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TMI Blog2018 (4) TMI 1964X X X X Extracts X X X X X X X X Extracts X X X X ..... les to Indian customers directly as well as through independent agents appointed in India. The said concern has a Liaison Office (LO) in Mumbai which has been set-up in terms of specific prior approval of the Reserve Bank of India (RBI). In terms of the permission of RBI, LO's activities are confined to liaison and representative activities and it is not permitted to carry out any business/commercial activities in India. It transpires that on 06.02.3003, a survey action u/s 133A of the Income Tax Act, 1961 (in short 'the Act') was carried out at the office premises of the LO and certain books of account/documents were impounded. As a consequence of the findings of the survey action, Revenue took a stand that the activities of the LO involved identifying, negotiating and concluding business contracts in India for and on behalf of its parent office and, therefore, the LO was to be considered as a Permanent Establishment (PE) of the assessee in India. On the contrary, the stand of the assessee was that the LO was involved in only liaison and representative activities and was not involved in any trading or commercial activity so as to be construed as a PE of the assessee in India. Nota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r deciding anything for the year under consideration. Now, we would like to analyse the other documents that are relevant for the instant AY. Agreement dtd. 13.09.1996, entered in to between LG Chemicals Ltd. Korea and Nagase & Co.(pg.517-22) take of granting non 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 activities. A fax message from GS on 15.07.2000 to the HO(Pg.537-39) clearly show that till July, 2000 LO was supposed to find out the 'business possibilities' in the various parts of India. It also talks that intention of the Bombay office was not to do 'independent business'. Letter from one of the employees to HO (Pg.546) pertains to some information about purchases to be made as per the 'comments/ order' of the HO. Pg.559 of the PB is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n it is clear that any activity being subsidiary or in aid or support of main activity has to be treated auxiliary or preparatory activity. Perusal of the impounded documents, relevant for the year under appeal, have not led us to the conclusion that the LO was offering services that were not auxiliary. 5.3. We have not come across any statement of any of the employees or the officials / executives of the LO, recorded during the survey proceedings or after the action u/s. 133A of the Act was over. Generally, during the such operations statements are recorded and questions are asked about relevant and important impounded 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 consideration. We want to make it clear that our observation are for the AY.199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r for Assessment Year 2007-08 also came up before the Tribunal, and vide order in ITA No. 4654/Mum/2010 dated 30.11.2017, the primary stand of the Assessing Officer of the LO being a PE in India has been negated. In its order for Assessment Year 2007-08, again our co-ordinate Bench recorded a factual finding having regard to the material relatable to that year and concluded that there was no evidence to prove that the activities of the LO in India constituted any business connection of the assessee in India. In fact, after referring to the documents and materials relevant to the year before them, our co-ordinate Bench thereafter considered the question as to whether the activities of the assessee could constitute business connection in India in the context of Sec. 9 of the Act as well as Article 7 (or other similar Articles of India-Japan DTAA dealing with business income). Such findings of our co-ordinate Bench are contained in para 5.2 to 5.4 of the order dated 30.11.2017, which are as under :- "5.2. Independently of the documents, whether the activities of the assessee would constitute business connection in India in the year under appeal is the second aspect the issue. In our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection in India or from any property in India or through any assets or source of income in India or through transfer of capital assets situated in India, shall be deemed to accrue or arise in India. The mandate contained in clause(a) of the Explanation is that for the purpose of the afore -mentioned clause, where the business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Explanation 2 contains an inclusive definition; it brings in the business activities specified in clauses (a) to (c), referred to above, within the fold of the expression business connection which has to be understood in its ordinary meaning. We would like to refer to the judgment of the Hon'ble Supreme Court in the case of R. D. Aggarwal and Co.(56 ITR 20). The expression business connection has been defined as under: "The expression business connection postulates a real and intimate relation between the trading activity carried on outside the tax able territories and the trading activities within the territori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncentive plan was existing that could lead to the conclusion that the purpose of the LO in India was not merely to advertise the products of the assessee or to act as a link of communication between the assessee and a prospective buyer but involved activities which traversed the actual marketing of the products of the assessee in India. In the case of Brown and Sharp on the basis of the orders generated that an incentive was envisaged for the employees. In that matter the Hon'ble Court had arrived at the finding of the fact that the activity of the LO during