9911796707
TMI Blog2009 (5) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... rs listed out by the RBI. The application has been signed by the General Manager of the L.O., namely Mr. Siung-Yong Shin, who has, reportedly, been directed by the Head Office to obtain the ruling on behalf of the applicant. 3. Details filed along with the application further reveal that pursuant to the opening of the L.O. in 2004, the applicant entered into a Reciprocal Carrier Service Agreement (in short RCSA), dated 13.8.2007, with Vodafone Essar South Ltd. (in short VESL) which is an Indian company registered in India with the address at C-48, Okhla Industrial Area, Phase-II, New Delhi. The applicant and VESL are telecommunication carriers/resellers and have agreed to enter into the agreement to provide certain services to each other. Under this agreement, they have agreed to interconnect with each other and to purchase and provide the services by a date confirmed between them. As per the agreement, the applicant shall bear the investment cost, the connection and maintenance of the connecting facilities between its Network and VESL's Foreign POP on locations (city and country) as may be mutually discussed and agreed. Similarly, VESL shall bear the investment cost, the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not as sought by the applicant, the payments received by the applicant from VESL under the above agreement may be taxable in terms of section 5(2) read with section 9(1)(vi), 9(1)(vii) of the Act and Article 13 of the DTAA, avers the Revenue. 6. In the supplementary statement of facts filed on 24.2.09, the applicant has given the details of activities undertaken by the L.O. in India. It has been stated that the L.O. was set up in India to act only as a communication channel and it became functional within the restrictions imposed by the R.B.I. The applicant's counsel has further submitted that the L.O. is, no doubt, a fixed place of business (i.e. an office) maintained exclusively for the purpose of collecting information for the applicant which is in the nature of preparatory and auxiliary character for the enterprise. Facts being so, it has been contended that the L.O. is deemed not to be Permanent Establishment especially in terms of Article 5(4)(d), 5(4)(e) and 5(4)(f) of the Treaty. Further, the LO. in India, as submitted, only carries out preparatory or auxiliary activities such as (i) holding of Seminars, Conferences (ii) receiving trade enquiries from the customers (iii) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty in India) Regulations, 2000. (vi) The office in India will furnish to our Regional Office (on an yearly basis) a certificate from the auditor that the office has complied with the terms and conditions stipulated in the letter of approval issued by the Reserve Bank of India and that all the expenses are met by way of inward remittances. In the case of winding up of the office, you may approach Regional Office with the documents as required in terms of Regulations 6(1)(iii) of Notification No. FEMA.13/RB-2000 dated 3rd May 2000. (vii) The office in India will not render any consultancy or any other services directly/indirectly, with or without any consideration. (viii) The office in India will not have any signing/commitment powers, except than those which are required for normal functioning of the office, on behalf of the Head Office. (ix) In case you desire to open a Head Office account in the books of your liaison office in India, we hereby grant you our approval to maintain such an account subject to the conditions that the credits to the account should represent the funds received from Head Office through normal banking channels for meeting the expenses of the office. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preparatory or auxiliary activities. 12. To appreciate the point at issue, it would be quite apposite to advert, first, to paras 1,2,& 4, which are relevant for our purpose, of Article 5 of the Treaty between India & Korea (165 ITR (St) 191) which is as under:- Article 5: Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" shall include especially : (a) a place of management; (b) a branch; (c) an office; ……. 3. xxx xxx xxx 4. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI generally lays down restrictive conditions, as referred to in preceding para, at the time of granting permission for the opening of a Liaison Office. 15. From the above, it is evident that even as per statutory provisions, the activities of a Liaison Office are much restricted and it cannot legally venture into securing orders from the customers in any manner either directly or indirectly. No doubt, the Liaison Office is a fixed place and the activities conducted by it are seemingly business activities but these activities are restricted to preparatory or auxiliary activities only. Besides, the plain meaning of the word 'auxiliary' is found in Black's Law Dictionary 7th Edition at page 130 as 'aiding or supporting, ancillary and subsidiary'. Such 'aiding', 'assisting' or 'supporting' are in relation to the main activities of the enterprise. 16. It has been urged by the applicant that maintenance of liaison office mainly for the purpose of communication channel between the Head Office of the applicant and the parties concerned is covered particularly by exclusionary clause (d), (e) and (f) as referred to above in Article 5(4) of the Treaty. It is emphasized that no business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of a preparatory or auxiliary character. Thus the provisions of paragraph 4 are designed to prevent an enterprise of one State from being taxed in the other State, if it carries on in that other State, activities of a purely preparatory or auxiliary character. 23. …. To a considerable degree it limits that definition and excludes from its rather wide scope a number of forms of business organizations which, although they are carried on through a fixed place of business, should not be treated as permanent establishments. It is recognized that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realization of profits that it is difficult to allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how contract, if such activities have a preparatory or auxiliary character." 24. It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the final contracts entered into by the applicant with VESL. Plainly to our minds, the instant activities viz. preparation of reports dealing with India's market scenario in Mobile as well as broadband segments etc. are in 'aid' or 'support' of the main activities and accordingly rest in the realm of preparatory and auxiliary activities. The liaison office is very much covered within the exclusionary clause (e) and (f) of Article 5(4) of the Treaty and consequently can't be regarded as a Permanent Establishment in the sets of facts presented. It will be quite befitting to recall the following observation of the Supreme Court in the case of D.I.T.(International Taxation) vs. Morgan Stanley 292 ITR 416, 427:- "There is one more aspect which needs to be discussed namely, exclusion of P.E. under Article 5(3). Under Article 5(3)(e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a P.E. Article 5(3) commences with a non obstante clause. It states that notwithstanding what is stated in Article 5(1) or under article 5(2) the term P.E shall not include maintenance of a fixed place of business solely for adve ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
