The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) observed that activities by Liaison Office (LO) proprietary in nature and hence is not Permanent Establishment (PE) under India Switzerland Double Taxation Avoidance Agreement (DTAA).
The assessee, S.R. Technics Switzerland Limited, offered only lease charges to tax in India as royalty at 10% on gross basis as per Article 12(2) of the India-Switzerland DTAA. Rest of the streams of revenue from repairs and maintenance and form integrated component services, have not been offered to tax, by claiming benefit of DTAA saying that the balance services are not in the nature of technical services and hence neither taxable under section 9(1) (vii) of the Income Tax Act, 1961 nor Article 12 the DTAA. It also claims that it does not have a Permanent Establishment in India.
However, AO was of the opinion that assessee has a LO as a Service PE or Dependent Agency Permanent Establishment (DAPE), there is no option but to perforce resort to estimation of the taxable profits of the assessee as per Rule 10 of the Income Tax Rules.
The AO held Rule 10(ii) will not be applicable in the instant case since the global profits and gains of the assessee have not been computed in accordance with the provisions of the Indian Income Tax Act. The income of the assessee is, therefore, liable to be computed as per Rule 10(i) read with rule 10(iii) of the Income Tax Rules, which provides that income of the assessee may be determined at a reasonable percentage of the turnover.
Against, this order of AO passed under Section 143(3) read with Section 144C (13) of the Income Tax Act, the assessee preferred this present appeal before the Tribunal.
The AO worked on an assumption that simply by having a liaison office in India would result in setting up a PE within the meaning of DTAA, this assumption of the AO in these circumstances (conditions imposed by RBI) being contrary to the well-established principles as well as provisions of law.
Once an activity (as can be confirmed with reference to conditions imposed by RBI while granting the licence to open LO) once an activity is construed as being subsidiary or in aid or support of the main activity, it would fall within the category of preparatory or often auxiliary character.
The Bench comprising Vikas Aswathy, Judicial Member and Gagn Goyal, Accountant Member observed that “We are of the opinion that the LO in India does not constitute PE in India under Article 5 of India Switzerland DTAA because. The LO does not constitute a fixed place through which business of assessee is carried out in India.”
“The LO did not carry any activity, beyond that permitted by the RBI. The activities carried by the LO are thus, preparatory (auxiliary in nature). The activities/operations of the assessee in connection with the contracts are carried from outside India” the Tribunal noted.
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