TaxTMI 
TaxTMI 
2007 (10) TMI 321
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....cts and circumstances of the case, the AO was of the view that the appellant was having a business connection in India Under Section 9 of the Act as well as permanent establishment under article 5 of the Double Taxation Avoidance Agreement (in short 'DTAA') between India and UK. The business connection and permanent establishment were found to be in existence in India in the form of a UK incorporated subsidiary company of the appellant in the name of M/s Rolls Royce India Limited (in short 'RRIL') which was having its offices in India. It was found by the AO that the marketing and sale of goods to Indian customers were carried out by the appellant through the said permanent establishment situated in India. As the appellant was found to have carried out its business activities through the permanent establishment situated in India, the AO was further of the view that the profits attributable to the permanent establishment was liable to tax in India in terms of article 7 of the DTAA. The AO, accordingly, invoked Rule 10 of the Income-tax Rules, 1962 and attributed 100% of the profits arising from sale of goods to Indian customers in India in the assessment years 1997-9....
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....n depicts the real picture of the business activities carried of by the appellant and RRIL in India which leaves no doubt to hold that there is not only business connection but also a PE in India as per Article 5 of Indo-UK DTAA and hence the income is to be brought to tax in India. It was also held that since no separate accounts are maintained for India operations, the global accounts are to be considered and applying Rule 10 of Income-tax Rules, 1962, the income is to be computed. Learned CIT(A) held that through Indian PE, significant and major parts of it core business activity relating to marking and selling of its goods in India is carried out. Thus, as per Rule 10 of Income-tax Rules read with Article 7(4) of the Indo-UK DTAA, the profit attributable to PE shall be 75% of the total profits arising to the appellant from sales made to Indian customers. 5. Though several grounds are raised, the assessee challenges the order on following grounds, namely: (1) The issue of notice Under Section 148 for framing assessment Under Section 147 is bad in law. (2) There is no business connection in India within the meaning of Section 9(1)(i) of the Act read with Section 5(2) of the ....
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....he AO noted in the reasons recorded that in asstt. order far asstt. year 2001-02, it was found that the assessee has PE in India in the form of RRIL and the supplies are made to customers in India is attributable to it. The assessee has not filed return Under Section 139 of the Act. As per Explanation 2 to Section 147, where no return of income has been furnished although his total income assessable is exceeding the maximum amount not chargeable to tax. On the basis of such reasons, the AO formed an opinion and issued notice Under Section 148. Shri Vikas Srivastava submitted that effectively reasons recorded for all these years are similar to reasons recorded for four years. Since there was no material while issuing notice Under Section 148 to form an opinion that income has escaped assessment particularly when the Tribunal by its order dated 19.4.2005 has held that there is no PE in India. Thus, the ground for re-Opening is non existent and hence, assessment framed pursuant to incorrect assumption of jurisdiction should be annulled. 8. Learned Counsel for assessee further submitted that for the first four years i.e. Asstt. Years 1997-98, 1998-99, 1999-2000 and 2000-01 the additio....
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....hat under Article 5(4) of Indo-UK Treaty, an agent of dependent status can be considered as PE only if (a) he habitually exercises any such authority to negotiate and enter into contracts for and on behalf of the enterprises; or (b) he habitually secure orders wholly or almost wholly for such enterprise. From the minutes of the meeting and other documents, it is clear that the employees of RRIL has no authority to negotiate and enter into contracts leave apart exercising such authority habitually. The activity of RRIL are merely of a preparatory or auxiliary character. He also submitted that there is no fixed place PE in India. Article 5(1) of the Treaty defines 'permanent establishment' as a fixed place of business through which the business of the enterprise is wholly or partly carried on. However, to apply this Article, the premises should belong to or must be at the disposal of the enterprise whose business is being carried on. In the present case, the premises belonged to RRIL and not the appellant and the premises are not utilized by the appellant. Thus, the premises of RRIL cannot constitute fixed place PE of the appellant. He also submitted that even under Article 5....
