TMI Blog2012 (6) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... unless its activities exceed the permitted activities or the department lays hand on any concrete material or evidence to state that any substantive business activity has been carried on from this place. Since no income accrues or arises to the assessee in India, no income can be deemed to accrue or arise to the assessee in India by invoking exclusionary sub-paragraph (e) - Decided against the Revenue - IT Appeal No. 5377 (Delhi) of 2011 - - - Dated:- 11-5-2012 - I. P. BANSAL, K. G. BANSAL, JJ. ORDER K.G. Bansal, Accountant Member- This appeal is directed against the order of assessment passed by the Dy. Director of Income-tax, Circle-3(1), International Taxation, New Delhi ("AO" in short), on 18/10/2011 u/s 144(3) read with section 144C of the I.T. Act, 1961, The assessee has taken up following grounds: "1. That on the facts and in law the Assessing Officer [herein above referred as the "Assessing Officer"]/Dispute Resolution Panel [herein above referred as the "DRP"] erred in holding that the assessee's Liaison Office (LO) in India was its Permanent Establishment (PE) in terms of Article 5 of the India-Japan Double Taxation Avoidance Agreement (DTAA). 1.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer in the draft assessment order. 5. That on the facts and in law the AO/DRP erred in levying interest under section 234B of the Act. 6. That on facts and in law the orders passed by the Assessing Officer/DRP are bad in law and void ab initio. " 1.1 It is seen from the grounds that they contain facts as well as arguments and, therefore, they are not in accordance with ITAT Rules. However, in the course of hearing before us, the learned counsel for the assessee explained that the appeal primarily involves three questions: ( i ) Whether the assessee has a Permanent Establishment ("PE" in short) in India? ( ii ) If answer to aforesaid question is in affirmative, what is the amount which can be attributed as profit to the activities carried on by the PE ? and ( iii ) Whether the assessee is liable to pay interest u/s 234B ? 1.2 Before proceeding further, it may be mentioned that the assessee - company had made an application for stay of demand. This application was disposed of on 23/12/2011. The assessee was directed to pay a sum of Rs. 4.00 crore upto 30/03/2012. On doing so the balance demand was stayed for a period of 180 days or the disposal of ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributed to the LO. The income was computed at Rs. 32,58,04,780/- as under: Particulars Rs. Sales in India 6,99,51,34,490 Gross profit on sales @10% as discussed above 69,95,13,449 Profits attributed to India @50%(A) 34,97,56,724 Less: Expenses incurred by LO as discussed above(B) 2,39,51,948 Taxable Income (A-B) 32,58,04,776 Round off to 32,58,04,780 2.2 The assessee filed objections to the draft order, which were considered by the ld. Dispute Resolution Panel "(DRP" in short). After hearing the assessee, it has been mentioned that it is pertinent to look at the description of activities of Mitsubishi Corporation Japan ("MCJ" in short). In the case of Mitsubishi Corporation India Private Limited for assessment year 2007-2008, in the draft order, the Assessing Officer has held that in the year 2003, MCJ created a separate entity in the form of Metal One Corporation, with a view to conduct metal business in the same manner in which MCJ had been conducting the business earlier. Based upon the detailed discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 51 Less: Expenses incurred by LO as discussed above (refer para 17) (B) 2,39,51,948 Taxable Income (A-B) 32,63,29,903 4.1 Aggrieved with this order the assessee is in appeal before us. 5. The learned counsel furnished background facts of the case that the assessee company is a tax resident of Japan. It deals in steels and steel products. It had opened a LO in India with the approval of the Reserve Bank of India in terms of section 6(6) of the Foreign Exchange Management Act ('FEMA' in short). The LO was to act as only as a communication channel between constituents in India and HO in Japan. The approval is subject to filing of audited accounts before the Reserve Bank of India along with the activity report. This has been done every year. The LO has been closed down in the year 2008. The assessee was required to pay fringe benefit tax because of which return was filed in which income was shown at nil. 5.1 The Assessing Officer passed a draft order on 23/12/2010 holding that the LO is a PE, carrying on core business activities. A draft order was passed computing the income of about Rs. 35.58 crores. The DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by Mahindra. The India office also informed Mahindra that the HO will discuss the matter with the supplier in Japan. The requirement of Mahindra was also sought. Finally the HO wrote to the India office on 03/09/2007 that its representative will visit India on 12/09/2007 although none from the supplier side is available. In these circumstances advice was also sought regarding rescheduling of the visit so that representative of supplier in Japan may also be available to come to India. 