TMI Blog2024 (1) TMI 548X X X X Extracts X X X X X X X X Extracts X X X X ..... eable to tax has escaped assessment. Whether the information contained in the documents and the statements recorded would ultimately result in assessment of escaped income, is a factor which need not be gone into at the time of recording reasons for forming the belief that the income chargeable to tax has escaped assessment. What is required at the stage of recording of reasons is whether there are tangible materials available on record to form a belief that income has escaped assessment. Having examined the facts on record, we are firmly of the view that the Assessing Officer, at the time of forming the belief regarding escapement of income, had tangible material available with him. Thus, in our view, there is a direct nexus/live link between the material available on record and the formation of belief for reopening the assessments under section 147 of the Act. Therefore, we do not find merit in the submissions made by the assessee that reopening of assessments under section 147 of the Act is invalid. PE in India - Whether the assessee had a PE in India? - Whether liaison office (LO) in India can be treated as permanent establishment (PE) in terms of Article 5(2) of Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer has himself observed that the subsidiary is remunerated with a mark up of 11% of the gross receipts while rendering similar nature of services as rendered by the LO. Thus, in our view, the profit rate, at which the Indian subsidiary was remunerated, can be taken as an yardstick to determine the quantum of profit attributable to PE. AO has attributed 15% of the gross revenue as profit to the PE. Whereas, learned first appellate authority has determined the net profit rate at 15% of the total sales and attributed 80% out of that to the PE. In our view, it will be reasonable to estimate the net profit at 11% of the total sales made in India and out of that attribute 80% as income of the PE, as major role was played by the PE with regard to EPZ sales. Of course, while computing the income of the PE, the Assessing Officer must consider assessee s claim of expenses incurred towards making sales in India and other deductions such as depreciation, head office expenses, turnover discounts etc. While undertaking such exercise, the Assessing Officer must provide reasonable opportunity of being heard to the assessee. Though the assessee has taken an argument that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income under section 139(1) of the Act. A survey under section 133A of the Act was conducted at the premises of the LO on 23.10.2002. In course of survey, certain documents were impounded, which included loose papers and compact discs (CDs) containing records of emails and other correspondences from LO to Head Office and others. Summons under section 131 of the Act were also issued to the assessee on the date of survey and statements were recorded from certain officers/persons working in the LO. Based on the information gathered in course of survey operation, the Assessing Officer recorded reason to believe that income chargeable to tax has escaped assessment in assessment years 1999-2000 to 2001-02. Therefore, he reopened the assessments under section 147 of the Act by issuance of notices under section 148 of the Act. 5. In response to notices issued under section 148 of the Act, assessee furnished returns of income declaring nil income. It was the case of the assessee that the income earned by the assessee from sale of books/journals in India cannot be made taxable in India, as such income is in the nature of business income and in absence of Permanent Establishment (PE), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iption (b). Direct import of books in India (c). Sale of books printed at export processing zone (EPZ) in India. 8. He submitted, at no stage, the Assessing Officer has recorded the reasons why such activities should be constituted as commercial activity of the LO. He submitted, in the reasons recorded, the Assessing Officer has not referred to any document found in course of survey, which indicates that the LO is involved in commercial activities of sale, appointment of dealers, securing dealers, signing of contracts, negotiation of price etc. He submitted, the departmental authorities except making general observations, have not given any substantive finding as to how the statements recorded or the information/documents collected can lead to an inference that income has escaped assessment. Drawing our attention to the sequence of events starting from application made to RBI for opening of LO in India and ending with the survey action carried out on 23.10.2002, learned counsel submitted, for exercising power under section 147 of the Act, the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment. He submitted, the expression re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. It is also a fact that a survey action under section 133A of the Act was carried out at the premises of the LO, in course of which, certain documents/CDs were impounded, which contained communication between the LO and head office. On the date of survey itself, statements under section 131 of the Act were recorded from the Country Head and Manager, Promotion and Publicity, who were working at the LO. In the statements recorded, the extent of work/activities performed by the LO with regard to promotion and sales of books, journals etc. produced and printed by the HO could be ascertained. Undisputedly, the HO has earned substantial amount of income from sale/subscription of its books/journals in India. The information contained in the impounded documents found at the time of survey operation coupled with revelation made regarding activities of the LO from the statements recorded from two of the officers working at the LO, certainly gave an insight not only with regard to the business activities carried on by the HO in India but the extent of involvement of the LO in such business activities of the HO. Thus, in our view, the information gathered at the time of survey operation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without our prior permission. (v). The representative shall not acquire, hold, (otherwise than by way of lease for a period not exceeding five years), transfer or dispose of any immovable property in India without obtaining prior permission of the Reserve Bank of India under section 31 of the