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TMI Blog2018 (4) TMI 1964X X X X Extracts X X X X X X X X Extracts X X X X ..... the LO could not be construed as a PE in India. There was no material to suggest that any action was taken by the RBI or whether any correspondence in this regard was at all made by the AO or not. Be that as it may, even before us, there is nothing to suggest that the RBI has found the activities of the LO as being noncompliant with the terms and conditions of its permission and, therefore, the said factual matrix strengthens the assertions of the assessee that the LO was performing activities which were permissible by the RBI, meaning thereby, that it was only performing support activities and engaged in only preparatory and auxiliary activities and not in the nature of a PE so as to impute any business connection in India. Thus, following the precedent as also the aforesaid discussion, in our view, it is irresistible to conclude that the assessee s LO did not constitute a PE in India for the Assessment Year 2005-06. In this view of the matter, the Ground of appeal no. 1 raised by the assessee is allowed. Levy of interest u/s 234B - While completing the assessment, interest u/s 234B of the Act was levied by the Assessing Officer for default in payment of advance tax. It h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a PE of the assessee in India. Notably, the Head office had appointed Commission agents in India who were independent entities and the H.O was also making sales to Indian customers directly. Notably, consequent to the survey, Revenue issued notices u/s 148 of the Act on 25.03.2003 covering Assessment Years 1996-97 to 2002-03 and the returns were filed by the assessee in response thereof, declaring NIL income, being a tax-resident of Japan. 3. In the assessments finalised for Assessment Years 1996-97 to 2002-03, which are more or less on similar basis, the Assessing Officer held that the LO was to be understood as a PE in India in terms of the India-Japan Double Taxation Avoidance Agreement (DTAA); and in determining the total taxable income, the Assessing Officer invoked Rule 10 of the Income Tax Rules, 1962 and estimated the profit at 10% of the total turnover from India. In this background, the learned representative for the assessee pointed out that the assessment pertaining to Assessment Year 1998-99 came up before the Tribunal and vide its order in ITA Nos. 1800/Mum/2007 115/Mum/2006 dated 12.01.2017, the stand of the assessee that the LO could not be construed as a PE w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts/ order of the HO. Pg.559 of 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 made by the assessee. The next document (Pg.567) talks about meeting of members of the LO with agent and one of the manufacturer. It does not prove that the LO was carrying out business activities. 5.2. There is a very thin line between liasoning/providing auxiliary services and doing business. In the first instance support is given by LO to its HO who looks after the business. But, if the LO starts taking independent business decisions, including dealing with the customers, same could not be treated preparatory/auxiliary services. Providing/collecting information and acting as per the instructions of the HO will not definitely fall in the category of doing business independently. So, until and unless some reliable evidence is not brought on record it cannot be held that an assessee was not liasoning or was doing business. What has to be seen is that with whom the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 portion of order of the AO, wherein he has mentioned that he would inform the RBI about the violations made by the LO in conducting its activities. We are not aware as to what was the outcome of that exercise. The 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. By not taking any action against the assessee, the RBI has accepted the plea that the LO was performing the activities that were allowed by the Bank. Considering the above, we are of the opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia in the year under appeal is the second aspect the issue. In our opinion, section 9 of the Act and Article 7 of the DTAA.s (or other similar articles dealing with business income)would be helpful to solve the issue, as they deal with the concepts of PE and business connection. 5.2.1. Section 9 provides that income accruing directly or indirectly, through or from any business connection in India shall be deemed to be income accruing or arising in India. Hence, where the person entitled to such income is a non- resident, it would be included in his total income. However, Articles 7 of the DTAA.s (or other similar Articles) further stipulate that a PE must exists in India before income accrues and is taxable in India. Articles 5 of the DTAA.s (or similar Articles) define permanent establishment. Section 92F(iiia) of the Act also defines permanent establishment. Once a PE exists and business is being carried out through it then profits, being a necessary consequence, needs to be attributed and taxed in India as per Rule 10 of the Income-tax Rules. The establishment of a PE presupposes that business operations are being carried out for profit. 5.2.2. For existence of a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on outside the tax able territories and the trading activities within the territories, the relation between the two contributing to the earning of income by the nonresident in his trading activity .. business connection contemplated by section 42 involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection. 