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Nagase & Company Limited C/o., S.R. Batliboi & Co Versus ADIT- (Intl. Taxn.) -Range-3 (2) , Mumbai And Vice-Versa

2017 (1) TMI 1098 - ITAT MUMBAI

Functioning of Liaison Office (LO) - Permanent Establishment(PE) in India - provisions of India-Japan Tax Treaty (Treaty)applicability - whether the business premise of the assessee proved that its activities were not confined to Liaison Work(LW)only, that it was having a PE in India, that it had not restricted its activities to LO? - Held that:- From the discussion it is clear that any activity being subsidiary or in aid or support of main activity has to be treated auxiliary or preparatory act .....

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ments. There is no doubt that two of the employees GS and Vinod Balgi were employer of the LO for the year under consideration. But, that does not lead to any final conclusion. No question was ever asked to them about the duties assigned to them or about the responsibilities shared by them. There appointment letters would have given some clues about their job profile. Nothing is on record that can prove that the LO was functioning as an independent profit center for the year under consideration. .....

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eiving a communication from the AO, not initiated any proceedings against the assessee for violating the terms and conditions of the permission letter issued to it by the Bank for operating the LO, then it will strengthen the case of the assessee. By not taking any action against the assessee, the RBI has accepted the plea that the LO was performing the activities that were allowed by the Bank. - Considering the above, we are of the opinion that there is no evidence that the LO was functioni .....

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from its public accounts. Because of a genuine mistake in one of the certificates (not all the certified documents), the AO should not have estimated the turnover. In our opinion, before taking such a drastic step in case of a public limited company he should have commented upon the reconciliation statement filed by the assessee. Considering the above, we are of the opinion that the order of the FAA does not need any interference from our side. So, confirming his order, we decide the first groun .....

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d Bench of the Madras High Court was of the view that levy of interest under section 215 on the assessee was not justified. - We are in respectful agreement with the view taken in the case of CIT v. Sedco Forex International Drilling Co. Ltd. [2003 (10) TMI 40 - UTTARANCHAL High Court]. We are clearly of the opinion that when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the payee-assessee. - ITA/1800/Mum/2007, ITA/115/Mum/2006, ITA/369/Mum/2 .....

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T(A) s order dt. 27. 2. 2006. The assessee- company is engaged in import/export as well as domestic sales of dyestuff, chemicals, plastics, machinery, health food and medical equipments. It has a Liaison Office(LO) in Mumbai, established with the specific prior approval of the Reserve Bank of India (RBI). It filed its return of income for the year under consideration, declaring income at Rs. Nil. Brief Facts: 2. A survey under section 133A of the Act was conducted at the office premises of the a .....

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ule 10 of the Income Tax Rules, 1962 (Rules)and estimated the profit at 10% of the total turnover from India. For computing the total turnover, he adopted the figures mentioned in the performance review reports of one employee namely George Sunder(GS)as the sales figure for the AY. under consideration. During the re-assessment proceedings, the AO held that perusal of the documents impounded from the business premise of the assessee proved that its activities were not confined to Liaison Work(LW) .....

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d, appraisal of the work, contribution of the employees/agents for the subsequent years and the overall assessment by the higher authori - ties, that in the appraisal column of the PRR sales figures were reported and the column was required to be maintained by the sales staff only, that assessee LO had separate sales staff other than the regular staff. Referring to column number three of the report of GS for the year under consideration, he mentioned that sales target were fixed for him at US$42 .....

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Column 4 of the report GS increased the export business by US$ 1. 5 million (29%) for the year under consideration as compared to last years. As per the AO, similar sales targets were assigned to two more employees namely we Vinod Blagi & Kishore L Rajani. He held that the sales staff was directly involved into business activities, that they were responsible for achieving the target fixed and also expansion and development of the future business of NCJ. He referred to pages 34, 115 156, 157 .....

