TMI Blog2007 (10) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding that the appellant has Permanent Establishment ("PE") in terms of art. 5 of the Double Taxation Avoidance Agreement between India and Japan ("tax treaty"). 4. Without prejudice to above grounds, based on the facts and circumstances of the case and in law, the learned CIT(A) has erred in attributing income to the PE of the appellant in India on an unreasonable and arbitrary basis disregarding the provisions of art. 7 of the tax treaty." 2. The assessee vide his application dt. 30th Jan., 2007 also applied under r. 29 of the ITAT Rules for production of additional evidence in the form of following documents : "(i) Copy of auditor's certificate dt. 19th Aug., 2002 certifying that no income was earned/accrued by the liaison offices for the year ending 31st March, 2002; (ii) Copy of the auditor's certificate dt. 19th Aug., 2002 certifying that all the; expenses of the liaison offices were incurred out of the inward remittances received from abroad; (iii) Copy of assessment submission dt. 30th Nov., 2005 for asst. yr. 2004 05 detailing the nature of activities carried out by the liaison offices; (iv) Copy of letter dt. 2nd Dec, 1983 to RBI for opening of liaison offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents and related information and sending them to different overseas establishments of the assessee company had been admitted to be one of the main assignments of the Indian offices. Officers/officials of Indian establishments had been doing the job of interpreters of English-Japanese and vice versa. They had been assisting the visiting delegates of the company in India and also doing liaison work on behalf of various overseas establishments of the company with the Indian clients. Under these circumstances, learned Authorised Representative's contentions that branch offices did not carry on any business activity in India were incorrect and far from convincing. It cannot be said by any stretch of imagination that operations of these offices were limited to preparatory and auxiliary activities. On the contrary, it is noted that activities of these branch offices in India did contribute effectively towards assessee's worldwide operations and thereby helped directly or indirectly in earning the global profit. According to AO s. 9(1)(i) of the Act states that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fectively towards assessee's worldwide operations and thereby helped directly or indirectly in earning global profit inclusive of profits from Indian clients. A portion of such profits is remitted back to India for sustenance of the Indian offices. Hence, Indian offices will constitute PEs of the non-resident enterprise in the facts of the case. Para 1 of art. 7 of the DTAA between India and Japan states that so much of the profits of an enterprise of a Contracting State may be taxable in other Contracting State as is directly or indirectly attributable to the permanent establishment (PE) situated therein through which business is carried on. In this respect, information was gathered from assessee's official website http.www.nisshoiwai.co.jp. It is seen that board of directors' meeting was held on 16th May, 2002. Consolidated business results for the year ended 31st March, 2002 revealed that operating profit was one per cent of net sales of JPY 5464524 millions. In other words, operating expenses incurred were 99 per cent of the net sales. Therefore, expenses : profit ratio can be worked out at 1 per cent (1/99 x 199). This ratio can safely be applied to expenses incurred in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o expatriate Japan staff on deputation in India. The amount of TDS on such payments to expatriate staff stands Rs. 3,01,98,462 for the year in question. The returns filed by expatriate Japanese officers in India reveal that they were paid substantial amounts by way of fees, certainly not for mere collection of information and sending it to Japan. The job of collection of information could very well be done by local personnel and would not necessitate deputing highly specialized and technical person from Japan. Close look at organizational chart of appellant establishes the fact in no uncertain terms that appellant carried out its activities through a number of subsidiaries and department headed by specialized and technical expatriate officers deputed from Japan. Mere use of term 'liaison work' would not by itself change the character of principal activities carried out by the appellant in India. 