5.4 In regard to Tractor Engineers Limited, a letter was received from it by the India office intimating that supplier's request for increase in price by 15% is a matter of concern, in the background of the fact that in February, 2007, it had reluctantly agreed to price increase of 6%. It was informed that quantity has been increased by more than 100%, therefore, the price should come down rather than increasing by 15%. This e-mail dated 20/07/2007 was replied to in which it was mentioned that the price hike is high and it needs clear explanation. Tokyo office has also been requested to negotiate the level of price hike which should be more moderate. This was followed by another e-mail informin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.8 Our attention is drawn towards the dictionary meaning of the word "preparatory" to mean serving as a preparation, occupied in preparation. The word "auxiliary" means adding or supporting; subsidiary. 5.9 Our attention has also been drawn towards OECD commentary wherein it is mentioned that sub paragraph (e) provides that a fixed place of business through which the enterprise exercises solely an activity which has for the enterprise a preparatory or auxiliary character, is deemed not to be a permanent establishment. It is recognized that such a place of business may contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realization of profits that it is difficult to allocate any profit to the fixed place of business in question. It is often difficult to distinguish between the activities which have a preparatory or auxiliary character and those which do not have such character. The decisive test is whether or not the activities carried on form an essential and significant part of the activity of the enterprise as a whole. Therefore, each case will have to be examined on its own merits. The commentary also gives some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deeming section which neither accrued nor arose in India. 5.10.2 In the case of BKI/HAM V.O.F . v. Addl. CIT [2001] 79 TTJ 480 (Del), the Tribunal referred to the dictionary meaning of the word "auxiliary" furnished in Webster's Dictionary to mean 'ancillary'. 'Ancillary' means subordinate or auxiliary. Therefore, 'auxiliary' means helping or aiding living support; subsidiary or additional supplementary power; a helper or aid; a confederate; an ally. The Tribunal found that the period of 6 months was admittedly to be counted from arrival of first dredger on 16/12/93 on the basis of documents on record and the machinery and plant was completely demolished by 12/06/94. Thus, the period of 6 months was not completed. Therefore, no PE came to be existence in India. 5.10.3 In re 791 of 2008 in the case of K.T. Corporation, the authority mentioned that as per regulation 2(e) of FEMA 'liaison office' means a place of business to act a channel or communication between the principal place of business or HO by whatever name called and entity in India but which does not undertake any commercial, trading, industrial activity, directly or indirectly and maintains itself from remittan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.12 In the case of DCIT v. Tokio Marine and Fire Insurance Co. Ltd. in I.T.A. No.4696/Del/05 for assessment year 2002-2003 dated 31st October, 2007, a copy of which has been placed on record, the Tribunal observed that the LO was approved by the RBI with the condition it would not render any consultancy or other services directly or indirectly with or without any consultation and it would not undertake any insurance business in India. No adverse finding has been brought on record. The material on record is that two expatriate employees of the LO signed as witness to the joint venture agreement. On the basis of this evidence alone it cannot be said that any business has been conducted as activity is preparatory and auxiliary in nature. 5.13 The facts in the case of Sojitz Corporation v. ADIT [2008] 117 TTJ 792 (Cal) are that the assessee is a trading and export house of Japan, having presence in different countries including India. The assessee initially set up four branch offices in New Delhi, Calcutta, Mumbai and Chennai in the year 1957. Thereafter, new offices were established in Bangalore, Pune and Jamshedpur. In the year under consideration the assessee incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. This ground is admittedly covered in the ruling in case of Abdul Razak A. Meman [2005] 276 ITR 306. 