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2007 (10) TMI 321 - AT - Income TaxIncome Deemed to accrue or arise in India - Income escaping assessment - notice issued u/s 148 - assessment framed u/s 147 - Non-resident foreign company - DTAA between India and UK - PE in India Or Not - income chargeable to tax in India u/s 5(2)? - Business connection in India within the meaning of s. 9(1)(i) ? - Appellant has a dependent agent in India in the form of RRIL - As regards issue of notice u/s 148 - HELD THAT - In respect of activities being carried on in India, the return was not filed which led the AO to believe that income has escaped assessment due to failure on the part of the assessee to file return of income. It is also to be noted that even though the Tribunal in its order for AY 2001-02 has held that there is no PE in India, it has upheld the validity of proceedings being initiated u/s 147/148. Failure to file return within the time prescribed u/s 139 would also attract the provisions of s. 147. Hon'ble Supreme Court in the case of Raymond Woollen Mills Ltd. vs. ITO 1997 (12) TMI 12 - SUPREME COURT held that for commencement of reassessment proceedings, it has only to be seen that whether there was prima facie some material on the basis of which Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We, therefore, uphold the validity of issue of notice u/s 148 and consequent framing of assessment u/s 147 of the Act. Business connection in India within the meaning of s. 9(1)(i) - The expression 'business connection' has a wide though uncertain meaning. It admits of no precise definition and the solution to the question must depend upon the particular facts of each case. Even the amended definition will not determine as to what constitutes business connection as the same is not an exhaustive definition but is a definition which also includes some of the activities to be termed as business connection. The contention of appellant is that this material was found during survey carried out in 2006. The assessments for AY 1997-98, 1998-99, 1999-2000 and 2000-01 were completed prior to survey being conducted. Thus, this material cannot be used in an assessment framed prior to conducting of survey. We are unable to agree to such a contention. The material existed for all the time to come and it is unfortunate that the assessee never disclosed its true relationship vis-a-vis RRIL. Only after the survey was conducted, the true face has come out. Once this material was found, the appellate proceedings were pending and were being considered by learned CIT(A) after calling for a remand report from the AO. The objections of assessee against the remand report were also considered. However, since the material relates to the entire business activity even for all the years under appeal, there is no case that the same should be ignored only because the same were not (sic) found after the conclusion of assessment proceedings but before the conclusion of appellate proceedings. Prima facie these papers itself show the extent of work being handled by RRIL for appellant in India. RRIL is not only 100 per cent subsidiary of the appellant but also maintains a permanent office in India to undertake all such activities. Thus, it can be concluded that the appellant has a business connection in India within the meaning of s. 9(1)(i) of the Act and under the IT Act, its income is chargeable to tax in India arising out of such business connections. PE in India Or Not - It is also seen that the appellant has a dependent agent in India in the form of RRIL. The fact that RRIL is totally dependent upon the appellant is not denied. However, the contention of the appellant is that even though RRIL is a dependent agent and such agency is to be deemed as a PE, so long as such dependent agent has no authority to negotiate and enter into contracts, under art. 5(4), there is no PE in India. It is to be noted that art. 5(4) has three clauses, namely, (a), (b) (c). Thus, even if one has to hold that the dependent agent has no authority to negotiate and enter into contracts for and on behalf of appellant, still as per cl. (c) of sub-art. (4), it is found that RRIL habitually secures orders in India for the appellant. It is a set practice that no customers in India are directly to send orders to the appellant in UK. Such orders are required to be routed only through RRIL. This fact is evident from the letter of Mr. L.M. Morgan to Mr. Prateek Dabral and Ms Usha. In the said letter, it is made clear that even requests for quotation/extension could not be communicated directly to the appellant but are to be routed through the office of RRIL. This is applicable even to the orders. The fact is not denied that the orders are firstly received by RRIL from the customers in India and only then communicated to the appellant. Thus, as per para 4(c) of art. 5, the dependent agent habitually secures orders wholly for the enterprise itself and hence, is deemed to be a PE of the appellant. The contention of appellant that the role of RRIL is merely of a post office is, therefore, unacceptable in view of the facts of the case as evidenced by various documents and correspondence found during the course of survey. Income attributable to the PE in India - The assessee has not maintained separate books of account for the activities carried out in India. However, it is seen that the manufacturing of the goods dealt or traded in India are not manufactured in India. The manufacturing operation is carried on outside India. Manufacturing is one of the important and integral part of the total activities which contributes to the earning of income. The extent of assets used is irrelevant as in the present case, the activity comprises of manufacturing and marketing. The marketing is in India. Hon'ble Supreme Court in the case of CIT vs. Ahmedbhai Umarbhai Co. 1950 (5) TMI 1 - SUPREME COURT held that where the manufacture and sale of the goods were not carried out in the same State, the profit of a part of business i.e. relating to manufacture of goods accrued at a place where manufacturing activities are carried out and hence, not assessable in the other State where only trading activities are carried on. We shall, therefore, allocate 50 per cent of the profits towards manufacturing activity which cannot be taxed in India as no such manufacturing activity is carried out in India. In respect of other activities apart from marketing of goods in India, the assessee has also carried out research and development activity outside India. In a product in which the assessee deals in research and development activities are as important as manufacture. R D activities are on an ongoing basis which results into development of newer products. We, therefore, allocate 15 per cent of the profits to such R D activities. Balance of the profit can be attributable to the marketing activities which are in India. Though contracts are signed outside India yet the negotiations and other discussions are in India and hence, all other profits can be said to accrue or arise into directly or indirectly through the operations of PE in India. We, therefore, direct the AO to adopt 35 per cent of the profit as against 75 per cent of the global profits in respect of sales effected in India as chargeable to tax in India. In the result, all the appeals are partly allowed.
