2008 (2) TMI 468 - AT - Income Tax

Summary

Issues Involved:
1. Legality and validity of the orders passed by the AO and CIT(A).
2. Treatment of the Liaison Office (LO) as a Permanent Establishment (PE) in India and its tax implications.
3. Presumption of income liable to tax in India from the LO.
4. Alleged submission of incorrect details to RBI and reliance on statements of the director of an Indian subsidiary.
5. Determination of profits attributable to the alleged PE.
6. Conduct of a survey by the AO and reliance on collected documents.
7. Request for details of expenses and time given to the appellant for compliance.
8. Liability to pay interest under section 234AC of the Act.
9. Adoption of correct figures of salary and fringe benefits in computing profits.

Issue-wise Detailed Analysis:

1. Legality and Validity of Orders:
The appellant argued that the orders passed by the AO and CIT(A) were illegal, invalid, and ab initio void. The Tribunal's analysis did not find specific grounds to support this claim, focusing instead on the substantive issues related to the LO's activities and tax implications.

2. Treatment of LO as PE and Tax Implications:
The central issue was whether the LO constituted a PE in India under Article 5 of the Double Taxation Avoidance Agreement (DTAA) with Japan. The AO and CIT(A) held that the LO was a PE, attributing business income to it. The Tribunal noted that the Special Bench of the Tribunal had previously held that the LO's activities were auxiliary and preparatory in nature, thus not constituting a PE. The Tribunal found no new material evidence to depart from this precedent, concluding that the LO's activities remained auxiliary and preparatory.

3. Presumption of Income Liable to Tax:
The AO presumed that the LO had income liable to tax in India. The Tribunal found that the LO's activities, such as collecting information and facilitating meetings, did not generate income or involve trading activities. The Tribunal emphasized that the LO was not authorized to conclude business contracts independently, and its activities were preparatory and auxiliary in nature.

4. Alleged Submission of Incorrect Details to RBI:
The CIT(A) held that the appellant submitted incorrect details to the RBI and relied on the statements of Mr. Yuki Morata, the director of an Indian subsidiary. The Tribunal found that the appellant complied with RBI guidelines, and there was no evidence of misleading the RBI. The Tribunal noted that the RBI had not found any violation of its conditions, supporting the appellant's claim that the LO's activities were within the permitted scope.

5. Determination of Profits Attributable to PE:
The CIT(A) determined profits attributable to the alleged PE at an arbitrary figure, ignoring the formula upheld by the Tribunal in previous years. The Tribunal did not adjudicate on this issue, as it concluded that the LO did not constitute a PE, rendering the profit computation dispute academic.

6. Conduct of Survey and Reliance on Documents:
The CIT(A) asked the AO to conduct a survey and relied on the collected documents. The Tribunal found that the CIT(A) could not direct a survey under section 250(4) of the Act, and the evidence gathered post-assessment could not be considered. The Tribunal held that the evidence did not establish that the LO was engaged in trading activities, supporting the appellant's claim that the LO's activities were preparatory and auxiliary.

7. Request for Details of Expenses and Compliance Time:
The appellant contended that the CIT(A) did not give adequate time to collect required details from its Tokyo office. The Tribunal did not specifically address this issue, focusing instead on the substantive matter of the LO's activities and tax implications.

8. Liability to Pay Interest under Section 234AC:
The appellant argued that it was not liable to pay interest under section 234AC of the Act. The Tribunal did not specifically address this issue, as the primary focus was on whether the LO constituted a PE and had taxable income in India.

9. Adoption of Correct Figures of Salary and Fringe Benefits:
The appellant contended that the CIT(A) did not adopt the correct figures of salary and fringe benefits while computing profits attributable to the alleged PE. The Tribunal did not adjudicate on this issue, as it concluded that the LO did not constitute a PE, rendering the profit computation dispute academic.

Conclusion:
The Tribunal held that the LO did not constitute a PE in India, and the appellant was not liable to tax in India. The appeal was allowed, following the precedent set by the Special Bench of the Tribunal in previous years. The Tribunal emphasized that the LO's activities were preparatory and auxiliary in nature, and there was no evidence to suggest otherwise.