fell within the treaty exclusion for preparatory or auxiliary operations. On that basis, the offices were not a permanent establishment in India and the income directly or indirectly attributable to them was not taxable under the India-Japan DTAA.

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Issues: Whether the assessee's liaison office and project offices in India constituted a permanent establishment under the India-Japan double taxation avoidance agreement, and whether the income attributable to those offices was taxable in India.

Analysis: The onus lay on the Revenue to establish that the Indian offices were a fixed place of business through which the assessee's business was wholly or partly carried on. The mere presence of a liaison office, some overlapping supervision, alleged storage of records, or a portion of telephone expenditure was insufficient. The factual findings of the Commissioner of Income Tax (Appeals), affirmed by the Tribunal, showed that the project offices were treated as separate taxable units and that the liaison office was used only for liaison and information-gathering functions. Such activity fell within the exclusion for offices maintained solely for preparatory or auxiliary purposes. The Revenue also failed to dislodge the factual findings as perverse.

Conclusion: The liaison office and project offices did not constitute a permanent establishment in India, and the income directly or indirectly attributable to them was not taxable in India under the treaty.

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