that year was not of a preliminary or preparatory nature. Thus, the judgment is year and activity specific. In our opinion, the cases relied upon by the DR are of no held to decide the issue against the assessee. Considering the above, we hold that the LO was not functioning as PE of the assessee in India for the year under appeal. First effective ground is decided in its favour. As all other grounds, raised by the assessee, are alternative grounds, so, the same stand allowed for statistical purposes. We would like to emphasise that our decision is based on the facts for the year under appeal. It should not be taken as a pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 234B of the Act. 9. the learned CIT(A) has erred in upholding the initiation of penalty under section 271(1)(c) & 271B of the Act." ITA No. 412/MUM/2009 (Revenue's appeal) "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in estimating the profits at the rate of 3.73% as against 10% determined by the Assessing Officer by holding that the assessee has worked out India Specific Profits correctly whereas during the assessment proceedings assessee stated that it is not possible to ascertain the proper income pertaining to P.E. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in allowing a deduction of expenses amounting to Rs.1,07,97,060/- by holding that the said expenses were met out for the purpose of business carried out by the P.E.in India. 3. The Appellant prays that the order of the ld. CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer restored." 8. Notably, in the return of income filed for Assessment Year 2005-06, assessee declared NIL income and asserted that except for liaison office work, the LO had not undertaken any activity involvin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Article 5 of the DTAA between India and Japan. Quite clearly, the dispute in Assessment Year 2005-06 is fully covered by the decision of the Tribunal in assessee's own case for Assessment Year 2007-08 dated 30.11.2017 (supra). Notably, the previous year relevant to the Assessment Year 2007-08 as well as the previous year relevant to the assessment year under consideration before us, i.e. 2005-06, are posterior to the date of survey, i.e. 06.02.2003 and, therefore, the material and evidence found in the survey would be of no relevance to decide the controversy in this year. In any case, as noted by us in the earlier paras, the Assessing Officer has not referred to any documents or evidence pertaining to the instant year in order to conclude that the assessee's LO constitutes its PE in India. The conclusion of the Assessing Officer is simply and purely based on the stand of the assessing authorities for Assessment Years 1996- 97 to 2002-03, which obviously relate to the period covered by the survey action u/s 133A of the Act. Even the decision of the CIT(A) is based on his decision for Assessment Years 2002-03 and 2003-04 and no independent reasoning has been given by him perta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort activities and engaged in only preparatory and auxiliary activities and not in the nature of a PE so as to impute any business connection in India. Thus, following the precedent as also the aforesaid discussion, in our view, it is irresistible to conclude that the assessee's LO did not constitute a PE in India for the Assessment Year 2005-06. In this view of the matter, the Ground of appeal no. 1 raised by the assessee is allowed. 12. The other Grounds raised by the assessee are alternate pleas and so far as the Grounds raised by the Revenue in its cross-appeal are concerned, the same relate to computational disputes regarding the income attributable to the PE in India. Since we have upheld the principal plea of the assessee in Ground of appeal no. 1 that it's LO does not constitute a PE, all other Grounds in the cross-appeal (except the Grounds in assessee's appeal which we discuss hereinafter) are rendered academic. 13. Before parting, we may also refer to a specific Ground raised by the assessee challenging the levy of interest u/s 234B of the Act. While completing the assessment, interest u/s 234B of the Act was levied by the Assessing Officer for default in payment of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with Article 7(1) and 7(2) of the India-Japan tax treaty. 7. Without prejudice to grounds 3 to 5 above, the learned CIT(A) has erred in not adopting the average rate of commission paid by the Appellant to its independent agents, while determining the profits attributable to the Permanent Establishment. 8. Without prejudice to grounds 3 to 7 above, the learned CIT(A) has erred in regarding the entire gross profits of the Appellant from sales made in India as attributable and taxable in India. Further, the learned CIT(A) has disregarded the principle laid out in Explanation (1) (a) to section 9(1)(i) of the Act that only the profits attributable to operations carried out in India are taxable in India. Disallowance of transportation expenses 9. The learned CIT(A) has erred in upholding the action of the AO in disallowing 25% of transportation expenses amounting to Rs 301,353 under section 37(1) of the Act on the ground that the same have not been incurred for business purpose. Disallowance of travelling expenses 10. The learned CIT(A) has erred in upholding the action of the AO in disallowing 25% of travelling expenses amounting to Rs 712,910 under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which in turn has arisen from the order dated 29.03.2004 passed by the Assessing Officer u/s 143(3) r.w.s. 147 of the Act. Insofar as appeal in ITA No. 1798/Mum/2007 is concerned, the same is also related to Assessment Year 1996-97 which is preferred by the assessee against the order of CIT(A)-33, Mumbai dated 30.11.2006, which in turn has arisen from the order dated 27.02.2006 passed by the Assessing Officer u/s 143(3) r.w.s. 250 of the Act giving effect to the order of CIT(A) dated 31.10.2005. 