Facts of the Case

  • Mitsui & Co. Ltd., a Japanese company, was a non-resident entity having its headquarters in Japan.
  • The Assessee had undertaken two projects in India:
    1. Anpara Thermal Power Project (UPSEB)
    2. New Delhi Cable Project (DESU)
  • The Assessee maintained a Liaison Office in India after obtaining RBI approval.
  • The Liaison Office was permitted only to undertake liaison activities and was prohibited from carrying on commercial or trading activities.
  • The Assessing Officer held that the Liaison Office constituted a Permanent Establishment (PE) in India and made additions to taxable income.
  • The Revenue also taxed project profits under Section 44BBB of the Income Tax Act.
  • CIT(A) and ITAT held in favour of the Assessee.
  • Revenue filed appeals before the Delhi High Court under Section 260A.

 Issues Involved

  1. Whether the Liaison Office of Mitsui & Co. Ltd. constituted a Permanent Establishment under Article 5 of the India-Japan DTAA?
  2. Whether income attributable to the Liaison Office was taxable in India?
  3. Whether Project Offices and Liaison Office could be collectively treated as PE?
  4. Whether profits from project activities could be taxed under Section 44BBB?
  5. Whether exemption under the India-Japan DTAA was available?

 Petitioner’s Arguments (Revenue)

  • The Revenue contended that the Liaison Office was actively involved in business activities and therefore constituted a PE.
  • Books of accounts relating to project offices were allegedly connected with the Liaison Office.
  • Common management of Liaison Office and Project Offices showed business integration.
  • Telephone expenses indicated operational overlap.
  • Under Article 5 of DTAA, an office falls within the definition of PE.
  • Since business turnover and imports existed in India, income was taxable in India.
  • Revenue argued profits were attributable directly or indirectly to PE under Article 7 of DTAA.

 Respondent’s Arguments (Assessee)

  • The Assessee argued that the Liaison Office strictly complied with RBI conditions.
  • The Liaison Office only acted as a communication channel and performed preparatory and auxiliary activities.
  • No commercial, industrial or trading activity was carried out through the Liaison Office.
  • Project Offices were separately maintained and separately taxed.
  • Previous ITAT Special Bench decisions had already held that Liaison Office was not a PE.
  • Revenue failed to establish factual foundation for existence of PE.
  • The burden to prove PE was on Revenue.

 Sections Involved

Income Tax Act, 1961

  • Section 9(1) – Income deemed to accrue or arise in India
  • Section 44BBB – Special provision for foreign companies engaged in turnkey power projects
  • Section 143(3) – Scrutiny assessment
  • Section 133A – Survey
  • Section 260A – Appeal before High Court

India-Japan DTAA

  • Article 5 – Permanent Establishment
  • Article 7 – Business Profits Attribution

FERA (Foreign Exchange Regulation Act, 1973)

  • Section 29 (RBI approval conditions)

 Court Findings / Court Order

The Delhi High Court dismissed the Revenue’s appeals and held:

  • A Liaison Office can be treated as PE only if business is wholly or partly carried on through it.
  • Mere existence of an office in India does not automatically constitute PE.
  • Activities of the Liaison Office were preparatory or auxiliary in nature and protected under Article 5(6) of DTAA.
  • Revenue failed to prove that the Liaison Office carried on actual business operations.
  • Project Offices were separate taxable units and could not be merged with the Liaison Office for PE determination.
  • Income attributable to Liaison Office was not taxable in India.
  • Assessee was entitled to DTAA protection.

 Important Clarification

Key Legal Principle Clarified by the Court

For establishing a Permanent Establishment:

  • There must be a fixed place of business.
  • Business must be carried out through that place.
  • Preparatory or auxiliary activities are excluded from PE.

The Court clarified that:
Liaison activities permitted by RBI, without actual commercial operations, cannot constitute a Permanent Establishment merely because the foreign entity undertakes projects in India.

 Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:3969-DB/PMS27072017ITA132005.pdf

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