2017 (2) TMI 780 - AT - Income Tax

Validity of reopening of assessment - assessee was making sales in India with the involvement of its Permanent Establishment (PE) in India and, accordingly, the profits attributable to such PE were chargeable to tax - whether No name of the assessee, business transactions and the relevant year appear in the reasons ? - Held that - AO categorically recorded in para 7 of the reasons dated 26.3.2008 that such information was demanded, but, not given by the GE group, which demonstrated that there were other expats working/making sales of GE Overseas throughout the period 1.4.2000 onwards. The assessee raised objections to the reasons recorded by the AO vide its letter dated 7.10.2008, whose copy is available on pages 1-16 of the assessee s fourth paper book. It is vivid that the assessee did not controvert this fact. The assessee has taken several legal objections against the initiation of reassessment, but did not deny correctness of factual assertions in this regard in the reasons. As noticed from the survey documents paper book, being, a letter from Price Waterhouse Coopers to some person of the GE group at AIFACS Building, 1, Rafi Marg, New Delhi intimating the approval by the RBI of change of nodal office of GEIOC from Mumbai to New Delhi vide its letter dated 8th March, 2000. It is this address which was subjected to survey proceedings in 2007. Page 311 of the survey documents paper book is a copy of the lease agreement for the official premises of the LO which shows that the lease agreement of AIFCAS premises was renewed from 1st December, 2003. The same page indicates that the earlier lease agreement dated 1st March, 1994 came to an end on 28th February, 2003. These two documents corroborate that the premises, subjected to survey proceedings on which business activities of GE overseas entities were found to be carried on, was at their disposal for all the years under consideration. These two documents coupled with the GE group supplying information about the sales made by the GE overseas entities from the year 2000 onwards tilt the balance in favour of the Department. Above discussion boils down that the seven expats worked in India for a period of 2-5 years covering some of the years and for the prior period covered in this batch of appeals, some other expats were working in India for the GE overseas entities in a similar manner. To sum up, we jettison the contention of the ld. AR that the reasons for reopening do not refer to the name of the assessee or its business activities for the year under consideration. Whether No assertion in reasons that any person in India entered into contract on behalf of assessee? - Held that - We do not concur with the submissions put forth on behalf of the assessee in this regard. Some documents found during the course of survey zeroed in the possibility of the GE overseas entities conducting full-fledged business in India, which got fortified from post-survey enquiries divulging more specific information on the business of the assessee carried out from India. Para 4 of the reasons categorically notes that the survey and post-survey enquiries transpired that the GE Group was engaged in various sales activities in India for which seven business heads, viz., Dan Nalawade, Riccardo Procacci, Wllliam Blair, Ashfaq Nainar, Kenneth Peirson, Sameer Aggarwal and Prat. Kumar, mostly expats from GEII, were appointed to head Indian operations, with the support staff provided by GEIIPL and also third parties. Details of business and the sales made by such entities during the period 01.04.2000 to 31.03.2006 form part of the reasons by way of Annexure. It is ergo abundantly clear that the AO has clearly asserted in the reasons that GE India carried out full-fledged business activities and made sales in India for all the GE overseas entities. This contention fails. Whether no assertion in reasons that income escaped assessment because of failure of assessee to disclose fully and truly all material facts? - Held that - It is apt to take note of the fact that the assessee had not filed return of income prior to the issue of notice u/s 148. Explanation 2(a) to section 147 provides that where no return of income has been furnished by the assessee although his total income during the previous year exceeded the maximum amount, which is not chargeable to income-tax, it shall be deemed to be a case where income chargeable to tax has escaped assessment. Business carried on by the GE overseas entities in India was never disclosed to the Department. Business connection of the assessee in India, as set up by the AO, has not been denied. In that view of the matter and the further fact that the sales were made by GE Overseas in India through GE India, there was income of the assessee chargeable to tax in India for which the return of income ought to have filed and the benefit of DTAA, if any, could have been claimed as was done pursuant to the notice u/s 148. The fact that the assessee had a PE in India and no return was filed prior to the issuance of notice u/s 148 also brings the case within the fold of Explanation 2(a) to section 147. In view of the foregoing discussion, we are fully satisfied that the AO was justified in initiating reassessment proceedings. TP Adjustment - Held that - ALP of payment made by GEIOC to GEIIPL was determined only w.r.t. the apparent services elaborated in the Agreement which are more or less of liaison nature, not leading to the doing of some income generating activity. But in reality, the actual services rendered by GEIIPL to the GE overseas entities under the