6.1 Having regard to the facts discussed above, I find myself in agreement with AO's finding that activities of the appellant were not limited to 'collection of information' in India and could not be termed as preparatory or auxiliary in nature. It is needless to point out in the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel of the assessee submitted that the assessee is a non-resident: foreign company incorporated under the provisions of law relating to companies in Japan. The assessee is engaged in the business of trading of goods. The assessee had applied for permission to the RBI to open a liaison office in India on the 30th of January, 1974. Accordingly permission was granted by the RBI vide its letter dt. 21 July, 1974 to start four liaison offices in New Delhi, Kolkata, Mumbai and Chennai. Subsequently, assessee sought permission to open three more liaison offices in Bangalore, Pune and Jamshedpur which was also granted by the RBI vide its communication dt. 8th Feb., 1975. The RBIIs approval specifically stipulates that the activities of the liaison offices are restricted to only the collection and sending of information from India to Japan. The permission was granted by the RBI subject to the following conditions as specifically stipulated in the approval itself : (a) The entire expenses of the offices in India will be met exclusively out of remittances received from abroad through normal banking channels; (b) No commission/fee will be charged or any other remuneration received for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught on record concerning any other activity carried on by the LO that would render it a PE. This submission of the assessee is further strengthened by the computation of income by the AO who has merely estimated the income of the LO from the total profits of the Japanese entity as set out in the company's website. The AO proceeded on surmises and presumptions in making the said estimate and the very fact that he had to resort to this method of estimation reflects the lack of material and evidence to substantiate such an assessment. 12. Learned counsel of the assessee referred to the provisions of the Double Taxation Avoidance Agreement between India and Japan. Art. 5 defines "PE". Reliance was placed on sub-cl. (e) of cl. 6 which excludes the maintenance of a fixed place of business for the purpose of carrying on activity of a preparatory or auxiliary character from the purview of "PE". It was submitted that the activity permitted by the RBI to be carried on by the LO is merely the collection and supply of information to Japan which is clearly of a preparatory/auxiliary nature. Admittedly, the LO does not have powers of concluding contracts on behalf of the assessee and docs not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2006] 206 CTR (AAR) 393 : [2006] 287 ITR 341 (AAR); (vi) Western Union Financial Services Inc. v. Addl. Director of IT [2006] 101 TTJ (Del)56; (vii) UAE Exchange Centre LUC, In re [2004] 189 CTR (AAR) 467 : [2004] 268 ITR 9 (AAR); and (viii) Educational Institute of American Hotel Motel Association, In re [1996] 132 CTR (AAR) 40 ; [1996] 219 ITR 183 (AAR). 14. Learned counsel for the assessee further submitted that the assessee has been engaged in identical operations for the last 45 years. This is an admitted fact as set out in the assessment order itself. Accordingly, since the Department has accepted the fact that the LO of the assessee, in India, has been carrying on only preparative and ancillary activities and is not a PE for the last many years, it is now estopped from questioning this established factual and legal position in the absence of any other material or evidence to support a deviation from the establishment position. She further placed reliance on the following decisions of the Supreme Court and High Courts : (i) Parashuram Pottery Works Co. Ltd. v. ITO 1977 CTR (SC) 32 : [1977] 106 ITR 1 (SC); (ii) Radhasoami Satsang v. CIT [1991] 100 CTR (SC) 267 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee camouflaged the word liaison and used the specialized information collected directly for its business purposes. In the case of UAE Exchange Centre LLC also it was argued on behalf of the assessee that he has not violated any RBI guidelines but pointing out certain activities done by the assessee which were essential and vital to the business of the assessee it was held that assessee in the name of liaison work was doing other work and was held to be having PE to avoid Indian tax laws. The facts of the instant case are similar and, therefore, he pleaded that the LOs maintained by the assessee have rightly been treated as PE of the assessee. 16. Coming to the question of how the profits are taxed and the basis for that learned Departmental Representative referred to Explanation to cl. (i) of s. 9(1) that only such part of the income as is reasonably attributable to the operations which are carried1 out in India should be treated as deemed accrued income of the assessee from the business connected (sic) in India. The AO in his order has been very reasonable in estimating the income of the assessee. 17. Coming to the point of res judicata to the IT proceedings learned De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not (sic) estimated the income without any basis or evidence. While making this submission he relied on the case of Dy. Director of IT v. Set Satellite (Singapore) Pte. Ltd. [2007] 108 TTJ (Mumbai) 445 : [2007] 106 ITD 175 (Mumbai). 20. Learned Departmental Representative also referred to expatriate agreement available at pp. 38 to 42 of the paper book to show that the LOs were indulging not only in collecting information but also were involved in inventions or improvements of equipment, machinery, process or other things which' also comes under the violation of the RBI guidelines. 21. Learned Departmental Representative further submitted that the facts of the cases relied by assessee were different from the facts of this case and, therefore the ratio of those decisions is not applicable in the instant case. 22. Concluding his argument learned Departmental Representative submitted that the lower authorities have rightly estimated the income of the company by treating the LOs as PE of the company in India. 