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he LO was indulging in full-fledged sales activity, that for the contravention of the permission of the RBI he would be informing the bank separately, that the papers found during the survey proceedings indicated that LO was being used to carry out sales and marketing activities in a big way, that the employees were contacting potential customers and were giving quotations about the rates, that they were passing on the requirements of those customers to the HO Japan, that they were forwarding th .....

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as a group, that the targets were constantly reviewed by the appraisers, that they were supposed to increase/expand business and to develop new contacts, that the raising of final bills by the HO would not mean that assessee could claim that no profits were attributable to it, that the entire activity of the business except for the file of dispatch and raising the bills were carried out by the assessee in India, that the assessee had arranged its work in such a fashion that final invoices were .....

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ppeal. He directed it to submit a copy of its global accounts to assess the profitability at the global level and to determine the profit of the Indian branch. As per the AO the assessee did not furnish any documents/details in that regard. Invoking the provisions of Rule 10 of the Rules, he estimated the income at the rate of 10% of the total turnover from India. He held that assessee was mainly supplying chemicals that were in great demand and some of the items were near monopoly items, that t .....

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e AY. 1998-99 he estimated at 20% less than the sales for the subsequent AY. and so on. As stated earlier, he determined the income of the assessee at ₹ 7, 97, 69, 800/- 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). It was argued that reasonable opportunity was not given by the AO to produce the evidence. The assessee furnished certain documents before the FAA for the first time. He called for a remand report from the AO w .....

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from Japan and the HO would deliver the goods directly to the customers, the customer would open a letter of credit in favour of the HO for making the payment, that sales were carried out through the independent agents, that approximately 80 to 85% of the assessee s export of goods to Indian customer was conducted through the independent agents, that the agents were unrelated to the assessee and would provide similar services to other parties, that the agents were paid commission for their serv .....

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activities and not non-core activities for the assessee, that the employees of the LO would carry out support functions to enable the HO to carry out the sales in as well as purchases from India, that the employees of LO were not authorised to negotiate the pricing for the contractual terms with the potential customers /suppliers, that they would act to facilitate the sale by the HO, that the performance review reports were primarily grouped into various subdivisions at the HO level, that those .....

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he HO in ensuring satisfied and loyal customers and maximise sales, that the HO sales and purchases targets were relevant for measuring performance or for evaluating the efficiency/performance of the LO staff, that the AO had placed reliance on incorrect documents, that the turnover computed by the AO included the sales made by the assessee through its independent agents, that the agents would collect and provide information about the Indian market to the HO, that they would identify and meet ne .....

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assessee, that they were paid a commission @ 2 to 5%(appr- oximately)of the sales amount, that all the costs relating to conducting their agency business was born by the agents, that the agents would independently frame their business policies, that the only instruction the agents would receive from the assessee was regarding the overall term of identifying the new customer and the price to be charged to them, that such instruct - tions were normal in any agency relationship, that the agents wo .....

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nd Fragrance (M&F) and on the website of associated agencies, list of customers agents wise and product wise. It was further argued that direct sales/sales through independent agents were not taxable in India, that the business of the assessee was structured in such a manner that a major part of its sales in India was affected through its independent agents that the agents had considerable knowledge and experience of the market, that the AO himself had acknowledged the fact, that majority (a .....

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sessee to whom direct sales were made, that the assessee had submitted several sample documents evidencing the fact that agents were independent and would directly deal with the HO, that the documents also proved that the assessee had made direct remittances of the commission amount to the bank accounts of the agents, that the LO had only provided a support service to the HO, that the AO had himself acknowledged the fact that agents were working for the others also, that the assessee had filed a .....

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reconsiliation statement in response to the issue raised by the AO with regard to discrepancy in the amount of sales made by M&F, as independent agents for the AY. 1998-99, that the AO had not commented on para 5A and 5B of the first remand report as well as the submissions made by the assessee on 30/06/2005 in his second remand report. The assessee further argued that turnover computed by the AO was erroneous, that the figures reflected in the achievement column of the PRR of the employees .....