5.2.3. In the light of above discussion, the essential features of business connection may be summed up as follows : (a) a real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India ; (b) such relation shall contribute, directly or indirectly, to the earning of income by the non-resident in his business ; (c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise that our decision is based on the facts for the year under appeal. It should not be taken as a precedent for any other year. 6. In the above background, we may now take-up for consideration the cross-appeals filed by the assessee and the Revenue for Assessment Year 2005-06, which is directed against the order of CIT(A)-33, Mumbai which in turn has arisen from the order passed by the Assessing Officer, Mumbai dated 27.12.2007 u/s 143(3) of the Act. 7. In this context, the respective Grounds of appeal read as under :- ITA No. 134/Mum/2009 (Assessee s appeal) 1. The learned CIT (A) has erred in confirming the action of the AO in holding that the Appellant's Liaison office constitutes its Permanent Establishment in India under Article 5 of the Double Taxation Avoidance Agreement between India and Japan ('India-Japan tax treaty'). 2. The learned CIT (A) has erred in confirming the action of the AO in holding that the sales made by the Appellant through independent agents in India are taxable in India. 3. The learned CIT (A) has erred in confirming the action of the AO in holding that there is no basic difference between the Appellant' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for Assessment Year 2005-06, assessee declared NIL income and asserted that except for liaison office work, the LO had not undertaken any activity involving trading, commerce or industrial in nature, and that no commission or fee was charged nor any other remuneration was received by it for the liaison activity rendered. It was also canvassed that the entire expenses of the LO were met exclusively out of the remittances from the Head Office and that its activities were fully compliant with the terms and conditions of the permission granted by the RBI. It is noted that the Assessing Officer in para 3 of the impugned order concluded that the LO constituted a PE and further held that assessee has also failed to bring on record any evidence that it is not engaged in business activity (sales in India) in the instant year . It is also notable that the only basis taken by the Assessing Officer to treat the LO as a PE in India was the survey action as well as the assessment orders passed for the earlier assessment years. What we are trying to bring out is that in the impugned assessment year, the Assessing Officer has not given any independent reasoning for treating the LO as the PE of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. Even the decision of the CIT(A) is based on his decision for Assessment Years 2002-03 and 2003-04 and no independent reasoning has been given by him pertaining to the Assessment Year 2005-06. 11. In this background, we may refer to the relevant extract of the order of Tribunal dated 30.11.2017 (supra) for Assessment Year 2007-08, which has been reproduced by us in the earlier part of this order. Thus, following the parity of reasoning brought out by our co-ordinate Bench in its order dated 30.11.2017 (supra), we may note that so far as the instant year is concerned, there is no evidence and material referred to by the income-tax authorities so as to establish in the instant year that the LO was executing business or contracts independently with the customers in India and, therefore, the plea of the assessee that the LO was carrying only support activities and was engaged in preparatory and auxiliary activities deserves to be affirmed and the LO could not be construed as a PE in India. At this stage, we may also make an observation that the LO has been set-up in India as per the express approval granted by the RBI with the purpose of only carrying out liaison and represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he levy of interest u/s 234B of the Act. While completing the assessment, interest u/s 234B of the Act was levied by the Assessing Officer for default in payment of advance tax. It has been brought out that similar issue for Assessment Year 1998-99 was considered by our co-ordinate Bench in its order dated 12.01.2017 (supra) and decided in favour of the assessee following the ratio of the judgment of the Hon'ble Bombay High Court in the case of NGC Network Asia LLC, 313 ITR 187 (Bom.). Following the aforesaid precedent, the plea of the assessee on this aspect is also upheld. 14. Thus, insofar as Assessment Year 2005-06 is concerned, the appeal of the assessee is allowed and that of the Revenue is dismissed. 15. Now, we may take-up the cross-appeals of the assessee and the Revenue pertaining to Assessment Year 2006-07 which are directed against the order of CIT(A)-11, Mumbai which in turn has arisen from the order passed by the Assessing Officer, Mumbai dated 20.12.2010 u/s 143(3) r.w.s 147 and 144C(3) of the Act. The respective Grounds of appeal raised by the assessee and the Revenue read as under :- ITA No. 8598/Mum/2011 (Assessee s appeal) Reopening of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been incurred for business purpose. Disallowance of travelling expenses 10. The learned CIT(A) has erred in upholding the action of the AO in disallowing 25% of travelling expenses amounting to Rs 712,910 under section 37(1) of the Act on the ground that the same have not been incurred for business purpose. Disallowance of conference expenses 11. The learned CIT(A) has erred in upholding the action of the AO in disallowing 25% of conference expenses amounting to Rs 100,243 under section 37(1) of the Acton the ground that the same have not been incurred for business purpose. Levy of interest under section 234B of the Act amounting to Rs 46,07,602 12. The learned CIT(A) has erred in not deleting the levy of interest under section 234B of the Act. ITA No. 8205/Mum/2011 (Revenue s appeal) 1. