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TMI Blog2008 (2) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and incorrect details of expenses/reports to the RBI and contravened the conditions laid down by the RBI while approving the setting up of LO. (b) Relying upon the statements of Mr. Yuki Morata, director and chief financial officer of an independent Indian subsidiary. (c) Observing that the assessee has not disclosed complete and correct expenses to the RBI, that assessee has incurred more expenses than what were reported to RBI, has also accepted that it has not complied with conditions and compliances prescribed by RBI while granting approval. 4. That on facts and in law the CIT(A) erred in determining the profits attributable to the alleged PE at an arbitrary, excessive and unreasonable figure ignoring the formula upheld by the Hon'ble Tribunal Bench "B" in appellant's own case for the asst. yrs. 1978-79 and 1979-80 (ITA Nos. 1697 and 1698/Del/1984 decided on 30th April, 1986) which was accepted and all along followed by the Department pending the final decision on "PE" issue in its case. 5. That on facts and in law the CIT(A) erred in asking the AO at assessee's back to conduct survey at its premises and collect fresh material and in relying upon the documents/corres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f letters of credit and other necessary follow-up. Although the AO noted that Tribunal in the case of the appellant company reported in IAC vs. Mitsui Co. Ltd. (1991) 41 TTJ (Del)(SB) 547 : (1991) 39 ITD 59 (Del)(SB) had held that the above activities were auxiliary and preparatory in character and, hence LOs did not constitute PE in India but, according to him, the activities of HO of Mitsui and all other offices are more or less similar in nature, thus he concluded that activities of LOs are not auxiliary in nature but constitute principal and core activity. He further held that signing of contracts by overseas entity is a mere formality and the reliance on RBI's supervision is not correct, as it is not concerned with the provisions of DTAA and the Act. In view thereof, he held that appellant company is having PE in India and consequently profit from the trading activity, namely, supply of equipment directly from overseas was held attributable to such PE. In order to compute the income from such trading activity in India, the AO referred to the global accounts of the assessee and calculated the global GP rate as 4.04 per cent for asst. yr. 2001-02. By applying this rate to tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in appeal before us. 6. We have heard the rival contentions in the above background. The central issue involved in the instant appeal is whether the LO of the assessee constitutes PE in India. The claim of the assessee is that it does not constitute a PE in India in view of the exclusionary cl. 6(e) of art. 5 of Double Taxation Avoidance Agreement with Japan (hereinafter referred to as 'DTAA'). The stand of the Revenue is to the contrary. Before we proceed to deal with the rival claims pertaining to the assessment year under consideration, we find it relevant to note the past history and the manner in which the CIT(A) has departed from the decisions of the Tribunal for the past years. The bone of contention between the assessee and the Revenue has been the cl. 6(e) of art. 5 of the DTAA which provides that the term "PE" shall not include a fixed place of business maintained solely for the purpose of carrying on for the enterprise any activity of a preparatory or auxiliary in character. In the past, the Special Bench of Tribunal for asst. yrs. 1980-81 and 1981-82 reported at (1991) 41 TTJ (Del)(SB) 547 : (1991) 39 ITD 59 (Del)(SB) held that the LO of the assessee was only carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplied to the contracting parties. It can start with negotiations from the very nascent stage to the final conclusion of the contract and also removal of doubts on various points relating to supply of material, transportation, payment schedule, mode of transport, freight and charges, bank guarantees, interest payable, commission payable, etc. It is difficult to specify the areas to which supply of information can be limited. That was why the art. (iiia) was so widely worded as to include extensively and intensively all areas of supply of information, the only limiting factor being that supply of information should be either preparatory or auxiliary to the formation of the final contract. Any information conveyed even after the conclusion of a contract say, for example, delay in the payment by the party in one Contracting State to the party in another Contracting State may also fall within the broad spectrum of supply of information. Information can be elicited or gathered only by negotiations or questions and answers and communication of these answers to the question raised cannot but be as supply of information. The Bench dealing with the asst. yr. 1977-78 had considered all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. (i) of sub-art. (1) of art. II of DTAA between India and Japan." 