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such PE in India, that purchases made by the assessee from India should be excluded while computing its total taxable income, that the AO had assumed that there was a 20% increase in the sales in the subsequent years, that the increase/decrease of 20% in the sales figure for the subsequent/ prior years could not be taken on an ad hoc basis, that the AO had attributed the entire 10% profits to the LO in India, that even if the LO was considered as a PE of the assessee the entire profit on sales c .....

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herefore be considered for computing revenue attributable to the LO operations in respect of direct sales, that from such revenues the expenses pertaining to the LO should be directed to arrive at the net profits, that based on the above the income attributable to the PE should be computed as per the average rate of commission on by the independent agents, that the agents acted in the ordinary course of their business and had legal and economic independence, that even if any of its agents was he .....

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y the AO in the first remand report and the submissions made by it before the AO. 3. 1. The FAA, after considering the submissions of the assessee and the remand reports, held that the AO had provided a table listing out of 21 instances of documentation (forming part of the impounded documents)to support the argument that it s LO was engaged in full-fledged business activities, that the documents indicated strong evidence to the point that LO had undertaken marketing activities, including negoti .....

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of the assessee had been conducted through independent agents and that they were unrelated to it, that although all the customers whether attended directly or through agents made payments to the HO at Japan but the business negotiations were carried out with them by the LO, that there was no basic difference in the dealing by the assessee with the customers directly or through agents, that the role of the independent agents was not different from the customers who negotiated directly, that duri .....

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essee with regard to the figure as per the exhibits vis a vis the PRR did not substantiate the claim that it also included purchases, that nowhere it had been certified by the assessee that reports also included agents sales, that it had not filed details of purchases, that in respect of remaining AY. s the figures as per the certified exhibits should be considered as there was no justification for 20% ad hoc increase/ decrease to the sales figure of the those AY. s, that sales figure had been t .....

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the sales figures adapted on estimate basis by the AO. He directed the AO to adopt the sales figure for all the above AY. s (except AY. 1999-00 and 2000-01) as per the certified exhibits submitted by the assessee. The FAA further held that the PE in India was an extension of the assessee, that from the verification of the accounts, submmitted it by the assessee, it was not possible to draw any reasonable conclusion, that in the absence of various details like itemised details of sales/ purchase .....

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ding/ marketing which would yield high profits. Finally, he applied the GP rate of 8%, as against 10% applied by the AO. 4. Before us, the Authorised Representative (AR) argued that facts available for later year i. e. AY. 1999-00 could not form basis for assuming facts for the years prior to such year, that income for earlier years had to be assessed on the basis of material subsisting for those years, that the AO had majorly relied on the documents impounded during the survey proceedings for t .....

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tomers and hence the figures mentioned were in respect of support given by the staff and did not relate to sales achieved by such employees in India, that the PRR. s were relevant for the subsequent AY. s. , that no adverse conclusion should be drawn from such documents not pertaining to the year to hold that assessee had a LO in India, that LO carried out the RBI permitted activities only and acted as a communication channel gathering market information, that the analysis of the documents for t .....

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ificance on account of the language barrier between the countries, that the staff of the LO was responsible for collecting the market information and relaying the same to the HO, that the documents impounded by the Department clearly indicated that activities carried out by the staff of the LO were merely that of communication channel, that the AO had mentioned that RBI was being separately informed about the violation by the LO of carrying out activity beyond what was permitted, that the RBI ha .....

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ted to the AO, that while determining the issue of PE in India he did not consider the material filed before him and held that entire sales of the assessee in India were attributable to PE of the assessee in India, that the agents were independent agents and were carrying out the activities in the normal and ordinary course of business, that as per Article 5 (7) and 5 (8) of the treaty activities carried out by an independent agent in his ordinary course of business would not constitute a PE, th .....

