Liaison office activity as preparatory or auxiliary work does not create a permanent establishment under the India-Switzerland DTAA.

A liaison office in India that is limited to communication and coordination within RBI approval, and does not negotiate or conclude contracts or carry on core business operations, is treated as only preparatory or auxiliary activity and not a permanent establishment under Article 5 of the India-Switzerland DTAA. Where the Indian office has no authority or infrastructure to conduct business, service PE or agency PE cannot be established, and profits cannot be attributed to India on an estimated basis. On those facts, the addition made on the footing of an alleged PE was deleted.

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Issues: Whether the liaison office in India constituted a permanent establishment, including a service PE or agency PE, of the assessee under the India-Switzerland DTAA, and whether the profits attributed by the Assessing Officer to such alleged PE were taxable in India.

Analysis: The liaison office was found to have acted only as a communication and coordination channel within the limits permitted by the RBI approval. The record showed that contract negotiation, finalisation, and core repair and maintenance operations were carried out outside India, while the Indian office had no infrastructure, facility, or authority to conduct business or conclude contracts on behalf of the assessee. The activities of the liaison office were held to be preparatory or auxiliary in nature and therefore outside the scope of a permanent establishment under Article 5 of the DTAA. In the absence of a PE, the attempt to attribute profits to India and to compute income on an estimated basis did not survive.

Conclusion: The liaison office did not constitute a permanent establishment of the assessee in India, and the addition made on that basis was deleted.

Ratio Decidendi: A liaison office that is confined to coordination and communication activities, and does not negotiate or conclude contracts or carry on core business operations in India, is only preparatory or auxiliary in character and does not constitute a permanent establishment under the DTAA.

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