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TMI Blog2012 (6) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... ord. 1.2 That on facts and in law the AO/DRP erred in holding that: (a) The LO of the Appellant was an "office" within the meaning of the term u/Art 5(2)(c) of the DTAA. (b) The Appellant was maintaining the LO as a fixed "place of business". (c) From the activities carried out by the LO it was apparent that the same were not solely restricted to the activities mentioned in Article 5(6) of the DTAA. (d) The Appellant was using the premises of the LO to undertake core revenue generating activities. (e) The business of the Appellant was partly carried on by the LO. 1.3 That on facts and in law while holding that the LO constitutes a PE the AO/DRP erred in: (a) Mechanically relying upon the findings recorded by some other AO in cases pertaining to M/s Mitsubishi Corporation and M/s Mitsubishi India Pvt. Ltd. (b) Holding that the LO was carrying out negotiations and conclusion of contracts for the assessee. (c) Not appreciating that the LO was only carrying out activities which were preparatory or auxiliary in nature as stated in Article 5(6)(e) of the DTAA. 2.&n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment in hearing of the appeal except on account of unavoidable circumstances. This interim order comes to an end with passing of this order. 2. The facts mentioned in the assessment order are that the return declaring nil income was filed on 26/09/2008. Assessment proceedings were initiated by issuing notice u/s 143(2) on 07/08/2009. The assessee has maintained a liaison office ("LO" in short) with effect from 16/04/2003 with the approval of the Reserve Bank of India. In this year sales of Rs. 699,51,34,489/- have been effected. The assessee was directed to file correspondence with the clients in India, copies of invoice, e-mail exchanged and profit & loss account of the Head Office ('HO' in short). The assessee furnished the details on a sample basis. It was informed that the LO was closed down in May, 2008 and, therefore, the information has to be obtained from HO in Japan. In the circumstances, it has tried to do the best it could do on the basis of old records. The legal argument of the assessee was that by its very nature, the LO cannot earn profits and, therefore, no tax is payable under Double Tax Agreement voidance Agreement between India and Japan. ("DTAA" in short). 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l buyers, negotiating and selling the goods in the market. The tax residence certificates are of no consequence in such a business model. Further, the Assessing Officer concluded that the assessee has been functioning in the same manner as MCJ had been functioning earlier. Accordingly the taxability has to be decided in the same manner. 3.1 The activities carried on by the assessee are that potential buyers are located in different countries, negotiations are carried on with a view to settle contractual terms and the sales are effected. The documents prove that the India office locates potential buyers, conducts negotiations with them and then sells the goods through the HO. These activities are core business activities. They are not in the nature of preparatory or auxiliary activities. Thus, the existence of PE has been upheld. 3.2 The Assessing Officer had considered only the sales effected in India. He had not taken into accounts the sales made from India. These sales have been computed at Rs. 1,05,02,539/-. These have been taken into account to determine the total sales effected by the India office. 3.3 Coming to attribution of income, the finding of the Assessing Officer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment order, it is inter alia mentioned that it appears (emphasis supplied of the learned counsel) that the assessee's LO in India is in a sense not only undertaking preparatory and auxiliary work but also core revenue generating activities. It is argued that this is only a tentative conclusion as the word "appears" has been used. The conclusion is arrived on the basis that the assessee did not furnish sufficient evidence that it was carrying on only preparatory and auxiliary work. As a matter of law, this is not sufficient reason to hold that the assessee has set up a PE in India. The Assessing Officer has also made a mention of the LO of MCJ. Such a mention had been made in the order of the DRP. It is argued that the details in the case of MCJ were not furnished to the assessee and the assessee was not granted sufficient opportunity to distinguish facts or rebut the same. 5.3 The learned counsel took us through the evidence filed before the Assessing Officer in respect of e-mails exchanged between India office, its HO and customers. As mentioned earlier, these have been filed on a sample basis. We may note the gist of such correspondence in respect of two customers, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price and the quantity but LO informed that the required quantity may not be available. Subsequently the customer forwarded the revised requirement. 5.5 Page numbers 56 to 90 of the paper book contain direct correspondence between the HO and the customers and page numbers 96 to 111 contain e-mails exchanged regarding fixing of meeting between representatives of HO and the customers. 5.6 Coming to applicability of the DTAA, our attention has been drawn to paragraph number 6 of Article 5, which excludes from permanent establishment, the office which carry on activities of following nature: "(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 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 of collecting information, for the enterprise; (e) the maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratory or auxiliary activity, because such a managerial activity exceeds this level. 5.10 The learned counsel relied on a number of decisions to support his case that the activity carried on by India office is only preparatory or auxiliary in nature. We may discuss these cases at this stage with a view to recapitulate the ratio decidendi thereof. 5.10.1 In the case of U.A.E. Exchange Centre Limited v. U.O.I. and ANR 313 ITR 94, the authority for advance ruling had come to the conclusion that the activity carried on by the liaison office in India did not have an auxiliary character as the option of remitting of funds through the liaison office in India was exercised by the NRI remitter, which was nothing short of, as in the words of the parties, performing contract of remitting the amounts. It is mentioned that this view is clearly erroneous. We are living in a global village where organizations and companies operate transnationally. There is an eagerness to bring to tax income of states by employing deeming fiction so that income which ordinarily does not accrue or arise within the taxing state is brought within its tax net. The expression "Permanent Establishment" has to be view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies. From the facts made available, it has emerged that the liaison office in this case has not performed any core business activity but it has confined itself to preparatory and auxiliary activities. All that it has done is supplying information which is preparatory and auxiliary to formation of final contracts. The activities of preparing reports on Indian market scenario, mobile and broadband segment is in aid or support of the main activity and, therefore, rest in the area of preparatory and auxiliary activities. 