Preparatory or auxiliary liaison functions do not create a Permanent Establishment without evidence of independent commercial activity.

A liaison office maintained only for information gathering and liaison work was treated as falling within the treaty exclusion for preparatory or auxiliary activities, because the record did not show that it independently concluded contracts or carried on commercial activity beyond RBI-approved scope. The Revenue's burden to prove a Permanent Establishment in India was not met, so the income was not taxable in India. Post-assessment material was also not accepted as valid support, as its admissibility under the appellate evidence framework was not established and it did not show trading activity in the relevant year.

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Issues: (i) Whether the assessee's liaison office in India constituted a Permanent Establishment under the India-Japan treaty and its income was taxable in India. (ii) Whether the survey material and other post-assessment evidence relied upon in appeal could be used to support the Revenue's case.

Issue (i): Whether the assessee's liaison office in India constituted a Permanent Establishment under the India-Japan treaty and its income was taxable in India.

Analysis: The exclusionary clause for a fixed place maintained solely for preparatory or auxiliary activities governed the controversy. The earlier Special Bench decision in the assessee's own case had held that the liaison office only collected information and performed liaison work, and that finding had been consistently followed in later years. The material relied upon by the Revenue did not show that the liaison office independently concluded contracts, transacted business, or exceeded the limited scope permitted by the RBI approvals. In the absence of cogent material showing a departure from the earlier position, the burden resting on the Revenue was not discharged.

Conclusion: The liaison office did not constitute a Permanent Establishment in India and the income was not taxable in India; the finding is in favour of the assessee.

Issue (ii): Whether the survey material and other post-assessment evidence relied upon in appeal could be used to support the Revenue's case.

Analysis: The evidence gathered after completion of assessment was not shown to have been obtained pursuant to a proper direction under section 250(4), and the appellate record did not establish admissibility under the procedural framework governing fresh evidence. In any event, the materials relied upon did not demonstrate that the liaison office carried on trading or commercial activity in the relevant year. Once the primary issue of taxability failed, the dispute on computation also ceased to survive for adjudication.

Conclusion: The post-assessment material could not validly sustain the Revenue's case, and the related computational dispute was not adjudicated; this is in favour of the assessee.

Final Conclusion: The appeal succeeded because the liaison office was held to be engaged only in preparatory and auxiliary functions, and the Revenue failed to justify departure from the settled earlier view.

Ratio Decidendi: A fixed place of business that performs only preparatory or auxiliary liaison functions, without authority to conclude business or evidence of commercial activity beyond the permitted scope, does not amount to a Permanent Establishment under the treaty exclusion.

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