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TMI Blog2014 (11) TMI 508X X X X Extracts X X X X X X X X Extracts X X X X ..... he exclusion contained in Article 5(3)(e) of India-USA DTAA, the LO did not constitute PE of appellant in India and consequently no business profits were liable to tax in India as per Article 7 of that DTAA; 3. Without prejudice, whether the Tribunal erred in law in assessing the surplus funds remitted by the appellant/ Head Office as business income liable to tax in India; 4. Without prejudice, whether the Tribunal erred in law in not appreciating that only profits attributable to alleged business activities carried out by LO in India could have been brought to tax in India, having regard to functions performed, assets employed and risk assumed ('FAR analysis') by LO; 5. Whether on the facts and circumstances of the case, the decision arrived at by the Tribunal is such that no reasonable person correctly informed of the position in law could come to; and, 6. Whether on the facts and circumstances of the case, the findings arrived at by the Tribunal are perverse." The assessee is a company incorporated in the US. The Registrar of Companies issued a certificate of registration to the assessee under Section 591 of the Companies Act, 1956 on 14 November 2002. During the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assets used for the purpose of business activities. The Assessing Officer recorded the statement of the Chief Representative Officer of the assessee and came to the conclusion that the activities of the assessee were not restricted only to providing a channel of communication between the buyers of the products sold by the parent company but the activities were, it was found, extended to searching for prospective buyers, providing required information and persuading them of the worth of the brand of the assessee in the US, which was, in turn, a subsidiary of a Swedish company. The Assessing Officer held that the activities of the assessee involved marketing activities in India and that the assessee was, in fact, carrying on business activities. On this basis, the income of the assessee was computed at Rs. 24.86 lacs, comprising of the receipts of Rs. 63.72 lacs less the expenses of Rs. 38.86 lacs, which was taken as the profit from business activities carried on in India. The Commissioner of Income Tax (Appeals)4 confirmed the order of the Assessing Officer. The Tribunal by its judgment and order dated 17 January 2014 has come to the conclusion that the activities of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having either conducted negotiations or of having executed any contract; and, (D) The assessee while filing its return of income had claimed a loss under the head of 'profits and gains of business and profession' and had made a claim of depreciation inadvertently, which should not be held against the assessee. In the alternative, it has been submitted on behalf of the assessee that under Article 7 of the DTAA, even if an enterprise carries on a business in India, the profits of the enterprise may be taxed only to the extent as is attributable to the permanent establishment in India. On the other hand, learned Standing Counsel appearing on behalf of the Revenue has submitted that: (i) The Assessing Officer has proceeded on the basis of the admitted factual position as it emerged from the answers which were furnished by the representative of the assessee during the course of the assessment proceedings. The material disclosed by the assessee would make it clear that the activity of the liaison office in India was not merely to carry on work of a preparatory or auxiliary nature but was to promote the products of the assessee and hence, the assessee directly engaged in mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or similar conditions and dealing wholly at arm's length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as that enterprise. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis. The estimate adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article." Under Article 7 of the DTAA, where an enterprise of a contracting State results in profits, these profits are taxable only in that contracting State unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein. The expression "permanent establishment" is governed by Article 5 of the DTAA, which reads as follows, insofar as is material: "ARTICLE 5- Permanent establishment- 1. For the purpose of this Convention, the term "permanent establishment" means a fixed place of business through whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a preparatory or auxiliary character, for the enterprise. In the present case, the Assessing Officer, during the course of the assessment proceedings, had called upon the assessee to explain the nature of its activities. The Chief Representative Officer of the assessee, who attended the proceedings before the Assessing Officer on 12 February 2006, furnished a detailed explanation to the queries which were raised by the Assessing Officer. Both the queries and the answers have a material bearing on the issue which arises in these proceedings and are hence reproduced below: "QUESTION NO. 8. Whether the company of USA has deputed their agent in India to procure the order and got supplied the goods or have maintained their own office for this purpose in India, if so give the details of the both. ANSWER M/s Brown & Sharpe INC has maintained a liaison office in India which is called Brown & Sharpe INC India liaison office. There was one agent during the year 2002-03 only but thereafter there is no agent. The liaison office explain about the product/ the machine to the buyer and according to their requirement intimation is sent, the technician to discuss the commercial issue comes, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a channel of communication between the Head Office in the US and prospective buyers in India. The activities of the liaison office included: (i) explaining the products to buyers in India; (ii) furnishing intimation in accordance with the requirements of the buyers; and, (iii) a discussion of commercial issues pertaining to the contract through the technical representative, after which an order was placed by the buyer directly. Apart from this, it is significant that the performance of the personnel in India was, as disclosed by the Chief Representative Officer, judged by the number of direct orders that the assessee received and by the extent of awareness of the assessee that was generated in India. The assessee had an incentive plan, and it is not in dispute, as was disclosed by the Chief Representative Officer, that in the sales incentive plan an employee was allowed to receive upto 25% of its annual remuneration as SIP. Whether or not any incentive was, in fact, paid to an employee during the year in question, is not material. What is relevant is that the nature of the incentive plan would clearly indicate that the purpose of the liaison office in India was not merely to ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minds, the instant activity is in "aid" or "support" of the main activity." The liaison office, in that case, therefore, was only engaged in downloading information contained in the main servers located in UAE, based on which certain cheques were drawn in India and couriered to beneficiaries in India in accordance with the NRI remitter. This was held to be merely in aid or support of the main activity. In clear distinction, the Tribunal has correctly noted that in the present case, the liaison office was promoting the sales of the goods of the assessee company through its employees, to whom a sales incentive plan was provided for achieving a sales target and the performance of the employees was being judged by the orders secured by the assessee. Similarly, in an earlier decision of the Delhi High Court in Director of Income Tax v. Noikia Networks OY7 it was held by the Tribunal that the liaison office was not carrying on any business activity for the assessee in India and that its role was only to assist the assessee in preliminary and preparatory work. In contrast, in the present case the activity of the liaison office during the year relevant to the assessment year was not of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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