Liaison office functions and permanent establishment: preparatory or auxiliary activities do not create Indian taxability under the treaty.

A foreign enterprise's Indian liaison offices will not constitute a permanent establishment under the India-Japan tax treaty where their functions are limited to passing information, coordinating communications and other preparatory or auxiliary activities incidental to contract formation. On the facts described, the Revenue's material did not establish trading or sales activity in India, and the regulatory permissions showed the offices were authorised only as liaison offices. In that situation, the treaty definition of permanent establishment prevails over the general deeming rule in section 9(1) of the Income-tax Act, so no business connection taxable in India is made out.

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Issues: Whether the assessee's Indian branches constituted a permanent establishment under the India-Japan double taxation agreement, and whether the assessee had a business connection in India so that income was taxable under section 9(1) of the Income-tax Act, 1961.

Analysis: The activities of the Indian offices were examined in the light of the treaty definition of permanent establishment and the carve-out for fixed places maintained solely for advertising, supply of information, or scientific research of a preparatory or auxiliary character. The evidence relied on by the Revenue was found insufficient to show that the branches were carrying on trading or sales activity in India. The correspondence and the regulatory permissions showed that the offices were permitted to function only as liaison offices, and the work done by them was confined to passing on information and coordinating communications incidental to contract formation. On that basis, the treaty provisions were held to prevail over the general deeming provision of section 9(1).

Conclusion: The assessee did not have a permanent establishment in India and no business connection bringing its income to tax under section 9(1) was made out; the finding is in favour of the assessee.

Ratio Decidendi: Where the Indian presence of a foreign enterprise is confined to liaison and supply-of-information functions that are preparatory or auxiliary to contract formation, and no trading activity in India is established, no permanent establishment arises under the treaty and section 9(1) cannot be invoked to tax the income in India.

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