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TMI Blog2009 (4) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia is taxable and therefore, the learned CIT(A) will have to adjudicate the issue on which he has not recorded his finding - Decided against the assessee - - - - - Dated:- 30-4-2009 - Member(s) : N. L. KALRA., GEORGE GEORGE K. ORDER-BY THE BENCH: The Revenue has filed appeals against the order of learned CIT(A)-IV, Bangalore dt. 23rd May, 2008. Since the grounds of appeal are the same for all the assessment years, therefore, the appeals are being disposed of by a single consolidated order. 2. The grounds of appeal raised by the Revenue are as under: "(i) The learned CIT(A) has erred in holding that there was no PE of the South Korean company in India in the form of its Liaison Office, in terms of provisions of art. 5 of the DTAA between India and South Korea. (ii) The learned CIT(A) has erred in holding that no income was deemed to accrue or arise to the assessee in terms of provisions of s. 9 of the IT Act, 1961 or in terms of provisions of art. 7 of the DTAA between India and South Korea. (iii) The learned CIT(A) has failed to appreciate that the assessee had actually concluded contracts and has consequently erred in concluding that its activities were mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e LO. The seniormost employee i.e. the country manager was drawing a salary of Rs. 85,000 per month while his deputy, the general manager was drawing a salary of Rs. 35,000 per month. From the quantum of salary being paid to such employees, the AO felt that there could be other non-liaison functions that the employees could be doing because such a large salary is not payable only for liaison work. During the course of survey, statement of Shri V. Natarajan, country manager was recorded. Shri V. Natarajan explained that the LO is into promoting, marketing and sales of electronic components such as PCBs, LCDs and thermal printers. The LO engineers identify the customers on the basis of their past sales experience. Some of the customers themselves directly approach the LO after getting references from other customers. The engineers make enquiries telephonically or by way of cold-calls on likely customers. The AO inferred that the LO is doing the primary task of identifying the customers. After identifying the customers, the LO engineers set up a meeting with the concerned employee of the customer to ascertain the product specifications, quantity required and the time available for del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent freedom in deciding the margin or selling price provided they are not incurring any loss. Shri V. Natarajan further stated that Indian LO is given annual targets for sales. The targets are based on the forecasts given by the LO to the head office. The LO pursues the payments with the customers and this shows that the entire process of receiving the payments is constantly monitored and followed up by the LO. It is true that the payment is received by the South Korea office. The South Korea office is involved only with order processing with the principals, inspection of goods and shipments to customers. 4. The AO thereafter has referred to s. 9 of the IT Act. According to s. 9(1), an income accruing or arising whether directly or indirectly through or from any business connection in India is deemed to accrue or arise in India and is therefore taxable in India. The employees of the LO are acting on behalf of the South Korea based head office. It has an authority to conclude contracts on behalf of the non-resident company. The AO therefore held that there is a business connection and therefore, the income is deemed to accrue in India and is taxable in the hands of non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olation has been committed. The granting of RBI approval shows that the LO is not undertaking any activity of trading, commercial or industrial nature. The approval of RBI has persuasive value though the learned CIT(A) observed that the RBI is not the authority to examine the LO's activities from the income-tax perspective or its taxability under IT laws. - The correspondence between the LO and the head office reveals that specifications were sent by the LO to the head office and the head office sent specifications, costing details and sales margin/price band to the LO. The minimum and maximum sales margin varied between 10 to 15 per cent, 8 to 15 per cent, 8 to 12 per cent, 4 to 8 per cent and 6 to 12 per cent depending on the model numbers, their unit price and set up charges. - The quotations made to the prospective customers by the LO on behalf of the head office shows that unit price was well within the price band specified by the head office on the basis of which the LO quotes the best possible margin. - The customers placed the purchase orders directly on Jebon Corporation, South Korea and after acceptance of terms by both parties, proforma invoices are raised by the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of proceedings before us, the learned Departmental Representative has filed written submissions. It was submitted that LO has not been defined in the IT Act or in DTAA. According to regn. 2(e) of Foreign Exchange Management Regulations, 2000, a LO is defined as "a place of business to act as a channel of communication between the principal place of business or head office by whatever name called and entities in India but which does not undertake any commercial/trading/industrial activity, directly or indirectly, and maintains itself out of inward remittances from abroad through normal banking channel". Permanent Establishment has been defined in s. 92F of IT Act. In terms of art. 5 of DTAA, a PE is a fixed place of business through which the business of the enterprise is wholly or partly carried on. The CBDT Circular No. 14 of 2001 [(2002) 172 CTR (St) 13] mentioned that the term PE though not defined under the Act but its meaning may be understood with reference to the tax treaties entered into by India. Sec. 92F has been inserted by the Finance Act, 2002 w.e.f. 1st April, 2002. In the instant case, the LO is a fixed place of business and accordingly the requirements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he pricing- division of the company as far as the clients in India are concerned. Business has been defined under s. 2(13) of the IT Act and it includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The activities can be broadly classified as under: (i) Personal activity; (ii) Religious activity; (iii) Charitable activity; (iv) Scientific activity; (v) Business activity. The above activities are given different treatments under the IT Act. The activities of the company working for profit making qualify as business activities. Non-resident company is not doing charity or any other activity but is a purely commercial organization. The LO is assisting the head office in earning revenues and therefore, the activities definitely fall within the meaning of business under s. 2(13) of the IT Act. The learned Departmental Representative thereafter drew our attention to Expln. 