The Liaison Office (LO) of non-resident taxpayer would qualify as business connection PE in India if the activities of the LO not confined to purchase of goods in India for the purpose of export

Columbia Sportswear Company Vs. DIT (International Taxation), Bangalore- (Advance Ruling Authority) – In addition to the activities relating to the purchase of goods, the Liaison Office was carrying out various activities such as ensuring the choice of quality material, occasional quality testing, conveying of requisite design, picking out competitive sellers, etc. Further, the Liaison Office facilitated the business of the applicant in Eygpt and Bangladesh. It will be unrealistic that all the activities other than the actual sale of the goods are not integral part of the business of the applicant and have no role in the profit being made by the applicant on the sale of its branded products.

Further, all its profits cannot be said to have accrued outside India since the sales are made outside India. Considering the nature of the activities carried by the Liaison Office in India, and that the activities supported the business in Egypt and Bangladesh, the operations of the applicant in India cannot be said to be confined to the purchase of goods only in India for the purpose of export. Hence the purchase/ sourcing exemption under the Act is not available to the applicant. The Liaison Office constitutes a fixed place PE of the applicant in India under Article 5(1) of the DTAA, since the applicant was carrying at least a part of its business through such office (except the selling activity). With respect to the PE exclusion clause under Article 5(3)(d) of the DTAA, it was held that this exclusion is not applicable since the activities of the Liaison Office are not limited only to purchase of goods or merchandise or for collection of information for the enterprise. Further, as the Liaison Office is engaged in conducting a substantial part of the business of the applicant, its activities cannot be classified as preparatory or auxiliary as understood under the exclusionary clause 3(e) of Article 5 of the DTAA.  Accordingly, the applicant shall be taxable in India but only in respect of the income which can be attributed to the operations carried out by the Liaison Office in India.

Finally, the AAR held that the activities, functions and operations of the LO lead to constitution of a PE of the Applicant in India , and hence its income attributable to the operation carried out in India are taxable in India .

BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI

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