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TMI Blog2012 (10) TMI 245X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant. D.K. Gupta for the Respondent. ORDER Shamim Yahya, Accountant Member - This appeal by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-XI, New Delhi dated 07.3.2011 pertaining to assessment year 2006-07. 2. The grounds raised read as under:- 1. GENERAL 1.1 That the order dated March 7, 2011 passed by the, Commissioner of Income-tax (Appeals) - XI, New Delhi [hereinafter referred to as the CIT(A) ] under section 253 of the Income tax Act 1961 ( Act ) is illegal, bad in law and void ab initio. 1.2 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the Assistant Director of Income-tax, Circle 1(1), International Tax, New Delhi, (hereinafter referred to as the AO ) assessing the income of the appellant for the relevant assessment year at ₹ 79,353,253, as against the returned income of ₹ 19,718,810. 2. CREATION OF PERMANENT ESTABLISHMENT ( PE ) 2.1 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO concluding that the appellant had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee acquired all the shares in the joint venture company. Regarding the fact whether the assessee has a Permanent Establishment (PE) in India, the observation of the AO are summarized below:- 5.1 The contention of the assessee that DAIPL acted as a communication channel between the prospective customers and the assessee and facilitate the flow of information and documents like enquiries, proposals, quotation, purchase orders, invoices etc between the assessee and the customers. As against this, the commission agreement dated 22/12/05 states the roles and responsibility of DAIPL as below:- (i) To forward the customer's request for procuring products from DIL to DIL. (ii) To forward DIL's quotation and contractual proposals to the customers, The assessee did not submit any document to prove that enquiries, proposals from the customers were received by it, it clearly indicates that no such enquiries or proposals were received from the customers by the assessee and these functions were performed by DAIPL and for these functions DAIPL is not being remunerated. Without prejudice to the above and without accepting, even if the assessee was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not vested in them through any agreement, but in practice they are deciding the prices and such prices are later on being confirmed by the assessee through documents. Such prices decided by DAIPL have the binding effect on the assessee, as the otherwise has not been proved. In this regard, reference is invited to Para 32.1 of the Commentary on OECD Model Tax Convention reads as below:- 32.1 Also the phrase authority to conclude contracts in the name of the enterprise does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprises; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. Lack of active involvement by an enterprise in transactions may be indicative of a grant of authority to an agent. For example, an agent may be considered to possess actual authority to conclude contracts where he solicits and receives (but does not formally finalize) orders which are sent directly to a warehouse from which goods are delivered and where the foreign enterprise routinely approves the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the contract as alleged by the Ld. AO. (b) The Art.5(7)(a) stipulates the conditions for having PE in India and the DAIPL would not meet the conditions as laid down and hence the action of the Ld AO is wrong. 5. Considering the above, Ld. CIT(A) held as under:- Examined the rival submissions. The short question of law to be adjudicated here as to whether the appellant has PE in India within the meaning of para 7(a) and para 7(c) of Article 5 of Indo Japan treaty (DTAA). Either side has given its argument which has been placed above in verbatim. The fact remains in the instant case that the appellant did not supply any document before the Revenue to prove that enquiries, proposals from the customers were received by it. Whether such act of appellant would ipso facto indicate that no such enquiries or proposals were performed is also to be decided but there is no shred of doubt that the appellant has grossly failed to discharge its onus which has been placed on it by the statute itself. The Ld AO has brought on record that regarding the claim of the appellant that the consultant /contractor represent several price and are in contact with the appellant coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h taken by the Ld. AO in holding that the appellant has PE in India within the meaning of para 7(a) and para 7(c) of Article 5 of Indo Japan Tax Treaty. With this the question relating to the fact that whether the appellant has PE in India is answered in favour of Revenue and against the appellant and the ground of the appellant fails. 6. Against the above assessee is in appeal before us. 7. We have heard the rival contentions in light of the material produced and precedents relied upon. 8. In this regard assessee's submission as regard Permanent Establishment are as under:- Authority to conclude contracts Article 5(7) of the India-Japan tax treaty reads as follows: .. 7. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 8 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if (a) he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the activity of negotiation with the customers and such activity results in the creation of PE for the appellant in India. However, it may be noted that Article 5(7) of the India-Japan tax treaty, as reproduced above, envisages the creation of a PE only when the agent has an authority to conclude contracts on behalf of the enterprise, and such authority is habitually exercised. The stress in the India-Japan tax treaty is on conclusion of contract and not on negotiation. It is amply clear from the plain reading of the commission agreement that DAIPL did not have any authority to even negotiate contracts much less conclude contracts on behalf of the appellant. Further, it is respectfully submitted that DAIPL is not a dependent agent, per se, as it is also undertaking its own business of trading in air-conditioners and therefore, it should be considered as an independent agent of the appellant, if at all it is held to be an agent. The Department representative ( DR ), during the course of the hearing, has stated that the appellant, inter alia, has a PE in India under Article 5(7)(c) of the India-Japan tax treaty, which reads as follows: ... (c) he habitually secures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant could not have been carried out without the Indian company and the office of the Indian company was being used by the non-resident assessee and, therefore, it had a fixed place PE in India. It is respectfully submitted that the facts in the instant case are substantially different as the issue is regarding constitution of dependent agent PE ( DAPE ) and the role of DAIPL is only to act as a communication channel between the appellant and the customer, therefore, the same could not be applied. Commission agreement rejected - conclusion drawn on conjecture and surmise It is respectfully submitted that, the Income-tax Act, 1961 ( Act ) does not clothe the taxing authorities with any power or jurisdiction to re-write the terms of the agreement entered into, particularly in view of the fact that there is no cogent evidence on records to suggest that the parties were not undertaking their respective duties. Reliance in this regard is placed on the