Permanent establishment dispute and profit attribution support stay of recovery pending appeal with instalment conditions.

A prima facie case for stay of recovery was shown where the dispute concerned whether liaison office activities crossed preparatory or auxiliary functions and created a permanent establishment in India. The Tribunal noted that the existence of a permanent establishment was debatable on the material placed, and that the Assessing Officer had treated the evidence as sketchy while still making attribution of profits. It also noted that profit attribution had been estimated by applying a gross profit rate and Rule 10(iii), without regard to the assessee's disclosed global margin. Recovery was stayed subject to instalments and the usual stay conditions.

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Issues: Whether the assessee had made out a prima facie case for stay of recovery of the outstanding demand pending disposal of the appeal, in the context of the dispute on existence of a permanent establishment in India and attribution of profits thereto.

Analysis: The demand arose from an assessment treating the liaison office activities as exceeding preparatory or auxiliary functions and suggesting the existence of a permanent establishment in India. The Tribunal noted that the dispute whether sufficient material existed to establish a permanent establishment was debatable, and that the Assessing Officer had called for details but treated the material as sketchy. It also noted that the profit attribution had been estimated by applying a 10% gross profit rate and by relying on Rule 10(iii) of the Income-tax Rules, 1962, ignoring the assessee's disclosed global profit margin. On these facts, the Tribunal found that the assessee had shown a prima facie good case on merits.

Conclusion: Recovery of the demand was stayed in favour of the assessee, subject to payment of specified instalments, operation of the stay for 180 days or till disposal of the appeal, and the condition against seeking adjournments except for unavoidable circumstances.

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