leadership of expatriates from GEII is alien to the Agreement. Such activities performed by GEIIPL beyond the scope of the Service agreement have led to the creation of the PE of the assessee in India. Such services have not been remunerated at all. Since the transfer pricing analysis did not reflect these functions performed by GEIIPL, there is a need to attribute profits to the PE for those functions/risks that have not been considered. Further, it came to light during the course of the survey and the postsurvey proceedings that the premises of the LO of GEIOC was being used as a fixed place PE by the GE overseas entities including the assessee, which fact was never disclosed to the Department. Our attention has not been drawn towards any payment having been made by the GE overseas entities to GEIOC on this account. As this international transaction was not reported at all, there was no question of any transfer pricing analysis of the same. These facts delineate that the instant cases fall under the exception to the rule laid down in Morgan Stanley (2007 (7) TMI 201 - SUPREME Court) as reiterated in LG Electronics (2014 (8) TMI 210 - ALLAHABAD HIGH COURT ). We, therefore, reject this contention raised by the ld. AR. Mandatory sanction required under section 151(2) not taken - Held that - Addl. DIT should not hurriedly accord sanction in a mechanical way but properly examine the facts before giving approval. Criteria for examining validity of a sanction is the genuineness of reasons for re-assessment and application of mind by the authority before granting sanction u/s 151 of the Act. We are satisfied that in the given circumstances, the Addl.CIT committed no mistake in granting sanction u/s 151(2) of the Act. This ground, therefore, fails. Existence of PE - taxability of income of GE Overseas under the Act as well as the Double Taxation Avoidance Agreement - Held that - All the three conditions for constituting a fixed place PE in terms of paras 1, 2 and 3 of the Article 5 are fully satisfied as AIFCAS building is a fixed place from which business of GE Overseas is partly carried on in India and the activities carried out from such fixed place are not of preparatory or auxiliary character. See Liaison Office vs. CIT (International Taxation) and Another 2011 (2) TMI 1233 - KARNATAKA HIGH COURT wherein held that merely because the buyers place orders directly with the Head Office and make payment directly to the Head Office and it is the Head Office which directly sends goods to the buyers, would not be sufficient to hold that the work done by the liaison office is only liaison and it does not constitute a permanent establishment as defined in Article 5 of DTAA, liaison office is undertaking an activity of trading and therefore entering into business contracts, fixing price for sale of goods and merely because, the officials of the liaison office are not signing any written contract would not absolve them from liability, finding recorded by the tribunal is based on legal evidence and that the finding that the liaison office is a permanent establishment as defined under Article 5 of DTAA and therefore, the business profits earned in India through this liaison office is liable for tax is established , Agency PE - Held that - The nature of activities done by GE India, which are of core nature and not merely preparatory or auxiliary, we hold that they clearly indicate its authority to conclude contracts on behalf of GE Overseas. It is, consequently, held that GE India constituted agency PE of all the GE Overseas entities in India. Attribution of income - chargeability of tax in India - Held that - Considering the nature of activities performed by GE India in generating sales of GE Overseas in India, we have elaborately taken note of the lead role played by GE India and GE overseas playing only a supporting role. In such circumstances, we cannot approve attribution of whole of 35% of the profits relating to sales and marketing to the PE in India. Considering all the relevant facts and adopting a holistic approach, we hold that GE India conducted core activities and the extent of activities by GE Overseas in making sales in India is roughly one fourth of the total marketing effort. Ergo, we estimate 26% of total profit in India as attributable to the operations carried out by the PE in India. Therefore, as against the AO applying 3.5% to the amount of sales made by the assessee in India, we direct to apply 2.6% on the total sales for working out the profits attributable to the PE in India. Interest u/s 234B - Held that - The Hon ble Delhi High Court in assessee s own group cases involving identical facts has approved the cancellation of the levy of interest u/s 234B for the assessment years 2001-02 to 2006-07. Facts relating to the A.Ys. 2007-08 and 2008-09 instantly before us, are, admittedly, similar to such facts considered and decided by the Hon ble Delhi High Court. When there is a judgment of the Hon ble jurisdictional High Court directly in assessee s own case and the facts and circumstances for the later years are similar, there can be no question of applying the ratio decidendi of another judgment laying down a different proposition. It is more so, when the earlier judgment was also considered by the Hon ble High Court in a later decision in assessee s own case. In view of the foregoing discussion and respectfully following the precedent in assessee s own case for the immediately preceding assessment years, we are satisfied that the interest u/s 234B has been wrongly charged for the A.Ys. 2007-8 and 2008-09. The same is hereby cancelled.