2 to s. 9(1). According to the learned Departmental Representative, the case of the assessee is covered under Expln. 2 and therefore, business connection stands established. It was therefore submitted that the learned CIT(A) has erred in hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain to a period after the assessment order and the first appellate order has been passed. It was therefore submitted that these e-mails appear to be an afterthought and the effort of the assessee is to present a different factual position. The learned Departmental Representative supported the order of the AO. 12. During the course of proceedings before us, the learned Authorised Representative has filed a paper book containing 92 pages. The learned Authorised Representative drew our attention to the approvals given by the RBI. These approvals have been given on 5th Aug., 1996, 2nd Dec., 1999, 1st Dec., 2001 and 7th Aug., 2002. The learned Authorised Representative drew our attention to the conditions imposed by the RBI while giving approval. As per the conditions imposed by the RBI, the LO was not authorized to undertake any other activity of a trading, commercial or industrial nature and it was not authorized to enter into any business contract in its own name without prior permission of the RBI. No commission/fees was to be charged for the business activities/services rendered by it. The entire expenses of the office are to be met exclusively out of the funds received from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of a preparatory or auxiliary character. The learned Authorised Representative submitted that the LO is collecting information and passing on to the head office. Every service which the LO is rendering are of auxiliary character. Hence, in view of sub-cl. 4 of art. 5, the LO should be deemed to be not includible in PE. Once, there is no PE then as per art. 7 of the DTAA no income of the non-resident company can be taxed in India. 14. On query from the Bench, the learned Authorised Representative has filed certain copies of e-mail. First of the e-mail is dt. 26th Sept., 2005. LO intimated the head office that in case they quote the selling price of 104.60 per sq. mtr. in respect of PCB after taking selling price as US dollar 91 each + 12 per cent GSM then such rate will be very high because there are several customers (sic) in India who supply such PCB at US dollar 65 per sq. mtr. The price as quoted by the LO came to US dollar 75 per sq. mtr. The head office intimated the LO their best time price is 0.69 US dollar per piece. The learned Authorised Representative therefore stated that in case the price quoted by the head office is not reasonable or is not acceptable to the cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to accrue, or arise in India. For us, the relevant clause is s. 9(1)(i). The same is reproduced as under: "9. (1) The following incomes shall be deemed to accrue or arise in India: (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India: Explanation 1: For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; (c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office Korea | | v Direct Mailers/Specification/catalogs sent to prospects by email | | v Interested customers send enquiries to Jebon |----- Korea with a CC to Jebon Corp.(Liaison Office) --- | | Bangalore | | | | | | | | v | | Jebon (LO) receives engineering clarification and queries | | | | | | | | v | | Jebon Liaison Office checks the query with | | prospective customer in India and feedback | | will be given to | | | | ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Follow up for payment on due date if the credit period is agreed in the purchase order From the above flow chart, it is clear that the LO is securing orders in India for the non-resident company. Hence, in view of Expln. 2(c), there is a business connection in respect of asst. yr. 2004-05 and subsequent assessment years. 19. The Hon'ble apex Court in the case of CIT vs. R.D. Aggarwal Co. Anr. (1965) 56 ITR 20 (SC) had an occasion to consider the meaning of business connection. The Hon'ble apex Court held as under: "Business connection contemplated by s. 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incident to the main business of the non-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customers, requirement of the customers with respect to number and specification, identifying the sources from which such items can be procured, negotiating the purchase price, negotiating the sale price with the customers and thereafter procuring order from the customer. In the instant case, part of the trading activity in respect of supplies made to Indian customers is done by the LO and is in continuation of the trading activity of the South Korean company. This shows that there is a business connection and therefore any income accruing or arising from such business connection is taxable in the hands of the South Korean company as per the provisions of s. 9(1)(i) of the IT Act. As per Expln. 1(a), only that part of the income which can be reasonably attributable to the operations carried out in India will be taxable in the hands of the South Korean company. Explanation 1 (b) provides that no income shall be deemed to accrue or arise in India through or from operations which are confined to the purchase of goods in India for the purpose of export. It means, the legislature was fully aware that in a trading activity there is always a profit element attached to the purchase of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE. 3. In the determination of the profits of a PE, there shall be allowed as deductions expenses which are incurred for the purposes of the PE including executive and general administrative expenses so incurred, whether in the State in which the PE is situated or elsewhere, which are allowed under the provisions of the domestic law of the Contracting State in which the PE is situated. 