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.... a principle-to- principal basis. In the assessment of the amount of profits, allowance will be made for the expenses incurred, including the agent's commission, in making the sales. If the agent's commission fully represents the value of the profit attributable to his service; it should prima facie extinguish the assessment. Even the Transfer Pricing Officer has held that for the activities of RRIL cost plus 14.51% is the arm's length price. Thus, attribution of any further income is not justified. 12. Without prejudice to all the above submissions, it was submitted that even if any income is to be attributed to the operations in India, the same cannot be as high as 75% of the profit on the sales made in India. Reference was made to the decision in the case of Carborandum Co. v. CIT 108 ITR 335. He also submitted that the core activity of the assessee is not in marketing the products in India. The core activity is manufacturing which is in UK. The contract of the nature executed in India does not require more than 10% of its total activities in India and hence, not more than 10% of the profit should be attributed to the Indian operations. Reliance was placed on the d....
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....ace, strategic planning etc. on behalf of assessee. These facts would not have been noticed but for the survey conducted and the statement of MD of RRIL Mr. Tim Jones being recorded. Various documents found during survey were examined by the AO as well as learned CIT(A) in detail and the inescapable conclusion that could be drawn was that (i) the appellant has a fixed place of business in India in the form of premises of RRIL. Hence, under Article 5(1) of Indo UK DTAA, it has PE in India; (ii) Under Article 5(2)(f), premises used as a sales outlet or for receiving or soliciting orders will also be includible in the term 'permanent establishment'. Though at first instance, the premises are used by RRIL, RRIL recovers the entire cost for use of such premises from appellant. Such premises are also used for receiving and soliciting orders. Thus, even under Article 5(2)(f), the assessee has a PE in India; (iii) Under Article5(4) of Indo UK DTAA, an agent if he is of a dependent status and if habitually, secure order for the enterprise such enterprise is said to have a PE in such state. The fact is admitted by the assessee that RRIL is a dependent agent of the appellant in India.....
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....L and Mr. Prakeek Dabral of RRIL are assigned such job. Various other actions revealed that the relationship to the maintained with IAF and particularly with various key decision makers of IAF are to be handled by the employees of RRIL only. Even some of the personnel in Ministry of Defence like Defence Secretary, Joint Secretary and others are to be handled by Mr. Tim Jones, the MD of RRIL. These documents relate to all the years under appeal which gives an impression that but for the involvement of RRIL at each and every level i.e. from identifying the key players for relationship till negotiating and convincing IAF to convert letter of intent into orders, the employees of RRIL are involved at all stages. This fact came to light only after survey was conducted. Thus, it will be incorrect to hold that in respect of first four years there were no other documents to hold the assessee as having any business connection or having PE in India. On the contrary, the Tribunal was misguided on earlier occasion by the assessee in saying that apart from the four minutes of the meeting there were no other documents to lead to conclusion for having any PE in India. These are continuous activiti....
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.... CIT(A) maybe upheld. 16. We have heard the parties at length. In our opinion, following questions arise for consideration: (1) Whether the AO was justified in issuing notice Under Section 148 so as to frame an assessment Under Section 147? (2) Whether the assessee has any income chargeable to tax in India Under Section 5(2) of the Act and whether the assessee has any business connection in India as per Section 9(1)(i) of the Act? (3) If the answer to Question No. 2 is in affirmative, whether, in terms of DTAA between India and UK, the appellant has any PE in India? (4) If answer to Question Nos. 2 & 3 are in affirmative what is the extent of income earned in India and whether the same can be held as paid by the appellant to RRIL and no further income is attributable to the PE in India? (5) If the answer to Question No. 4 above is in negative, to what extent the income arises in India which can be charged to tax in India. (6) Whether interest Under Section 234A and 234B is chargeable? 17. As regards issue of notice Under Section 148, it is seen from the reasons recorded in this behalf that the AO have a prima facie opinion which suggests that the appellant having esta....
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....of a person, who is a non resident to the extent which is received or deemed to be received in India, or accrue or arise or deemed to accrue or arise in India is taxable in India. As per Section 9(1)(i) of the Act, all income accruing or arising whether directly or indirectly through or from any business connection in India shall be deemed to accrue or arise in India. As per Clause (a) of Explanation 1, in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be such part of the income as is reasonably attributable to the operations carried out in India. Thus, as per the conjoint reading of Section 5(2) and Section 9(1)(i) of the Act, only if the income is arising directly or indirectly through or from any business connection in India, can be taxed in India. The expression 'business connection' was earlier not defined in the Act. The Finance Act, 2003 w.e.f. 1st April, 2004 i.e. as applicable to Asstt. Year 2004-05 and onwards has inserted two new Explanations to Clause (i) of Section 9(1) clarifying that expression 'business connection' will include a pe....
