Permanent establishment and profit attribution turn on core business functions, with TNMM applied and advance tax interest denied.

A foreign enterprise's Indian liaison office was examined for permanent establishment status under the India-Singapore treaty, with the evidence showing core commercial functions such as marketing, sales promotion, order follow-up, deliveries and collections rather than merely preparatory or auxiliary work. On that basis, the office was treated as a permanent establishment and profits attributable to Indian operations had to be computed on a realistic, function-based method; the note identifies TNMM as the appropriate approach and rejects excessive attribution based on unsuitable comparables. It also records that interest under section 234B was not leviable where the assessee was a non-resident and tax was deductible at source under section 195. The remand issue is noted as not permitting the assessee to be placed in a worse position than in the first round.

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Issues: (i) Whether the Dispute Resolution Panel exceeded the directions issued in the earlier remand proceedings and whether the assessee was put in a worse position after the fresh assessment; (ii) Whether the liaison office constituted a permanent establishment in India under the India-Singapore treaty; (iii) Whether profits were liable to be attributed to the permanent establishment and, if so, by what method; (iv) Whether interest under section 234B was leviable.

Issue (i): Whether the Dispute Resolution Panel exceeded the directions issued in the earlier remand proceedings and whether the assessee was put in a worse position after the fresh assessment.

Analysis: The earlier remand was only to require a speaking order and reconsideration of the objections. The re-adjudication did not amount to unlawful enhancement by the Dispute Resolution Panel. However, the fresh assessment resulted in the assessee being placed in a materially worse position than before the appeal, and the overall consequence of the remand could not be allowed to operate to the assessee's detriment beyond the income as originally assessed in the first round.

Conclusion: The panel did not exceed its remand mandate, but the assessee could not be worse off than in the first round; relief was granted to that extent in favour of the assessee.

Issue (ii): Whether the liaison office constituted a permanent establishment in India under the India-Singapore treaty.

Analysis: The evidence from survey material, employee statements and email correspondence showed that the Indian office was not confined to preparatory or auxiliary work. The office was engaged in marketing, sales promotion, market research, customer coordination, price negotiation, follow-up of purchase orders, deliveries and collections, which were core functions of the trading business. Those activities satisfied the treaty test of a fixed place through which business was carried on and did not fall within the exclusion for purely preparatory or auxiliary activities.

Conclusion: The liaison office was a permanent establishment in India and this issue was decided against the assessee.

Issue (iii): Whether profits were liable to be attributed to the permanent establishment and, if so, by what method.

Analysis: Once the permanent establishment was held to exist, profits attributable to the Indian operations had to be computed on a realistic basis reflecting the functions performed, assets employed and risks assumed. The comparable relied upon by the revenue was found not to be a sound basis for attribution, and the profit allocation made on the earlier approach was considered excessive and abnormal. The appropriate method was held to be TNMM, with exclusion of the identified comparables used by the authorities below.

Conclusion: Profit attribution was permissible, but the computation was to be redone by applying TNMM; this issue was partly in favour of the assessee.

Issue (iv): Whether interest under section 234B was leviable.

Analysis: The assessee was a non-resident and the payments received were subject to tax deduction at source under section 195. In such a case, advance tax liability was not attracted to the extent tax was deductible at source, and interest for failure to pay advance tax could not be charged.

Conclusion: Interest under section 234B was not leviable and this issue was decided in favour of the assessee.

Final Conclusion: The appeals succeeded in part. The existence of a permanent establishment was upheld, profit attribution was directed to be recomputed on the proper method, and interest under section 234B was deleted.

Ratio Decidendi: Where a foreign enterprise's Indian office performs core business functions beyond preparatory or auxiliary activities, it constitutes a permanent establishment, and profits attributable to that establishment must be determined on a functionally appropriate basis reflecting the actual role of the Indian operations.

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