2011 (12) TMI 285 - AT - Income Tax

Stay Application - Non resident opened a liaison office in India - AO treated it as Permanent Establishment(PE) - Held That - The Assessing Officer has called for certain material from the assessee. details were sketchy. There is no specific reference about the details. Assessing Officer has estimated the gp at 10% ignoring the g.p. disclosed by the assessee at its Head Office relating to the global profit. After payment of Rs 2 Crore out of 4 Crore we stay recovery of demand for a period of 180 days or till the disposal of the appeal whichever event occurs first

Summary

Issues:
1. Stay of outstanding demand amounting to Rs. 19,70,67,038.
2. Determination of Permanent Establishment (PE) in India.
3. Quantification of profit attributable to PE.
4. Chargeability of interest under sec. 234B.
5. Prima facie case of the assessee.

Stay of Outstanding Demand:
The assessee sought ad-interim stay of the outstanding demand of Rs. 19,70,67,038, comprising tax of Rs. 13,78,09,118 and interest under sec. 234B of Rs. 5,92,57,920. The assessee, a Japanese company with a Liaison Office in India, claimed nil income in its return, leading to scrutiny assessment. The Assessing Officer alleged the LO exceeded its permitted activities, establishing a PE in India. Dispute Resolution Panel directed finalization of the draft order.

Determination of Permanent Establishment (PE):
The assessee contended that its Indian Liaison Office did not constitute a PE, citing Article 5 of the DTAA between India and Japan. Emphasis was on sub-clause (6)(e) exempting fixed places of business for preparatory or auxiliary activities. The onus of proving PE existence was debated, with the assessee challenging profit estimation methods and attribution percentages.

Quantification of Profit Attributable to PE:
The Assessing Officer estimated profits attributable to the alleged PE based on turnover, gross profit rate, and expenditure deductions. The assessee argued for lower profit estimations and referenced legal precedents to support its case. Discrepancies in profit margin calculations and attribution percentages were highlighted.

Chargeability of Interest under sec. 234B:
The assessee argued against interest under sec. 234B, claiming the disputed tax liability was deductible at source under sec. 195. The conflicting positions on PE existence and tax liability deduction were debated, questioning the coherence of the assessee's stance.

Prima Facie Case of the Assessee:
The Tribunal analyzed the material and contentions presented by both parties. Considering the debatable nature of the PE existence and profit attribution, the Tribunal found merit in the assessee's case. Discretion was exercised in favor of the assessee, granting a stay of demand subject to specified conditions, including partial payment and time limits.

This detailed analysis of the judgment addresses the issues of stay application, PE determination, profit quantification, interest chargeability, and the prima facie case of the assessee, providing a comprehensive overview of the legal proceedings and arguments presented before the Tribunal.