2019 (2) TMI 2045 - AT - Income Tax

Income deemed to accrue or arise in India - existence of a Permanent Establishment (PE) in India - Liaison Office at Bombay - India Japan Tax Treaty - assessee is a company incorporated in Japan as allowed by the Reserve Bank of India to open a Liaison Office (LO) at Bombay for liaison work with a condition that no business will be carried out by the company and no income will be earned by the company through the LO - HELD THAT - As on the basis of the facts and evidences available on record which are very much the same in the impugned assessment year the Tribunal ultimately concluded that there is nothing on record to prove that the Liaison Office at Mumbai was functioning as an independent profit centre to constitute as PE of the assessee. While coming to such conclusion the Tribunal also took note of the allegation of the Assessing Officer that the Liaison Office has violated the permission granted by the RBI with regard to conducting its activities and which will be taken up by the Assessing Officer with the RBI. In this context the Tribunal observed that since there is no adverse report or action taken by the RBI against the assessee it has to be accepted that the Liaison Office was performing its activities in accordance with the permission granted by the RBI. It is relevant to observe same view was expressed by the Tribunal while deciding identical issue in assessee s own case for assessment year 2007 08. Tribunal has taken a conscious view that such impounded documents do not establish the fact that the Liaison Office is acting as a PE of the assessee such decision of the Tribunal being purely on the basis of facts obtaining from the impounded documents which also forms the basis for addition in the impugned assessment year respectfully following the view expressed by the Tribunal in the preceding assessment years in the orders referred to above we hold that the Liaison Office at Bombay does not constitute a PE of the assessee under Article 5 of Indian Japan Tax Treaty. Hence no income of the assessee can be brought to tax in India. Accordingly we delete the addition made by the Assessing Officer. Grounds no.1 2 and 3 are allowed.

Summary

Issues Involved:
1. Existence of a Permanent Establishment (PE) in India.
2. Attribution of profit to the PE.
3. Rate of tax applicable to the assessee.

Detailed Analysis:

Existence of a Permanent Establishment (PE) in India:
The primary issue was whether the Liaison Office (LO) of the assessee, a company incorporated in Japan, constituted a PE in India. The assessee argued that the LO was only for liaison work as permitted by the Reserve Bank of India (RBI) and did not engage in any commercial activities. The Assessing Officer (AO) conducted a survey under section 133A of the Income Tax Act, 1961, and found documents suggesting that the LO was involved in commercial activities, including sales. The AO concluded that the LO constituted a PE under Article 5 of the India-Japan Tax Treaty and section 9 of the Act, attributing income to the LO.

The Tribunal examined the impounded documents, including performance review reports and correspondences, and found that they did not conclusively establish that the LO was involved in commercial activities or concluding contracts on behalf of the Head Office. The Tribunal noted that similar documents had been considered in previous assessment years (1996-97 to 2002-03), where it was held that the LO did not constitute a PE. Therefore, the Tribunal concluded that the LO did not constitute a PE under Article 5 of the India-Japan Tax Treaty, and no income could be attributed to it.

Attribution of Profit to the PE:
Since the Tribunal held that the LO did not constitute a PE, the grounds related to the attribution of profit to the PE became redundant. The Tribunal did not need to adjudicate on the method or quantum of profit attribution to the PE.

Rate of Tax Applicable to the Assessee:
Similarly, the issue of the rate of tax applicable to the assessee also became redundant following the Tribunal's decision that the LO did not constitute a PE. Therefore, this issue was not adjudicated.

Conclusion:
The Tribunal allowed the assessee's appeal in part, holding that the LO did not constitute a PE and deleted the additions made by the AO. Consequently, the grounds raised by the Revenue regarding the quantification of sales turnover and gross profit attributable to the PE were dismissed as redundant. The assessee's appeal arising out of the order giving appeal effect was also dismissed as infructuous.

Order Pronounced:
The order was pronounced in the open Court on 22.02.2019, with the assessee's appeal partly allowed and the Revenue's appeal dismissed.