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he view that agents were actually involved in developing market and not the LO-employees, that the LO- employees had passed information to HO, that such passing of information could not be the basis to assume that agents were working at the behest of the LO, that agents would coordinate with the local office, that declaration from the major agents of the assessee to the effect that they were independent agents was filed, that the simple print of the websites of the agents clearly showed that the .....

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scope of activities could not be in any event be wider than the activities of independent agents, that profits attributable to the PE of the assessee in India in relation to the direct sales in India should be computed on the basis of the average rate of commission paid by the assessee to such agents. Alternatively, it was argued that the profits attributable to the PE of the assessee in India in relation to the direct sales in India should be computed on the basis of the allocating the gross m .....

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hin margins. He relied upon the cases of Mitsui and Company Ltd. (39ITD59) and Tokyo Marine and Fire insurance Company Limited (ITA/4696/Del/2005). 4. 1. The Departmental Representative (DR)contended that two of the employees of the LO working with the assessee during the year under consideration, that the details of travelling expenses and the establishment expenses for the assessment year 1998-99 proved that GS and Balgi were on the payroll of the assessee, that they were engaged in the sales .....

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and development of future business, that the LO had undertaken marketing activities including negotiations and it was dealing with customers, that the role of LO in India was critical to the main trading business of the assessee, that the activities could not be categorised as preparatory or auxiliary activities, that the activities carried out by the LO did not qualify for the exclusion from the definition of the term PE under Article 5 of the Treaty, that AO had noticed that all customers made .....

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n pertaining to Indian operations, that the estimation of profit the rate of 10% on ad hoc basis was in accordance to Rule 10 of the Rules, that the AO had asked the assessee to submit details of its global accounts for last six years, that the assessee had not produced any documents/details, that the AO was left with no other option but to estimate the profit, that the assessee changed stands constantly by filing the revised certified copies of the accounts and documents every now and then. 5. .....

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LO, that that the LO had played a role in the sales made by the agents, that the figures of the PRR should constitute the part of the turnover for those years. The AO estimated sales adopting a particular formula( i. e. 20% increase or decrease in the sales figures for the subsequent or earlier years), the FAA held that the LO was the PE of the assessee in India, that the AO was not justified in estimating the sales, that he should accept the sales figures submitted by the assessee except for tw .....

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basic fact in a particular year the assessee had received certain income or income had accrued to it. In the case under consideration, the AO/FAA referred to certain impounded documents to establish that the LO was, in fact, functioning as PE of the assessee for the year under appeal and hence its income should be taxed in India. Therefore, we are of the opinion that issue of existence of PE should be decided first. For that purpose it would be essential to refer to the impounded material. One .....

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on transferable rights to distribute certain chemicals. The agreement was valid up to December, 1996. No other document was referred to by the AO/FAA to prove that the agreement was renewed was acted upon during the year under appeal. Pg. 523 of the PB is a letter from one of the employees of the assessee to its Shanghai office. In that letter the employee has advised the Shanghai office as to how to deal with Indian customers. But, it does not prove that the assessee was indulging in sales acti .....

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me across any evidence that can prove that LO had directly dealt with the agent. The assessee had claimed that information received from M&F had been forwarded to HO. The AO had not commented upon the assertion made by the assessee. The next document (Pg. 567) talks about meeting of members of the LO with agent and one of the manufacturer. It does not prove that the LO was carrying out business activities. 5. 2. There is a very thin line between liasoning/providing auxiliary services and doi .....

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n assessee was not liasoning or was doing business. What has to be seen is that with whom the decision making power lies. If the LO has to follow the directions/command of the HO then the reins of the business would not be in its hands and it cannot be treated an independent entity. But, if it informs the HO, after entering in to business transaction on its own, about the results of its business activities then the HO cannot claim that the HO was assisting it. In the matter of UAE Exchange Centr .....