Summary

Issues Involved:
1. Challenge to Reassessment
2. Permanent Establishment (PE)
3. Attribution of Income
4. Interest under Section 234B

Detailed Analysis:

1. Challenge to Reassessment:
The first issue pertains to the initiation of reassessment proceedings. The assessee, a company incorporated in the USA and part of the GE Group, did not file a return of income prior to the proceedings. A survey under Section 133A was conducted at the Delhi address of the Liaison Office (LO) of General Electric International Operations Company Inc. (GEIOC) on 2.3.2007, revealing incriminating material. Notices under Section 148 were issued to 24 entities of the GE Group. The main thrust of the AO’s opinion was that the assessee was making sales in India with the involvement of its Permanent Establishment (PE) in India, attributing 3.5% of the total value of supplies made by the assessee to the customers in India as taxable business income. The AO’s reasons for initiating reassessment included the presence of a fixed place PE and a dependent agent PE in India. The Tribunal upheld the initiation of reassessment, noting that the AO had prima facie grounds for forming a belief that there was some escapement of income, which is a condition precedent for initiating reassessment.

2. Permanent Establishment (PE):
The AO held that the GE Overseas entities had PE in India in two forms: a fixed place PE at the AIFACS premises of GEIOC and a dependent agent PE through GE India. The Tribunal found that the expatriates from GEII and employees of GEIIPL were permanently using the LO premises of GEIOC at AIFACS building, conducting core activities related to sales and marketing, which were not of a preparatory or auxiliary character. The Tribunal concluded that the AIFACS building constituted a fixed place PE of the assessee and all the GE Overseas entities. Additionally, GE India, consisting of expatriates and employees of GEIIPL, acted as agents of dependent status for multiple GE overseas enterprises, thereby constituting an agency PE under Article 5(4) of the DTAA.

3. Attribution of Income:
The AO estimated the profit attributable to the PE in India at 10% of sales made in India, inspired by sections 44BB and 44BBB, and attributed 35% of such profit to marketing activities based on the decision in Rolls Royce PLC vs. DDIT. The Tribunal, however, held that the activities carried out by Rolls Royce and ZTE Corporation in India were not similar to those done by the PEs of GE overseas entities. Considering the lead role played by GE India and the supporting role of GE Overseas, the Tribunal estimated 26% of the total profit in India as attributable to the operations carried out by the PE in India.

4. Interest under Section 234B:
The Tribunal noted that the AO levied interest under Section 234B for all the assessment years from 2001-02 to 2008-09. The CIT(A) deleted the levy of interest, and the Tribunal confirmed the deletion. The Hon’ble Delhi High Court in DIT (IT) vs. GE Packaged Power Inc. upheld the deletion of interest under Section 234B for the assessment years 2001-02 to 2006-07. Following this precedent, the Tribunal cancelled the interest charged under Section 234B for the assessment years 2007-08 and 2008-09.