The assessee is a public company incorporated in Japan which is engaged in the business of import/export as well as domestic sales of dye stuffs, chemicals, plastic, machinery, electronic materials, cosmetics, health foods and medical equipment. In 1974, the assessee opened a liaison office in Mumbai after obtaining necessary approvals from the Reserve Bank of India. In terms of the permission of RBI, liaison office’s activities are confined to the liaison and representative activities and it is not permitted to carry out any business/commercial activities in India. under section 143(3) of the Act, AO did not agree with the submissions of the assessee.

The Assessing Officer on the basis of documents/books of accounts and other papers impounded during the course of survey under section 133A of the Act came to the conclusion that liaison office’s activities are not confined to the liaison work only, but it is also actively engaged in business activity (i.e. sales in India).

Tribunal found out that nothing has been brought on record to suggest that the RBI has found activities of the liaison office as being non-compliant with the terms and conditions of its permission and, therefore, the said aspect supports the assertion of the assessee that liaison office was performing activities as permitted by the RBI, which were preparatory and auxiliary in nature and not the core business activity independent of the Head Office. Accordingly, the Tribunal held that the liaison office in Mumbai does not constitute permanent establishment of the assessee in India under the provisions of Double Taxation Avoidance Agreement. (AY. 2001-02,  2003-04)