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2014 (11) TMI 508 - HC - Income TaxLiability to tax on business income - Article 5(3)(e) of India-USA DTAA LO constitutes PE or not - Whether the Liaison Office ('LO') was engaged in marketing/ promoting assessee's products in India Held that:- The AO during the course of the assessment proceedings, had called upon the assessee to explain the nature of its activities - assessee also explained before the AO in pursuance of a notice to show cause dated 13 February 2006 that initially it had an agent in India for the purpose of contacting buyers but during the year relevant to the AY, the assessee had set up a liaison office - The assessee also explained before the AO that the activities of the liaison office also included various activities, for instance, coordinating the commercial activities like purchase orders, letters of credit and shipment - This was carried out through the office of the assessee at NOIDA by the Chief Representative Officer and other technical staff. The office also coordinated the technical service and sales visits of the company's representatives who visited India from the overseas office - The Tribunal rightly relied upon relevant documentary material in arriving at the conclusion that the activities of the liaison office established that it was promoting the sales of the assessee in India and the AO was justified in holding that the income attributable to the liaison office was taxable in India - the activity of the liaison office during the year relevant to the AY was not of a preliminary or preparatory nature so as to attract the exclusion under Article 5(3)(e) of the DTAA thus, no substantial question of law arises for consideration Decided against assessee. Article 7(1) of the DTAA provides that if an enterprise carries on business in the other contracting State through a permanent establishment situated therein, "the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to" (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment. The AO did not apply his mind to this crucial requirement which defines the extent of taxability - The AO followed a simplistic course of deducting the expenses of ₹ 38.86 lacs from the receipts of ₹ 63.72 lacs from the head office - Whether any part of the profits were attributable to the permanent establishment, has not been considered either in the order of the AO or, for that matter, by the Tribunal thus, the matter is remitted back to the AO for fresh determination of the taxable income having due regard to the provisions of Article 7 of the DTAA Decided partly in favour of assessee.
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