Issues Involved:
1. Validity of Notice Under Section 148 for framing assessment Under Section 147. 2. Existence of business connection in India within the meaning of Section 9(1)(i) of the Act. 3. Existence of a Permanent Establishment (PE) under Article 5 of the Indo-UK DTAA. 4. Extent of income attributable to the PE in India. 5. Attribution of 75% of the profits to the sales made in India. 6. Chargeability of interest Under Section 234A and 234B. Detailed Analysis: 1. Validity of Notice Under Section 148 for Framing Assessment Under Section 147: The Tribunal upheld the validity of the notice issued Under Section 148, stating that the AO had prima facie material to form an opinion that income chargeable to tax had escaped assessment. The AO's belief was based on the minutes of meetings between the appellant and HAL, suggesting that the appellant had a business connection in India. The Tribunal clarified that at the time of issuing the notice, the AO is not required to reach a final conclusion regarding the exact quantum of income that has escaped assessment. The sufficiency or correctness of the material is not to be considered at this stage, as held by the Hon'ble Supreme Court in Raymond Woollen Mills Ltd., 236 ITR 34. Therefore, the Tribunal upheld the validity of the notice and the consequent framing of assessment Under Section 147. 2. Existence of Business Connection in India: The Tribunal found that the appellant had a business connection in India within the meaning of Section 9(1)(i) of the Act. The appellant had entered into an agreement with RRIL, which provided various support services, including marketing, technical support, and customer relationship management. The Tribunal noted that the activities of RRIL were not merely preparatory or auxiliary but formed an essential and significant part of the appellant's business. The Tribunal referred to judicial pronouncements, including CIT v. R.D. Agarwal & Co. 56 ITR 20 and Blue Star Engineering Co. v. CIT 73 ITR 283, to establish that the business connection must be real and intimate, contributing directly or indirectly to the earning of profits by the non-resident. 3. Existence of a Permanent Establishment (PE) under Article 5 of the Indo-UK DTAA: The Tribunal concluded that the appellant had a PE in India under Article 5(1), 5(2)(f), and 5(4) of the Indo-UK DTAA. The premises of RRIL were used for the business operations of the appellant, and the expenses for operating and maintaining the office were borne by the appellant. The Tribunal held that the activities of RRIL were not solely of a preparatory or auxiliary character but involved significant marketing and sales functions. The Tribunal also found that RRIL acted as a dependent agent, habitually securing orders for the appellant, thereby constituting a PE under Article 5(4)(c). 4. Extent of Income Attributable to the PE in India: The Tribunal determined that the income attributable to the PE in India should be computed based on the activities carried out in India. Under Article 7 of the Indo-UK DTAA, the profits directly or indirectly attributable to the PE are taxable in India. The Tribunal noted that the appellant did not maintain separate accounts for its Indian operations and attributed 50% of the profits to manufacturing activities outside India and 15% to R&D activities. The remaining 35% of the profits were attributed to marketing activities in India. 5. Attribution of 75% of the Profits to the Sales Made in India: The Tribunal disagreed with the AO's attribution of 75% of the global profits to the sales made in India. Instead, the Tribunal directed the AO to adopt 35% of the global profits as attributable to the marketing activities in India, considering the significant role of manufacturing and R&D activities outside India. 6. Chargeability of Interest Under Section 234A and 234B: The Tribunal held that the charging of interest Under Section 234A and 234B is consequential and mandatory in nature. The interest is compensatory and must be charged as per law. Conclusion: The Tribunal partly allowed the appeals, upholding the validity of the notice Under Section 148 and the existence of a business connection and PE in India. However, it reduced the attribution of profits to 35% of the global profits for the sales made in India and confirmed the chargeability of interest Under Section 234A and 234B.
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