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2018 (3) TMI 434 - HC - Income TaxIncome accrued in India - Existence of Permanent establishment (PE) so as to attract the provisions of Section 9 - income directly or indirectly attributable to the branches/offices is not taxable in India - DTAA between India and Japan - Held that - The Court is unable to be persuaded that the ITAT erred in its conclusion that the evidence produced by the AO does not show that the LOs of the Assessee carried on any activity which was not incidental and auxiliary in nature. As urged that the ITAT had merely gone by the fact that the Reserve Bank of India ( RBI ) had not found the Assessee to be in violation of any of the conditions subject to which it was permitted to operate its LOs in India. The Court finds that, independent of the above factor, the ITAT has in fact examined in detail all the materials referred to by the AO in its remand report as well as the order of the CIT (A) and has given detailed reasons why none of these materials establish that the LOs were used by the Assessee to carry on any business or trading activity in India. The said factual finding by the ITAT has not been shown to be perverse. The Court further notes that there was no basis for the AO to conclude that the Special Bench of the ITAT had erred in its conclusion in favour of the Assessee that the LOs were not carrying on any activity which was either incidental and auxiliary in nature. With the consistent position in this regard continuing since 1977-78, in the absence of any evidence to suggest a change in the circumstances, there was no warrant for the AO and the CIT (A) to take a different view of the matter. - Decided in favour of assessee.
Issues Involved:
1. Permanent Establishment (PE) status of Indian branches/offices of the assessee. 2. Taxability of income attributable to Indian branches/offices under the Double Taxation Avoidance Agreement (DTAA) between India and Japan. 3. Authority of the Assessing Officer (AO) to conduct a survey under Section 133A of the Income Tax Act based on directions from the Commissioner of Income Tax (Appeals) [CIT (A)] under Section 250(4). 4. Burden of proof concerning the preferential treatment under the statute. Issue-wise Detailed Analysis: 1. Permanent Establishment (PE) Status of Indian Branches/Offices: The core issue was whether the Indian Liaison Offices (LOs) of the assessee, a non-resident foreign company from Japan, constituted a Permanent Establishment (PE) in India. The Assessing Officer (AO) concluded that the LOs were involved in substantial business activities such as locating customers, negotiating terms, and ensuring follow-up measures, which went beyond mere liaison work. However, the Income Tax Appellate Tribunal (ITAT) found that the activities of the LOs were preparatory or auxiliary in nature and thus did not constitute a PE as per Article 5(6)(e) of the DTAA between India and Japan. The ITAT emphasized that the LOs could not independently take business decisions or engage in trading activities. 2. Taxability of Income Under DTAA: The ITAT held that the income from business turnover/imports in India was exempt under the DTAA between India and Japan. The Tribunal referred to the Special Bench decision for AYs 1980-81 and 1981-82, which consistently held that the LOs were engaged in liaison work and not in trading activities. The Tribunal examined various documents and statements and concluded that there was no evidence to suggest that the LOs were involved in any business or trading activities in India. The Court affirmed this conclusion, noting that the ITAT's factual findings were not perverse and were consistent with the historical position since 1977-78. 3. Authority of AO to Conduct Survey Under Section 133A: The ITAT scrutinized the power of the CIT (A) under Section 250(4) to direct further inquiry by the AO and found that the CIT (A) had not issued any such direction. The Tribunal noted that the evidence collected by the AO during the survey was not part of the original assessment proceedings and was not collected at the behest of the CIT (A) under Section 250(4). Consequently, such evidence could not be considered in the appellate proceedings. The Court did not address this issue directly, as it was rendered unnecessary by the conclusions on other questions. 4. Burden of Proof: The ITAT held that the burden of proof had not shifted to the Revenue Authorities. The Tribunal found that the evidence did not establish that the LOs were carrying on any activities beyond those of a preparatory or auxiliary nature. The Court agreed with this conclusion, noting that the ITAT had thoroughly examined the materials and provided detailed reasons for its findings. Conclusion: The Court answered Questions (a) and (b) in the affirmative, favoring the assessee and against the Revenue, and Question (d) in the negative, also favoring the assessee. Question (c) was left open for consideration in an appropriate case. The appeal was dismissed with no order as to costs.
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