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TMI Blog2017 (1) TMI 1098X X X X Extracts X X X X X X X X Extracts X X X X ..... yees GS and Vinod Balgi were employer of the LO for the year under consideration. But, that does not lead to any final conclusion. No question was ever asked to them about the duties assigned to them or about the responsibilities shared by them. There appointment letters would have given some clues about their job profile. Nothing is on record that can prove that the LO was functioning as an independent profit center for the year under consideration. We want to make it clear that our observation are for the AY. 1998-99 and they are in no way binding for any other AY. We have analysed the papers that are relevant for the year under consideration only and our decision is also based solely on those documents. FAA or the DR has not mentioned anything about the correspondence entered into with the RBI. We are aware that decision of RBI may not be very relevant for determining the tax liability of an assessee. But, if the RBI has, after receiving a communication from the AO, not initiated any proceedings against the assessee for violating the terms and conditions of the permission letter issued to it by the Bank for operating the LO, then it will strengthen the case of the assessee. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue by : Shri Dipak Ripote-Sr. DR ORDER Per Rajendra, AM Challenging the order dated 31. 10. 2005 of the CIT(A)-XXXIII, Mumbai the assessee and the Assessing Officer(A. O. ) have filed the cross appeals for the above mentioned AY . The assessee has also filed an appeal against the order passed u/s. 143(c) r. w. s 250-order giving effect to the CIT(A) s order dt. 27. 2. 2006. The assessee- company is engaged in import/export as well as domestic sales of dyestuff, chemicals, plastics, machinery, health food and medical equipments. It has a Liaison Office(LO) in Mumbai, established with the specific prior approval of the Reserve Bank of India (RBI). It filed its return of income for the year under consideration, declaring income at Rs. Nil. Brief Facts: 2. A survey under section 133A of the Act was conducted at the office premises of the assessee on 06/02/2003. During the course of survey, certain books of accounts/documents were impounded. The AO issued notice under section 148 of the Act, on 25/03/2003. In response to the notice, the assessee filed its return of income on 28/03/2003 declaring nil income. The assessee contended that its LO was not a Permanent Es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od Blagi Kishore L Rajani. He held that the sales staff was directly involved into business activities, that they were responsible for achieving the target fixed and also expansion and development of the future business of NCJ. He referred to pages 34, 115 156, 157 of the volume one. With regard to the diaries impounded, he stated that same records showed double the figures of quantity, rate, total various items and details of shipments. He directed the assessee to file explanation in that regard and to furnish the turnover figures of the Indian entity as well as the total turnover. He held that assessee had a PE in India, that it was calling the PE is LO, that the permission from the RBI to open only LO would not change the character of the office, that the LO was indulging in full-fledged sales activity, that for the contravention of the permission of the RBI he would be informing the bank separately, that the papers found during the survey proceedings indicated that LO was being used to carry out sales and marketing activities in a big way, that the employees were contacting potential customers and were giving quotations about the rates, that they were passing on the requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... every year, that the turnover figures were not available for the remaining years, that same had to be estimated at 20% more or less than the succeeding/preceding year. For the AY. 1998-99 he estimated at 20% less than the sales for the subsequent AY. and so on. As stated earlier, he determined the income of the assessee at ₹ 7, 97, 69, 800/- 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). It was argued that reasonable opportunity was not given by the AO to produce the evidence. The assessee furnished certain documents before the FAA for the first time. He called for a remand report from the AO with regard to the additional evidences produced before. Before the FAA, the assessee contended that it was a tax resident of Japan, that the provisions of Indo Japan Treaty would be applicable, that as per Article 7 of the Treaty the profits would be taxable in India only if it had a PE, that it was carrying out preparatory and auxiliary activities through its LO, that the said LO would not constitute a PE of the assessee in India [Article 5(6)of the Treaty], that sales would take place directly from Japan and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation about the Indian market to the HO, that they would identify and meet new customers and would provide information about price to them, that as per the provisions of Article 5 (8) of the Treaty and independent status of the agents, acting in ordinary course of its business, would not constitute a PE of the principal in India, that no employee of the assessee held the position of management, that neither the agents not the assessee had any shareholding in each other s business, that the decision-making power in respect to activities of the agents did not rest with the assessee, that they were paid a commission @ 2 to 5%(appr- oximately)of the sales amount, that all the costs relating to conducting their agency business was born by the agents, that the agents would independently frame their