decision of the Delhi High Court in the case of D.S. Bist Sons v. CIT [1984] 149 ITR 276. The appellant and DAIPL had entered into a commission agreement for direct sales to customers (refer page 48 to 57 of pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, he must indicate in his order on what material he ultimately basis his conclusion it is not clear from the record that the Income-tax Officer proceeded on any definite material and the Tribunal had not found that he did. The definite material need not necessarily be in the form of legal evidence but there must be something which at the first stage should be brought to the notice of the assessee and if the Income-tax Officer in default of any response from the assessee adds something more the additional material also should appear in the order ... Onus not discharged by the Revenue The onus was on the AO to bring on record evidence to demonstrate the action on part of DAIPL of negotiating and concluding contracts. Merely stating that the appellant has failed to prove the contrary cannot be adequate to hold that such acts were actually performed by DAIPL and a PE came into existence. The onus to show that a PE exists is on the Revenue. In this regard, kind attention is invited to the decision of the Delhi Bench of Income Tax Appellate Tribunal in the case of Dy. CIT v. Mis Sofema SA bearing [IT Appeal No. 3900 (Del) of 2002, dated May 5, 2006]. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned that the finding has been given on the basis that there is no evidence or justification forthcoming from the Revenue to show that the assessee has a PE. On this account alone, the court does not wish to interfere in the matter Documents submitted by the appellant not considered Further, the appellant had filed details of visits of its employees to India at various times during the subject assessment year (refer page 46 of the paper book). A perusal of the details will clearly indicate that the employees include people from sales and marketing who had made frequent visits to India. Such personnel were responsible for discussing proposals and to negotiate the terms and conditions and prices with the Indian customers. Moreover, documents like proforma invoice, invoice, quotation from appellant to customer, acceptance of the quotation, packing List, bill of lading, insurance documents, certificate of fumigation were submitted before the AO in relation to sales made to some parties (refer page 103 to 167 of the paper book). It is pertinent to note that all documents are between the appellant and customers. The quotations were raised by the appellant on the cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue on page 17 para 5.7 of his order. He has rightly held that merely on this basis it cannot be said that employees had visited India for negotiating with end customers. 5. Except the above documents no other evidence whatsoever was submitted by the assessee in the form of emails or other communications to show that the end customers directly negotiated the price and other terms and conditions with the assessee (page 16 para - 5.1 to 5.4 of the AD's order). 6. It is difficult to believe that the end customers in India, who were large in number (PB 11 to 23), would directly contact and negotiate the price with the assessee at their own cost in Japan having different times zone and different language (particularly when the assessee's representative in the form of DAIPL with whom they had discussed the purchase proposals etc was available in India). This is more so when there are large number of competitors selling air conditioners in India. It is also difficult to believe that in not single case the quoted price was not accepted by the end customer and the price had to be re negotiated. In view of the aforesaid it was imperative on the part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar extent in business activities in the state concerned may be treated as an agent (para32). It also states that a person who is authorised to negotiate all elements and details of a contract in away binding on the enterprise can be said to exercise this authority in that state even if the contract is signed by another person in the state in which the enterprise is situated ,or ,if the first person has not formally been given the power of representation (para 33). As mentioned above, para 32.1 re-produced by the AO in the order (page 18) clinches the issue the favour of the department. The views of Klaus Vogel reproduced in the AAR's decision in the case of TVM Ltd. (supra) on page containing para 18 wherein it is mentioned that substance over form should be seen and after considering the actual behaviour of the parties a permanent establishment may be deemed to exist irrespective of what the formal arrangements were, further support the department's case. Case Laws: The department relies on the following case laws:- (i) Aramex International Logistics (P) Ltd.; In re [2012] 208 Taxman 355. (ii) M/s. Rolls Royce PLC, ITAT, Delhi; 2007- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no such enquiries or proposals were received from the customers by the assessee and these functions were performed by DAIPL. 10.4 It has been claimed by the assessee that from plain reading of the commission agreement, it is clear that DAIPL does not have any authority to even negotiate contracts much less conclude contracts on behalf of the assessee. However, it is Assessing Officer's case that Assessing Officer had requested the emails/ correspondence with the direct customers in India, with regard to the receipt of proposals, relating to price negotiations and other the documents which were not produced. In this regard, the Assessing Officer has noted assessee's response that assessee was trying its best to procure the relevant documents/ details. However, substantial record for the year under question were not traceable with assessee. Assessing Officer has further noted assessee's response that inspite of the limitations the assessee had furnished whatever documentation relating to specified customers, it has been able to search out so far. It is also respectfully submitted that the person responsible for handling tax matters of the assessee has not been able ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as required documentary evidences were not furnished. Assessee has claimed that documents like proforma invoice, invoice, quotations from assessee to customers acceptance of the quotation, packing list, bill of loading, insurance documents, certificate of fumigation were submitted before the Assessing Officer in relation to sales made to some parties. 10.9 We further note that with regard to attribution of profits to the PE assessee has inter-alia claimed that without prejudice to the claim of the assessee that a PE does not exist in India, the amount attributed by the Assessing Officer is unjustified keeping in mind the global profitability of the assessee. In this regard ld. Counsel of the assessee admitted that this claim was not made before the Assessing Officer. However, claim in this regard was made before the Ld. Commissioner of Income Tax (A), but the same was ignored by the Ld. Commissioner of Income Tax (A), and no finding in this regard has been given in his appellate order. 10.10 Further as regards levy of interest u/s. 234B by the Assessing Officer, assessee has contended before the Ld. Commissioner of Income Tax (A) that section 234B is not applicable wher ..... X X X X Extracts X X X X X X X X Extracts X X X X
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