5.11 In the case of Mitsui & Co. Ltd. v. ACIT [2008] 114 TTJ 903 (Delhi), the question before the Tribunal was whether, the LO of the assessee constitutes PE in India? The assessee claimed exclusion under the aforesaid sub paragraph (e). The revenue and the assessee had differed on this issue in past and the Special Bench held in assessment years 1980-81 and 1981-82 that the LO was carrying out the work of supply of information and it was not carrying on any trading activity in India. The Reserve Bank of India while permitting the setting up of LOs in India does not allow the carrying out of trading, commercial or industrial activities. All the expenses are required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it is difficult to allocate any profit to the fixed place of business. Further, the office had been following guidelines applicable to a LO, i.e., it will not carry out any activity other than the activity for which approval had been given by the RBI. That such guidelines have been actually followed is evidenced by the certificate of auditor filed by the assessee before the RBI. 5.14 In Re Gutal Trading Est. [2005] 278 ITR 642, the facts are that the applicant based in Dubai is owned by a non resident U.A.E. national and its local status is of "individual establishment" under the U.A.E. law. It is acting as agent of GVB, a group of foreign companies. It proposed to set up a communication channel in India, termed as LO by the RBI to perform - (a)hold seminars and conferences to cover information about general use by GVB in manufacturing reflective glass, (b) receive trade enquiries and pass on the same to Dubai or directly to GVB, (c) to transmit information from Dubai office or GVB to the customers, consumers and other organizations, (d) to collect feedback and pass on the same to Dubai office or to GVB. However, the LO in India was not to carry out negotiations by itself in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details were file on a sample basis. The details were also sketchy. It was informed that the office was closed in May, 2008, and the information was to be received from Japan. Therefore, whatever best information is available, the same has been filed from the old records. It is argued that sketchy information was filed on a sample basis. Further, only selective information was filed, which best suited the assessee. Therefore, the information does not represent true and correct picture of activity undertaken by the office. 5.17 The fact of the matter is that the office has gone beyond the functions which were permitted to be undertaken by it by the RBI. In this connection, he referred to the observations made by the DRP in the case of MCJ in whose case it has been held that in the year 2003, it created a separate entity in the form of Metal One Corporation, which was assigned to deal with metal business in the same manner as the division of MCJ was doing earlier. Excerpts from the website of MCJ and Metal One Corporation have been furnished in the draft order that the assessee creates supply chains and value chains which link steel manufacturers and consumers and contributes to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sketchy information filed by the assessee shows that the India office was engaged in price negotiation which is key to making a contract of sales. Thus, it is argued that the AO was perfectly justified in computing business profit in respect of India office. 6. We have considered the facts of the case and the submissions made before us. The facts of the case are that the assessee maintains an office in India, which under FRMA is known as LO. The office is maintained under the approval of RBI to carry out only certain activities. The assessee is required to furnish annually audited accounts to the RBI which have to be certified by a Chartered Accountant. Activity report has also to be filed to the RBI. This office has been closed in the year 2008. In the course of assessment, the assessee was required to file the details in respect of correspondence with clients, invoices, e-mails and profit & loss account of Head Office. The assessee admittedly filed sketchy details on sample basis. It was submitted that the office was carrying on preparatory or auxiliary work but not undertaking any core revenue generating activity. This submission has not been accepted by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is whether or not the activity is essential and significant part of the enterprise as a whole. India does not subscribe to the OECD model and, therefore, this commentary may have only a limited force. Nonetheless it may be capitulated that according to this commentary what is to be seen whether India office is carrying on essential and significant part of the activity in the scheme of the business of the assessee. 6.4 The learned counsel has relied on a number of cases decided by the Tribunal in which it has been held that if the assessee maintains a LO with the permission of the RBI and the RBI does not find any violation of any condition(s) imposed on its functioning, a presumption can be drawn that the office is carrying on preparatory or auxiliary activity. We have discussed these cases but we may again state the names of these cases for the sake of completeness. These are BKI/HAM, Mitsui & Co. Ltd., Tokio Marine & Fire Insurance Co. Ltd., Sojitz Corporation and Sofema SA. This is a rebuttable presumption, which the AO may rebut with suitable evidence. 6.5 Then, there is a decision of Hon'ble Delhi High Court in the case of UAE Exchange Centre Limited. Being the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd sketchy information has been furnished by the assessee in the course of assessment. This is in fact correct, and it may be a cleaver way of presenting facts. However, the AO has not taken any step to bring on record information that the activity was beyond the limit prescribed by the RBI. No doubt that the learned CIT(DR) referred to three pages in the paper book which, according to him, furnish a definite clue that India office was engaged in price negotiation. However, that is not correct as quotations were made on the basis of instructions from the Head Office. Some more information was added about internal dispute in the case of TOPY. But that does not form an essential part of the business of the sale of iron/iron material and iron product by the assessee in India. 6.7 On the basis of aforesaid discussion it can be concluded that the presumption which can validly be raised in this case that India office does not constitute a PE as no violation was noticed by the RBI. This presumption has not been rebutted by the Assessing Officer by bringing any positive material to show that any substantive business activity was carried on by the assessee in India. 6.8 Coming to similari ..... X X X X Extracts X X X X X X X X Extracts X X X X
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