4. No profits shall be attributed to a PE by reason of the mere purchase by that PE of goods or merchandise for the enterprise. 5. For the purposes of the preceding paras, the profits to be attributed to the PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 6. Where income or profits include items of income which are dealt with separately in other articles of this convention, then the provisions of those articles shall not be affected by the provisions of this article." The business profit of the South Korean company can be taxed in India in Case the South Korean company is having a PE." 24. Now the next issue which is to be adjudicated is to decide as to whether the LO can be treated as a PE. 25. Article 5 of the DTAA dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n are limited to those mentioned in para 4 which, if exercised through a fixed place of business, would not make this fixed place of business a PE by virtue of that para. (6) An enterprise shall not be deemed to have a PE in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. (7) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a PE or otherwise) shall not, of itself, constitute either company or a PE of the other." 26. As per art. 5, PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Looking to the flow-chart of the LO, it is clear that the business of the South Korean company is partly carried on by the LO. As per art. 5(2), it is mentioned that the PE shall include especially an office. The office is not defined either under the IT Act or under the DTAA. LO is an of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime. After this, the same enquiry is converted into request for quotation format to the head office staff responsible for purchase activities from our suppliers in Korea and China. As soon as we get the request for quotation format fully filled up with price, delivery and specification in Bangalore through e-mail, the sales 'person who is responsible for generating the enquiry will reply to the customer with a quotation adding the sales margin. We have a thumb rule to calculate the sales margin depending upon the end-use of the product and the competition in the market and the volumes. We get only the buying price from our head office and margins are decided by the sales team based in Bangalore on a case-to-case basis depending upon the merits of the case. After this there will be negotiation for each enquiry between the customers and the sales personnel of this office and in some cases, we are able to close the order to the satisfaction of our customer and the head office. In other cases, if the customer is not happy with the price and if he asks for more discount our personnel at Korea will discuss the same with our suppliers to request for more discount in the price. If the supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r marketing was also recorded. He has given the job description in answer to question No. 2. This is the same as per the flow-chart given by the learned Authorised Representative. Mr. H.B. Raghumaran stated that if a customer asked for price discount then he negotiates with them on the same based on the buying price given by the head office and also based on the market competition, customer's payment terms quantity and value of order. These are the same things which marketing manager has to consider before finalizing any deal. He has also stated that he enjoys full freedom in deciding the price of the material while negotiating with the customer. Once the selling price is arrived at with customer, he does not need to discuss with the head office or organization. He immediately requests the customer to release the purchase order. The annual sales target has also been fixed by the organization. This shows that the activities carried by Mr. Raghumaran are of the nature of a marketing manager who is authorized to conclude the contract and can obtain the purchase order. He is representing the organization and it is not the case of the assessee that such purchase orders obtained are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion channel between the parent company and Indian companies. Thus, the LO can participate in promotion of import to India and in the instant case, the LO is engaged in such activities by procuring purchase orders after negotiation of the deal. Hence, we hold that the AO was justified in holding that LO is a PE and therefore, income attributable to LO will be taxable as per art. 7 of the DTAA. 30. The Hon'ble Delhi High Court in the case of U.A.E. Exchange Centre Ltd. vs. Union of India (2009) 223 CTR (Del) 250 : (2009) 22 DTR (Del) 33 : 2009-TIOL-84-HC-DEL-IT had an occasion to consider as to whether the income of the non-resident is taxable in India in view of having a LO at five places in India. The exclusionary clause found in that case was similar to art. 5 (4)(e) of the agreement between India and South Korea. The Hon'ble High Court observed that the plain meaning of the word 'auxiliary' is found in Black Law Dictionary, 7th Edition at p. 130 which reads as "aiding or supporting, subsidiary". In that case, the only activity of the LO in India was simply to download information, which was contained in the main servers located in UAE based on which cheques were drawn on ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king authority on behalf of the head office. They were also empowered to conclude the contract and to secure purchase orders. Hence, considering the activities carried on by the LO as found by the Department in course of survey, it is clear that LO is to be treated as PE and will not be excluded from the definition of PE as per art. 5(4)(e) of DTAA. 32. The learned CIT(A) held that income of the non-resident assessee is not taxable under 9(1)(i) or under the DTAA and therefore has not decided the issue regarding validity of reopening of assessment and the quantum of profit attributable to the PE. Before us, the learned Authorised Representative submitted that these issues are required to be decided by the learned CIT(A) in case it is held that income of non-resident is taxable in India. Since we have held that as per DTAA, the profit attributable to the LO held as PE in India is taxable and therefore, the learned CIT(A) will have to adjudicate the issue on which he has not recorded his finding. The assessee will be free to move an application before the learned CIT(A) for disposal of such grounds of appeal in view of our finding that income of non-resident assessee attributable t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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