(2009 TIOL 12 ARA IT) (AAR)
Articles 5(1), 5(2), 5(4), 13,
India-Korea DTAA;
S. 9(1)(vi)/(vii), Income-tax Act
Dated : 29-5-2009
Issue :
Whether a liaison office in India involved in collecting
and transmitting of information for a Korean company would, by virtue of
Article 5(4) of India-Korea DTAA, not constitute a PE ?
Facts :
The applicant was a Korean company (‘KorCo’). KorCo had
obtained RBI’s permission for opening a liaison office (‘the LO’) in India for
the sole purpose of acting as a communication channel between the head office
and companies in India. While granting its permission, RBI had stipulated
various conditions and parameters subject to which the LO was to function.
The issue before the AAR was whether the LO of KorCo would
constitute its PE in India. Together with its application, KorCo had furnished
copy a Reciprocal Carrier Service Agreement (‘RCSA’), which it had executed
with an Indian company (‘IndCo’) after opening of its LO. Both KorCo and IndCo
were telecom carriers/resellers and had agreed to provide inter-connection
services to each other. IndCo was to provide and maintain connecting
facilities in India and KorCo was to do the same outside India. Each party was
to raise invoice on the other party in respect of the traffic terminated on
its side during each calendar month.
On the merits of the application, the tax authorities had
commented that the applicant had not sought ruling on the question of
taxability of payment made by IndCo to KorCo but had sought ruling only on the
limited issue whether the LO would constitute a PE. The tax authorities
mentioned that unless the applicant furnishes its reply on the following four
specific questions, it was not possible to conclude the issue :
(i) What was the role of LO in pre-bid survey carried out
before entering into the Agreement ?
(ii) How was the feasibility report prepared, did the LO
play any role in it ?
(iii) Were the employees of the LO involved in the
technical analysis of the project ?
(iv) Is the LO involved in the technical analysis of the
project or the execution of any part of the contract ?
Further, the tax authorities contended that independent of
the issue under consideration, the payments received by KorCo from IndCo were
taxable u/s. 9(1)(vi)/(vii) of the Act and Article 13 of India-Korea DTAA3.
By a supplementary statement of facts, KorCo furnished
information on the questions raised by the tax authorities. It submitted that
the LO was to act only as a communication channel within the restrictions
imposed by RBI. While it was a fixed place of business, its purpose was only
to collect information and to carry out preparatory and auxiliary activities
such as :
(i) Holding of seminars/conferences.
(ii) Receiving trade inquires from customers.
(iii) Advertising about the technology used by the
applicant in its wired/wireless services and replying to queries of
customers.
(iv) Collecting feedback from perspective customers.
The LO had not played any role in the pre-bid survey nor
had it involved itself in the technical analysis of any project before KorCo
executed agreement with IndCo. The applicant also furnished affidavit of the
general manager of the LO to this effect. The affidavit also stated that the
LO did not have permission/authority to conclude, nor had it executed, any
trade contract. Similarly, LO did not procure any order nor did it conclude
any negotiation. The counsel for the applicant emphasised that the LO was only
a representative office acting within the restrictions imposed by RBI and had
not undertaken any trading activity, nor had it executed any business
contract, nor had it rendered consultancy or any other services. Thus, the LO
was not a fixed place of business through which the business of KorCo was
wholly or partly carried on but it was a fixed place which had undertaken only
preparatory or auxiliary work. Hence, it could not be regarded as a PE under
Article 5(1), 5(2) read with clauses (d), (e) and (f) of Article 5(4) of
India-Korea DTAA.
Held :
The AAR referred to : paragraphs 1, 2 and 4 of Article 5 of
India-Korea DTAA; definition of ‘liaison office’ as per FEMA; the permitted
activities for a liaison office as per FEMA; and legal definition of the term
‘auxiliary’.
The AAR expressed its view that collecting information for
an enterprise by a liaison office can be considered to be an auxiliary
activity unless collection of information is primary purpose of the
enterprise. In case of KorCo, collection of information was not its primary
purpose and hence, collecting and transmitting of information by the LO to the
Head office was auxiliary activity particularly when the LO had no connection
with telecom services and network and the contracts related thereto. Hence, LO
could not be considered as PE in terms of Article 5(4)(d), (e) of India-Korea
DTAA. The AAR supported its view with certain extracts from the commentary on
OECD Model Convention, which inter alia, stated that the decisive criterion is
whether the activity of fixed place of business in itself was an essential and
significant part of the activity of the enterprise as a whole.
The AAR held that, as per the facts available, the LO had not performed ‘core business activity’ but had confined itself only to preparatory and auxiliary activity and as such the LO was covered within the exclusion in Clauses (e) and (f) of Article 5(4) of India-Korea DTAA. Hence, it could not be regarded as a PE in terms of Article 5(1). Reliance in this regard was made by the AAR on the Supreme Court’s decision in DIT (International Taxation) v. Morgan Stanley and Co Inc, (2007) 292 ITR 416 (SC) and Delhi High Court’s decision in UAE Exchange Centre v. UOI, (2009) 223 CTR 250 (Del.).