business policies, that the only instruction the agents would receive from the assessee was regarding the overall term of identifying the new customer and the price to be charged to them, that such instruct - tions were normal in any agency relationship, that the agents would carry out similar activities for a number of principles, that each of the agents would conduct its business as indep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in response to the issue raised by the AO with regard to discrepancy in the amount of sales made by M F, as independent agents for the AY. 1998-99, that the AO had not commented on para 5A and 5B of the first remand report as well as the submissions made by the assessee on 30/06/2005 in his second remand report. The assessee further argued that turnover computed by the AO was erroneous, that the figures reflected in the achievement column of the PRR of the employees included the sales made by the assessee through its independent agents, that the figures also included the amount of purchases, that the LO essentially acted as, negation channel between the HO and the Indian parties and only played a supportive role in respect of assessee s import business, that the LO is not engaged in making purchases for the assessee in India, that as per the provisions of Article 7 (5) of the Treaty no profit would be attributable to the PE on account of purchases made by such PE in India, that purchases made by the assessee from India should be excluded while computing its total taxable income, that the AO had assumed that there was a 20% increase in the sales in the subsequent years, that the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e main trading business of the assessee in India, that the activities could not be categorised as preparatory and auxiliary activities, that they did not qualify for exclusion from the definition of the term PE under Article 5 of the Treaty, that the LO constituted a PE of the assessee in India, that the assessee had claimed that approximately 80-85% of the export business of the assessee had been conducted through independent agents and that they were unrelated to it, that although all the customers whether attended directly or through agents made payments to the HO at Japan but the business negotiations were carried out with them by the LO, that there was no basic difference in the dealing by the assessee with the customers directly or through agents, that the role of the independent agents was not different from the customers who negotiated directly, that during the survey operations details regarding the sales claimed to have been made by so-called independent agents were found to be reflected in the total sales figure of Mumbai office for the AY. 1999-2000 and 2000-2001, that the LO had played a role in sales made by the agents, that LO was involved in the agents sales transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y. 1999-00 could not form basis for assuming facts for the years prior to such year, that income for earlier years had to be assessed on the basis of material subsisting for those years, that the AO had majorly relied on the documents impounded during the survey proceedings for the period 1995 to 2003 to hold that LO of the assessee constituted a PE in India for the year under consideration, that only documents from 1995 till March 1998 could be considered for understanding the state of affairs for the impugned year under appeal, that the AO/FAA had based their conclusions on the PRR. s of the staff of the LO, that the PRR. s. were not for the year under appeal, that the members of the staff were being evaluated on the basis of their support role given to the actual/customers and hence the figures mentioned were in respect of support given by the staff and did not relate to sales achieved by such employees in India, that the PRR. s were relevant for the subsequent AY. s. , that no adverse conclusion should be drawn from such documents not pertaining to the year to hold that assessee had a LO in India, that LO carried out the RBI permitted activities only and acted as a communicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mers of LO, that the said paper supported the view that the agents were independent and the LO was only acting as facilitator, that page 559 of paper book indicated and supported the view that agents were actually involved in developing market and not the LO-employees, that the LO- employees had passed information to HO, that such passing of information could not be the basis to assume that agents were working at the behest of the LO, that agents would coordinate with the local office, that declaration from the major agents of the assessee to the effect that they were independent agents was filed, that the simple print of the websites of the agents clearly showed that they were dealing with the others beside the assessee, that the sales made through the agents in India should be excluded from the profits attributable to the PE of the assessee in India. He made a reference to pages 75 -78 and 81-85 of the PB. It was further argued that the profits attributable in respect of the direct sales of the assessee in India should be computed on the average rate of commission of the independent agents that even if the LO was considered as a PE of the assessee in India the scope of activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term PE under Article 5 of the Treaty, that AO had noticed that all customers made payments to the HO at Japan and that assessee would raise invoices in the name of each serves customers, that there was no basic difference in assessee s dealing with customer either directly or through agents, that the role of independent agents was not different from the customers who were negotiated directly, that sales