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TMI Blog2008 (2) TMI 890X X X X Extracts X X X X X X X X Extracts X X X X ..... 1980-81 and 1981-82 in IAC v. Mitsui & Co. Ltd. [1991] 41 TTJ (Del)(SB) 547 : [1991] 39 ITD 59 (Del)(SB). 3.That the learned CIT(A) has erred in law and on facts in : (a)Holding that the appellant has submitted wrong 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 pendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 143(3) of the Act held that LOs constituted Permanent Establishment (hereinafter referred to as 'PE') in India. He held that LOs were engaged in locating the customers, making offers to them, getting the terms of contract settled with them and ensuring the opening of letters of credit and other necessary follow-up. Although the AO noted that Tribunal in the case of the appellant company reported in IAC v. 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 dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready allowed by the AO, the CIT(A) directed that the expenditure of global salary of expatriate employees should also be allowed. He further held that 50 per cent of the total net income can be attributed to Indian operations and not the entire income. Aggrieved with the above, the assessee 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 mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal with the import-export policy of the country involving several public institutions, supply of information can be on a variety of points is meant to clear the doubts in the minds of the contracting parties so that ad idem is established before a final contact is concluded. In international trade and commerce, there are several aspects on which information has to be gathered and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o inference adverse to the assessee can be drawn or is possible to draw. To repeat what all that was done by the assessee fell within the parameters of supplying of information which is preparatory and auxiliary to the formation of the final contracts. 31. We are of the opinion that the activities of the branches of the assessee company in India were within the ambit of sub-cl. (iiia) of cl. (i) of sub-art. (1) of art. II of DTAA between India and Japan." (Underlined, Italicized in print, for emphasis by us) 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct any liability to tax in India in respect of any part of appellant's trading income from export of goods from abroad to various parties in India on principal to principal basis. 10. The learned counsel has also assailed the observations of the CIT(A) in para 5.2 of his order that the assessee has not brought full facts to the notice of the RBI. The CIT(A) observes that the assessee has expatriate employees in India whose salaries have been paid from 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 per/nits payment of salaries abr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which establishes expenditure incurred by the LO was so camouflaged as to cover the expenditure incurred in a trading activity to show it as expenditure incurred on liaison activity. In fact, statement of Shri Morata supports the claim that LO was only engaged in gathering of relevant information. 13. Further, it is submitted that the AO has framed the assessment on five factors, which in his opinion established that the appellant had a PE in India. It 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) (supra) 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proper opportunity to the assessee, the CIT(A) has upheld the conclusion of the AO that the LO in India is the PE of the assessee in India. Apart from making oral submissions, the learned Departmental Representative has submitted in writing the arguments on behalf of the Revenue, which we deem it appropriate to reproduce as under : 1.The Department/CIT(A) has considered all the relevant records/evidences including statements recorded during survey and various correspondence to hold that assessee for the asst. yr. 2001-02 has PE in India. 2.1The 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) (supra). 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. 2.2The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s many as 89 such offices all over the world. Therefore it can be seen that the offices in India are undertaking more or less same or similar activities as that of its HO or other offices that constitute the principal and core activity of the assessee. Signing of contract by the entity overseas etc. are more formal arrangements-substance of the matter should have precedence over the form. Signing of negotiated documents overseas, does not mitigate the importance of negotiating 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. 2.5The 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. 2.6That survey was undertaken and various documents were recorded and assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re we get information regarding the manufacturers. We contact the manufacturers preferably Japanese, collect the requisite information, interact with supplier and clients and accompany the representatives of suppliers if required to have a meeting with Indian clients. We also provide financial solutions to Indian clients if they require". Thus the aforesaid explains the business model HO undertakes then those undertaken by the LO in respect of a business deal. The business model of the assessee 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 play a 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramifications establish a so-called management office in States where they maintain subsidiary, PEs, agents or licenses, such office having supervising or co-ordinating functions for all the departments of the enterprise located within the region concerned, a PE will normally deemed to exist, because management office may be regarded as an office within the meaning of para 2. Where big international concern has delegated all management functions to its regional management offices so that the functional 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 prec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment to Indian telecom operators. In that case the assessee had entered into contracts with Indian telecom operators for supply of advanced network equipment for use of fixed/mobile telecommunication networks. The equipment was supplied from overseas whereas installation was done by the Indian entities under terms of separate installation contracts with the Indian telecom operators. It was taken by the Revenue that the assessee had a PE in India on account of the fact that the supply contracts were signed in India 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. (supra), n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erruled. In the assessment year under consideration the AO as well as the CIT(A) have decided contrary to the decision of the Tribunal in the past years. A notable feature in the instant year is that there is no allegation much less any material referred to by the Revenue which suggests that the assessee has been found to be violating any of the conditions or guidelines of the RBI with respect to the LO in India. Certainly the AO as well as the CIT(A) have made out certain points which, according to them are relevant to 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. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness contracts have been concluded by the LO on its own or that the LO is authorized to transact and conclude business on behalf of HO. While observing so, we are conscious of the argument of the Revenue that mere signing of contract by the overseas entity is a formality whereas entire work in this regard is done by the LO. The said argument, in our view, advanced by the Revenue is not on the basis of material but is on a presumption. Remaining on this point, we may also observe that the Revenue has not established that any employee or representative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the past years does not get negated and on the basis of the submissions before us, we observe that all that is done by the assessee falls within the parameter of supplying of information to HO which is preparatory and auxiliary in character for the business of the HO. 20. We, at this stage would also deal with the manner in which the CIT(A) in paras 5.1 to 5.2 of his order has dealt with the material brought before him by the AO in the remand report. On this issue the assessee has challenged the very action of the CIT(A) in considering such 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 (placed at pp. 53 to 61 of the paper book of the Revenue). (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 (placed at pp. 51 to 52 of the paper book of the Revenue). (iii)Report of the meeting on 1st April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of economic intelligence and business information is a preparatory activity and if the HO provides a feed back to the LO of business transacted on the basis of such information, it would not invite an inference that the LO transacted such business. The main test is whether the LO could independently take a business decision to undertake trading and commercial activity or not. The impugned document does not indicate or suggest so and therefore it cannot be used to infer that the LO was engaged in any trading activity. Notwithstanding the aforesaid we also find that the report in question is dated March, 2003 and is for the month of February, 2003 i.e. a period beyond the previous year relevant to the assessment year under consideration. Hence the document is not relevant for the year under consideration. The CIT(A), in our view, erred in relying on such document to infer that 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 e-mail sent by an employee of LO at Bombay to Mr. Haga head of machinery division of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Corporation of India Ltd. The stand of the Revenue is that it is signed by an employee of LO on behalf of the HO and therefore it means that the employees of the LO do have the authority to transact on behalf of the HO. The contention of the assessee is that the said MoU is dt. 29th Jan., 2002 and is therefore not relevant for the year under consideration. Further it is explained that the MoU is meant for the parties mutually agreeing to co-work for demonstration (i.e. display) of the containers in India. Demonstration of the containers is display of articles and falls in the exclusionary clause of preparatory and auxiliary services in the art. 5 sub-art. (6) and para (b) of the DTAA between India and Japan. It is further submitted that there is no consideration and revenue involved in the MoU and is only for exploring new business of collecting information/responses of Indian market. 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 bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eading of the statement and the aforesaid specific questions, we do not find that the material is such so as to support the conclusion of the CIT(A) that the LO "was actively carrying on business in India and was not limited to actual (work) of economic intelligence or information gathering." 23. With respect to the evidence found during the survey conducted on 25th Jan., 2005 the stand of the assessee is that the same could not be relied upon by the CIT(A) and that it was not permissible for the AO to adduce additional evidence before the CIT(A) which was not available at the time of the assessment proceedings. It is also submitted that the CIT(A) could not direct conduct of the survey in the absence of any power conferred on him and in any case there is no direction by the C1T(A) under s. 250(4) of the Act. On this aspect we find that s. 250(4) empowers the CIT(A) to make such 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al proceedings, either of the parties cannot claim, as a matter of right, to lead fresh evidence except in accordance with the applicable law. In the present case the power of the CIT(A) in the matter of accepting additional evidence is circumscribed by r. 46A of the IT Rules, 1962. The provisions of r. 46A are in any case not applicable in the present case. Therefore on this aspect we conclude by holding that such evidence as is collected post-completion of assessment by the AO could not be considered in the appeal proceedings in the absence of the requisite order under s. 250(4) by the CIT(A). In any case the assessee has also assailed the relevance of such evidence. We have already dealt with the merits of such evidence elsewhere in our order. 24. In conclusion, we hold that the IT authorities erred in holding that the LO has Income liable to tax in India. The action of the lower authorities is not justified, both on account of the subsisting order of the Special Bench of the Tribunal in the assessee's case for asst. yrs. 1980- 81 and 1981-82 as also our aforestated discussion. 25. Once we hold that LO does not constitute a PE liable to tax in India, the dispute regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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