TMI Blog1991 (10) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... g houses ofJapanand its headquarters are inTokyoand branches are all over the world. Four branches of the company were also opened inIndiafrom 1954 onwards. These are atCalcutta,New Delhi,MadrasandBombay. It also has representative offices atBangalore,Goa,ParadeepPortetc. The accounting period of the assessee is the financial year. For the assessment year 1980-81 the assessee company filed its return declaring loss of Rs. 3,97,014 during the current year and total loss of Rs. 01,81,61,084 after adjusting brought forward losses. Similarly for the assessment year 1981-82 it declared loss of Rs. 1,42,71,880 during the year and total loss of Rs. 3,24,32,864 after adjusting the brought forward losses. In the profit and loss account for the assessment year 1980-81, the assessee claimed expenses of Rs. 1,28,88,944 relating to the Indian Branches without showing any receipt on the receipts side. Similar is the manner for declaring loss for the assessment year 1981-82. An agreement for avoidance of double taxation betweenIndiaandJapanwas entered into on the 5th day of January, 1960. 4. Article III(1) of the Agreement provided that the Industrial or commercial profits (excluding the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) the use of mere storage facilities of the maintenance of a place of business exclusively for the purchase of goods or merchandise and not for any of processing of such goods or merchandise in the country where such purchase Lakes place shall not constitute a permanent establishment ..... (iiia) an enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State if it maintains a fixed place of business solely for the purpose of advertising, for the supply of information or the scientific research, being activities solely of a preparatory or auxiliary character in the trade or business of the enterprise." 10. According to the Revenue the words 'maintains a permanent establishment inIndia' meant maintaining branches and representative offices at various places inIndia. 'Me assessee's contention was that its activities inIndiawere purely of liaison work and not of trading and is therefore covered by clause (iiia) quoted above. It was also stated on behalf of the assessee that the Reserve Bank ofIndiaunder section 29(2)(a) of the Foreign Exchange Regulation Act, 1973 had granted permission vide its letter No. EC.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of the contracts. He also relied upon the assessee's letter dated 30th November, 1990 filed during the course of assessment proceedings for the assessment year 1978-79 where the assessee had admitted that the negotiations which took place prior to entering into a contract were initiated by the branch offices. He further stated that an idea of the extensive and regular activities conducted by the assessee inIndiacan be had from the fact that the assessee company was maintaining a huge establishment in its branch offices inIndia. Its expenses on salaries, wages and bonus of the Japanese, and Indian staff kept in Indian branches amounted to Rs. 48,26,938 during the accounting period relevant to the assessment year 1980-81. These included expenses on travelling at Rs. 11,61,757, on traffic Rs. 13,57,654, on entertainment Rs. 3,15,819 and on telephone, telex, postage etc. at Rs. 19,59,836. He further noted that the assessee company's expenses on the establishment of branch offices inIndiadid not decrease but further increased after 1975 when the assessee claimed that its branch offices were converted into liaison offices. From these facts, the Assessing Officer came to the conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue came up for consideration at the instance of the Revenue before Delhi Bench 'C' for the first time for the assessment year 1977-78 (I.T.A.No. 693/Del/83 dated 25-4-1984). The Appellate Tribunal dismissed the Departmental appeal for that year. It observed in paragraphs 9 and 10 of that order as under: " 9. We have carefully considered the facts of the case and the rival arguments. As already noted above, there is an agreement between the Government of India and the Government of Japan for the Avoidance of Double Taxation in respect of taxes on income. As already pointed out wherever there is such an agreement with the foreign company, provisions of such agreement have precedence over the general principles or the provisions of the Income-tax Act. Article III(1) of the Agreement provides that the commercial profits of an enterprise of one country shall not be subjected to tax in the other country unless the enterprise has a permanent establishment situated in that other country. If it has such permanent establishment the profits attributable thereto may be subjected to tax in the other country. The other parts of that Article provide for the details as to how much profit is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the above position, we have perused the material on record and the facts mentioned in the order of the learned CIT (Appeals). We do not find any material on the basis of which it could be held that the Indian branch of the assessee company was carrying on any business or trading activity itself and it was doing anything beyond what was contemplated in the directions of the Reserve Bank ofIndia. The sale and purchases were being conducted by the head office of the company but the decisions were being communicated through the Indian branch. The delivery of the equipments was given outsideIndiaand the contract of sale was also executed by the head office inJapan. All operations like sale or delivery of goods took place outsideIndia. It has not been shown that the Indian branch had accepted or rejected any offer of purchase of malonite sum. The concept of permanent establishment itself has undergone a change insofar as it relates to the modification made in 1973 and that could have been a permanent establishment earlier, has been specifically taken out from the classification. We have looked into some of the correspondence to which our attention was drawn by the Departmental Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purview of Article III (A) of the Double Taxation Avoidance Agreement This Bench then examined that correspondence according to which the Indian branch of the assessee company had finalised sales contracts and held that the assessee was maintaining a permanent establishment in India and, therefore, the profits attributable to that permanent establishment in India were taxable in India. 18. The appeals for the assessment years 1980-81 and 1981-82 had again come up before the Tribunal for consideration as a consequence of the directions given by the Bench. In view of the conflicting orders of the Benches of the Tribunal, the matter was referred to the President to constitute a Special Bench to dispose of these appeals. It was in that context that the Hon'ble President of the Tribunal constituted the Special Bench for resolving the following controversy: "Whether, on the facts and in the circumstances of the case, it is correct to hold that the assessee company did have a permanent establishment inIndiaand hence income was not exempt under the provisions of Agreement for Avoidance of Double Taxation betweenJapanandIndiafor the assessment years 1980-81 and 1981-82 ?" 19. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. She also referred to the enormous magnitude of the expenditure incurred by the branches inIndiato show that they were actively engaged in business activities and not merely doing liaison work as canvassed by the assessee. (c) The prohibitions imposed by the Reserve Bank of India, in its letter dated 4-9-1975 on the assessee-company were not couched in the same language as was used in sub-clause (iiia) aforesaid and the branches of the company could do activities in India exceeding those mentioned in the said sub-clause and yet did not transgress the conditions imposed on the assessee-company in terms of FERA by the Reserve Bank of India. (d) For the assessment year 1977-78 though some correspondence was placed in the paper book, but the Tribunal did not specifically refer to these letters placed in the paper book, which showed that the assessee company was doing not only liaison work but also activities of trade. These letters in the paper book were not specifically highlighted by the Departmental Representatives and therefore the Tribunal had no occasion to deal with them although they showed that the assessee company was engaged in business inIndiathrough its net work o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inIndia. According to him, the nature of the correspondence referred to by the Tribunal in its order for the assessment years 1978-79 and 1979-80 was of the same nature as filed in the paper book for the assessment year 1977-78. He further pointed out that all the papers in the compilation for the assessment year 1977-78 were duly highlighted in those proceedings before the Bench and, therefore, it was incorrect to say that the same were not referred to. It was after careful consideration of all the correspondence placed before the Bench that it came to the conclusion that the branches inIndiawere engaged only in liaison work. He further stated that simply because the Tribunal did not specifically quote these letters in its order for the assessment year 1977-78, but referred to their gist, it would not make any difference so long as the correspondence placed before it was considered by the Tribunal. It was only a method of writing orders. He, therefore, urged that it was not open to the Bench in proceedings for the assessment years 1978-79 and 1979-80 to have reviewed the earlier order of the Tribunal for the assessment year 1977-78 and come to a different conclusion on the same s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the levels of expenditure by Multi-Nationals. Shri Harihar Lal then submitted that once it was held that the Double Taxation Avoidance Agreement betweenIndiaandJapanheld the field, it would have precedence over the provisions of section 9(1). In view of the above submissions, he urged that the Commissioner (Appeals) had rightly accepted the appeals by the assessee and no interference with his order was called for. 23. We have given our very careful thoughts to the rival submissions and gone through the records and the orders of the Tribunal expressing conflicting views. We have also gone through the orders of the authorities below. The Revenue has emphasised that the Branches of the assessee company inIndiawere not merely doing the liaison work, but much more than that. At the outset, we would like to mention that the Revenue has not placed on record any paper book containing the correspondence between the branches of the assessee company inIndiaand other parties inIndiato show that it was engaged in business and not merely liaison work. The Assessing Officer has also not discussed specifically any documents in that direction. As a matter of fact, he has referred to in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the same contract for import of Urea. It conveyed that the assessee-company inUSAquotes price on one port discharge basis at West Coast of India. It further stated that it was agreed that an extra charge of US scents 0.35 per MT would be payable to the supplier in case of discharge at one port on East Coast of India, if necessity arose. Request was to aimed the contract accordingly and to confirm the port of discharge. 28. The other letter referred to was of1-2-1979, which was available at page 2. By this letter, 12 copies of the charter party have been forwarded to MMTC,New Delhi. 29. A perusal of the letters, the contents of which have been referred to by us, would show that it was purely a liaison work i.e., passing on the information to MMTC on behalf of the USA counterparts of the assessee company. There are several other letters in the compilation for the assessment year 1977-78 relating to import of Urea under Contract No. 558-FZ(96) dated 22-12-78. At page 8 is a letter dated31-1-1979again addressed to MMTC, conveying the text of a telex message received from Mitsui Co.New York. There are more than 20 letters placed in the compilation for the assessment year 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established before a final contact is concluded. In International Trade and Commerce, there are several aspects on which information has to be gathered and supplied to the contracting parties. It can start with negotiations from the very nascent stage to the final conclusion of the contract and also removal of doubts on various points relating to supply of material, transportation, payment schedule, mode of transport, freight and charges, bank guarantees, interest payable, commission payable etc. etc. It is difficult to specify the areas to which supply of information can be limited. That was why the Article (iiia) was so widely worded as to include extensively and intensively all areas of supply of information, the only limiting factor being that supply of information should be either preparatory or auxiliary to the formation of the final contract. Any information conveyed even after the conclusion of a contract say, for example, delay in the payment by the party in one contracting State to the party in another contracting State may also fall within the broad spectrum of supply of information. Information can be elicited or gathered only by negotiations or questions and answers a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Branches again through the Reserve Bank ofIndia. There was no evidence brought on record at any stage that the Indian Branches had exceeded the limits prescribed for it by the Reserve Bank ofIndia. As long as the Indian Officers were conducting the operations within the restricted area and so long as those activities were not considered by the Reserve Bank ofIndia, which is the concerned authority as amounting to anything other than carrying on of liaison work no inference adverse to the assessee can be drawn or is possible to draw. To repeat what all that was done by the assessee fell within the parameters of supplying of information which is preparatory to and auxiliary to the formation of the final contracts. 31. We are of the opinion that the activities of the Branches of the assessee company inIndiawere within the ambit of sub-clause (iiia) of clause (i) of sub-article (1) of Article II of the Double Taxation Avoidance Agreement betweenIndiaandJapan. 32. We are also in agreement with the learned counsel for the assessee that the increase in the expenditure of the Branches of the assessee company inIndiaas compared to the earlier years was marginal and quite reasonab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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