TMI Blog2017 (8) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... creases the burden of the Revenue to show that notwithstanding the RBI permission continuing during the AYs in question, the Assessee’s LO should be construed to be a PE in terms of Articles 5 (1) and 5 (2) of the DTAA. The Court has undertaken the exercise of again examining the factual position since in the impugned order the ITAT has merely relied upon its order for an earlier AY. While the Court appreciates the contention put forth by the Revenue that the facts of each AY has to be separately considered, the Court finds that there is no ground made out to disturb the reasoned order of the CIT (A) for both the AYs. ITAT was correct in holding that the Assessee did not have a PE in India and was therefore exempt under the provisions of the DTAA between India and Japan. ITAT was right in holding that the offices of the Assessee and its activities during the AY in question could not be regarded as its PE in India and the income directly or indirectly attributable to the said offices was not taxable in India. Assessee does not have any PE in India and its income from business turnover/imports in India was exempt in view of DTAA between India and Japan. - Decided in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an income of ₹ 6,57,28,814 from the Anpara Power Project and a loss of ₹ 1,28,57,065 from the DESU Power project. Subsequently, a revised return was filed by the Assessee on 25th May, 1995 declaring an income of ₹ 8,69,34,500. The AO's order for AY 1994-95 5. The return was picked up for scrutiny and an assessment was framed at a total taxable income of ₹ 10,69,55,975 by the Assessing Officer (AO) order dated 25th March, 1997 under Section 143 (3) of the Act. The said total taxable income was arrived at by making an addition of ₹ 28,52,899 after concluding that the Assessee had a Permanent Establishment (PE) in India within the meaning of the Indo-Japanese Double Taxation Avoidance Agreement ( DTAA ). 6. During the assessment proceedings, a questionnaire was issued to the Assessee. An Authorized Representative (AR) of the Assessee appeared before the AO to provide the necessary details. The AO noted that the Assessee had a Liaison Office ( LO ) in India which, according to the AO, helped the Assessee in finding new purchasers and sellers of goods and merchandise. The Assessee had contended before the AO that the conditions imposed upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessee had offered its income from the Anpara Power Project to tax under Section 44BBB of the Act by taking the profit at 10% of the entire value of the contract. However, the income of the DESU Cable Project had not been offered to tax on a similar basis. The explanation offered by the Assessee in this regard was not accepted by the AO. Interestingly, the Assessee contended that Article 7 of the DTAA would prevail over Section 44BBB of the Act. This was negated by the AO while recording that the Assessee should follow one method of taxing the income. Consequently, the income from the DESU Power Project was also held to be taxable by the AO under Section 44BBB of the Act by taking the profit at 10% of the total turnover. Accordingly, ₹ 43, 11,511 was added to the Assessee's income and the loss of the DESU Power Project claimed as ₹ 1,28,57,065 was disallowed. The CIT (A)'s order for 1994-95 11. The Assessee's appeal was partly allowed by the Commissioner of Income Tax (Appeal) [ CIT(A) ] by an order dated 29th May 1998. On the question of the LO being a PE, the CIT (A) held that: (i) The Assessee had been acting in strict compliance with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to tax the profits of the DESU Power Project in terms of Section 44BBB of the Act, the CIT (A) observed: On going through the assessment record I find that as per the letter dated 24.5.94 of DESU it was confirmed that the supply and erection of 220 KV XPLE Cable and accessories between I.P. Extension and Park Street Sub-Stns. was turn- key project. Subsequently though the DESU had issued another letter in this connection, the fact remains that the original letter did mention and the content of the project explaining this position that this project is a turn-key project. Moreover, the contention of the AR that the Exim Bank was funding the main Mitsui Company and was not directly funding does not make much difference in the situation because the appellant company is a part of the main company, which was receiving aid from the Exim Bank. Therefore, I agree with the AO, that the project was financed under an international aid programme. Even as the AR contended before me that the project was not approved as a 'Project' by the Department of Power, Ministry of Energy, Government of India; the fact remains that the project was approved by the Government of India; Minist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. VII. Because the Ld. ITAT for the AYs 1978-79 and 1979-1980 has held that the Assessee had permanent establishment in India. VIII. Because the Assessee had been functioning and carrying on business through its branch offices. It was incurring huge establishment expenses and carrying on trading activities. IX. Because the Assessee had carried on business through a permanent establishment in India and profits directly or indirectly attributable to the permanent establishment were taxable in India. XIX. Because the ITAT failed to appreciate the significance and importance of Article 5(4) of the DTAA that had been applied by the AO in the present case. 17. Interestingly, although in Ground II and elsewhere in the appeal, a reference is made to the Branch Offices of the Assessee, it was nobody s case, and definitely not for the AY in consideration, that the Assessee had any Branch office which was a PE. The appeal concerning AY 1995-96 18. ITA 13 of 2005 is concerned with AY 1995-96. The basic facts are not different in this appeal. The Assessee filed its return of income for AY 1995-96 on 30th November, 1995 declaring a total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xempt it from being considered as PE. According to him, since the Assessee has been carrying on business in India for several years, and has executed several projects, no longer can the LO be considered to be only a place where the activity of preparatory or auxiliary character is carried out. He submitted that once, it was clear that there was a PE in India then there should be no difficulty in