Liaison office not a permanent establishment where activities were limited to communication and information gathering under the treaty.

A liaison office that only communicated with Indian entities, gathered and transmitted information, and had no authority to conclude contracts or undertake commercial activity was held to fall within preparatory or auxiliary functions under Article 5 of the India-Netherlands DTAA. On those facts, the office was not a permanent establishment in India, and the consequential attribution of profits could not be sustained. The addition made on the basis of PE and profit attribution was deleted.

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Issues: Whether the liaison office of the foreign company constituted a permanent establishment in India under the India-Netherlands DTAA and whether the addition made on attribution of profits was sustainable.

Analysis: The liaison office was found to function only as a channel of communication between Indian entities and the head office, without undertaking any commercial, trading or industrial activity in India. Its activities were confined to gathering and transmitting information, with no authority to conclude contracts, no decision-making role, and no business income generated in India. On the facts, the Court held that the activities remained within the scope of a liaison office permitted by the RBI and fell within the preparatory or auxiliary exemption under Article 5 of the treaty. In these circumstances, the fixed place used as a liaison office could not be treated as a permanent establishment, and the consequential attribution of profits was unsustainable.

Conclusion: The addition based on permanent establishment and profit attribution was deleted, and the issue was decided in favour of the assessee.

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