TMI Blog2007 (10) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... ttract the provisions of s. 147. Hon'ble Supreme Court in the case of Raymond Woollen Mills Ltd. vs. ITO [ 1997 (12) TMI 12 - SUPREME COURT] held that for commencement of reassessment proceedings, it has only to be seen that whether there was prima facie some material on the basis of which Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We, therefore, uphold the validity of issue of notice u/s 148 and consequent framing of assessment u/s 147 of the Act. Business connection in India within the meaning of s. 9(1)(i) - The expression 'business connection' has a wide though uncertain meaning. It admits of no precise definition and the solution to the question must depend upon the particular facts of each case. Even the amended definition will not determine as to what constitutes business connection as the same is not an exhaustive definition but is a definition which also includes some of the activities to be termed as business connection. The contention of appellant is that this material was found during survey carried out in 2006. The assessments for AY 1997-98, 1998-99, 1999-2000 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... teek Dabral and Ms Usha. In the said letter, it is made clear that even requests 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 art. 5, the dependent agent habitually secures orders wholly for the enterprise itself and hence, is deemed to be a PE of the appellant. The contention of appellant that the role of RRIL is merely of a post office is, therefore, unacceptable in view of the facts of the case as evidenced by various documents and correspondence found during the course of survey. Income attributable to the PE in India - The assessee has not maintained separate books of account 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 the total activities which contributes to the ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. The appellant was not filing any return of income in India. It was found by the AO that the appellant was supplying aero-engines and spare parts of Indian Customers, mainly to M/s. Hindustan Aeronautics Limited (HAL), Indian Navy and Indian Air force. On examination of the facts 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 attributabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the validity of initiation of assessment proceedings Under Section 147 but held that there is no PE in India. Learned CIT(A) held that the order of the Tribunal did not consider the documents and evidence gathered by the AO as a result of survey operation. The result of survey operation 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 437 (b) John Lal (HUF) v. CIT 88 ITR 439 (c) Sheo Nath Singh v. AAC 82 ITR 147 (SC) (d) S. Narayanappa v. CIT 63 ITR 219 (SC) (e) Ganga Saran and Sons (P) Ltd. v. ITO 130 ITR 1 (f) Phool Chand Bajrang Lal v. ITO 203 ITR 456. 7.1. Shri Srivastava further argued that for asstt. year 2002-03, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no income can be attributed to the non resident which can be taxed in India. In the assessment order for first four years, the AO on the basis of minutes of the meeting held that RRIL is a dependent agent of appellant and to that extent, such dependent agent is to be considered as PE in India. It is to be noted that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng out of the transaction will be limited to the amount of profit which is attributable to the agent's services, provided that (i) the nonresident principal's business activities in India are wholly channelled through his agent, (ii) the contracts to sell are made outside India, and (iii) the sales are made on 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er certain services, the evidence found as a result of survey reveal that the activities undertaken by RRIL on behalf of assessee were much more than what were agreed to in the agreement. The activities of RRIL also includes marketing services, liaison services, market analysis, technical support, customer relationship/interface, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'RR-IAF relationship - key players'. This reveals various actions to be undertaken by appellant RRPLC through RRIL and who are the personnel designated for such action. It reveals that for identifying key players for relationship, mapping the key influence and decision makers and various other actions Mr. Tim Jones, MD of RRIL 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the form of remuneration paid to RRIL. Under Section 92C(4) read with proviso thereto, there can still be double taxation of the income if the transaction is not at arm's length. Thus, even if income of RRIL is enhanced, to that extent, income of appellant RRPLC cannot be reduced. He accordingly pleaded that the order of learned 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue of notice Under Section 148 and consequent framing of assessment Under Section 147 of the Act. 18. The next question before us is whether there is any business connection in India within the meaning of Section 9(1)(i) of the Act. The scope of total income is described in Section 5 of the Income-tax Act. As per Section 5(2), the total income 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. A relation to be a business connection must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by Section 42, income, profit or gain which accrues or arises to a nonresident outside the taxable territories is sought to be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Government and business leaders. Arranging discussions between Rolls-Royce and its current and potential customers and suppliers as requested by Rolls-Royce business units and Indian entities. Administrative support: Assisting with Visa applications Assisting with arrangements for travel and accommodation Facilitation of discussions with professional advisers 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 Wing Commander S. Puntambekar Director Eng 13(T) CS/PDH/PD 9 Suadron Leader D. Shrivastava AD Purchase PD/Usha 10 Squadron Leader O.P. Singh AD Purchase PD 11 Squadron Leader S. Balakumar AD Eng J(T) PD 12 Squadron Leader P.K. Awasthi DD Eng B(T) PD/Usha 13 Group Captain V.V. K. Bhalla AOC Ambala PD 14 Air Commodore D. C. Kumaria AOC Gorakhpur PD 15 Group Captain A B Maini OC 4 BRD PD/Bir Singh MOD (Ministry of Defence): 1 Mr. Ajay Prasad Defence Secretary TPFJ 2 Mr. Arvind Joshi JS(Air) TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 these papers itself show the extent of work being handled by RRIL for appellant in India. RRIL is not only 100% subsidiary of the appellant but also maintains a permanent office in India to undertake all such activities. Thus, it can be concluded that the appellant has a business connection in India within the meaning of Section 9(1)(i) of the Act and under the Income-tax act, its income is chargeable to tax in India arising out of such business connections. 20. The next question for our consideration is even if there is business connection in India whether there is any PE in India within the meaning of Article 5(1). 5(2)(f) and 5(4) of the Indo UK DTAA. Whereas the appellant s case is that there is no PE in India and even if it is so, it is solely for the purpose of preparatory or auxiliary character and hence, under Article 5(3), it shall not be deemed to be considered as PE in India. For the sake of brevity, Article 5 of the Indo UK DTAA is extracted herein: 1 Article 5: PERMANENT ESTABLISHMENT: 1. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods 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 maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising for the supply of in formation or for scientific research, being activities solely of a preparatory or auxiliary character 'in the trade or business of the enterprise. However, this provision shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State for any purpose or purposes other than the purposes specified in this paragraph; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of this paragraph, provided that the overall activity of the fixed place of business resulti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 support services including but not limited to the salaries and expenses of employees, the cost of operating office premises and any payment to sub contractors used. RRIL is to receive service fees at 5.1-6% of the reimbursed expenses. The employees of the appellant visits India frequently and the premises of RRIL are being occupied and used during such visits. This fact is confirmed by the counsel for appellant. In a way, the appellant maintains the premises but on the face of premises, it is being stated as occupied by RRIL However, the entire expenses for operation and maintenance of such office in India is being paid by appellant Paragraph. Paragraph I gives a general definition the term permanent establishment' which brings on its essential characterstics of a permanent establishment in the sense of the Convention i.e. a distinct 'situs', a 'fixed place of business'. The paragraph defines the term 'permanent establishment' as a fixed place of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 appellant has a PE in India within the meaning of Article 5(1) of the treaty. 22. It is to be examined as to whether under Article 5(3), the exclusion will apply to such PE or not. It is the case of appellant that the premises are used by RRIL for the supply of information which are activities solely of a preparatory or auxiliary character. For this purpose, once again reliance is placed on the finding of the Tribunal in appeal for Asstt Year 2001-02. We are unable to agree. When the matter was considered by the Tribunal various documents found during survey were not available before the Tribunal to give the finding. In the light of various documents found, it is for us to examine and come to a conclusion whether the activities of RRIL in India is merely of a preparatory or auxiliary character. It is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The decisive criterion is whether or not the activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-Royce India Ltd in order to have a senior manager at Rolls-Royce India Ltd., Delhi with the responsibility of managing Defence (Aerospace) liaison activities with the Government of India (Ministry of Defence i.e. Indian Army, Navy Aviation and Air Force). He will report locally to the MD Rolls-Royce India Ltd and functionally will be responsible to the Rolls Royce Defence (Aerospace) Customer Executive for the following): - To manage and coordinate all communications associated with MOD. - To develop and maintain personnel contact with appropriate service. Industrial/seniors/organizations and maintain upto date organization charts. - To advise relevant market and competitor intelligence in an agreed and regular format. - To advise and support RRDA participation in Air Shows. Exhibitions, Seminars, Conferences, Media/RR events and hospitality opportunities. - To provide Customer satisfaction Reports to meet RRDA requirements and when necessary, assist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot 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 scheme for engine division, supply of Master Vanes and various other matters where the actions were to be taken at the end of appellant. A decision was taken at the meeting which could not have been possible but for the authority of the person remaining present at the meeting and to agree to the agenda of the meeting. (vi) A letter was written by Mr. Prateek Dabral to HAL suggesting turbine casing repair scheme, recommending to accept the offer of the repair scheme, advising to go for specialist for the exhaust duct repair scheme and also suggesting that such an exhaust duct which is available with the appellant can be supplied. This letter do suggest that the work is something more than merely preparatory or auxiliary nature, and also for advising and seeking orders for the appellant. (vii) Correspondence was found whereby Mr. Prateek Dabral signed certificate of origin of the goods manufactured by appellant and also sending the warranty stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 of a post office is, therefore, unacceptable in view of the facts of the case as evidenced by various documents and correspondence found during the course of survey. It can, therefore, be summarized that in the light of the facts as well as document mentioned above, RRIL's presence in India is a permanent establishment of appellant because: (a) It is a fixed place of business at the disposal of the Rolls Royce Plc and its group companies in India through which their business are carried on. (b) The activity of this fixed place is not a preparatory or auxiliary, but is a core activity of marketing, negotiating, selling of the product. This is a virtual extension/projection of its customer facing business unit, who has the responsibility to sell the products belonging to the group. (c) RR1L acts almost like a sales office of RR plc and its group companies, (d) RRIL and its employees work wholly and exclusively for the Rolls Royce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 entered into by the enterprise, then, notwithstanding that other parts of the enterprise have also participated in those transactions, that proportion of profits of the enterprise arising out of those contracts which the contribution of the permanent establishment shall be treated for the purpose of paragraph 1 of this Article as being the profits directly attributable to that permanent establishment. 4. In so far as it has been customary in a Contracting State according to its law to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraphs 1 and 2 of this Article shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be necessary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the total activities which contributes to the earning of income. The extent of assets used are irrelevant as in the present case, the activity comprises of manufacturing and marketing. The marketing is in India. Therefore, the profit accruing directly or indirectly in respect of the marketing activities in India shall be taxable in India Under the Income-tax Act read with Rule 10 of income-tax Rules. 1962. in a case in which the AO is of the opinion that actual amount of the income accruing or arising directly or indirectly through or from any business connection in India cannot be definitely ascertained, for the purpose of assessment the same may be calculated at such percentage of the turnover so accruing or arising as may be considered reasonable, or in such other manner as the AO may deem suitable. Hon'ble Supreme Court in the case of CIT v. Ahmed Bhai Umar Bhai Co. 18 ITR 472 held that where the manufacture and s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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