2012 (6) TMI 294 - AT - Income Tax

Assessee's India Liaison Office not a Permanent Establishment under Tax Treaty

The Tribunal concluded that the assessee's Liaison Office (LO) in India did not constitute a Permanent Establishment (PE) under the India-Japan Double ... DTAA between India and Japan - Whether Liasion Office maintained in India under approval of RBI constitutes its Permanent Establishment in terms of Article 5 of said DTAA - assessee submitted that office was carrying on preparatory or auxiliary work but not undertaking any core revenue generating activity - Held that:- There is no dispute that India office is a fixed place. The dispute is whether the business of the assessee is being partly carried on through this office and in absence of any evidence on record with regard to commercial activity having been done by the assessee in India, the LO cannot be considered to be a PE. Further, income which otherwise neither arose nor accrued in India cannot be deemed to accrue or arise in India by looking merely an exclusionary clause (e). Once an activity is construed as being subsidiary or in aid or support of main activity, it would fall within the exclusionary clause. In view of the AAR ruling in case of K.T. Corporation, Korea(2009 (5) TMI 37 (AAR)) it is held that LO cannot be taken to be a PE unless its activities exceed the permitted activities or the department lays hand on any concrete material or evidence to state that any substantive business activity has been carried on from this place. Since no income accrues or arises to the assessee in India, no income can be deemed to accrue or arise to the assessee in India by invoking exclusionary sub-paragraph (e) - Decided against the Revenue Issues Involved:1. Permanent Establishment (PE) status of the assessee's Liaison Office (LO) in India.2. Attribution of profits to the PE.3. Liability to pay interest under section 234B of the Income Tax Act.4. Jurisdiction of the Dispute Resolution Panel (DRP) to enhance assessed income.5. Legality of the orders passed by the AO/DRP.Detailed Analysis:Issue 1: Permanent Establishment (PE) StatusThe primary issue was whether the assessee's Liaison Office (LO) in India constituted a Permanent Establishment (PE) under Article 5 of the India-Japan Double Taxation Avoidance Agreement (DTAA). The assessee argued that the LO was only engaged in preparatory or auxiliary activities and thus should not be considered a PE. The Assessing Officer (AO) and the DRP disagreed, holding that the LO was involved in core business activities, such as locating potential buyers, negotiating terms, and facilitating sales, which went beyond mere preparatory or auxiliary work. The Tribunal, however, found that the AO did not provide sufficient evidence to prove that the LO was conducting substantive business activities. The Tribunal relied on the presumption that since the Reserve Bank of India (RBI) did not find any violation of its conditions, the LO was only engaged in preparatory or auxiliary activities. Therefore, the Tribunal concluded that the LO did not constitute a PE in India.Issue 2: Attribution of ProfitsSince the Tribunal concluded that the LO did not constitute a PE, the question of attributing profits to the PE became moot. The AO had previously attributed 50% of the gross profits from sales in India to the LO, applying a gross profit rate of 10%. However, this attribution was based on the premise that the LO was a PE, which the Tribunal found to be incorrect.Issue 3: Liability to Pay Interest under Section 234BThe AO had levied interest under section 234B of the Income Tax Act. The Tribunal noted that since the LO was not considered a PE, no income was deemed to accrue or arise in India. Consequently, the question of liability to pay interest under section 234B did not arise.Issue 4: Jurisdiction of the DRP to Enhance Assessed IncomeThe assessee contended that the DRP erred in assuming jurisdiction to enhance the assessed income proposed by the AO in the draft assessment order. The Tribunal did not specifically address this issue in detail, as the primary finding that the LO did not constitute a PE rendered other grounds less relevant.Issue 5: Legality of the Orders Passed by the AO/DRPThe assessee argued that the orders passed by the AO and DRP were bad in law and void ab initio. The Tribunal's finding that the LO did not constitute a PE effectively rendered the assessment orders incorrect. Therefore, the Tribunal allowed the appeal, holding that the orders were not legally sustainable.Conclusion:The Tribunal concluded that the assessee's LO in India did not constitute a PE under the India-Japan DTAA. Consequently, no income was attributable to the LO, and the assessee was not liable to pay interest under section 234B. The appeal was allowed in favor of the assessee, and the orders passed by the AO and DRP were deemed invalid.