Foreign Exchange Regulation Act, 1973. (vi). The representative office in India will furnish to the General Manager, Exchange Control Department, Reserve Bank of India, New Delhi (on a yearly basis): a). a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India; b). Details of remittance received from abroad duly supported by Inward Remittance Certificates; c). Certified copy of the audited final accounts of the office in India; and d). Annual report of the work done by the representative in India, stating therein the details of actual export or import, if any, effected during period in respect of which the representative had rendered liaison services; e). The number of staff engaged/appointed and duties assigned to each staff. (vii). The representative office will not render any consultancy or any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent of attribution of profit to the PE. 14. Before us, learned counsel appearing for the assessee submitted that the Assessing Officer has concluded existence of PE purely relying upon the statements recorded from certain employees working at LO, in course of survey proceedings. He submitted, section 133A(3)(iii) of the Act does not authorise the Income-tax Authority to record any sworn statement. He submitted, for this reason unlike statements recorded under section 132(4), the statements recorded in course of survey cannot be used as evidence. In support of such contention, he relied upon the following decisions : (i). PCIT v. Meeta Gutgutia [2017] 395 ITR 526 (Delhi HC) (ii). Paul Mathews Sons v.CIT [2003]129 Taxman 416 (Kerala HC) (iii). CIT v. S. Khader Khan Son [2008] 300 ITR 157 (Madras HC) approved by Hon'ble Apex (iv). Court in CIT v. S. Khader Khan Son [2012] 210 Taxman 248 (SC) (v). CIT v. Dhingra Metal Works [2011] 196 Taxman 488 (Delhi HC) (vi). DCIT v. Bansal Credits Ltd. [2016] 74 taxmann.com 224 (Delhi - Trib.) 15. Without prejudice, he submitted that the statements relied upon by the departmental authorities only discuss about role o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that LO has no authority to appoint dealers/distributors. The credit applications are sent to the assessee by the distributors. Only after undertaking a scrutiny process, if credit application is accepted, then the assessee sends a letter of appointment to the concerned distributor. He submitted, the acceptance of credit application is also signed by the assessee and the LO has no authority, whatsoever. The role of LO is that of a communication channel in terms of forwarding distributors credit applications to Germany. Even the discounts are standard discounts, which are agreed by the dealers at the time of signing the agreement and the LO has no role to play. The orders for books are directly placed upon the assessee and not on the LO. The sale of books happens outside India. In terms of the agreement with dealers, consignment is delivered by the assessee to the distributor s nominated freight forwarder outside India. In rare cases, if LO receives any orders, it forwards the same to the assessee , as it has no access to the database of stock of books at Germany, which is sold all over the world. In this context, learned counsel drew our attention to sample copies of letters sent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mple copies of books published by the HO, which have promotional use only. He submitted, the Assessing Officer has used certain statements of the employees working at LO selectively according to his convenience. In this context, learned counsel furnished his rebuttal to the findings of the Assessing Officer and learned Commissioner (Appeals) in a tabular format as under : S. No. Ld. AO/Hon ble CIT(A) s contention Appellant s submission 1 Employees of the LO visit various institutes, libraries, and individuals to discuss and promote the publication of the assessee and to ascertain their exact requirements Employees of the LO who visited the universities 'etc., were not specialist in their respective lines. In other words, no employee of the LO was in a position to influence the requirement of any potential customer 2 These requirements are then consolidated and discussed with a distributor about the profitability and the willingness of the distributor to undertake the sales There was no discussion about the profitability with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter of pure formality. Rather, it was an indication of the fact that standard process set by the Appellant were being followed by the LO in most of the cases for the cost computation. A definite process was put in place by the Appellant to scrutinize each and every proposition sent by the LO and Appellant did not take any decision unless the proposition sent by the LO was passed though the scrutinizing process. This is evidenced by the fact that at least 10% of the quotes sent by LO for Appellant s acceptance were rejected for not conforming to Appellant stipulations 6 In the purchase order issued by the Appellant, printer is asked to take instructions from Sanjiv Goswami Appellant gave delivery instructions and asked the LO to convey to the Printer, as address of delivery place was to be confirmed from the distributor in India. In many cases the Appellant also gave direct delivery instructions 7 Printer raises the invoice of Springer Germany on the agreement reached with LO The printer raises invoice based on the Purchase Order raised by the Appellant and the LO is not involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies Act, 1956. The said company was the distributor for Springer titles and the relationship was that of a principal-toprincipal basis. Relevant portion of Conny s report on page 242 Certificate of incorporation of SBIPL dated 29 September 1980 on page 275 Annual return of SBIPL for AGM held on 27 September 1993, annual return for AGM held on 23 September 1996 and annual return for AGM held on 27 September 2000 on page 275 - 301 5 The report states that there was a massive growth in book segment and journal segment between 1997 and 1998, and the same was attributed to LO. Imperative to note that the aforesaid increase in business was not because of the establishment of LO but because of the inclusion and expansion of a bigger distribution network by Springer, Germany. When Springer was being supported in India by SBIPL, no other distributor had the right to import Springer books but subsequently with the inclusion of more direct importers and the expansion of the distribution network, sales showed a significant growth. The LO had nothing to do with the improvement in performance of the Appellant in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a conduit for transmission of information and cannot lead to a PE situation. 