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....brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by Section 4(1)(a) and 4(1)(c) of the Act, whether the person earning is a resident or non-resident. If the agent of a nonresident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in Section 40(2). Income not taxable under Section 4 of the Act of a non-resident becomes taxable Under Section 42(1) if there subsists a connection between the activity in the taxable territories. Hon'ble Bombay High Court in the case of Blue Star Engineering Co. v. CIT 73 ITR 283 at page 291, after referring to the decision of R.D. Aggarwal and Co. (supra) held as under: It would thus be seen that in order to constitute a "business connection" as contemplated by Section 42, there must be an activity of the non-resident and contributing to the earning of profits by the non-resident in his....
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....dvisers Assisting with in-country support of expatriate employees and their families based in India Technical support: Coordinating the provision of technically competent personnel to advise Rolls-Royce, its customers and its suppliers on technical issues elating to Rolls-Royce products. Apart from the above, during the course of survey some papers were found. These papers were not available when the Tribunal decided the appeal of assessee for Asstt. year 2001-02. Annexure 4 which was found during survey outlined the detailed RRPL-IAF relationship as under: "RR-IAF Relationship: S.No. Action By 1 Identify key players for relationship TPFJ/CS/PD 2 Map key influencer and decision maker PD/TPFJ 3 To break impasse, meet JS(Air) with an open mind TPFJ 4 Priorities the objectives TPFJ/PD 5 Working level meetings held with pilots, maintenance and logistics officers PD 6 Understand IAF's concern and translate them in a language which could understood by DA PD 7 Product support visits made to operational ................ and maintenance basis PD 8 Organize visits from customers business and projects PDH/CS/PD 9 Carry out review meetings with CAS, ....
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....ondence received from the customers in India. This shows the extension of operation of appellant in India. The contention of appellant is that this material was found during survey carried out in 2006. The assessment for Asstt. year 1997-98, 1998- 99, 1999-2000 and 2000-01 were completed prior to survey being conducted. Thus, this material cannot be used in an assessment framed prior to conducting of survey. We are unable to agree to such a contention. The material existed for all the time to come and it is unfortunate that the assessee never disclosed its true relationship vis-a-vis RRIL. Only after the survey was conducted, the true face has come out. Once this material was found, the appellate proceedings were pending and were being considered by learned CIT(A) after calling for a remand report from the AO. The objection of assessee against the remand report were also considered. However, since the material relates to the entire business activity even for all the years under appeal there is no case that the same should be ignored only because the same were not found after the conclusion of assessment proceedings but before the conclusion of appellate proceedings. Prima facie the....
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.... enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-month period; or (ii) services are performed within that State for an enterprise within the meaning of paragraph 1 of Article 10 (Associated enterprises) and continue for a period or periods aggregating to more than 3- days within any twelve-month period: Provided that for the purposes of this paragraph an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire used or to be used in the prospecting for, or extraction or production of. mineral oils ion that State. 3. The term "permanent establishment" shall not be deemed to include: (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; (c) the main....
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....er, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. 7. For the purposes of this article the term "control", in relation to a company means the ability to exercise control over the company's affairs by means of the direct or indirect holding of the greater part of the issued share capital or voting power in the company. It is firstly to be noted that RRIL has a office in India at DLF Centre. New Delhi. RRIL is wholly owned subsidiary of appellant. The appellant is to reimburse RRIL all the cost incurred by RRIL in the provision of the ....
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....his may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereon owned by the other enterprise. 21. As noted above, the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is therefore, required. Thus, for instance, a permanent establishment could exist where an enterprise illegally occupied a certain location where it carried on its business. Article 5(1) does not refer that the premises should belong to the assessee but if it is able to use the same, it is an identified and distinct location and on which he exercise the control, it will be considered as a PE within the meaning of Article 5(1) of the treaty. In the present case, we have found that the premises though in the name of RRIL are being occupied for the business operation in India. The cost of maintenance of such premises are being paid for by the appellant. The premises are also available to all the employees of appellant in respect of any business operations in India. Accordingly, it can be said that the appell....
