On 17 September 2019, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) in the case of: Hitachi High Technologies Singapore Pte Ltd vs. DCIT [ITA Nos. 2683 to 2688/DEL/2015], held that a Liaison Office (LO) of Hitachi Technologies Singapore Pte Limited constituted a Permanent Establishment (PE) of Hitachi in India.

Facts of the case:

Hitachi Singapore Ltd, a wholly-owned subsidiary of Hitachi High Technologies (HHT) Corporation, Japan, established a liaison office (LO) in India to carry out preparatory and auxiliary services, including market research and liaison activities.

The Indian tax authorities conducted a thorough examination of the liaison office through tax survey proceedings conducted at the premises of the liaison office in India. Statements of the employees were obtained by the tax authorities, who also extracted copies of e-mail exchanges between the liaison office, head office in Singapore, the customers, and the tax consultants.

Based on these data, the tax authorities concluded that the scope of work carried out by liaison office far exceeded the limited purpose for which it was set up, and that the office was actually involved in commercial activities of HHT Singapore.

However, the main argument made by Hitachi was that LO acted only as a communication channel between the customers and Hitachi and provided logistical support, as permitted by the Reserve Bank of India. Hitachi therefore argued that the activities of the LO were “preparatory and auxiliary” in nature and would fall under the exclusion provided for in Article 5 (7) (e) of the India-Singapore Tax Agreement.

Decisions of the case:

The Tribunal ruled in favor of the tax authorities as Hitachi was involved in trading and since 1988, LO’s activities cannot be considered “preparatory and auxiliary” and would qualify as Hitachi’s core business. The activities of LO therefore formed a PE of Hitachi in India.

Regarding the attribution, the Tribunal found that the basis established by the tax authorities was inappropriate because LO exercised routine and limited functions with negligible risk profile (compared to an independent agent), and therefore instructed the tax authorities to attributable income according to the Transactional Net Margin Method (TNMM).