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2014 (1) TMI 986 - AT - Income TaxDetermination of income - Held that - The liaison office, apart from having Chief Representative Officer and other staff, is also having a Technical Expert - The employees of the assessee company are promoting the sales of the goods of the assessee company as per service conditions - There is a sales incentive plan by which employees are provided the incentive for achieving the sales target and the performance of the employees is being judged by the orders secured by the assessee company - All these activities clearly establish that the liaison office of the assessee was promoting the sales of the assessee company in India. In all the three years, the liaison office received more amount than the expenses actually incurred by the liaison office - The Assessing Officer himself has not treated reimbursement of expenses as income - The amount received by liaison office over and above the expenses actually incurred, year after year, was treated as income - Following Commissioner Of Income-Tax Versus Industrial Engineering Projects Pvt. Limited 1992 (7) TMI 38 - DELHI High Court - To the extent of the receipt representing reimbursement of the expenses the same were not taxable - It is only when there was surplus that the same should be taxed - Decided against assessee.
Issues Involved:
1. Determination of income by the Assessing Officer. 2. Nature and activities of the liaison office. 3. Taxability of reimbursement of expenses. 4. Applicability of various judicial decisions cited by the assessee. Issue-wise Detailed Analysis: 1. Determination of Income by the Assessing Officer: The primary issue in these appeals is the determination of income at Rs. 24,86,703/- against the declared loss of Rs. 38,86,254/-. The assessee, M/s Brown & Sharpe INC, argued that it merely operated a liaison office in India, which acted as a communication channel and did not render any services that would generate taxable income. The Assessing Officer, however, found that the liaison office was involved in promoting the brand and sales of the assessee's products in India, thus attributing income to the liaison office. 2. Nature and Activities of the Liaison Office: The assessee contended that the liaison office was established with RBI's permission and was restricted to communication activities without rendering any consultancy or other services. However, the Assessing Officer examined the employment contracts and the statements of employees, concluding that the liaison office was involved in promoting sales and was not merely a communication channel. The office had a sales incentive plan, and employees were judged based on the number of orders received, indicating active involvement in business activities. 3. Taxability of Reimbursement of Expenses: The assessee argued that the reimbursement of expenses from the head office could not be considered income, citing the decision in CIT Vs. Industrial Engineering Projects Pvt. Ltd. The Tribunal acknowledged that reimbursement of expenses is not income; however, it noted that in this case, the amount received by the liaison office exceeded the actual expenses incurred. The excess amount was treated as income, aligning with the principle that reimbursement equal to expenses is not taxable, but any excess is. 4. Applicability of Various Judicial Decisions Cited by the Assessee: The assessee relied on several judicial decisions to support its claim that the liaison office's activities were auxiliary and did not constitute a permanent establishment (PE). These included cases like U.A.E. Exchange Centre Ltd., Angel Garment Ltd., K.T. Corporation, and Sojitz Corporation. The Tribunal distinguished these cases based on facts, noting that in those instances, the liaison offices were involved in auxiliary activities such as collecting information or coordinating communication. In contrast, the assessee's liaison office in this case was actively promoting sales, thereby constituting a PE and generating taxable income. Conclusion: The Tribunal upheld the orders of the authorities below, concluding that the liaison office was involved in business activities that generated taxable income in India. The appeals were dismissed, and the determination of income by the Assessing Officer was sustained. The decision was pronounced in the open court on 17th January 2014.
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