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2016 (2) TMI 705 - ITAT DELHI

2016 (2) TMI 705 - ITAT DELHI - [2016] 46 ITR (Trib) 739 - Existence of P.E. in India - nature of power of attorney - whether the liaison office (L.O.) of the assessee constitutes Permanent Establishment (P.E.) of the assessee in India? - Held that:- A plain reading of the clauses in the power of attorney takes us to a conclusion that the powers given therein are L.O. specific. No doubt the AO can investigate, call for evidences and come to a conclusion where any income earning activity has been .....

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Having come to conclusion that prima facie a reading of the power of attorney does not demonstrate that the employees of the assessee at the L.O. are authorised to do core business activity or to sign and execute contracts etc., we now examine whether the AO has brought out any documentary evidences in support of his contention that the assessee has a P.E. in India.

The assessee has furnished before the AO as well as before the DRP numerous documents, in support of his contention tha .....

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is no adverse comment by the D.R. on these voluminous evidences filed before us by the assessee to demonstrate that it does not have a P.E. in India. The AO has also not brought on record any material, other than his interpretation of the terms of the power of attorney, to demonstrate that the L.O. is carrying on core business activity warranting his conclusion that the assessee has a P.E. in India. Thus neither the documents produced by the assessee are rebutted by the Revenue, nor the Revenue .....

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R This is an appeal filed by the Assessee directed against the final assessment order passed by the Assessing Officer (AO) u/s 144(13) r.w.s. 143 of the Income Tax Act 1961 (the Act) pertaining to the Assessment Year (A.Y.) 2011-12. 2. Facts in brief:- The assessee company is engaged in diversified business of ship building, consumer product such as motor cycles and allterrain vehicles. It also manufactures personal water craft, ships, industrial plants, tractors, trains, small engines, and aero .....

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) in pursuance to the directions as issued by the Learned Dispute Resolution Panel ("Ld. DRP") is a vitiated order as the Ld. DRP has erred both on facts and in law in confirming the addition made by the Ld. AO to the appellant's income. Appellant does not have a Fixed Place Permanent Establishment ("PE") in India : 2(a). On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the Liaison Office ("LO") of the appellant in I .....

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eement and not merely preparatory and auxiliary activities. (c ) On the facts and in the circumstances of the case and in law, Ld. AOIDRP erred in holding that the appellant has filed false declaration before the Reserve Bank of India ("RBI") as the LO was intended to work as fully functional branch office and further holding that such information was also withheld from the Income Tax Department. (d) On the facts and in the circumstances of the case and in law, Ld. AOIDRP very grossly .....

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P erred in observing that the employees of the La possessed specialised knowledge of various technical activities which were not necessary for the liaisoning and auxiliary functions and that these employees are not expedient for functioning of the LO. (f) On the facts and in the circumstances of the case and in law, Ld. AO/DRP very grossly erred in holding that the visiting employees of the appellant used the place of business in India at the disposal of the appellant i.e. the LO, through which .....

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DRP erred in holding that the sale of equipments concluded outside India were done through the Fixed Place PE (i.e. the LO) of the appellant in India ignoring the fact that there does not exist a Fixed Place PE of the appellant in India in the first place and attributing income of ₹ 10,58,87,057 in this regard. (b) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that except manufacturing all other functions like market survey, market research, cust .....

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son for the same. (d) That on the facts and circumstances of the case and in law, Ld. AOIDRP have failed to appreciate that income from off-shore supplies can under no circumstances be subject to tax in India. Taxability of Fees for Technical Services under section 44DA of the Act considering it to be effectively connected to the alleged PE in India 4(a) On the facts and in the circumstances of the case and in law, Ld. AO erred in holding that the entire technical services income was taxable und .....

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d in the circumstances of the case and in law, Ld. AO erred in ignoring the fact that the amount of INR 70,92,129 appearing as income received from a customer was never received by the appellant without independently verifying the same. (d) That without prejudice in any manner to the aforesaid grounds, the AO has very grossly erred in computing income from fees for technical services by allowing expenses at a meager rate of 0.02% of gross amount of receipt. Attribution of profits to alleged PE s .....

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ght to have been considered instead of considering the end customer revenue earned by the appellant from provision of services. (c) On the facts and in the circumstances of the case and in law, Ld. AOIDRP has grossly erred in attributing 60% of the gross profits margin (based on the consolidated financials of the head office, which also includes profit for activities such as manufacturing, research, services etc.) in relation to goods supplied by HO in India to the Indian LO. Levy of interest un .....

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grounds either before or at the time of hearing in the interest of natural justice. 4. Mr.Piyush Kaushik, the Ld.Counsel for the assessee submitted that ground no.1 is general in nature. Ground no.2 pertains to the issue whether the liaison office (L.O.) of the assessee constitutes Permanent Establishment (P.E.) of the assessee in India. Ground no.3 is on the issue of attribution of business profits to the P.E. in India in terms of Article 7 of the India Japan Double Taxation Avoidance Agreemen .....