21. Drawing our attention to Article 5 of India-Germany treaty, learned counsel submitted that the LO is not fixed place of business of the assessee, as it does not satisfy the basic conditions for constituting a PE under Article 5(1) of India-Germany treaty. He submitted, Article 5(2) cannot override the basic conditions of Article 5(1) that a PE has to be a place of business. Whereas, LO is merely a representative office in India, through which, no part of the business of the assessee is carried out. Therefore, even if LO can be considered as an office, it cannot be treated as PE, as it is not a place of business. 22. Without prejudice, he submitted, in respect of books and journals directly imported from outside India, the LO had no role to play. Even in respect of the books printed in India, the LO did not conclude contracts on behalf of the HO, neither had stock of books for delivery to customers nor did it secure orders for assessee. Therefore, in terms of Article 5(5), there is no PE of the assessee in India. He submitted, assessee s case falls purely under the exceptions provided in Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Indian subsidiary was remunerated by 11% of the gross revenue, however, the LO was not paid anything. Thus, he submitted, the decision of learned first appellate authority should be upheld. 25. We have considered rival submissions in the light of decisions relied upon and perused materials on record. We have also painstakingly perused all facts and materials on record including the documents submitted in the factual paper books. The precise issue arising for consideration is whether the LO of the assessee in India can be treated as PE in terms of Article-5 of India-Germany DTAA. Before we delve into the issue, it is necessary to look into the definition of PE as per Article 5 of India-Germany DTAA, which reads as Article 5 : Permanent establishment 1. For the purposes of this agreement, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprises; (b) has no such authority, but habitually maintains in the first mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) habitually secures orders in the first mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business and in their commercial and financial relations to the enterprise no conditions are agreed or imposed which differ from those agreed between independent persons. 7. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... libraries and individuals to discuss and promote the publications of the assessee and to ascertain their exact requirements. b. These all requirements are consolidated and discussed the distributor about the profitability and willingness of the distributor to undertake the sales. c. The quotations are obtained from the printers asking for printing of exact no. of copies. d. Upon receiving the quotations from printers, the L.O. obtains cost component of publishing to be incurred outside viz royalty etc. On the basis of all the cost component received, it works out the profitability with regard to each title. Normally the gross profitability in all cases are worked out at more than 50%. e. Thereafter the L.O. asks the H.O. to issue the purchase order directly to the printers, which the H.O. invariably do in accordance with the terms and conditions agreed between printer and L.O. f. In the purchase order issued by H.O. also, the printers are asked to take instructions from Mr. Sanjeev Goswami. g. After the books are printed, the Liaison office instructs the printer to supply the books to the specific publishers. h. The printer raises the invoice on Springer German ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned, the activities of the LO is much more than mere preparatory and auxiliary character. The LO not only procures orders, but also works out the cost components and margin of the books to be reprinted in EPZ and sends for acceptance of the HO. It is also evident, in majority of cases, almost 90 to 95%, the price and margin fixed by the LO in respect of specific titles to be published/reprinted at the EPZ are accepted by the HO. Thus, the aforesaid facts clearly reveal that the LO has a major say with regard to not only the titles to be reprinted in India, but their pricing also. It is also a fact on record that in a report submitted by Conny Schindewolf, the achievement of the LO in increasing the sale of products of the assessee has been appreciated. Though, learned counsel for the assessee has submitted before us that much importance cannot be attached to the said report, as it was for internal consumption , however, we are not impressed. From various invoices placed in the paper book, it is observed that Conny Schindewolf was in an authoritative position of the company, hence, her report carries much weight. 30. So far as contention of learned counsel for the assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intervention of the LO. Therefore, in our view, no part of the income derived by the assessee from sale of journals and books imported to India can be attributed to the PE. The attribution of income to PE should only be with reference to the books printed at EPZ and sold to distributors/customers. It is observed, with regard to EPZ sales, learned Commissioner (Appeals) has determined net profit rate at 15% of the total sales made in India and out of that has attributed 80% to the PE. In our view, the attribution of profit by learned Commissioner (Appeals) appears to be irrational and not in consonance with the facts on record. From the assessment order, it is evident that the assessee has incorporated a subsidiary in India in the year 2002. The Assessing Officer has himself observed that the subsidiary is remunerated with a mark up of 11% of the gross receipts while rendering similar nature of services as rendered by the LO. Thus, in our view, the profit rate, at which the Indian subsidiary was remunerated, can be taken as an yardstick to determine the quantum of profit attributable to PE. The Assessing Officer has attributed 15% of the gross revenue as profit to the PE. Whereas, l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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