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Rajendra Nayak |
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Ganesh Pai |
The Authority for Advance Rulings (AAR), in the case of K.T. Corporation (2009-TIOL-12-ARA-IT) and the Income-tax Appellate Tribunal (ITAT) in the case of Jebon Corporation (2009-TIOL-323-ITAT-Bang) have both recently examined whether the activities of a liaison office in India would constitute a permanent establishment (PE) under the provisions of the tax treaty between India and Korea. Under the provisions of the tax treaty, a PE is defined as not to include a fixed place of business engaged in carrying out preparatory or auxiliary activities.
In the case of K.T. Corporation, the taxpayer was a company incorporated in Korea and a telecommunications carrier/reseller. The liaison office of the taxpayer in India was involved in preparing a report dealing with India's market scenario in mobile as well as broadband segments. Its other activities included organising seminars, receiving trade enquiries from customers, advertising and collecting feedback from prospective customers/trade organisations.
The taxpayer approached the AAR on whether the activities of the liaison office created a PE for the taxpayer in India. The AAR observed that – (a) the liaison office did not transgress the parameters and the terms prescribed by the central bank of India, (the Reserve Bank of India); (b) the preparation of reports dealing with India's market scenario were not the core business activity of the taxpayer but were in aid or support of the main activities and therefore preparatory/auxiliary in nature. Accordingly the AAR concluded that the liaison office will not constitute a PE of the taxpayer in India under the tax treaty.
In the case of Jebon Corporation, the taxpayer was a company incorporated in South Korea and engaged in the trading of semiconductor components. The taxpayer had established a liaison office in India. During a survey conducted by the tax authorities, it was established that the office performed activities which included identification of customers, understanding their requirements, negotiating the purchase price and procuring confirmed orders from the customers.
Based on the above, the Bangalore ITAT observed that the liaison office's activities were neither preparatory nor auxiliary in nature and the activity profile showed that it partly carried on the core business activities of the taxpayer in India. Accordingly, the ITAT concluded that the liaison office constituted a PE of the taxpayer in India under the tax treaty.
Rajendra Nayak (rajendra.nayak@in.ey.com) & Ganesh Pai (ganesh.pai@in.ey.com)