7. The aforesaid Special Bench decision has been consistently followed by the Tribunal in all succeeding assessment years upto asst. yr. 1998-99 to hold that LOs of assessee did not constitute PE in India. However, in the assessment year under consideration, the CIT(A) has not followed the aforesaid precedent and has held that benefit of exclusionary clause is not available to the appellant. According to the CIT(A) the benefit of the exclusionary clause is available only when the services performed by LO are so remote from the actual realization of the profits that it is difficult to allocate any profit to such fixed place of business. In this regard he has relied on the decision of Authority of Advance Rulings reported in XYZ, In re (1999) 156 CTR (AAR) 583 : (2000) 242 1TR 208 (AAR). According to the CIT(A), on the basis of the material found in the course of survey, the documents show active involvement of the employees of LO in conducting the business of head office (hereinafter referred to as HO) in India. Their activities are not limited to economic intelligence or forwarding of tender and gathering informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Japan and the same were not fully accounted for in the audited statements submitted to RBI of the LO. In this regard it was submitted by the learned counsel that the Japanese expatriates receive salary in India and also in Japan. The local portion of the salary is paid through the inward remittances from HO and the same is reported to the RBI in compliance of the conditions contained in the RBI approval. A part of salary of Japanese expatriates is paid in Japanese Yen in their country of residence i.e. Japan. The payment of the salary in Japan is entirely in accordance with Circular No. 17 issued by RBI dt. 20th Sept., 2003 and clarification issued under FERA (AD/MA-51/97 dt. 15th Dec., 1997) which permits payment of salaries broad to the employees deputed to their Indian offices to the extent of 75 per cent of the salary provided taxes are paid for full amount in India. Accordingly, the assessee has complied with the directions of the RBI and no facts have been withheld from the RBI. Therefore, according to the learned counsel the assessee has not misled the RBI in any manner. 11. It is submitted that the entire operations of the LO are regulated and supervised by the RBI. In fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is asserted that all the five factors have been duly considered by the Special Bench in the case of the appellant company in (1991) 39 ITD 59 (Del)(SB) relevant to the asst. yrs. 1980-81 and 1981-82 and it is opined that none of the factors could be said to be sufficient to conclude that assessee has a PE in India more particularly because under the permission granted by the RBI it was permitted to carry out only liaisoning activity. Since it has not been found or held by the RBI that the activities carried in India by LO were other than preparatory or auxiliary activity, the purported violation to the permission granted cannot be assumed by the AO. In fact, it was submitted that no such violation has ever, been found by the RBI even in relation to the assessment year under consideration. 14. It was without prejudice further submitted that, even otherwise the learned AO is not empowered in law to lead any additional evidence before the learned CIT(A) and in support reliance had been placed on the judgment of Rajasthan High Court in the case of CIT vs. Rao Raja Hanut Singh (2001) 171 CTR (Raj) 135 : (2001) 252 ITR 528 (Raj). It was submitted that in fact, the CIT(A) during the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrespondence to hold that assessee for the asst. yr. 2001-02 has PE in India. 2.1 The assessee has placed reliance on the judgment of the Special Bench of learned Tribunal (Delhi) in its own case reported at (1991) 41 TTJ (Del)(SB) 547 : (1991) 39 ITD 59 (Del)(SB). It appears that the following aspects had either failed to attract the attention of Hon'ble Tribunal or the same were not brought to the notice of Hon'ble Tribunal. 2.2 The assessee has a huge back up of innumerable vendors. Whenever, it needs to supply anything it has its suppliers ready to deliver the products. In essence, its business is to locate a potential customer negotiate a deal finalize a deal procure the material and supply the same to the customers. Of course in doing so, the assessee has to undertake various supporting activities as well, but the essence of its activities is to collect information about potential buyers, information about potential sellers, negotiate with both of them and manage the supplies of goods from one to another through its set up and in its own name. 2.3 In an organization, to ascertain as to whether or not a, specific activity is of a preparatory or auxiliary nature, the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiating the finalizing the deal. It is also interesting to note that the assessee needs to forward all its documents like performance guarantee, letter of credit through its offices in India. But the contract is signed overseas independent of the Indian office. 2.5 The assessee locates potential customers negotiate a deal, finalize a deal, procure the material and supply them to the customers. For this purpose, the offices of the assessee have to in essence of its activities to collect information about potential buyers, information about potential sellers, negotiate with both of them and manage the supplies of goods from one to another. 2.6 That survey was undertaken and various documents were recorded and assessee was confronted with the same but assessee instead of filing any evidence to the contrary merely stating that the assessee is only undertaking liaison work. 2.7 That during the survey it was found that the assessee operates from a full-fledged office comprising of 3 floors with staff strength of approx. 