9911796707
TMI Blog2012 (10) TMI 245X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the income of the appellant for the relevant assessment year at Rs. 79,353,253, as against the returned income of Rs. 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 a PE in India as per the provisions of paragraph 7 of Article 5 of the Double Taxation Avoidance Agreement between Indian and Japan ("the treaty"). 3. ATTRIBUTION OF PROFITS 3.1 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO attributing profits of Rs. 59,634,440 to the alleged PE of the appellant in India without any cogent basis and without considering the provisions of the Act. 3.2 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO attributing profits of Rs. 59,634,440 to the alleged PE and not appreciating that an arm's length commission had been paid to the alleged dependent agent, Daikin Air-conditioning India Private Limited, which should effectively extinguish any attri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomers 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 receiving enquiries/proposals from customers forwarded by DAIPL for these functions also DAIPL is not being remunerated. 5.2 The reason for direct import by the customers are certainly on account of exemptions from customs duty. 5.3 The assessee has contended that the sales made to various customers were not less than Rs. 1 lakh, but more than that. Even if this being so, the same does not change the fact that, assessee, did not submit any objective documents to support its contention that, with these parties it has negotiated the prices. 5.4 The claim that the consultant/contractor/architect represents several price and are in contact with assessee generally for their requirements on a regular basis and the discussion about the prices take place generally between the consultants of the individual and the assessee. Even for such claim not a single documentary evidence is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 transactions." [Emphasis supplied] In arriving at the prices with the customers, the assessee could not prove that it was actively involved in negotiating the prices, which lead to the contracts. Therefore it is held that the assessee has PE in India considering the provisions of Paragraph 7(a) and 7(c) of the tax treaty between India and Japan." 4. Before the ld. CIT(A), assessee inter-alia submitted that the assessee company was incorporated in Japan and it has a wholly own subsidiary in the name and style Daikin Air-conditioning India Pvt. Ltd. The Indian company does trading in AC machine in as much it purchases the machine from the parent company and sells to Indian customers. The appellant, the parent company also directly sells its product to the resident customers. The Indian company provides after sale warranty services both for the parent company and for itself and marketing support for the parent company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge 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 could not be verified as not a single documentary evidence in this respect was filed before the Revenue in spite of specific requisition. The AO has also come to the conclusion from the material evidence that business meeting will not be only for the purpose of direct sales by the appellant but also through the DAIPL. In absence of any such document the Revenue was constrained to conclude that DAIPL secured orders in India for the appellant, the appellant is the controlling authority for DAIPL and DAIPL also negotiates and finalizes the prices with the customers of the appellant in India. The authority for such act although not vested in them through any agreement but in all practical purposes they were deciding the prices and such prices later on confirmed by the appellant through document at a routine manner. It has been decisively held by a five member bench of Supreme Court in the case of Mc Donald v. CIT 154 ITR 148 (5C) that any colourable device ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 enterprise, unless his activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph ... " The phrase "authority to conclude contracts" implies that an agent of a non resident can be construed to constitute a PE of the non-resident, if the agent can act independently on its own in the matter of concluding contracts on behalf of its principal. If the agent cannot conclude or enter into a contract on its own or without the final confirmation / approval from its principal, it negates the said power to conclude contracts. The commission agreement between the appellant and DAIPL (page 48 to 57 of paper book) makes it clear that DAIPL did not have this freedom and the role of DAIPL is limited to act as a communication channel between the appellant and customers. Reliance in this regard is placed on the following: Paragraph 32 of OE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 orders in the first-mentioned Contracting State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the 'same common control as that enterprise ... " There is no guidance in the India-Japan tax treaty on what constitutes 'securing orders'. Attention is, however, drawn to the Protocol to the India-USA tax treaty which explains the term 'securing orders' as follows: " ... a person shall be considered to habitually secure orders in a Contracting State, wholly or almost for an enterprise, only if: 1. such person frequently accepts orders for goods or merchandise on behalf of the enterprise; 2. substantially all of such person's sales related activities in the Contracting State consist of activities for the enterprise; 3. such person habitually represents to persons offering to buy goods or merchandise that acceptance of an order by such person constitutes the agreement of the enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 ITR 276. The appellant and DAIPL had entered into a commission agreement for direct sales to customers (refer page 48 to 57 of paper book). As per the agreement, DAIPL was - To forward the customer's request for procuring products from DIL to DIL - To forward DIL's quotation and contractual proposal to the customer From the above, it is clear that DAIPL was only responsible for acting as a medium through which appellant' used to communicate with customers in India. DAIPL acted as a communication channel between customers and DIL to facilitate flow of information and documents like enquiries, proposals, quotations, purchase orders, invoices, etc DAIPL did not have any authority to carry out negotiations with customers in India, which was exercisable only by the appellant. The AO has, without adducing any evidence to the contrary, held that DAIPL negotiated the prices on behalf of appellant, merely because the appellant has not proved to the contrary. It is respectfully submitted that the explicit terms of a contract between two parties cannot be ignored without bringing on record any material which indicates anything to the contrary. