2012 (10) TMI 245 - AT - Income Tax

India Japan DTAA/treaty - Existence of PE - Assessee s contention is that Indian company acted as a communication channel between the prospective customers and assessee - Indian company facilitated the flow of information and documents like enquiries, proposals, quotations, purchase orders, invoice etc. between the assessee and the customers - AO has not accepted assessee s explanation as required documentary evidences were not furnished Held that - As concluding from the facts of the case there are conflicting claim by the Revenue and the assessee. Before the AO assessee had pleaded that the person who was in charge of the requisite details had fallen ill. It has also been a claim of the assessee that its submission had not been appreciated properly. Issues are remitted to the file of the AO for de novo consideration. Appeal remand back to AO

Summary

Issues Involved:
1. Legality of the CIT(A)'s order.
2. Existence of a Permanent Establishment (PE) in India.
3. Attribution of profits to the alleged PE.
4. Levy of interest under section 234B.

Detailed Analysis:

1. Legality of the CIT(A)'s Order:
The appellant contested the order dated March 7, 2011, passed by the Commissioner of Income-tax (Appeals)-XI, New Delhi, claiming it to be "illegal, bad in law and void ab initio." The CIT(A) upheld the Assistant Director of Income-tax's (AO) assessment of the appellant's income at Rs. 79,353,253 against the returned income of Rs. 19,718,810.

2. Existence of a Permanent Establishment (PE) in India:
The primary contention was whether the appellant had a PE in India under paragraph 7 of Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and Japan.

- Appellant's Argument: The appellant argued that Daikin Air-conditioning India Pvt. Ltd. (DAIPL) acted merely as a communication channel between the appellant and Indian customers, forwarding requests, quotations, and proposals without concluding contracts. They relied on the commission agreement dated 22/12/05 to support this claim.
- Assessing Officer's (AO) Findings: The AO concluded that DAIPL secured orders and negotiated prices on behalf of the appellant in India, thus constituting a PE. The AO noted that the appellant failed to provide documentary evidence, such as emails or correspondence, to prove that enquiries and proposals were directly received by the appellant.
- CIT(A)'s Decision: The CIT(A) upheld the AO's findings, emphasizing the appellant's failure to discharge its onus of proof and the absence of documentary evidence. The CIT(A) agreed with the AO that DAIPL's actions indicated it was negotiating and finalizing prices, thus creating a PE under Article 5(7)(a) and 5(7)(c) of the Indo-Japan tax treaty.

3. Attribution of Profits to the Alleged PE:
The appellant contested the attribution of Rs. 59,634,440 to the alleged PE in India.

- Appellant's Argument: The appellant argued that an arm's length commission had been paid to DAIPL, which should extinguish any attribution to the alleged PE. They also contended that the AO did not allow a deduction for the actual commission payable to DAIPL and failed to consider the appellant's global profitability.
- AO's Findings: The AO attributed profits to the alleged PE without considering the arm's length commission paid to DAIPL or the appellant's global profitability.
- CIT(A)'s Decision: The CIT(A) upheld the AO's attribution of profits, stating that the appellant failed to provide facts substantiating a lower attribution of profits.

4. Levy of Interest under Section 234B:
The appellant challenged the levy of interest under section 234B of the Income Tax Act.

- Appellant's Argument: The appellant argued that section 234B is not applicable where the income is subject to deduction of tax at source under section 195. If the AO's allegation of a PE in India was accepted, the income would be subject to tax deduction at source.
- CIT(A)'s Decision: The CIT(A) held that the charge of interest under section 234B is consequential and no appeal lies against such an order.

Conclusion:
The appellate tribunal noted the conflicting claims and the lack of necessary evidence provided by the appellant. Given the circumstances, the tribunal decided to remit the issues back to the AO for fresh adjudication. The AO is directed to reconsider the issues de novo, granting the appellant adequate opportunity to present their case. The appeal filed by the appellant is allowed for statistical purposes.