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India Court Holds Liaison Office does not Constitute PE under Tax Treaty with Japan

The Delhi High Court recently issued a decision on whether or not a liaison office (LO) in India may constitute a permanent establishment under the 1989 India-Japan tax treaty. The case involved Japan-based Mitsui & Co. Ltd., which had engaged in two power projects in India. In addition, Mitsui maintained an LO in India as permitted by the Reserve Bank of India (RBI) to carry on liaison activities only, which included identifying new purchasers and sellers of goods and merchandise, and reporting information to the head office.

In its returns for the years concerned, Mitsui claimed nil income in respect of the LO because it considered that it met the conditions set by the RBI, which included that the LO does not carry on any trading, commercial, or industrial activity. However, in reviewing the returns, the assessing officer determined that the LO constituted a permanent establishment because the LO and the separate project offices shared a common chief representative and certain telephone expenses of one of the power projects had been allocated to the LO. Based on this, a tax adjustment was issued, which Mitsui appealed, with the case eventually making its way to the High Court.

In its decision, the High Court found in favor of Mitsui. In order for the LO to be treated as a permanent establishment, the Court held that the tax authority must prove that it met the conditions for a permanent establishment as set out in Article 5(1) and 5(2) of the India-Japan tax treaty. In particular, it must be shown that the LO was a fixed place of business through which the business of Mitsui was wholly or partly carried out. Because the LO was clearly not used for the purpose of business in the years concerned and the conditions set by the RBI were met, it could not be considered a taxable permanent establishment. With respect to the shared chief representative and the allocation of telephone expenses, the Court found it was not sufficient to conclude that the LO was carrying on the business of the enterprise.

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