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2018 (4) TMI 1964 - AT - Income TaxAccrual of income in India - PE in India - LO executing business or contracts independently with the customers in India - Whether the assessee s LO in India constitutes a PE under Article 5 of the DTAA between India and Japan? - HELD THAT - As following the parity of reasoning brought out by our co-ordinate Bench for Assessment Year 2007-08 in its order we may note that so far as the instant year is concerned, there is no evidence and material referred to by the income-tax authorities so as to establish in the instant year that the LO was executing business or contracts independently with the customers in India and, therefore, the plea of the assessee that the LO was carrying only support activities and was engaged in preparatory and auxiliary activities deserves to be affirmed and the LO could not be construed as a PE in India. There was no material to suggest that any action was taken by the RBI or whether any correspondence in this regard was at all made by the AO or not. Be that as it may, even before us, there is nothing to suggest that the RBI has found the activities of the LO as being noncompliant with the terms and conditions of its permission and, therefore, the said factual matrix strengthens the assertions of the assessee that the LO was performing activities which were permissible by the RBI, meaning thereby, that it was only performing support activities and engaged in only preparatory and auxiliary activities and not in the nature of a PE so as to impute any business connection in India. Thus, following the precedent as also the aforesaid discussion, in our view, it is irresistible to conclude that the assessee s LO did not constitute a PE in India for the Assessment Year 2005-06. In this view of the matter, the Ground of appeal no. 1 raised by the assessee is allowed. Levy of interest u/s 234B - While completing the assessment, interest u/s 234B of the Act was levied by the Assessing Officer for default in payment of advance tax. It has been brought out that similar issue for Assessment Year 1998-99 was considered by our co-ordinate Bench in its order dated 12.01.2017 2017 (1) TMI 1098 - ITAT MUMBAI and decided in favour of the assessee following the ratio of the judgment in the case of NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT . Following the aforesaid precedent, the plea of the assessee on this aspect is also upheld.
Issues Involved:
1. Whether the Liaison Office (LO) of the assessee constitutes a Permanent Establishment (PE) in India under Article 5 of the India-Japan Double Taxation Avoidance Agreement (DTAA). 2. The validity of the reopening of the assessment under section 148 of the Income Tax Act. 3. The quantification of income attributable to the PE in India. 4. The disallowance of various expenses under section 37(1) of the Income Tax Act. 5. The levy of interest under section 234B of the Income Tax Act. 6. The initiation of penalty under sections 271(1)(c) & 271B of the Income Tax Act. Issue-wise Detailed Analysis: 1. Whether the LO constitutes a PE in India: The primary issue was whether the activities of the LO in India constituted a PE under Article 5 of the India-Japan DTAA. The Revenue argued that the LO was involved in identifying, negotiating, and concluding business contracts, thus functioning as a PE. The assessee contended that the LO only engaged in liaison and representative activities, not business or commercial activities. The Tribunal referenced its earlier decisions for Assessment Years 1998-99 and 2007-08, where it was held that the LO did not constitute a PE. The Tribunal emphasized that there was no evidence that the LO was functioning as an independent profit center or engaging in business activities. The Tribunal noted that the LO was set up with RBI's approval for liaison activities only, and no punitive action was taken by RBI against the LO for violating its terms. Hence, the LO was not considered a PE for the relevant assessment years. 2. Validity of Reopening of Assessment under Section 148: For Assessment Year 2006-07, the assessee challenged the reopening of the assessment under section 148, arguing there was no material for escapement of income and the notice was issued to revive the time limit for issuing notice under section 143(2). The Tribunal did not adjudicate this issue as the assessee succeeded on merits, rendering the challenge to reopening academic. 3. Quantification of Income Attributable to the PE: The Assessing Officer had estimated the profit attributable to the PE at 10% of the total turnover from India. The CIT(A) reduced this estimate to 3.73% and allowed certain expenses as deductions. The Tribunal, following its decision that the LO did not constitute a PE, rendered the quantification of income and related computational disputes academic. 4. Disallowance of Various Expenses: The CIT(A) had upheld the disallowance of 25% of transportation, traveling, and conference expenses under section 37(1), arguing they were not incurred for business purposes. The Tribunal did not specifically address these disallowances as the primary issue of the LO constituting a PE was decided in favor of the assessee. 5. Levy of Interest under Section 234B: The Tribunal upheld the assessee's plea against the levy of interest under section 234B for default in payment of advance tax, following the precedent set by the Hon'ble Bombay High Court in the case of NGC Network Asia LLC. 6. Initiation of Penalty under Sections 271(1)(c) & 271B: The Tribunal did not specifically address the initiation of penalties under sections 271(1)(c) & 271B, as the primary issue of the LO constituting a PE was decided in favor of the assessee, rendering the penalty initiation academic. Conclusion: The Tribunal concluded that the LO did not constitute a PE in India for the relevant assessment years. Consequently, the appeals of the assessee were allowed, and those of the Revenue were dismissed. The Tribunal's decision was based on the lack of evidence showing that the LO was engaged in business activities or functioning as an independent profit center.
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