100 people including 6 expatriates. The LO is modeled in the same fashion that the model of its HO. The LO had various departments, information, electronics and tel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is based on the polycentric model. Each of the offices located worldwide acts as a wing of the HO to identify the suppliers and clients in trans-border situation and to playa major role in negotiating, finalizing and making the deal through. This is the essence of the activity, which is done by the assessee through its LO. (d) In reply to question No. 16, Mr. Morata reaffirms: We have a network of offices situated all over the world. In case any overseas clients say German clients need something from India our German offices contact us and we introduce the suppliers to our German office. Thereafter we do not play any part of details of, supplies, transportation and payments. It can be seen from the above that for the supplies to be made from India to Germany only two offices located in the respective countries are involved. The HO has little role to play. It comes into picture only when the contract is to be finally signed. Further the last line to the reply made by Mr. Morata in reply to above question is contradicted by the documents found. The documents found prove in supplies to be made from India an activity part in negotiation, finalization and conclusion of deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of the HO of the concern is restricted to general supervision, (so-called polycentric enterprises), the regional management offices even have to be regarded as a 'place of management' within the meaning of sub-para (a) of para 2. The function of meaning an enterprise even if it only covers a certain area of operations of the concerns, constitutes essential part of the business operations of the enterprises and therefore can in no way be regarded as an activity which has a preparatory or auxiliary character within the meaning of sub-para (e) of para 4." The above commentary fully and aptly applies in the facts of the LOs of the assessee. The assessee operating under precisely the same business model as has been discussed in the above commentary. Therefore the assessee cannot challenge that its offices located in India do not constitute PEs. 16. In this manner the learned Departmental Representative has supported the orders of the lower authorities that the assessee is not covered under the exclusionary clause of auxiliary and preparatory activities rather the assessee has carried the business from the fixed place in India and therefore, assessee has PE in India and accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia and title/risk in equipment supplied was transferred in India. The Bench held that the assessee did not constitute a PE in India and the supply revenues were not taxable in India because mere signing of the contract does not give rise to income in India; and, where the title and risk in the telecom equipment pass outside India, no income accrues in India from sale of telecom equipment. It is submitted that in the instant case even the contracts have also been executed outside India and the facts relating to the transfer of title outside India are also not disputed. Therefore, relying on the principles laid down by the Special Bench in the case of Motorola Inc., no portion of income from supply of goods can in any case be taxed in the hands of the assessee in India. 18. We have considered the rival submissions carefully. The crux of the issue involved in the instant appeal as noted by us earlier is whether the LO of the assessee constitutes PE in India. The case of the assessee is that it does not constitute a PE in view of the exclusionary cl. 6(e) of art. 5 of DTAA, whereas the stand of the Revenue is to the contrary. Before we proceed further, it is worthwhile to note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o take a view different from the view taken by the Tribunal in the past. We would deal with such aspects a little later in our order. For the present, we only intend to observe that because of the orders of the Tribunal in the past years, the burden is on the Revenue to establish that the LO of the assessee in India constituted a PE in the instant year. Needless to say, such burden is to be discharged on the basis of cogent material which would enable an authority to depart from the subsisting findings of the Tribunal in the past years. Normally where an assessee seeks to canvass a benefit or a preferred treatment as per the statute, the burden is on the assessee. However in the present case in view of the past history and specially that there are no adverse findings of the RBI with regard to the activities of the LO even for the year under consideration, the onus is on the Revenue to make out a case that the precedents by way of the decisions of the Tribunal of the past years are not applicable in this year. It is with this background in mind, we proceed to evaluate the rival stands. The issue revolves around cl. 6(e) of art. 5 of DTAA which reads as under: "Notwithstanding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntative of the LO is authorized to solicit, negotiate or conclude agreements for the performance of the assessee company's HO business activities. It is also not the case of the Revenue that any of the funds received by the LO are expended for trading activities, an aspect which is on the prohibited list of the RBI approval. It is also not the case of the Revenue that the LO is rendering services to any third parties and that it charges any, fee or commission for its activities. There is nothing to suggest that the LO is generating any revenue or income to support its activities. 