attributing the profits of the POs as well a percentage of the global income to such PE in terms of the Article 7 of DTAA, particularly, when Article 7 (1) permitted attribution of profits both directly or indirectly to the PE. This according to him was different from similar clauses in other DTAAs. Submissions of learned counsel for the Assessee 24. Mr. Mayank Nagi, learned counsel for the Assessee, on the other hand placed reliance on the earlier decision of the Special Bench of the ITAT for the earlier AYs where these very issues were examined with reference to the specific clauses of the DTAA. He points out that order of the Special Bench has attained finality since the reference sought by the Revenue was returned unanswered by this Court. He also placed reliance on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of final arguments in these appeals to urge such a ground for the first time. Provisions of the DTAA 28. Before beginning to discuss the central issue viz., whether the LO of the Assessee was during the AYs in question a PE, the provisions of the DTAA require to be examined. Article 5 of the DTAA reads as under: 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 includes especially: ( a) a place of management; ( b) a branch; ( c) an office; ( d) a factory; ( e) a workshop; ( f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; ( g) a warehouse in relation to a person providing storage facilities for other; ( h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; ( i) a store or other sales outlet; and ( j) an installation or structure used for the exploration of natural resources, but only if so used for a period of more t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanent establishment. 30. There have been protocols developed in relation to DTAA and one such protocol which seems to explain Article 7(1) reads as under: 6. With reference to paragraph 1 of article 7 of the Convention, it is understood that by using the term directly or indirectly attributable to the permanent establishment , profits arising from transactions in which the permanent establishment has been involved shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions. It is also understood that profits shall be regarded as attributable to the permanent establishment to the above-mentioned extent, even when the contract or order relating to the sale or provision of goods or services in question is made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment. The decision in National Petroleum 31.1 The Court next proceeds to examine the legal position as regards a PE and in that context discusses in some detail decision of this Court in National Petroleum Company Construction v. DIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of that expression. The use of the word especially underscores the intention of the authors of the treaty to remove any doubts that the places listed in sub-paragraphs (a) to (i) fall within the definition of the term permanent establishment . Normally an inclusive definition is used to expand the width of the term sought to be defined, however, that does not appear to be the principal intent in drafting paragraph (2) of article 5 of the Double Taxation Avoidance Agreement. Read in the context of the other provisions of article 5, paragraph (2) clearly indicates that it has been used as an explanatory provision to specifically include the species of places of business that would constitute a permanent establishment of an enterprise. In this view, paragraph (1) and (2) of article 5 of the Double Taxation Avoidance Agreement complement each other. Thus, all classes of permanent establishments as specified in various sub-paragraphs of paragraph (2) of article 5 of the Double Taxation Avoidance Agreement would be construed as a permanent establishment subject to the essential conditions of paragraph (1) of article 5 being met. In so far as sub-paragraphs (h) and (i) of paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office, factory or a workshop etc. within the meaning of Article 5 (2) of DTAA. For the purpose of Article 5 (1), the Revenue was required to show that such place was a fixed place of business through which the business of an enterprise is wholly or partly carried out. 33. For the AYs in question, the LO of the Assessee was not in fact used for the purpose of business. It is here that Article 5 (6) of the DTAA assumes significance. The use of facility solely for the purpose of search or display or for the maintenance of place for business solely for the purchases of goods or collecting information or for any other activity preparatory or auxiliary in character would take it outside the ambit of a PE. 34. Viewed in this context, the mere fact that the Manager of the Assessee stated that the books of accounts might be kept in a warehouse (which was unable to be shown by the Revenue to exist) or that some portion of the telephone expenses were attributable to the LO or that Mr. Ishibashi was managing both the LO as well as the PO was hardly sufficient to conclude the LO was being used to carry on the business of the enterprises. The CIT (A) found that the POs were treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticles 5 (1) and 5 (2) of the DTAA. 38. The Court has undertaken the exercise of again examining the factual position since in the impugned order the ITAT has merely relied upon its order for an earlier AY. While the Court appreciates the contention put forth by the Revenue that the facts of each AY has to be separately considered, the Court finds that there is no ground made out to disturb the reasoned order of the CIT (A) for both the AYs. Conclusion 39. The only question framed in ITA 334 of 2005 for AY 1994-95 by order dated 10th May 2005 is answered in the affirmative i.e. in favour of the Assessee and against the Revenue. It is held that the ITAT was correct in holding that the Assessee did not have a PE in India and was therefore exempt under the provisions of the DTAA between India and Japan. 40. The questions framed by the Court by order dated 3rd February 2005 in ITA No. 13 of 2005 for AY 1995-96 are answered thus: (i) Question (1) is answered in the affirmative i.e. in favour of the Assessee and against the Revenue. It is held that the ITAT was right in holding that the offices of the Assessee and its activities during the AY in question could not be reg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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