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argued that, (a) The assessee opened a liaison office (hereinafter referred to as L.O. ) in India with prior permission from Reserve Bank of India and the conditions laid down therein are complied with. (b) The activities of the LO are only preparatory/auxiliary in nature and the L.O. is not authorised to discuss the terms of contract or to bind the head office or to initiate contracts. (c ) That the LO was opened only to act as a communication channel for its head office. (d) that various evid .....

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(P.E.) in India and that the L.O. is not a P.E. 6. The basis for the A.O. as well as the D.R.P. to come to a conclusion that the assessee has a P.E. in India, was the interpretation placed by them on clauses in the power of attorney granted by the assessee, to the person in charge of the L.O. in Delhi. He took this Bench through the various Clauses of the power of attorney and submitted that these are restricted and limited power granted for the purpose of functioning of the L.O. and that no un .....

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evidence to contradict the facts put forward by the assessee. 6.1. He argued that the findings that the L.O. of the assessee is carrying out the entire business activity is not based on any evidence or document, and the allegation that the assessee has violated the terms and conditions laid down by the Reserve Bank of India, while permitting opening of L.O., is perverse. He submitted that the finding as to whether the assessee had violated the conditions stipulated by the RBI and whether false d .....

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the question of attribution or bringing to tax the income from the off shore supplies made from Japan does not arise. 6.3. Without prejudice to the above, it was submitted that, even if it is assumed that there is a P.E., off shore supplies cannot be said to be effectively connected to the P.E. in India. He submitted that the copies of invoices along with shipping documents of supplies demonstrate that they were made on principal to principal basis. He submitted these copies to the A.O. and poi .....

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nd thereafter made a hypothetical determination of 60% of the profits from sales as attributable to the P.E. in India. 6.5. He relied on the decision of Hon ble Supreme Court in the case of Ishikavajimaharima Heavy Industries Ltd. vs. DIT (2007) 288 ITR 408 (S.C.) as well as the judgement of the Apex Court in the case of CIT vs. Hyundai Heavy Industries Co.Ltd. (2007) 291 ITR 482 (S.C.) for the proposition that only such part of income as is attributable to the operations carried out in India is .....

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t, the supply is to be excluded from taxation. 6.7. On taxability of fee for technical services (FTS), he submitted that the assessee committed an error by filing his return of income in as much as, the income from FTS was not disclosed in the return of income. He submitted that the entire FTS received ₹ 65.44 crores is taxable in the hands of the assessee on gross basis @ 10% in accordance with Article 12 of the Indo Japan DTAA. 6.8. On a query from the Bench he submitted that the detaile .....

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tributable to the P.E. He took this Bench through the purchase orders of Afcons Gunanusa Joint Venture (AGJV) and that of Larson & Toubro Ltd. (Engineering and Construction division) to demonstrate that the FTS in question is not attributable to the activity of the L.O. He vehemently contended that no amount can be brought to tax in terms of Article 7. 7. In ground no.5, the assessee did not make any submissions on the ground that the attribution of profits to the alleged P.E. should be in l .....

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arguments of the Ld.Counsel for the assessee and submitted that the so called L.O. in India is conducting core business activity. He submitted that salaries of 41.8 lakhs and 54 lakhs per annum are being paid to the employees in the L.O. and that though no adverse view can be taken keeping in view the quantum of salaries, he submitted that it is an indicator of the nature of functions rendered by the employees and that it is not merely for the purpose of news paper reading and report collection .....

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nt that the power of attorney is L.O. specific. He relied on para 4.2 to para 4.9 of the AO s order and para 3.3 of DRP order. 9. On the arguments of the assessee that the findings of the AO that the conditions laid down in the RBI permission were violated and that the assessee has filed false compliance report with the RBI etc. are wrong and that it is not within the jurisdiction of the AO to give such a finding, he submitted that if an auditor certificate is taken as say all, then the requirem .....

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ese are composite contracts and cannot be segregated. He relied on the decision of the Hon ble Supreme Court in the case of M/s Hindustan Ship Yard Ltd. vs. State of Andhra Pradesh judgement dt. 20.7.2000. On interest levied u/s 234B he relied on the order of the DRP. He pointed out that the assessee has not pressed ground no.4C and has not argued ground no.5 in the appeal and hence no specific reply is given. He submitted that some of the contracts were signed by highly qualified persons of the .....

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issue of place of signing of the contract being India, it was submitted that the Hon ble Supreme Court had held that this is of no consequence. 10. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record, orders of the authorities below we hold as follows. 11. A perusal of the order of the AO as well as the DRP takes us to a conclusion that the sole basis on which they had come to a conclusion that the assessee had a P .....