19. The case of the AO is that the Tribunal in the earlier years has not considered certain factors in arriving at its decision. Firstly it is observed by the AO that assessee is one of the biggest trading companies in the world and whenever it needs to supply anything, it has got its supply line ready to deliver the products. Therefore, its essential activities are to locate a potential customer, initiate a deal and supply that to the customer. In such activity, the LO helps the HO in collecting information about potential buyers, information about potential sellers and manages the supply of goods. Seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material. We will deal with this argument a little later in our order. At this stage, we may refer to the material considered by the CIT(A) to arrive at a conclusion that the assessee carried out activities in the LO which were not merely preparatory or auxiliary in nature, which is as under: (i) Business report for the month of February, 2003. (ii) E-mail dt. 7th Nov., 2002 sent by Mr. Aswani Bhagwan from Bombay office to Mr. Haga, head of machinery division of textile business. (iii) Report of the meeting on 1st April, 2004 with M/s Tata Tele Services Ltd. (iv) Copy of MoU between Balmer Lawrie Co. Ltd. and Yanmar Co. Ltd. for supply of cool container. (v) Copy of successor report submitted by an employee of LO to three expatriates of New Delhi LO along with a MoU. (vi) Statement of Mr. Yuki Morata, director and chief financial officer recorded on date of survey on 25th Jan., 2005. 21. On the basis of the aforesaid the CIT(A) concludes (a) that the documents show that employees are concluding contracts in India as well as the negotiations are taking place in India; (b) that the employees of the LO have participated in the meeting as employees of Mitsui and Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the employees of the LO are in a position to conclude contracts in India on behalf of the HO. The CIT(A) has also relied upon the document at item (ii) above to support the stated conclusion. The said document is an email sent by an employee of LO at Bombay to Mr. Haga head of machinery division of the LO relating to textile business. On the basis of said e-mail the CIT(A) observes that employees are concluding contracts in India as well as the negotiations are taking place in India. In this connection we find that the e-mail is dt. 7th Nov., 2002 and that the same cannot be said to be relating to the year under consideration. Further the reading of the e-mail only suggests passing of information from one person to another at LO, Bombay in respect of cotton yarn for various customers in philipines. It gives details of contracts concluded and further negotiations to materialize such contracts. This e-mail cannot be read to conclude that contracts were either negotiated in India or concluded in India by the LO. Similarly the document at item No. (iii) above is report of the meeting between Tata Tele Services Ltd. and Mitsui. According to the appellant the said document does show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket. It is therefore contended that the CIT(A) has incorrectly considered it as a document to establish that the LO was engaged in an activity other than preparatory and auxiliary in nature. In our view none of the documents referred above brings out that the LO is authorized to transact and conclude business in India. Mere facilitation of the business being conducted and conceived by the HO would not imply that the LO by itself is engaged in such business. No doubt from the above documents it shows that the staff and infrastructure of the LO have collected information pertaining to the business undertaken by the HO in India but it does not show that the LO was transacting business in India on behalf of the HO. There is no clinching evidence to establish that the LO finalized and transacted a business deal on its own or in the name of the HO. Further the CIT(A) has considered the statement of Mr. Yuki Morata, director and chief financial officer of M/s Mitsui Co. India (P) Ltd. recorded during survey on 25th Jan., 2005. Firstly it is submitted that the said person was in India since March, 2002 and therefore his statement has no relevance for the assessment year under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further enquiry as he thinks fit or he may direct the AO to do so and report the result to him in order to dispose of an appeal. In other words, the said section enables the CIT(A) to effectuate an enquiry further to that conducted by the AO during the assessment proceedings. Such further enquiry may result in unearthing of evidence or material not considered during the assessment proceedings. The result of such enquiry can be considered by the CIT(A) and the only requirement that can be read in this regard is that the same be confronted to the assessee on the principle of natural justice. In the present case we find that the evidence was collected after the completion of assessment proceedings and therefore the material acquired by the AO therefrom is an additional evidence not available with the AO during the assessment proceedings. The same forms the basis of the remand report submitted to the CIT(A). In this connection the Revenue was specifically directed to file the relevant material in the form of copies of direction issued by the CIT(A) under s. 250(4), copies of survey report etc. The same was considered appropriate to adjudicate the grievance articulated by ground No. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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