The Mumbai ITAT has ruled in favor of the assessee, holding that the liaison office (LO) of a Swiss company’s subsidiary in India does not qualify as a permanent establishment (PE). As a result, the addition of business income of Rs. 1.50 crore, attributed to 50% of the income from repairs and maintenance and integrated component services, was deleted.
The assessee, a company engaged in the maintenance, repair, and overhaul of aircrafts, engines, and the leasing of components and spare engines, filed its return of income for the assessment year 2015-16, offering the receipts from lease charges as royalty at 10% of the gross basis under Article 12(2) of the India-Switzerland Double Taxation Avoidance Agreement (DTAA). The revenue observed that the assessee had also earned income from repairs and maintenance and integrated component services that were not offered to tax in India. The revenue believed that these services were taxable under the DTAA as technical services.
However, the revenue held that the liaison office (LO) of the assessee’s Swiss-based subsidiary constituted a service PE or dependent agency PE of the assessee, and accordingly computed the assessee’s income under Rule 10 of the Income Tax Rules. The revenue attributed 50% of the income to a permanent establishment (PE) in India.
The ITAT noted that the liaison office (LO) was permitted to be set up with the approval of the Reserve Bank of India (RBI) and was only authorized to act as a communication channel with parties in India. The liaison office (LO) pertained to the assessee’s subsidiary and not the assessee itself and could only perform activities approved by the RBI, including a prohibition on carrying out any business or trading activities in the LO. The ITAT observed that the employees of the liaison office (LO) carried out only communication and coordination functions, which fall within the exclusionary provisions of Article 5(3)(d) and 5(3)(e) of the DTAA as preparatory and auxiliary activities. Thus, the LO did not constitute a permanent establishment (PE).
The ITAT also pointed out that the employees of the liaison office (LO) did not negotiate, finalize, or discuss the mechanics of contracts, including pricing, with the assessee’s customers. Furthermore, the liaison office (LO) did not have any infrastructure, facilities, or relevant stocks of spare parts to carry out repairs and maintenance, piece part repairs, integrated component services, and replacement of parts. The employees in India were not of a high enough level in the hierarchy of the company to negotiate with customers, sign contracts, or run the assessee’s office on their own.
The ITAT took note of the sample engine repair and maintenance agreement and invoices, which showed that the assessee did not carry out any activities through the liaison office (LO) other than routine communication and client coordination. As a result, the ITAT held that in the absence of a permanent establishment (PE), the business income earned by the assessee was not taxable under Article 7 of the DTAA.
The ITAT also rejected the revenue’s contention that the assessee’s Indian subsidiary, which was a dormant company with its name struck off the Registrar of Companies records, was its permanent establishment (PE). The ITAT held that just because an Indian company is controlled by a Swiss company or that a Swiss company carries out business in India, it does not result in the Indian company being considered as a permanent establishment (PE) of the Swiss company in India.
The ITAT criticized the revenue for not conducting an inquiry under section 131 and 133(6) of the Income Tax Act to strengthen its allegations about the non-fulfillment of the conditions imposed by the RBI. Instead, the ITAT stated that the assessing officer relied on the documents available on record supplied by the assessee and applied the wrong principles to the facts at hand.
In summary, the Mumbai Income Tax Appellate Tribunal (ITAT) ruled in favor of the taxpayer (Assessee) and held that the Liaison Office (LO) of the Swiss company’s subsidiary in India does not constitute a Permanent Establishment (PE). The ITAT observed that the LO was permitted to be set up as a communication channel with parties in India, pertained to the Assessee’s subsidiary, and could only perform activities approved by the Reserve Bank of India, which did not include carrying on any business or trading activities. The employees of the LO carried out only communication and coordination functions, which were considered to be preparatory or auxiliary in nature and thus, did not constitute a PE. The ITAT also noted that the LO did not have the necessary infrastructure, facilities, or relevant stocks of spare parts to carry out repairs and maintenance, integrated component services, or replacement of parts. The ITAT concluded that the LO did not carry out any activities other than routine communication and client coordination, and as such, did not constitute a PE. The business income earned by the Assessee was therefore not taxable under Article 7 of the India-Switzerland Double Taxation Avoidance Agreement (DTAA). The ITAT rejected the Revenue’s argument that the Assessee’s Indian subsidiary was its PE, stating that mere control of an Indian company by a Swiss company does not result in the Indian company being considered a PE of the Swiss company.
(Related Assessment year : 2015-16) – [S.R. Technics Switzerland Ltd. v. ACIT (International Taxation) [TS-1018-ITAT-2022(Mum)] – Date of Judgement : 25.11.2022 (ITAT Mumbai)]
