2016 (1) TMI 1106 - AT - Income Tax

Permanent Establishment(PE) in India - whether assessee only having activities that are proprietary or auxiliary in nature - Held that - We have observed from the findings of the ld. CIT(A) that the assessee has been involved in supplying the literature relating to marketing and sales without any participation in actual sales activity. The Israeli company is selling the products to the distributors as per the requirements directly from Israel and also makes efforts to services and maintain products used within the territory which are sold directly by the Israeli company. The Israeli company further sells to the distributors within the territory not being the assessee and that these distributors further resale the products to ultimate customers independently. The Liaison office only provides certain servicing of the equipments to the distributors for which the expenses are reimbursed by the Israeli company. The Liaison office in India is merely in the nature to facilitate the contract between the distributors and the Israeli company. The distribution contract per se at page of the paper book do not result into any generation of income and therefore the activities of the assessee have to be definitely considered to be proprietary and auxiliary in nature. The ld. AR has brought to our notice RBI approval at page 10 of the paper book which has been received by the assessee for the purposes of undertaking liaison activities and to act as a communication channel between the parties in India and the Israeli company. In view of the foregoing discussion we conclude that the assessee does amount to a PE in India and are of the considered opinion that the assessee is a liaison office and are providing services which are proprietary or auxiliary in nature. We therefore do not find any infirmity with the findings of the ld. CIT(A). See UAE Exchange Centre 2009 (2) TMI 56 - DELHI HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the activities of the assessee in India are preparatory or auxiliary in nature.
2. Whether the assessee has a permanent establishment in India.

Issue 1: Activities of the Assessee in India
The case involved an appeal by the Revenue against the order of the ld. CIT(A) regarding the nature of the activities carried out by the assessee in India. The Revenue contended that the activities were not merely preparatory or auxiliary but constituted a permanent establishment (PE) in India. The ld. CIT(A) referred to the provisions of the Indo Israel double taxation avoidance agreement and concluded that the assessee's activities were indeed of a preparatory and auxiliary nature. The ld. CIT(A) relied on a decision of the Hon'ble Jurisdictional High Court and deleted the addition made by the Assessing Officer.

Issue 2: Permanent Establishment in India
The main issue before the Tribunal was whether the assessee had a permanent establishment in India or was engaged in activities that were only preparatory or auxiliary in nature. The ld. AR representing the assessee argued that the Indian liaison office was solely engaged in liaison activities, acting as a communication channel between the head office in Israel and parties in India. It was emphasized that the office did not conduct any trading, commercial, or industrial activities in India, nor did it generate any business income in the country. The ld. AR highlighted that the company in Israel made sales through independent distributors directly from Israel, with the Indian office primarily servicing the equipment sold by the company.

The ld. DR, on the other hand, contended that the Indian office played a crucial role in the sales process in India and thus constituted a permanent establishment. The Tribunal examined the arguments, the judgments cited by the ld. AR, and the decision of the Jurisdictional High Court in a similar case. It was observed that the activities of the Indian liaison office were limited to providing services to distributors, facilitating contracts between parties, and servicing equipment, without directly participating in sales activities or generating income. The Tribunal noted that the activities fell under the category of preparatory and auxiliary services, as per the Indo Israel DTAA.

In conclusion, the Tribunal upheld the decision of the ld. CIT(A) and dismissed the Revenue's appeal, stating that the assessee did not have a permanent establishment in India and its activities were proprietary or auxiliary in nature. The judgment highlighted the importance of analyzing the nature of activities carried out by foreign entities in India to determine the existence of a permanent establishment for tax purposes.