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late Tribunal in the case of Dy. CIT v. Mis Sofema SA bearing [IT Appeal No. 3900 (Del) of 2002, dated May 5, 2006]. The ITAT inter alia held as under: " ... We are further of the considered view that in the absence of any evidence on record with regard to commercial activity having been done by the assessee company in India., its liaison office cannot be considered to be permanent establishment in India, as provided for in DTAA between India and Government of France...." The order passed by the ITAT in Sofema's case has since been upheld by the Jurisdictional Delhi High Court in ITA No. 1764/2006 vide order dated December 18, 2006. The SLP filed by Revenue has been dismissed by the Supreme Court (Civil Appeal No. 5260 of 2008 vide order dated 26th August 2008), wherein the Apex court has observed as follows: " ... In the present case, there a concurrent finding that Sofema SA, respondent herein, is not a PE under the DTAA. However, we find that this finding has been given on the basis that there is no evidence or justification forthcoming from the side of the Department to show that the respondent is a PE. On that account alone, we do not wish to interfere in this matter. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant and customers. The quotations were raised by the appellant on the customer and in turn the customer has given the acceptance to the appellant only. DAIPL was, thus, only responsible for forwarding the documents between the appellant and the customer. The AO/CIT(A) have, however, brushed aside all the documents and held that no evidence was produced by the appellant. If the AO was to reject such evidence then some positive evidence should have been brought on record to prove otherwise." 9. The submissions of the Ld. Departmental Representative are as under:- (A) Permanent establishment: The Department's stand is that Daikin Air-conditioning India (P) Ltd. (DAIPL) who is a 99.99% subsidiary of the assessee viz. Daikin Industries Ltd. (DIL) is a PE of the assessee within the meaning of paragraph 7(a) and (c) of article 5 of Indo- Japan Treaty (PB 222). This is for the following reasons:- 1. The assessee was repeatedly asked by the A.O. to furnish documentary evidence in support of the claim that prices were negotiated and contracts were entered by the assessee directly with the end customers in India and the Indian entity had no role to play in this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be re negotiated. In view of the aforesaid it was imperative on the part of the assessee to produce clinching evidence in support of its claim. Failure to do so clearly proves that it is the Indian entity (DAIPL) which in effect concluded the price and other terms and conditions. 7. The commission agreement (PB 48 to 57) has been entered into and signed on 22-12-2005 (PB 49 and 56). The 'effective date' has been defined as date of execution of the agreement (PB 50 clause 1.1.3) and the terms and conditions clearly state that agreement would be deemed to come into force from the effective date(PB 53 clause 6.1). No independent person without any agreement in place would undertake the marketing activities. The fact that the Indian entity undertook the marketing activities for the period prior to the agreement viz. 1-4-2005 to 21-12- 2005 clearly shows that i) both the parties acted beyond the terms of agreement and ii) the Indian entity viz. DAIPL was not a person of independent status and was in complete control of the assessee. 8. The AO thus in para 5.10, page 18 of the order has rightly concluded that the assessee has dependent agent PE in te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 355. (ii) M/s. Rolls Royce PLC, ITAT, Delhi; 2007-TII-32-ITAT-DEL-INTL (para 23 page 20/21) (iii) M/s. Rolls Royce PLC, Delhi High Court 2011-TII-35-HC-DEL-INTL (para 17 page 7) (iv) M/s. Rolls Royce Singapore (P) Ltd.-2011-13 (para 29 & 30). During the hearing the learned AR referred to the AAR's decision in the case of TVM Ltd. This decision is not applicable as Indo- Mauritius Treaty (reproduced on page containing para 9 of TVM decision) does not contain clause (c) of article 5(7) of the Indo- Japanese Treaty ( PB 222) . During the hearing it was argued by the learned AR that the AO has no power to go beyond the Commission agreement or to re-write the agreement. It is submitted that the AO has not re-written the agreement. While an agreement forms the starting' point for examining a transaction but the conduct of the parties has to be seen. If the conduct of the parties is not in accordance with the terms of agreement then the AO has power to travel beyond it. The jurisprudence on the concept of 'substance over form' is well developed and needs no elaboration. This concept is also recognized by the DECO. The same is 'also discussed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been able to attend office for sometime on account of ill health, which has also added to the difficulty in procuring and furnishing the required documents." However, Assessing Officer has not accepted the above. He observed that required documents were not supposed to be in the possession of person handling the tax matters. Assessing Officer has held that in absence of these documents one is required to draw the conclusion that the employees of DAIPL or the persons of the assessee, who are deputed with DAIPL only, are deciding the prices of the products and only those persons are securing the orders for the assessee. Ld. Commissioner of Income Tax (A) has also observed that the assessee did not supply any document before the Revenue to prove that enquiries, proposals, from customers were received by it. 10.5 The assessee has further claimed before the Assessing Officer that consultant / contractor/architect represent several prices and are in contact with the assessee generally for their requirement, on a regular basis and the decisions about the prices take place generally between the consultant of the individual and the assessee. However, the submissions were not accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome is liable to deduction of tax at source. If the Assessing Officer's allegation that assessee has a PE in India is to be accepted, then its income was subject to deduction of tax at source under section 195 of the Act. Ld. Commissioner of Income Tax (A) has not discussed this issue. He has held that charge of interest u/s. 234B is consequential and no appeal lies against such order. 11. From the above discussion we are of the opinion that there are conflicting claim by the Revenue and the assessee. The lower authorities have held that assessee has not provided the necessary evidence in support of its claim. On the other hand, assessee has pleaded that all the information to the extent possible were submitted. We have also noted that before the Assessing Officer assessee had pleaded that the person who was in charge of the requisite details had fallen ill. It has also been a claim of the assessee that its submission had not been appreciated properly. On some issues it is the claim of the assessee that proper adjudication has not been done. 12. In the background of the aforesaid discussion, we are of the considered opinion, that interest of justice will be served, if the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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