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a sense saying the obvious as every other activity which an enterprise undertakes in earning profits is with the ultimate view of giving effect to the obligations undertaken by an enterprise vis-a-vis its customer. If looked at from that point of view, then, no activity could be construed as preparatory or of an " auxiliary" character. From the above discussion it is clear that any activity being subsidiary or in aid or support of main activity has to be treated auxiliary or preparator .....

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documents. There is no doubt that two of the employees GS and Vinod Balgi were employer of the LO for the year under consideration. But, that does not lead to any final conclusion. No question was ever asked to them about the duties assigned to them or about the responsibilities shared by them. There appointment letters would have given some clues about their job profile. Nothing is on record that can prove that the LO was functioning as an independent profit center for the year under considera .....

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at was the outcome of that exercise. The FAA or the DR has not mentioned anything about the correspondence entered into with the RBI. We are aware that decision of RBI may not be very relevant for determining the tax liability of an assessee. But, if the RBI has, after receiving a communication from the AO, not initiated any proceedings against the assessee for violating the terms and conditions of the permission letter issued to it by the Bank for operating the LO, then it will strengthen the c .....

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rposes. ITA/1800/Mum/2007-AY. 1998-99(Appeal by the assessee): 6. While giving effect to the order of the FAA, the AO disallowed expenses under the heads Agents Commission (Rs. 1, 56, 26, 851/-)and expenditure incurred towards packing and trans - portation of personal and household effects and air travels of the employees (Rs. 2, 98, 750/-). The assessee challenged the order of the AO before the FAA, who dismissed the appeal filed by it. 7. Before us, the AR argued that the issue will have to be .....

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red to incur expenditure for relocation of personal and household effects of the employees, that the expenditure was incurred in connection with the relocation of the employees in the normal course of business, that the expenditure was an allowable deduction. The DR supported the order of the AO and the FAA. 8. While deciding the earlier appeal, we have held that assessee was not having PE in India. The issues raised by the assessee are academic in nature in the background of our order. So, we a .....

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rification by the certified Public accountant accepting the mistake along with the reconciliation of the amounts. However, the AO was not satisfied with the explanation filed by the assessee. He stated that there were mistakes in the average commission paid to the agents, that the accounts of the assessee were not reliable. He estimated the turnover figure on the basis of the PRR of the employees applying plus/minus to the figures appearing in the reports. He also estimated the gross profit for .....

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nover, that there was no justification for rejecting the certified statements. 9. 2. During the course of hearing before us, the DR stated that the assessee itself had admitted that there were mistakes in the statement filed with regard to average commission paid to the agents, that the assessee filed the revised statements only after detection by the AO, that AO was left with no option but to estimate the turnover. The AR supported the order of the FAA. 9. 3. We have heard the rival submissions .....

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t comment upon the reconciliation filed by the assessee with regard to commission paid to the agents. Pg. 309-316, 327-340 and 427 of the PB are about the reconciliation of the figures. After going through these documents we are of the opinion that the FAA were justified in rejecting the method adopted by the AO i. e. estimating the turnover instead of accepting the turnover is certified by the professionals. We have taken note of the fact that assessee is a public company in Japan and the state .....

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e the first ground of appeal against the AO. 10. Next ground of appeal is about reducing the GP to 8% by the FAA, as against 10% estimated by the AO. Following our order for the first ground of appeal, we dismiss second ground. 11. Last ground of appeal is about levy of interest under section 234B of the Act. While completing the assessment, the AO had levied interest under the said section. During the appellate proceedings, the FAA deleted the interest. 11. 1. We find that the issue is decided .....

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terest could be levied on the assessee under section 234B of the Act in respect of tax which was not liable to be deducted at source. A learned Bench of the Uttaranchal High Court, after considering the provisions, held as under (page 328) : "Secondly, although section 191 of the Act is not overridden by sections 192, 208 and 209(1)(a)(d) of the Act, the scheme of sections 208 and 209 of the Act indicates that in order to compute advance tax the assessee has to, inter alia, estimate his cur .....

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