2013 (6) TMI 421 - AT - Income Tax

Estimation of income of SJMI St. Jude Medical Inc. USA in assessee s hand - AO treated assessee s liaison office in India as a PE for the SJMI and taxed both the incomes attributable to sales made by SJMH as well as SJMI USA in one assessment order - Held that - Procedure adopted by AO is not correct as there should be separate proceedings for two separate companies established in different countries. Assessee here is the Hongkong company of which the branch is under consideration. In a situation, what can be considered for taxability is income that accrues directly to the assessee from its operations in India, which may be attributable to the existence of branch in India. As it is legally not possible to consider the profits attributable to SJMI in the hands of assessee, agreeing with the opinion of CIT(A) and direct AO to exclude the profits of St. Jude Medical Inc. USA brought to tax in assessee s hands. Accordingly the additional grounds are considered allowed. Some of the reports impounded by the Revenue are nothing but the correspondence with the Head Office about the sales in India, as a part of liaison office, but not as a sales unit. There are monthly reports also given which indicate the budget, projected targets, achievements, but nowhere this indicate that assessee was involved in direct sales activity except coordinating and liaisoning with the various distributors and the doctors who are to use the products. These documents does not establish at all that assessee was involved in business activity before it became a branch office. Therefore, AO s contention that assessee was involved in business activity cannot be accepted. As in the earlier year also i.e. AY 1998-99 for which also assessee filed the return at Nil were accepted without any addition in that year and also the fact that assessee claimed various expenditures for the three month period from 1st January, 2000 in AY 2000-01 which was allowed by the CIT (A) on which there is no cross appeal, assessee was involved in liaison activities upto 31.3.1999 and not in sales activity as opined by AO. Therefore, there is no question of estimating the profits in AY 1999-2000 when assessee does not have any business connection or business activity though its liaison office. So the attribution of income and estimation of gross profits in AY 1999-2000 does not arise at all. The grounds raised by assessee are allowed. With reference to the AY 2000-01, there is business activity for a period of three months in the year, once assessee established the branch. Therefore, the profits attributable to the branch office for the sales made in the three month period from Jan 2000 to March 2000 are to be confirmed. AO is directed to examine the sales made during that period and arrive at the profits at 10% as determined by the CIT (A) for the period of three months. The expenditure claimed by assessee for the above period, which was allowed by the CIT (A) need to be set off after due verification as directed by CIT(A). Order to that extent was confirmed. Therefore, the addition of business profits of SJMI USA is directed to be deleted in total in both years and profits attributable to the liaison period as determined by AO also gets deleted - assessee s appeals are treated as allowed.

Issues Involved:
1. Attribution of Income
2. Reattribution of income of St. Jude Medical Inc.
3. Estimation of gross profit
4. Estimation of gross profit (St. Jude Medical Inc. USA)
5. Treatment of St. Jude Medical (Hongkong) Ltd - India Branch Office as a permanent establishment (PE)
6. Validity of the assessment order
7. Deletion of addition made by treating the appellant as a PE of St. Jude Medical Inc.

Issue-wise Detailed Analysis:

1. Attribution of Income:
The assessee, St. Jude Medical Hongkong Ltd (SJMH), declared taxable income at Nil, asserting that its operations in India were restricted to acting as a liaison office which did not earn any income in India. The AO, based on a survey and statements collected, concluded that the assessee was involved in business activities and had a "business connection" in India. Consequently, the AO estimated profits on sales made by SJMI and SJMH, attributing income to the assessee.

2. Reattribution of Income of St. Jude Medical Inc.:
The AO treated the assessee's liaison office in India as a PE for SJMI and taxed the incomes attributable to sales made by both SJMH and SJMI USA in a single assessment order. This procedure was deemed incorrect as there should be separate proceedings for two separate companies established in different countries. The CIT (A) in AY 2002-03 accepted this contention, stating that the branch office of SJMH should be considered as a PE of SJMI and an independent assessment should be made for the American company's income attributable to the branch office.

3. Estimation of Gross Profit:
For AY 1999-2000, the AO computed profits at a gross profit rate of 40% based on global accounts and determined the income at Rs. 2.50 crores. For AY 2000-01, the gross profit rate was estimated at 20%. The CIT (A) upheld the AO's contention of the existence of a business connection and a PE in India but allowed a 50% deduction on the amount determined by the AO, confirming a 20% profit for AY 1999-2000 and 10% for AY 2000-01.

4. Estimation of Gross Profit (St. Jude Medical Inc. USA):
The CIT (A) directed that the income attributable to SJMI USA should not be taxed in the hands of SJMH. The Revenue accepted this order, and the Tribunal agreed, directing the AO to exclude the profits of SJMI USA from the assessee's hands.

5. Treatment of St. Jude Medical (Hongkong) Ltd - India Branch Office as a Permanent Establishment (PE):
The AO's contention that the assessee's liaison office was involved in business activities was based on statements and documents impounded during a survey. However, the Tribunal found that these documents pertained to the period when the branch office was already in operation, and the activities were part of liaison work, not business activities. Therefore, the AO's contention was not accepted.

6. Validity of the Assessment Order:
The assessee contended that the assessment order was bad in law and void ab-initio. The Tribunal agreed, stating that the procedure adopted by the AO was incorrect, and the assessment should have been made separately for SJMH and SJMI.

7. Deletion of Addition Made by Treating the Appellant as a PE of St. Jude Medical Inc.:
The Tribunal directed the AO to exclude the profits of SJMI USA from the assessee's hands and confirmed that the assessee was involved in liaison activities up to 31.03.1999 and not in sales activities. Therefore, the attribution of income and estimation of gross profits for AY 1999-2000 were not applicable. For AY 2000-01, the profits attributable to the branch office for the period from January 2000 to March 2000 were to be confirmed, with the AO directed to examine the sales and arrive at the profits at 10%.

Conclusion:
The Tribunal allowed the assessee's appeals, directing the AO to exclude the profits of SJMI USA from the assessee's hands and to recompute the income for AY 2000-01 based on the branch office's activities. The orders were to be modified accordingly.

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