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2024 (1) TMI 548 - AT - Income TaxValidity of Reopening of assessment - survey action u/s 133A as carried out at the premises of the LO, in course of which, certain documents/CDs were impounded, which contained communication between the LO and head office - HELD THAT - The information contained in the impounded documents found at the time of survey operation coupled with revelation made regarding activities of the LO from the statements recorded from two of the officers working at the LO, certainly gave an insight not only with regard to the business activities carried on by the HO in India but the extent of involvement of the LO in such business activities of the HO. Thus, in our view, the information gathered at the time of survey operation, either from the documents impounded or from the statements recorded from the officers working at LO certainly constitute tangible material to hold a prima facie view that the income chargeable to tax has escaped assessment. Whether the information contained in the documents and the statements recorded would ultimately result in assessment of escaped income, is a factor which need not be gone into at the time of recording reasons for forming the belief that the income chargeable to tax has escaped assessment. What is required at the stage of recording of reasons is whether there are tangible materials available on record to form a belief that income has escaped assessment. Having examined the facts on record, we are firmly of the view that the Assessing Officer, at the time of forming the belief regarding escapement of income, had tangible material available with him. Thus, in our view, there is a direct nexus/live link between the material available on record and the formation of belief for reopening the assessments under section 147 of the Act. Therefore, we do not find merit in the submissions made by the assessee that reopening of assessments under section 147 of the Act is invalid. PE in India - Whether the assessee had a PE in India? - Whether liaison office (LO) in India can be treated as permanent establishment (PE) in terms of Article 5(2) of India-Germany Double Taxation Avoidance Agreement(DTAA)? - HELD THAT - LO has a major say with regard to not only the titles to be reprinted in India, but their pricing also. It is also a fact on record that in a report submitted by Conny Schindewolf, the achievement of the LO in increasing the sale of products of the assessee has been appreciated. Though, learned counsel for the assessee has submitted before us that much importance cannot be attached to the said report, as it was for internal consumption , however, we are not impressed. From various invoices placed in the paper book, it is observed that Conny Schindewolf was in an authoritative position of the company, hence, her report carries much weight. While examining the issue relating to existence or otherwise of PE, learned first appellate authority has recorded a factual finding that the LO plays an active role with regard to printing of books in the EPZ, deciding their cost component and their sales. The assessee has not been able to rebut the concurrent factual finding of the departmental authorities in so far as it relates to activities of the LO in printing of books in EPZ. Therefore, in our view, the LO constitutes a PE in terms of Article 5(1) read with Article 5(2) of the treaty, at least, in relation to reprinting of books at EPZ. The exceptions provided under Article 5(4) would not be applicable, as, in our view, the activities undertaken by the LO is not merely limited to preparatory or auxiliary character of a communication channel between the clients in India and HO. In our view, the decision of Nagase Company Ltd. 2018 (4) TMI 1964 - ITAT MUMBAI would be of no help to the assessee, as in that case, the facts on record did not indicate that the role of LO is not limited to preparatory and auxiliary work. In aforesaid view of the matter, we hold that the LO constitutes PE of the assessee in India. Attribution of profit to the PE - As observed, with regard to EPZ sales, learned Commissioner (Appeals) has determined net profit rate at 15% of the total sales made in India and out of that has attributed 80% to the PE. In our view, the attribution of profit by learned Commissioner (Appeals) appears to be irrational and not in consonance with the facts on record. From the assessment order, it is evident that the assessee has incorporated a subsidiary in India in the year 2002. The Assessing Officer has himself observed that the subsidiary is remunerated with a mark up of 11% of the gross receipts while rendering similar nature of services as rendered by the LO. Thus, in our view, the profit rate, at which the Indian subsidiary was remunerated, can be taken as an yardstick to determine the quantum of profit attributable to PE. AO has attributed 15% of the gross revenue as profit to the PE. Whereas, learned first appellate authority has determined the net profit rate at 15% of the total sales and attributed 80% out of that to the PE. In our view, it will be reasonable to estimate the net profit at 11% of the total sales made in India and out of that attribute 80% as income of the PE, as major role was played by the PE with regard to EPZ sales. Of course, while computing the income of the PE, the Assessing Officer must consider assessee s claim of expenses incurred towards making sales in India and other deductions such as depreciation, head office expenses, turnover discounts etc. While undertaking such exercise, the Assessing Officer must provide reasonable opportunity of being heard to the assessee. Though the assessee has taken an argument that no profit is attributable to PE with regard to EPZ sales in terms of Article 7(5) of the treaty, however, on careful consideration, we are not convinced with the submissions of the assessee. We have discussed in detail the role of LO in procuring orders for EPZ sales. In that view of the mater, it cannot be said that no profit can be attributed to the PE.
Issues Involved:
1. Validity of reopening of assessments under section 147 of the Income-tax Act, 1961; Validity of assessment orders due to non-service of notices purportedly issued under section 143(2) of the Act. 2. Whether liaison office (LO) in India can be treated as permanent establishment (PE) of the assessee in terms of Article 5(2) of India-Germany Double Taxation Avoidance Agreement (DTAA). 3. Validity of attribution of income to the alleged PE by applying net profit rate of 10% on the total sales and further non-allowance of deduction of expenses in terms of section 44C of the Act. Summary: Issue 1: Validity of Reopening of Assessments The Tribunal examined the reopening of assessments under section 147 of the Income-tax Act, 1961. The assessee, a non-resident entity from Germany, did not file returns for the assessment years 1999-2000 to 2001-02. A survey under section 133A revealed documents and statements indicating potential income escape. The Tribunal held that the Assessing Officer had tangible material to form a belief that income chargeable to tax had escaped assessment, thus validating the reopening under section 147. Issue 2: Liaison Office as Permanent Establishment The Tribunal considered whether the Liaison Office (LO) in India constituted a Permanent Establishment (PE) under Article 5(2) of the India-Germany DTAA. The LO was initially approved by the RBI to act as a communication channel. However, based on documents and statements from employees, the Assessing Officer concluded that the LO was involved in activities beyond preparatory or auxiliary services, such as procuring orders and determining costs. The Tribunal upheld this view, concluding that the LO constituted a PE in India, especially concerning the reprinting of books in the EPZ. Issue 3: Attribution of Income to PE The Tribunal reviewed the attribution of income to the PE. It found that the LO did not play a role in the sale of journals and books imported from abroad, thus no income from these sales should be attributed to the PE. However, for books printed in the EPZ, the Tribunal deemed it reasonable to estimate the net profit at 11% of total sales in India and attribute 80% of this to the PE, aligning with the remuneration rate of the assessee's Indian subsidiary. The Tribunal directed the Assessing Officer to consider the assessee's claims for expenses and other deductions while computing the income of the PE. Conclusion: The appeals were partly allowed, with the Tribunal affirming the reopening of assessments, recognizing the LO as a PE for specific activities, and adjusting the attribution of income to the PE based on the nature of the LO's involvement in business activities.
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