20. Insofar as the circumstances prevailing before the Assessing Officer is concerned, the same is identical to Assessment Year 1998-99 which has already been considered and dealt with by the Tribunal in its order dated 12.01.2007 (supra). So, however, in order to recapitulate the following brief description is relevant. In the course of assessment proceedings, the Assessing Officer considered the LO to be a PE of the assessee in India and estimated the profit attributable to the PE in India by applying Rule 10 of the Rules considering 10% of the turnover relating to India, thus arriving at taxable income of Rs.4,41,43,800/-. The CIT(A) passed a consolidated order for Assessment Years 1996 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) in his consolidated order for Assessment Years 1996-97 to 2002-03. On the basis of such tabulation, which has been perused in the course of hearing, it has been brought out that there is only one document pertaining to the previous year relevant to the assessment year under consideration, namely, a letter dated 28.09.1995 of one, M/s. Musk and Fragrance, which is addressed to the LO. Notably, in the assessment order no reference has been made to such a document, but the same has indeed been referred to by the CIT(A) who has also called for a Remand report also from the Assessing Officer. No doubt, in the Remand report submitted by the Assessing Officer, it has been canvassed by the Assessing Officer that the said document justifies the assertion that the LO was directly dealing with the said agent. The Remand report of the Assessing Officer has been reproduced by CIT(A) in para 6.4 of his order and as per the Assessing Officer, the said communication from M/s. Musk and Fragrance to the LO proves the negotiations being carried out with the said agent regarding the requirement/order of goods instead of with the Head Office and, therefore, the activity of the LO could be construed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Head Office and to that extent, there is no dispute. The claim of the Revenue is that the said communication shows direct business dealings between the LO and the said agent. In this background, we have perused the contents of the said communication, a copy of which has been placed in the Paper Book at page 271. The said communication is with regard to certain product 'Citral' which is explained to be used in the perfumery industry. The communication gives information about the current demand, customer-wise and the present prices of the product. It also refers to certain fax already sent regarding indent of a product. Much has been made before us of the words "If we delay in offering we hope we will loose the market which is developed after putting lot many efforts." appearing in the said communication to say that the LO was involved in business activity. In our considered opinion, the document does not indicate that the LO has carried out any business activity and, in fact, the assertion of the assessee has all along been that the said document has been merely forwarded to the Head Office on the request of the concerned agent. 25. At the time of hearing, the learned repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other Grounds raised by the assessee are concerned, the same are only alternate pleas and would not require any adjudication in view of our decision in Ground of appeal no. 1 in the above paras. So far as the Grounds raised by the Revenue in its cross-appeal are concerned, the same relate to computational disputes regarding the income attributable to the PE in India. Since we have upheld the principal plea of the assessee in Ground of appeal no. 1 that it's LO does not constitute a PE, all other Grounds are rendered academic. 29. Thus, insofar as the cross-appeals for Assessment Year 1996-97 is concerned, the appeal of the assessee being ITA No. 113/Mum/2006 is allowed and that of the Revenue is dismissed. 30. Insofar as the appeal of assessee being ITA No. 1798/Mum/2007 is concerned, the proceedings therein have become infructuous once we have allowed the substantive stand of the assessee manifested in Ground of appeal no. 1 in ITA No. 113/Mum/2006. As a consequence, the appeal of assessee in ITA No. 1798/Mum/2007 is allowed for statistical purpose. 31. Now, we may take-up for consideration the appeals pertaining to Assessment Year 1997-98 vide ITA Nos. 114 & 367/Mum/2006, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence that the LO was tasked to carry out and execute business contracts also. 35. We have carefully considered the rival submissions. Factually speaking, a perusal of the agreement shows that there is no signature so far as the assessee is concerned. We may also look at it from another angle. The purported agreement is dated 13.09.1996 and the Revenue has carried out the survey action u/s 133A of the Act on 06.02.2003, which is on a much later date. There is no material or evidence referred to in the orders of the authorities below which would show that any of the activities purported to be covered by the said agreement have indeed been carried out by the LO. Therefore, on a prima facie consideration of the material sought to be relied upon by the Assessing Officer, it cannot be made out that any business activity qua the said agreement was ever carried out by the LO. We find that the assessee had taken a categorical position before the Assessing Officer itself and stated that the agreement was unsigned and it eventually did not fructify. We do not find any material or clinching evidence led by the Assessing Officer to demolish the said stand of the assessee. On this aspect, the l ..... 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