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nder the laws of Japan and having its registered office at 1, Higashikawasakicho, 3- Chome, Chuo-ku, Kobe -65091 (hereinafter called KHI) duly represented by its Board of Directors, does hereby constitute and appoint Mr. Takao Suto holding Passport No. T.10453120, the true and lawful attorney/local representative of KHI for and in the name of and on behalf of' KHI to do or execute all or any of the acts and things hereinafter mentioned. 1. To open and establish a Representative Office and/or .....

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ffice, and to make, draw, sign, endorse, accept, negotiate and realize (a') the case may be) cheques and perform such acts, deeds am things as may be necessary for operation of accounts with such banks. 3. To sign and execute contracts for the purchase of items required for the operation of the Liaison Office. 4. To sign bills of lading, orders for delivery of goods, forwarding notes, railway receipts, custom house wan ants, letter and correspondence in respect of the activities of the Liais .....

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ce. 6. To apply for, obtain and renew all licenses and permits that may be necessary for carrying on activities of the Liaison Office, and to undertake and fulfil all procedural formalities pertaining thereto, including making and filling of all applications, affidavits and giving necessary undertakings where required. 7. To file applications, documents and undertake follow-up thereof, with the Reserve Bank of India, Ministry of finance and any other authority for setting up the Liaison Office a .....

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s may be necessary or appropriate to protect the interests of the Liaison Office; and 11. To generally represent and act in the name and behalf of KHI in all matters arising out of related to the establishment and functioning of the Liaison Office. KHI is hereby declares that every act, deed, which shall be signed, executed made 01' done by the said attorney shall be as good, valid and effectual to all intents and purposes whatsoever as if the same had been signed, delivered, exercised , mad .....

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Emphasis ours) 11.2. The RBI permission reads as follows. FE.CO.FID/10.96.545/2005-06 By Air Mail/Regd.A.D. M/s Kawasaki Heavy Industries Ltd., 1, Higashikawasakicho 3 - Chrome Chuo-Ku, Kobe 650-91, JAPAN. Dear Sirs, Permission to establish Liaison Office in India. Please refer to your consultant s letter dated 16th October,2006 on the captioned subject. 2. Having noted from the documents furnished therewith that your company is engaged in the activity of manufacturing transportation equipment a .....

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parties in India. In the event that you propose to shift your Liaison Office to any other city you should seek prior approval from Foreign Exchange Department, Central Office, RBI, Mumbai. 3. Please note that this permission has been granted subject to the conditions mentioned in the Annexure. 4. Please note to furnish to us the postal address of your Liaison Office in due course for our record. Please also note to address the correspondence in future to: The General Manage, Foreign Exchange De .....

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d/income earned by the office in India for the liaison activities/services rendered by it or otherwise in India. iii. The entire expenses of the office in India will be met exclusively out of the funds received from abroad through normal banking channels. iv. The office in India shall not borrow or lend any money from/to any person in India without our prior permission. v. The office in India shall not acquire, hold (otherwise than by way of lease for a period of not exceeding five years) transf .....

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In the case of winding up of the office, you may approach Regional Office with the documents as required in terms of Regulations 8(1)(iii) of Notification no.FEMA 13/RB-2000 dated 3rd May, 2000. vii. The office in India shall not render any consultancy or any other services directly/indirectly, with or without any consideration. viii. The office in India will not have any signing/commitment powers, except than those which are required for formal functioning of the office, on behalf of the head o .....

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examined by RBI by carrying out a scrutiny as and when found necessary. 11.3. A plain reading of the clauses in the power of attorney takes us to a conclusion that the powers given therein are L.O. specific. The AO s conclusion that the power of attorney granted unfettered powers to its L.O. employee, to do all or any acts for and on behalf of the assessee, is incorrect. In our view the finding of the AO that the power of attorney is an open ended document, which is clearly outside the scope of .....

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I has not found any violation of conditions laid down by it while permitting the assessee to have an L.O. In such circumstances, no adverse inference can be drawn. 11.4. Having come to conclusion that prima facie a reading of the power of attorney does not demonstrate that the employees of the assessee at the L.O. are authorised to do core business activity or to sign and execute contracts etc., we now examine whether the AO has brought out any documentary evidences in support of his contention .....

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adverse finding on the evidences filed before him nor did he point out from the evidences filed, as to why the claim of the assessee is not acceptable. There is no adverse comment by the D.R. on these voluminous evidences filed before us by the assessee to demonstrate that it does not have a P.E. in India. The AO has also not brought on record any material, other than his interpretation of the terms of the power of attorney, to demonstrate that the L.O. is carrying on core business activity warr .....

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on the issue of attribution of business profits to the P.E. in India. Thus ground no.3 is not adjudicated as it is consequential in nature to our finding in ground no.2. 14. This brings us to the issue of taxability of fee for technical services. The Ld.Counsel for the assessee has conceded before us that the entire FTS of ₹ 65.44 crores is taxable in the hands of the assessee. This issue is set aside to the file of the A.O. for fresh adjudication, de novo in accordance with law. 14.1. The .....

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