Whether LO registered under RBI regulations can be challenged to be a PE?

DIT vs. MITSUI & CO. LTD. - Delhi HC- 27 July 2017

The appeal has been furnished against the question of law as below :-


“1. Whether the Tribunal was right in holding that the Indian branches/offices of the assessee company and their activities cannot be regarded as permanent establishment of the assessee in India and income directly or indirectly attributable to these branches/offices is not taxable in India? 

2. Whether the Tribunal was right in law in holding that the assessee company does not have any permanent establishment in India and its income from business turnover/imports in India was exempt in view of Agreement for Avoidance for Double Taxation between Indian and Japan?


Notes and important findings/ Interpretations of the CASE 


1- It was discussed during the process, the onus to prove ,if the establishment is considered as PE, would be on Revenue by using a reference of Northern Network v. DIT 386 ITR

2- Alternative ground of appeal was not allowed which has never been discussed during the process of initial appeal and thereafter,

3- As per the definition of the PE there must be a fixed place of business from which business of an enterprise is wholly or partly is being carried out,

4- It was noted by the learned court the "the Liasioning Office of the Assessee was not in fact used for the purpose of business. The use of facility solely for the purpose of search or display or for the maintenance of place for business solely for the purchases of goods or collecting information or for any other activity “preparatory or auxiliary in character” would take it outside the ambit of a PE"

5- It was further replied by the learned court that merely an instance where some telephone expenses was attributable to this LO and unable to produce books of account at the LO would not be a sufficient ground to conclude it as PE,

6- It was also noted that since other project office was offered for tax by the assessee under section 44BBB separately hence it would not be correct to treat such PO as PE within the reference of DTAA,

7- A very important reference text has been noted by learned court which was held in National Petroleum Company Construction v. DIT 

“........Whereas a liaison office can act as a channel of communication between the principal place of business and the entities in India and cannot undertake any commercial trading or industrial activity; a project office can play a much wider role. Regulation (6)(ii) of the aforesaid regulations mandates that a “project office” shall not undertake or carry on any other activity other than the “activity relating and incidental to execution of the project”. Thus, a project office can undertake all activities that relate to the execution of the project and its function is not limited only to act as a channel of communication.”

8- It was very well noted by learned court that even the LO was duly regulated by RBI conditions and regulations which primarily restrict such entities to carry out any commercial operations however these should not necessarily be binding to the AO however he has to prove with sufficient reason if anything contrary,

Appeal was hence dismissed and order against AO was given (who applied for LO being a PE)

For full text of judgement of the case please refer https://www.taxpundit.org/phocadownload/Taxpundit_Reporter/Taxpundit_Reporter_2017/August_2017/817Taxpundit7.pdf

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