TMI Blog2011 (2) TMI 1233X X X X Extracts X X X X X X X X Extracts X X X X ..... established, appeals are dismissed - IT Appeal NOS. 451, 704 & 708 OF 2009 - - - Dated:- 8-2-2011 - N. KUMAR AND RAVI MALIMATH, JJ. K.P. Kumar for the Appellant. K.V. Aravind and M.V. Seshachala for the Respondent. JUDGMENT 1. These appeals are by the assessee challenging the order passed by the tribunal holding that as per Double Taxation Avoidance Agreement, the profit attributable to the liaison office held as a permanent establishment in India, is taxable. 2. The assessee is a South Korean enterprise originally engaged in the business of trading in semi-conductor components manufactured by various companies across the world, moved in to the manufacture of PCB (Printed Circuit Boards), LCD (Liquid Crystal Displays) and SMPs (Switch Mode Power Supplies) in its factory in China from 2003. The assessee set up a liaison office at Bangalore in 1998 after obtaining the required approval from the Reserve Bank of India. By the permission dated 02.12.1999, the RBI accorded permission for continuing the liaison office for a further period of three years i.e. up to 04.08.2002. The RBI acceded to the request of the assessee for setting up an additional liaison o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such that the senior most employee, viz, the Country Manager was seen to be drawing a salary of Rs. 85,000/- per month, while his deputy, viz., the General Manager was seen to be drawing a salary of Rs. 35,000/- per month. According to the Assessing Officer, mere liaison functions would not lead to such payouts. Thus he felt that there could be other non-liaison functions that the employees could be doing, for which such salaries were being paid. It is in this background the statements of Shri. V. Natarajan, Country Manager and Shri. H.B. Raghumaran, Senior Engineer (Marketing) were recorded. On appreciation of the statements, the Assessing Officer recorded a finding that the liaison office has a very clear-cut approach to the business to even the primary task of identifying customers. The primacy of the Indian liaison office in negotiations, procurement and step by step by step execution of the order is clearly visible. The liaison office is not at all into liaising, rather it is into full fledged business activities. The final pricing is an issue decided at the Indian end without reference to the South Korean end. The margin of the liaison office is decided by the liaison of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent on the models, their unit price and set up charges. Therefore, the findings cannot be arrived at purely on the basis of the Country Manager's deposition wherein he has remarked that the Head Office has no role in deciding the sales margin unless it is suitably backed by incontrovertible evidence, which is not the case. Therefore, the Appellate Authority was of the view that the income cannot be deemed to accrue or arise in India through or from any business connection in India since it does not constitute a business activity carried out by the liaison office on behalf of the Head Office by habitually exercising an authority to conclude contracts on behalf of the non-resident within the meaning of clause (a) of Explanation 2 to Section 9 (1)(i) of the It Act. Therefore, the appeal was allowed. Hence the order passed by the Assessing Officer was set aside. Aggrieved by the same, the revenue preferred an appeal to the tribunal. The tribunal reversing the judgment of the Appellate Authority held after referring the judgment of the Apex Court for the assessment orders prior to assessment year 2004-05, there is a business connection in respect of source of income in India of the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding entering into contract and promoting the business of the assessee. After, conclusion of the contract, they sought to state that the transactions emanated from the Head Office directly to the customers in order to claim the exemption and therefore, he submits on the facts of this case, the finding recorded by the authorities that the liaison office at Bangalore was a permanent establishment as specified under Article 5 of the DTAA Rules is justified and the same is based on the legal evidence and no case for interference with the said question of fact is made out in these appeals. 5. In order to appreciate the rival contentions, it is necessary to refer to the relevant provisions in DTAA. Article 5 of the DTAA explains the provision of a permanent establishment, which reads as under:- "Article 5: Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" shall include especially: ( a ) a place of management ; ( b ) a branch ; ( c ) an office ; ( d ) a factory ; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. 7. 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 or a permanent establishment of the other." 6. The assessee applied to the RBI for permission to set up a liaison office under Section 29 (1) (a) of the Foreign Exchange Regulation Act, 1973 and the same was acceded as per Annexure-A on 05.08.1996. It was subject to the terms and conditions mentioned in the said permission. Clause 2 of the same reads as under :- "2. We advise that we are agreeable to your establishing a liaison office at Mumbai and Bangalore initially for a period of three years for the purpose of undertaking solely liaison activities viz., to act as a communication cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 attributable to that permanent establishment. Therefore, setting up of a permanent establishment by a Contracting State in India is a sine qua non for payment of income tax under Act. What is a permanent establishment is defined under Article 5 of the DTAA. Sub-article 4 of the Article 5 sets out what shall not be deemed to be a permanent establishment. 8. The permission granted by the RBI also makes it clear as to what the liaison office should not do. Relying on these provisions, it is contended by the assessee that the liaison office was opened to act as a communication channel between the Head Office at Korea and the parties in India. They have not undertaken any other activity of a trading or commercial or industrial nature nor have they entered into any business contract in their names. They have not charged any commission or any remuneration and they have no earned any such amount in India for liaison activities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cided by the sales team based in Bangalore on a case to case basis depending upon the merits of the case. After this, there will be a negotiation for each enquiry between the customers and the sales personnel of the office and in some cases, they are able to close the order to the satisfaction of the customer and the Head Office. In other cases, if the customer is not happy with the price and if he asks for more discount, the personnel at Korea will discuss the same with the suppliers to request for more discount in the price. If the supplier agrees for giving more discount, then accordingly, they quote a new discounted price to the customers and close the deal. After this, if the deal is through they have to process the order. They fill the details in the order processing chart and send the same to the head office through email as an attachment. The Purchase team at the Head office will process and place the order to the supplier and then wait for the goods to be ready. Once the goods are ready, they will be inspected by the Quality control Team at the head quarters to ensure that the specifications are properly met. After that the goods are packed and shipped to the freight forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the work done by the liaison office is only liaison and it does not constitute a permanent establishment as defined in Article 5 of DTAA. In fact, the Assessing Officer has clearly set out that what was discovered during the investigation and the same has been properly appreciated by the tribunal and it came to the conclusion that though the liaison office was set up in Bangalore with the permission of the RBI and in spite of the conditions being stipulated in the said permission preventing the liaison office from carrying on commercial activities, they have been carrying on commercial activities. 11. It was further contended that the RBI has not taken any action and therefore, such interference is not justified. Once the material on record clearly establishes that the liaison office is undertaking an activity of trading and therefore entering into business contracts, fixing price for sale of goods and merely because, the officials of the liaison office are not signing any written contract would not absolve them from liability. Now that the investigation has revealed the facts, we are sure that the same will be forwarded to the RBI for appropriate action in the matter in a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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