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2010 (11) TMI 681 - AT - Income TaxInternational Taxation - Liaison office in India ( Indian LO ) - The Indian offices practically carry out all operations of the business of the commission agent except the formation of the contract between the vendors and the buyers which in any case cannot be done by a commission agent. While carrying out FAR analysis the assessee attributed 33% of the business functions to the Indian offices. 18% of the assets employed in the business belong to the Indian offices. It is also admitted that 3% of the risk was taken by Indian offices. - held that - relying on the decision in the case of Performing Right Society Ltd. (1976 -TMI - 6491 - SUPREME Court) it is held that notwithstanding the nomenclature of liaison office the Indian offices are carrying out real and substantive business operations of the assessee the income from which accrues or arises in India. - business connection established - assessee has permanent establishment in India - assessee was liable to be taxed in India on the income attributable to India offices. - However expenses incurred shall be deducted. Regarding interest u/s 234B and 234C - it may be stated that the assessee is a non-resident company which receives income from another non-resident company outside India. All payments to a non-resident person are liable for deduction of tax at source under section 195 of the Act. Therefore all receipts of the assessee are liable to tax deduction at source - Since there is no liability to pay advance-tax there cannot be any reason for charging interest under sections 234B and 234C for failure to pay advance-tax which was not payable in the first place - Appeal is allowed
Issues involved:
1. Taxability of the appellant in India for activities carried out by the Liaison Office (LO). 2. Attribution of commission income to the Indian LO. 3. Functional and risk analysis for income attribution. 4. Verification of turnover, commission, and expenses by the Assessing Officer (AO). 5. Charging of interest under sections 234B and 234C of the Income-tax Act. Issue-wise Detailed Analysis: 1. Taxability of the appellant in India for activities carried out by the Liaison Office (LO): The appellant, a Hong Kong-based company, set up liaison offices in India. The AO concluded that the Indian LO was engaged in substantial business activities and not merely auxiliary activities. The CIT(A) upheld this view, noting that the Indian LO carried out significant functions such as product design, development, sourcing, quality control, and shipping coordination. The Tribunal agreed, holding that the Indian LO carried out substantive business operations and thus had a business connection in India, making the appellant liable to tax in India under section 9(1)(i) of the Income-tax Act. 2. Attribution of commission income to the Indian LO: The AO attributed 90% of the commission income to the Indian LO, which the CIT(A) revised to 72% based on a detailed analysis of the functions performed. The CIT(A) found that the Indian LO was responsible for substantial activities contributing to the commission income. The Tribunal, however, adjusted this attribution to 50%, acknowledging the significant role of the Indian LO but also recognizing the involvement of the head office and other entities. 3. Functional and risk analysis for income attribution: The appellant provided a Functional, Asset, and Risk (FAR) analysis, attributing 33% of the functions, 18% of the assets, and 3% of the risks to the Indian LO. The CIT(A) conducted an independent analysis, concluding that 86% of the functions and 44% of the risks were attributable to the Indian LO. The Tribunal found the CIT(A)'s analysis to be overstated but did not identify specific errors, ultimately attributing 50% of the commission income to the Indian operations. 4. Verification of turnover, commission, and expenses by the Assessing Officer (AO): The CIT(A) directed the AO to verify the turnover, commission, and expenses of the Indian LO, noting that the details were already available. The Tribunal upheld the CIT(A)'s direction, emphasizing the need for accurate verification to determine the correct income attributable to the Indian operations. 5. Charging of interest under sections 234B and 234C of the Income-tax Act: The CIT(A) confirmed the charging of interest under sections 234B and 234C, considering them mandatory. However, the Tribunal found that since the appellant, a non-resident company, received income from another non-resident company outside India, all payments were subject to tax deduction at source under section 195. Therefore, the appellant had no liability to pay advance tax, and consequently, no interest under sections 234B and 234C was chargeable. Conclusion: The appeals were partly allowed, with the Tribunal adjusting the attribution of income to the Indian LO to 50% and ruling that no interest under sections 234B and 234C was chargeable. The order applied to all assessment years under consideration.
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