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in deleting the disallowance of establishment expenditure incurred by Liaison Office (LO) u/s 37(1) of the I.T. Act by way of tax on behalf of an employee ignoring the fact that the tax was payable by the employee as an individual and hence the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in India and estimated the profit attributable to the PE in India by applying Rule 10 of the Rules considering 10% of the turnover relating to India, thus arriving at taxable income of Rs.4,41,43,800/-. The CIT(A) passed a consolidated order for Assessment Years 1996-97 to 2002-03 which, inter-alia, related to the year under consideration, i.e. Assessment Year 1996-97 also. The CIT(A) sustained the stand of the Assessing Officer that the LO constituted a PE of the assessee in India, against which assessee is in appeal before us in ITA No. 113/Mum/2006 on the abovestated Grounds of appeal. With regard to the quantification of income attributable to the PE in India, the CIT(A) had reduced the estimation made by the Assessing Officer, which is the subject matter of challenge by the Revenue before us on the basis of the aforestated Grounds of appeal. 21. In this background, we first take-up the cross-appeals by the assessee and the Revenue wherein also the first and foremost issue to be decided is whether assessee s LO in India constitutes a PE in India under Article 5 of the DTAA between India and Japan. The said dispute is manifested in Ground of appeal no. 1 in the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer, the said communication from M/s. Musk and Fragrance to the LO proves the negotiations being carried out with the said agent regarding the requirement/order of goods instead of with the Head Office and, therefore, the activity of the LO could be construed as trading or commercial in nature. The CIT(A) has also considered the said document and in para 9.2 of his order has noted that the same, inter-alia, showed that the LO was directly dealing with the agents and thus the LO was directly involved in the business activity with the help of agents who were otherwise appointed by the Head Office. 22. Even before us, the stand of the ld. DR is that the said document shows that the agents appointed by the Head Office were not only dealing with the Head Office, but they were negotiating for business activity with the LO also. 23. On the contrary, the stand of the assessee is that M/s. Musk Fragrance was an independent agent appointed by the Head Office and it had no direct dealing with the LO. The learned representative explained that the said agent has communicated with the LO merely to save the cost of communication with the Head Office in Japan; and, secondl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not indicate that the LO has carried out any business activity and, in fact, the assertion of the assessee has all along been that the said document has been merely forwarded to the Head Office on the request of the concerned agent. 25. At the time of hearing, the learned representative was asked to substantiate the fact that the LO acted only as a communication channel between the Head Office and the agent in question. The learned representative explained that the matter being very old, it would not be possible to dig-out the communication file, but it has been pointed out that for the relevant period covering the said communication dated 28.09.1995, there has been no sale of Citral in India. On this basis, it is sought to be canvassed that the said document is of no help in establishing that any business activity was directly carried out by the LO in India. 26. In our considered opinion, the manner in which our co-ordinate Bench in Assessment Year 1998-99 has considered the aforesaid material, in this year too, we do not find any reason to infer that the said communication from M/s. Musk Fragrance dated 28.09.1995 demonstrates that the LO was involved in any business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manifested in Ground of appeal no. 1 in ITA No. 113/Mum/2006. As a consequence, the appeal of assessee in ITA No. 1798/Mum/2007 is allowed for statistical purpose. 31. Now, we may take-up for consideration the appeals pertaining to Assessment Year 1997-98 vide ITA Nos. 114 367/Mum/2006, which are cross-appeals preferred by the assessee and the Revenue directed against the order of CIT(A)-33, Mumbai, which in turn has arisen from the order dated 30.03.2004 passed by the Assessing Officer u/s 143(3) r.w.s. 147 of the Act. Insofar as appeal in ITA No. 1799/Mum/2007 is concerned, the same is also related to Assessment Year 1997-98 which is preferred by the assessee against the order of CIT(A)-33, Mumbai dated 30.11.2006, which in turn has arisen from the order dated 27.02.2006 passed by the Assessing Officer u/s 143(3) r.w.s. 250 of the Act giving effect to the order of CIT(A) dated 31.10.2005. 32. The appeals for Assessment Year 1997-98 are also taken-up in the same manner as has been done for Assessment Year 1996-97 in the earlier paras. In this year also, the Assessing Officer as well as the CIT(A) have referred to one piece of evidence to conclude that the LO was involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had taken a categorical position before the Assessing Officer itself and stated that the agreement was unsigned and it eventually did not fructify. We do not find any material or clinching evidence led by the Assessing Officer to demolish the said stand of the assessee. On this aspect, the learned representative at the time of hearing had relied upon the judgment of the Hon'ble Delhi High Court in the case of CIT vs Gian Gupta, 369 ITR 428 (Del.) to point out that where the Memorandum of Understanding for purchase of land as well as receipts given by the seller found during the survey were unsigned documents, the same would not prove that the intended transaction had materialised. On the same analogy, in the instant case too, the agreement in question is unsigned by the assessee; and, secondly, the findings of the survey do not point to any of the activities stated in the said agreement to have been carried out by the LO of assessee in India. Therefore, in our view, the said evidence does not justify the inference that the LO was carrying out any business activity in India. 36. At this point, we may say that so far as the other documents relied by the CIT(A) in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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