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2017 (8) TMI 79 - HC - Income TaxPermanent establishment of the assessee in India - Avoidance of Double Taxation between India and Japan - Held that - the mere fact that the Manager of the Assessee stated that the books of accounts might be kept in a warehouse (which was unable to be shown by the Revenue to exist) or that some portion of the telephone expenses were attributable to the LO or that Mr. Ishibashi was managing both the LO as well as the PO was hardly sufficient to conclude the LO was being used to carry on the business of the enterprises. The basic factual foundation for holding a LO of the Assessee as its PE has not been laid by the Revenue in the present case. The fact that the Assessee was adhering to the conditions imposed by the RBI for running a LO, and the RBI had accepted the functioning of the Assessee s LO for over three decades, points out to the fact that the Assessee has complied to the conditions, one of which was that it could not carry on any business or trading activity in the LO. While, it is a moot question whether this would be binding on the Revenue, it certainly increases the burden of the Revenue to show that notwithstanding the RBI permission continuing during the AYs in question, the Assessee s LO should be construed to be a PE in terms of Articles 5 (1) and 5 (2) of the DTAA. The Court has undertaken the exercise of again examining the factual position since in the impugned order the ITAT has merely relied upon its order for an earlier AY. While the Court appreciates the contention put forth by the Revenue that the facts of each AY has to be separately considered, the Court finds that there is no ground made out to disturb the reasoned order of the CIT (A) for both the AYs. ITAT was correct in holding that the Assessee did not have a PE in India and was therefore exempt under the provisions of the DTAA between India and Japan. ITAT was right in holding that the offices of the Assessee and its activities during the AY in question could not be regarded as its PE in India and the income directly or indirectly attributable to the said offices was not taxable in India. Assessee does not have any PE in India and its income from business turnover/imports in India was exempt in view of DTAA between India and Japan. - Decided in favour of the Assessee and against the Revenue.
Issues Involved:
1. Whether the Indian branches/offices of the assessee company can be regarded as a permanent establishment (PE) in India. 2. Whether the income directly or indirectly attributable to these branches/offices is taxable in India under the Agreement for Avoidance of Double Taxation between India and Japan (DTAA). 3. Whether the provisions of Section 44BBB of the Income Tax Act, 1961 apply to the income from the DESU Power Project. Issue-wise Detailed Analysis: 1. Permanent Establishment (PE) Status of Indian Branches/Offices: The primary issue was whether the Indian branches/offices of the assessee company constituted a PE in India. The Revenue argued that the Liaison Office (LO) and Project Offices (POs) of the assessee should be considered as PE under the DTAA between India and Japan. The Assessing Officer (AO) concluded that the LO was involved in activities beyond mere liaison, thus constituting a PE. This conclusion was based on findings such as the presence of books of accounts in a warehouse, shared telephone expenses, and management by Mr. Ishibashi of both LO and POs. The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, holding that the LO was in strict compliance with RBI conditions, which prohibited any commercial activities. The CIT(A) noted that no books of accounts related to the projects were found in the LO during the survey. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)’s findings, emphasizing that the Revenue failed to prove that the LO was used for business activities. The High Court concurred, stating that the Revenue did not establish that the LO was used for business purposes, thus it could not be considered a PE under Articles 5(1) and 5(2) of the DTAA. 2. Taxability of Income Attributable to Indian Branches/Offices: The second issue was whether the income attributable to the Indian branches/offices was taxable in India under the DTAA. The AO and the Revenue argued that the income from the POs should be taxed in India, as they constituted a PE. The CIT(A) and ITAT, however, held that the POs were separate taxable units and their income was already taxed under Section 44BBB of the Act. The High Court agreed, noting that the profits from the POs were taxed under Section 44BBB, and therefore, the POs could not be treated as PEs for the purpose of the DTAA. Consequently, the income directly or indirectly attributable to these offices was not taxable in India under the DTAA. 3. Application of Section 44BBB to DESU Power Project: The third issue was whether the income from the DESU Power Project should be taxed under Section 44BBB of the Act. The AO applied Section 44BBB, treating the project as a turn-key project financed under an international aid program. The CIT(A) upheld this view, noting that all conditions under Section 44BBB were satisfied. The ITAT and the High Court also upheld this decision, agreeing that the DESU Power Project met the criteria for taxation under Section 44BBB. Conclusion: The High Court concluded that the ITAT was correct in holding that the assessee did not have a PE in India, and therefore, the income attributable to the Indian branches/offices was not taxable in India under the DTAA. The Court also upheld the application of Section 44BBB to the DESU Power Project. The appeals were dismissed with no orders as to costs.
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