The assessing officer (‘AO’) erred in concluding the business of the assessee’s liaison office (‘LO’) engaged in providing auxiliary services to its head office in Japan, as creating a fixed place permanent establishment (‘PE’) of the Japanese company in India. Accordingly the AO held that, the profits of the company shall be taxable in India to the tune of such profits attributable to PE.
The assessee preferred an appeal with the dispute resolution panel (‘DRP’) on the impugned order of the AO. However, the DRP disallowed the assessee’s appeal citing that the nature of powers accorded in the power of attorney (‘POA’) are open ended and thus allows the LO to carry out core activities in India on behalf of the head office.
On appeal with the tribunal, the AR submitted that the activities of the LO are only preparatory/auxiliary in nature and the LO is not authorised to discuss the terms of the contract or to bind the head office or to initiate contracts. Further, it was submitted that the purchase orders were directly raised by the Indian customers on the head office and the quotation and invoices, which were signed/executed directly by the head office, were sent to the Indian customers without any involvement of the LO in India.
The tribunal, on the perusal of the power of attorney, held that the clauses of the POA substantiate that the power granted to the LO are specific and that the AO’s conclusion that the POA granted unfettered powers to its LO is incorrect. Further the tribunal emphasised that no doubt the AO can investigate, call for evidences and come to a conclusion where any income earning activity has been carried out by the LO so as to construe it as fixed P.E. but, it is beyond the jurisdiction of the AO to adjudicate and conclude that the assessee has filed false declarations before the RBI. Since, RBI has not found any violations of conditions laid down by it while permitting the assessee to establish a LO; in such circumstances no adverse inference can be drawn.
The tribunal, based on the documents submitted by the assessee to the AO and DR, held that since revenue was unable to bring on records any material to demonstrate that the LO is carrying core business activities and that such activities warrant that the activities of the LO be held as a PE in India, granted the appeal in favour of the assessee.