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....ntract is final. The correspondence shows how RRIL plays its part in the sale of products in India. The activities are not merely preparatory or auxiliary in character but the primary responsibility rests on RRIL to analyze and scrutinize the proposal and orders received and if not found in accordance with the broad terms, to seek clarification from the customer. (iii) Even the letter from appellant through Mr. L.M. Morgan addressed to Shri Prateek Dabral insist that the request for quotation/extension should not be issued directly to the appellant in UK but should be routed through the office of RRIL so that only those correspondence which are confirming to the standards laid down are forwarded. This negates the contention that the activities of RRIL are solely of a preparatory or auxiliary character or like a conduit or postman. (iv) The employees of RRIL are functionally responsible to the appellant. Such positions are identified by appellant. This is evident from responsibility chart issued to the GM (Defence) which says as under: General Manager - Defence Business: The position of General Manager - Defence Business has been identified by Defence (Aerospace) and Rolls-R....
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....rmed by RRIL. Even the other activities which are to be undertaken by RRIL are not solely of the preparatory or auxiliary character but in a way like a marketing office to receive orders and even to promote the activities which converts the request for quotation into orders. (v) The MD of RRIL Mr. Tim Jones had issued a certificate under Foreign Corrupt Practices Act which certifies that in respect of agreement with Air Force, there is no permission to offer, promise or give any pecuniary or other advantage directly or indirectly. But for the authority from appellant such certificate could not have been issued. Surely such activities could not be considered as preparatory or auxiliary in nature. There are various meeting wherein Mr. Tim Jones and Mr. Prateek Dabral, who are employees of RRIL are present. Though it may be a case that the employees of appellant may also be present however, their participation in the meeting and making suggestions cannot be held to be only preparatory or auxiliary nature of work. In the meeting at HAL on 25.10.04, the only person present on behalf of the appellant was Mr. Prateek Dabral, GM, Defence Division. The points being discussed were repair s....
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....n India. It is to be noted that Article 5(4) has three clauses, namely, a, b & c. Thus, even if one has to hold that the dependent agent has no authority to negotiate and enter into contracts for and on behalf of "appellant, still as per Clause (e) of sub Article (4), it is found that RRIL habitually secures orders in India for the appellant. It is a set practice that no customers in India are directly to send orders to the appellant in UK. Such orders are required to be routed only through RRIL. This fact is evident from the letter of Mr. L.M. Morgan to Mr. Prateek Dabral and Ms Usha. In the said letter, it is made clear that even request for quotation/extension could not be communicated directly to the appellant but are to be routed through the office of RRIL. This is applicable even to the orders. The fact is not denied that the orders are firstly received by RRIL from the customers in India and only then communicated to the appellant. Thus, as per Para 4(c) of Article 5, the dependent agent habitually secures orders wholly for the enterprise itself and hence, is deemed to be a permanent establishment of the appellant. The contention of appellant that the role of RRIL is merely ....
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....do UK treaty are extracted herein: Article 7 BUSINESS PROFITS: 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business. In the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State, but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits which that permanent establishment might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment shall be treated for the purposes of paragraph 1 of this Article as being the profits directly attributable to that permanent establishment. 3. Where a permanent establishment takes an active part in negotiating, concluding or fulfilling contracts entere....
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....ctional and factual analysis. Under the first step, the economically significant. activities and responsibilities undertaken through the PE will be identified. This analysis should to the extent relevant consider the activities and responsibilities undertaken through the PE in the context of activities and responsibilities undertaken by the enterprise as a whole. Under the second step, the remuneration of any such dealing will be determined by applying, by analogy the principles developed for the application of the arm's length principle between associated enterprises, by reference to the functions performed, assets used and risk assumed by the enterprise through the PE and through the rest of the enterprise. As per Para 4 of Article 7, when the profits are to be attributed to the PE, it can be according to the law of the State where the PE is established. The assessee has not maintained separate books of accounts for the activities carried out in India. However, it is seen that the manufacturing of the goods dealt or traded in India are not manufactured in India. The manufacturing operation is carried on outside India. Manufacturing is one of the important and integral part of....