5.15 In the case of DCIT v. Sofema SA, I.T.A. No.3900/Del/2002 for assessment year 97-98 dated 05/05/2006, a copy of which has been placed before us, the facts are that the assessee has an office in India and it is a trader in defence equipments. It supplies goods to various companies and Government departments in India. The assessee maintains office at Delhi and Bangalore in which huge amounts have been spent. The finding of the Tribunal is that in absence of any evidence on record in respect of commercial activity having been undertaken by the assessee in India, its LO cannot be treated as a PE. In this connection reliance has been placed in the decision in the case of IAC v. Mitsui Co. Ltd. 39 ITD 59. This decision has been confirmed by Hon'ble Delhi High Court on 18/12/2006 with the remark that no substantial question of law arises. The Civil Appeal filed by the Revenue has also been dismissed by the Hon'ble Supreme Court. It has been mentioned that the finding has been given on the basis that there is no evidence or justification forthcoming from the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er assessment order of which the assessee is not aware. We may add that MCJ is an associated enterprise. Of course the question would remain as to whether the assessee knows or is required to know the activities of MCJ in India. 5.18 Our attention has also been drawn towards page No. 40 of the paper book, being a letter written by India office to Tractors Engineers Limited mentioning that he had talked to the HO to enquire as to what was going on. The writer agreed that the price hike of US$120 per mt. ton for this commodity is an extreme jump and needs more clear explanation behind it. He has also given some factual information about conflict going on in the supplier company, TOPY for securing allocation between domestic sales and export sales. In such conflict one criteria is sale price or profitability. The case of the learned CIT, D.R. is that this correspondence clearly shows that India office is engaged in negotiation of price, which is core business function. This letter was responded to and Tractors Engineers Limited wrote that the offer of increase of US$80 per mt. ton is surprising and that it is willing to increase of US$35 per mt. ton as suggested by it and upto US$ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y paragraph of Article 5 and what has to be seen under this paragraph is whether there is a fixed place through which the business of the assessee is carried on wholly or partly. There is no dispute that India office is a fixed place. The dispute is whether the business of the assessee is being partly carried on through this office. 6.2 Para No. 2 includes a number of items within the meaning of the term "PE" such as a place of management, a branch, an office, a factory etc. Admittedly, the India office is an office. However, it may be stated that this paragraph does not stand alone but has to be read in conjunction with paragraph No. 1. Therefore, it has to be seen whether business is partly carried on from this office. Paragraph No. 6 makes certain exclusions from the term "PE". These are facilities solely for the purpose of storage of goods, maintenance of stock of goods etc. solely for the purpose of storage or display etc. The sub paragraph on which assessee relies is (e), i.e., maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. The case of the assessee is that Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an exclusionary clause (e). Once an activity is construed as being subsidiary or in aid or support of main activity, it would fall within the exclusionary clause. This case has been followed by the AAR in the ruling in the case of K.T. Corporation, Korea, and it has been ruled that in view of the aforesaid decision the LO cannot be taken to be a PE unless its activities exceed the permitted activities or the department lays hand on any concrete material which impeaches the version of the assessee. 6.6 We may now consider the decision in the case of Sofema SA. The finding of the Tribunal is that in absence of any evidence on record with regard to commercial activity having been done by the assessee in India, the LO cannot be considered to be a PE. The Hon'ble High Court of Delhi dismissed the appeal of the Revenue by mentioning that no substantial question of law arises. However, the Hon'ble Supreme Court dealt with the case in greater detail and mentioned that there is concurrent finding that Sofema SA does not have a PE in India. This finding has been given on the basis that there is no evidence or justification forthcoming from the Revenue to show that the assessee has a PE i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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