Permanent establishment test: liaison offices used only for information gathering and auxiliary functions were not taxable in India.

Liaison offices in India that were approved only for collecting and transmitting information, funded entirely by foreign remittances, and without authority to conclude contracts or carry on trading activity fell within the treaty exclusion for preparatory or auxiliary functions. On those facts, they did not constitute a permanent establishment under the India-Japan tax treaty, and income could not be attributed to them under the domestic charging provisions where inconsistent with the treaty.

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Issues: Whether the liaison offices maintained in India constituted a permanent establishment of the non-resident assessee under the India-Japan tax treaty, and whether income could be attributed to those offices under the Income-tax Act, 1961.

Analysis: The liaison offices were approved by the Reserve Bank of India only for collecting and sending information from India to Japan, with expenses to be met entirely from foreign remittances and without authority to earn commission or carry on trading, commercial, or industrial activity. The record did not show that the offices had power to conclude contracts or exercised decision-making authority on behalf of the head office. On these facts, the Court held that the activities were confined to a fixed place maintained solely for collecting information and for other activity of a preparatory or auxiliary character. The treaty definition of permanent establishment, read with its exclusion for preparatory or auxiliary functions, prevailed over the domestic charging provisions to the extent of any inconsistency.

Conclusion: The liaison offices did not constitute a permanent establishment in India, and no income was liable to be attributed to them on that basis.

Final Conclusion: The additions made by treating the liaison offices as a taxable permanent establishment were unsustainable, and the assessee's appeal succeeded.

Ratio Decidendi: A fixed place of business approved and used only for collecting and transmitting information, without authority to conclude contracts or carry on profit-oriented business, falls within the treaty exclusion for preparatory or auxiliary activities and is not a permanent establishment.

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