2016 (2) TMI 705 - AT - Income Tax

Existence of P.E. in India - nature of power of attorney - whether the liaison office (L.O.) of the assessee constitutes Permanent Establishment (P.E.) of the assessee in India? - Held that - A plain reading of the clauses in the power of attorney takes us to a conclusion that the powers given therein are L.O. specific. No doubt the AO can investigate, call for evidences and come to a conclusion where any income earning activity has been carried out by the L.O. so as to construe it as fixed P.E. but, in our view it is beyond the jurisdiction of the AO to adjudicate and conclude that the assessee has filed false declarations before the RBI. At best, he can bring his findings to the notice of the RBI which may consider the same in accordance with law. The RBI has not found any violation of conditions laid down by it while permitting the assessee to have an L.O. In such circumstances, no adverse inference can be drawn. Having come to conclusion that prima facie a reading of the power of attorney does not demonstrate that the employees of the assessee at the L.O. are authorised to do core business activity or to sign and execute contracts etc., we now examine whether the AO has brought out any documentary evidences in support of his contention that the assessee has a P.E. in India. The assessee has furnished before the AO as well as before the DRP numerous documents, in support of his contention that all purchase orders would be raised directly by the Indian Customers on the Head Office of the assessee and that the Head Office had directly send quotations/invoices to its Indian customers and that these were signed and executed directly by the head office, without any involvement whatsoever by the LO in India. The AO has not given any adverse finding on the evidences filed before him nor did he point out from the evidences filed, as to why the claim of the assessee is not acceptable. There is no adverse comment by the D.R. on these voluminous evidences filed before us by the assessee to demonstrate that it does not have a P.E. in India. The AO has also not brought on record any material, other than his interpretation of the terms of the power of attorney, to demonstrate that the L.O. is carrying on core business activity warranting his conclusion that the assessee has a P.E. in India. Thus neither the documents produced by the assessee are rebutted by the Revenue, nor the Revenue has brought on record any evidence in support of its contention.Thus we have to necessarily hold that the Revenue could not demonstrate that the assessee has a P.E. in India. - Decided in favour of assessee

Summary

Issues Involved:
1. Permanent Establishment (PE) of the assessee in India.
2. Attribution of business profits to the PE in India under Article 7 of the India-Japan DTAA.
3. Taxability of fees for technical services under section 44DA of the Act.
4. Attribution of profits in line with transfer pricing principles.
5. Levy of interest under sections 234A, 234B, and 234C of the Act.
6. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Permanent Establishment (PE) of the Assessee in India:
The core issue was whether the Liaison Office (LO) of the assessee constituted a Permanent Establishment (PE) in India. The assessee argued that the LO was only for preparatory/auxiliary activities and not for core business activities. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) based their conclusion on the interpretation of the Power of Attorney granted to the LO's representative. The Tribunal found that the powers given in the Power of Attorney were LO-specific and did not authorize core business activities. The AO did not provide any evidence to contradict the assessee's claim. Therefore, the Tribunal concluded that the assessee did not have a PE in India and allowed ground no.1 in favor of the assessee.

2. Attribution of Business Profits to the PE in India:
Since the Tribunal concluded that the assessee did not have a PE in India, the issue of attributing business profits to the PE under Article 7 of the India-Japan DTAA became moot. Consequently, ground no.3 was not adjudicated as it was consequential to the finding on ground no.2.

3. Taxability of Fees for Technical Services:
The assessee conceded that the entire fees for technical services (FTS) amounting to Rs. 65.44 crores were taxable in India. The Tribunal set aside this issue to the AO for fresh adjudication in accordance with the law. The Tribunal also vacated the AO's finding that the FTS was attributable to the PE, given the conclusion that the assessee had no PE in India. Ground no.4(c) was dismissed as not pressed.

4. Attribution of Profits in Line with Transfer Pricing Principles:
The assessee did not make any submissions on this ground. Therefore, ground no.5 was dismissed as not pressed.

5. Levy of Interest:
The assessee argued only against the levy of interest under section 234B. The Tribunal adjudicated this issue in favor of the assessee by applying the decision of the Jurisdictional High Court in the case of DIT vs. Jacobs Civil Inc. and Director of Income Tax (International Taxation) vs. G.E. Packaged Power Inc. Ground no.6 against the levy of interest under sections 234A and 234C was dismissed.

6. Initiation of Penalty Proceedings:
The assessee did not press this ground. Therefore, ground no.7 was dismissed as not pressed.

Conclusion:
The appeal of the assessee was allowed in part. The Tribunal concluded that the assessee did not have a PE in India, thus negating the need to attribute business profits to a PE. The issue of taxability of FTS was set aside for fresh adjudication, and the levy of interest under section 234B was adjudicated in favor of the assessee. Other grounds were dismissed as not pressed.