23. In reply learned counsel of the assessee submitted that reliance placed by the Department on the decision in the case of UAE Exchange Centre LLC is misplaced as the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain demarcated activity the same would not constitute a PE. The decision applies on all fours to the facts of the instant case. 26. With reference to the case law in the case of Educational Institute of American Hotel Motel Association, In re, learned counsel submitted that this case law supports the assessee's contention insofar as the Hon'ble Authority for Advance Rulings after considering the approval of RBI held that applicant in that case was entitled to the benefit sought. 27. Learned counsel further submitted that the contention of the learned Departmental Representative that assessee is only authorized to send information and not to receive the information is actually erroneous and wholly misconceived since the LO is authorized to both receive and send information to and from Japan and, therefore, there is no reason of any violation of the approval of the RBI. 28. Coming to the official website of the company learned counsel submitted that it is not disputed that this website would to an extent reflect the performance of the entity however, it cannot be the sole basis on which a conclusion concerning the existence of a PE can be drawn in total disregard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India v. Azadi Bachao Andolan Hon'ble apex Court has held as under : "A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that s. 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a DTAA. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the IT Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under s. 4 and the general principle of ascertainment of total income under s. 5 of the Act, then there was no purpose in making those sections subject to the provisions of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under s. 90 towards implementation of the terms of the DTAAs which would automatically override the provisions of the IT Act in the matter of ascertainment of chargeability to income-tax and ascertainment of to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay for undertaking liaison work for the purpose of collecting and sending information from India to Japan as stated in your letter No. L/NI/2654 dt. 21st July, 1974. Please note that this permission has been granted subject to the following conditions : (a) The entire expenses of the offices in India will be met exclusively out of remittance received from abroad through normal banking channels; (b) No commission/fee will be charged or any other remuneration received for the liaison activities to be rendered by the Indian offices; (c) Excepting the said liaison work, the offices will not undertake any activity of a trading, commercial or industrial nature without the prior permission of the Reserve Bank; (d) The LO will furnish to us on yearly basis details of the remittances received in India, together with the bank certificates showing receipt of funds and certified copy of the final accounts of the office, quoting a reference to this letter. Yours faithfully," In pursuance of cl. (d) of this approval the assessee has been admittedly furnishing to the RBI the details of remittances and copy of the final accounts along with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State. 5. Notwithstanding the provisions of paras 3 and 4 an enterprise shall be deemed to have a PE in a Contracting State and to carry on business through that PE if it provides services or facilities in that Contracting State for more than six months in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State. 6. Notwithstanding the provisions of the preceding paras of this article, the term 'PE' shall be deemed not to include : (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... function of preparatory nature which has been specifically excluded from the purview of a PE by the DTAA as pointed out by us in earlier para. 39. The assessee on the other hand gets support from the decision in the case of Angel Garment Ltd., In re wherein Authority for Advance Rulings (Income-tax) held as under : "The applicant, a non-resident company incorporated in Hong Kong, proposed to set up a LO in India for collecting information and samples of garments and textiles from manufacturers, traders and exporters and passing on the information to the head office in Hong Kong and coordinating and acting as the channel of communication between the applicant and Indian exporters and follow up with Indian exporters for timely export of goods. The entire expenses of the proposed LO were to be met through remittances from the applicant's head office in Hong Kong. On these facts the applicant applied to the Authority for Advance Rulings on the question whether the applicant could be said to have received income taxable in India. On the facts stated the Authority ruled that a plain reading of Expln. 1(b) to s. 9(1)(i) of the IT Act, 1961, indicated that no income would be deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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