claim to have been made by independent agents were found to be reflected in the total sales figure of Mumbai office, that LO was directly involved in all the sales transaction pertaining to Indian operations, that the estimation of profit the rate of 10% on ad hoc basis was in accordance to Rule 10 of the Rules, that the AO had asked the assessee to submit details of its global accounts for last six years, that the assessee had not produced any documents/details, that the AO was left with no other option but to estimate the profit, that the assessee changed stands constantly by filing the revised certified copies of the accounts and documents every now and then. 5. We have heard the rival submissions and perused the material available on record including the impounded documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble rights to distribute certain chemicals. The agreement was valid up to December, 1996. No other document was referred to by the AO/FAA to prove that the agreement was renewed was acted upon during the year under appeal. Pg. 523 of the PB is a letter from one of the employees of the assessee to its Shanghai office. In that letter the employee has advised the Shanghai office as to how to deal with Indian customers. But, it does not prove that the assessee was indulging in sales activities. A fax message from GS on 15. 07. 2000 to the HO(Pg. 537-39)clearly show that till July, 2000 LO was supposed to find out the business possibilities in the various parts of India. It also talks that intention of the Bombay office was not to do independent business . Letter from one of the employees to HO (Pg. 546)pertains to some information about purchases to be made as per the comments/ order of the HO. Pg. 559of the PB is a letter from Musk and Fragrance (M F) to LO. We have not come across any evidence that can prove that LO had directly dealt with the agent. The assessee had claimed that information received from M F had been forwarded to HO. The AO had not commented upon the assertion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring services that were not auxiliary. 5. 3. We have not come across any statement of any of the employees or the officials / executives of the LO, recorded during the survey proceedings or after the action u/s. 133A of the Act was over. Generally, during the such operations statements are recorded and questions are asked about relevant and important impounded documents. There is no doubt that two of the employees GS and Vinod Balgi were employer of the LO for the year under consideration. But, that does not lead to any final conclusion. No question was ever asked to them about the duties assigned to them or about the responsibilities shared by them. There appointment letters would have given some clues about their job profile. Nothing is on record that can prove that the LO was functioning as an independent profit center for the year under consideration. We want to make it clear that our observation are for the AY. 1998-99 and they are in no way binding for any other AY. We have analysed the papers that are relevant for the year under consideration only and our decision is also based solely on those documents. 5. 4. Here, we want to mention that we have taken note of a porti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure was an allowable deduction. The DR supported the order of the AO and the FAA. 8. While deciding the earlier appeal, we have held that assessee was not having PE in India. The issues raised by the assessee are academic in nature in the background of our order. So, we allow the appeal filed by the assessee for statistical purposes. ITA/369/Mum/2006-AY. 1998-99(Appeal by the AO): 9. First ground of appeal is about estimation of sale figures. During the assessment proceed ings, the AO found that there was an error in the statement filed by the assessee with regard to turnover figures. The assessee, vide its letter dated 13/05/2005 (Page 257 of the PB) filed explanation in that regard. Later on, it also produced revise certified statement along with appended verification by the certified Public accountant accepting the mistake along with the reconciliation of the amounts. However, the AO was not satisfied with the explanation filed by the assessee. He stated that there were mistakes in the average commission paid to the agents, that the accounts of the assessee were not reliable. He estimated the turnover figure on the basis of the PRR of the employees applyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reconciliation statement filed by the assessee. Considering the above, we are of the opinion that the order of the FAA does not need any interference from our side. So, confirming his order, we decide the first ground of appeal against the AO. 10. Next ground of appeal is about reducing the GP to 8% by the FAA, as against 10% estimated by the AO. Following our order for the first ground of appeal, we dismiss second ground. 11. Last ground of appeal is about levy of interest under section 234B of the Act. While completing the assessment, the AO had levied interest under the said section. During the appellate proceedings, the FAA deleted the interest. 11. 1. We find that the issue is decided against the AO and in favour of the assessee by the order of the Hon ble jurisdictional High Court delivered in the case of NGC Network Asia LLC (313 ITR 187). We would like to reproduce the relevant portion of the judgment of the Hon ble court and it reads as under- Under the provisions of the present Act, the issue had come for consideration in the case of CIT v. Sedco Forex International Drilling Co. Ltd. reported in [2003] 264 ITR 320 (Uttaranchal). One of the questions was, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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