2017 (1) TMI 1098 - AT - Income Tax

Tribunal: Liaison Office not PE under India-Japan Tax Treaty. FAA's decision upheld.

The Tribunal ruled that the assessee's Liaison Office did not constitute a Permanent Establishment (PE) under the India-Japan Tax Treaty. It upheld the ... Functioning of Liaison Office (LO) - Permanent Establishment(PE) in India - provisions of India-Japan Tax Treaty (Treaty)applicability - whether the business premise of the assessee proved that its activities were not confined to Liaison Work(LW)only, that it was having a PE in India, that it had not restricted its activities to LO? - Held that:- From the discussion it is clear that any activity being subsidiary or in aid or support of main activity has to be treated auxiliary or preparatory activity. Perusal of the impounded documents, relevant for the year under appeal, have not led us to the conclusion that the LO was offering services that were not auxiliary. 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. 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 opinion that there is no evidence that the LO was functioning as PE of the assessee in India for the year under appeal. First effective ground is decided in favour of the assessee. Estimation of sale figures - Held that:- After going through these documents we are of the opinion that the FAA were justified in rejecting the method adopted by the AO i. e. estimating the turnover instead of accepting the turnover is certified by the professionals. We have taken note of the fact that assessee is a public company in Japan and the statements drawn were from its public accounts. Because of a genuine mistake in one of the certificates (not all the certified documents), the AO should not have estimated the turnover. In our opinion, before taking such a drastic step in case of a public limited company he should have commented upon the 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. Levy of interest under section 234B - Held that:- Madras High Court, in the case of CIT v. Madras Fertilisers Ltd. reported in [1983 (9) TMI 74 - MADRAS High Court] where in took the view that the amount of tax deductible at source is to be taken into consideration to determine the liability to pay the interest under section 215. In that case, the assessee had not paid advance tax on the interest income. The payer of interest had not deducted the tax. The learned Bench of the Madras High Court was of the view that levy of interest under section 215 on the assessee was not justified. We are in respectful agreement with the view taken in the case of CIT v. Sedco Forex International Drilling Co. Ltd. [2003 (10) TMI 40 - UTTARANCHAL High Court]. We are clearly of the opinion that when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the payee-assessee. Issues Involved:1. Existence of Permanent Establishment (PE)2. Estimation of Sales Turnover3. Gross Profit Rate4. Disallowance of Expenses5. Levy of Interest under Section 234BDetailed Analysis:1. Existence of Permanent Establishment (PE):The primary issue was whether the assessee's Liaison Office (LO) in Mumbai constituted a PE under the India-Japan Tax Treaty. The AO argued that the LO was involved in full-fledged business activities, including sales and marketing, and thus constituted a PE. The assessee contended that the LO was only engaged in preparatory and auxiliary activities and hence did not form a PE. The FAA upheld the AO's view, citing documents indicating the LO's involvement in business activities. However, the Tribunal found that the impounded documents relevant to the assessment year did not conclusively prove that the LO was functioning as a PE. The Tribunal noted that the LO's activities were auxiliary and preparatory, and there was no evidence of independent business decisions being made by the LO. Consequently, the Tribunal held that the LO did not constitute a PE for the year under appeal.2. Estimation of Sales Turnover:The AO estimated the sales turnover based on the Performance Review Reports (PRRs) of the employees, applying a formula of 20% increase or decrease in sales figures for subsequent or earlier years. The FAA directed the AO to adopt the sales figures as per the certified exhibits submitted by the assessee, except for two assessment years. The Tribunal agreed with the FAA, noting that the AO's estimation method was not justified, especially given that the assessee was a public company in Japan and the turnover figures were certified by professionals. The Tribunal upheld the FAA's decision to accept the certified turnover figures.3. Gross Profit Rate:The AO estimated the gross profit rate at 10%, which the FAA reduced to 8%. The Tribunal upheld the FAA's decision, noting that the assessee's activities involved trading and marketing, which typically yield high profits. The Tribunal found the 8% gross profit rate to be reasonable and justified.4. Disallowance of Expenses:The AO disallowed expenses under the heads of Agents' Commission and expenditure incurred towards packing and transportation of personal and household effects and air travel of employees. The FAA dismissed the assessee's appeal on this issue. However, since the Tribunal held that the assessee did not have a PE in India, the disallowance of expenses became academic. The Tribunal allowed the appeal for statistical purposes, noting that the expenses would only be relevant if the assessee had a PE in India.5. Levy of Interest under Section 234B:The AO levied interest under Section 234B, which the FAA deleted. The Tribunal upheld the FAA's decision, citing the jurisdictional High Court's ruling in NGC Network Asia LLC, which held that when a duty is cast on the payer to pay tax at source, no interest can be imposed on the payee-assessee. The Tribunal found that the FAA's deletion of interest was consistent with the High Court's judgment.Conclusion:The Tribunal allowed the assessee's appeal regarding the existence of a PE, holding that the LO did not constitute a PE for the year under appeal. The Tribunal upheld the FAA's decisions on the estimation of sales turnover and the gross profit rate. The disallowance of expenses was rendered academic, and the Tribunal allowed the appeal for statistical purposes. The Tribunal also upheld the deletion of interest under Section 234B. Consequently, the assessee's appeals were allowed, and the AO's appeal was dismissed.