International Tax Updates

published on 30 January 2025 I reading time approx. 2 minutes

1. Delhi High Court holds ‘Liaison Office’ as not constituting a permanent establishment (‘PE’)

In the instant case, taxpayer was a non-resident company registered in the USA, engaged in the business of rendering Money Transfer Services from a person residing in USA to an individual or an entity in India. For the purposes of facilitating its business and undertaking promotional activities, taxpayer established an office in India and posted a representative therein. This office was described to be the Liaison Office (‘LO’).

Based on the activities carried out in India, Assessing Officer concluded that the taxpayer had fixed place of business which constitutes Fixed Place PE in India and activities undertaken by the LO were sufficient to treat it as a Dependent Agent being present in India.

Subsequently, when matter came to the ITAT, the ITAT decided in favour of the taxpayer and held that the activities undertaken by LO would be liable to be viewed as being merely preparatory or auxiliary in character and also negated the conclusions rendered by the Assessing Officer insofar as the question of Dependent Agent Permanent Establishment (‘DAPE’) was concerned.

Aggrieved by the ITAT’s order, revenue appealed before the Delhi HC. The HC while adjudicating on the issue relied on the various judgements and made following observations :

The functions performed by the LOs were merely supportive of the transaction. Thus, the LOs did not contribute to the earning of profits by the taxpayer.
The gamut of activities which taxpayer undertook could not be described to be the undertaking of an essential or significant part of the principal business activity of the taxpayer.
It was the Indian agents which undertook and discharged the essential functions required for the completion of those transactions. The LO was not even remotely involved in the conclusion of those transactions.
Activities such as market research, promotional activities, training or deployment of software would clearly not breach the threshold of auxiliary functions as are envisaged under the Double Taxation Avoidance Agreement (‘DTAA’).

Based on the above observations, HC concluded that the activities undertaken by the LO were clearly auxiliary in character and would thus clearly fall within Article 5(3)(e) of the DTAA. The LO also did not meet the requirements of a DAPE as per the clauses (a), (b) and (c) of para 4 of Article 5. Accordingly, HC upheld the decision of ITAT that the taxpayer did not constitute a PE in India and there was no DAPE.

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