TaxTMI 
TaxTMI 
2007 (10) TMI 321
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....nd Indian Air force. On examination of the facts and circumstances of the case, the AO was of the view that the appellant was having a business connection in India Under Section 9 of the Act as well as permanent establishment under article 5 of the Double Taxation Avoidance Agreement (in short 'DTAA') between India and UK. The business connection and permanent establishment were found to be in existence in India in the form of a UK incorporated subsidiary company of the appellant in the name of M/s Rolls Royce India Limited (in short 'RRIL') which was having its offices in India. It was found by the AO that the marketing and sale of goods to Indian customers were carried out by the appellant through the said permanent establishment situated in India. As the appellant was found to have carried out its business activities through the permanent establishment situated in India, the AO was further of the view that the profits attributable to the permanent establishment was liable to tax in India in terms of article 7 of the DTAA. The AO, accordingly, invoked Rule 10 of the Income-tax Rules, 1962 and attributed 100% of the profits arising from sale of goods to Indian cust....
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....f survey operation. The result of survey operation depicts the real picture of the business activities carried of by the appellant and RRIL in India which leaves no doubt to hold that there is not only business connection but also a PE in India as per Article 5 of Indo-UK DTAA and hence the income is to be brought to tax in India. It was also held that since no separate accounts are maintained for India operations, the global accounts are to be considered and applying Rule 10 of Income-tax Rules, 1962, the income is to be computed. Learned CIT(A) held that through Indian PE, significant and major parts of it core business activity relating to marking and selling of its goods in India is carried out. Thus, as per Rule 10 of Income-tax Rules read with Article 7(4) of the Indo-UK DTAA, the profit attributable to PE shall be 75% of the total profits arising to the appellant from sales made to Indian customers. 5. Though several grounds are raised, the assessee challenges the order on following grounds, namely: (1) The issue of notice Under Section 148 for framing assessment Under Section 147 is bad in law. (2) There is no business connection in India within the mea....
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.... Ltd. v. ITO 130 ITR 1 (f) Phool Chand Bajrang Lal v. ITO 203 ITR 456. 7.1. Shri Srivastava further argued that for asstt. year 2002-03, the AO noted in the reasons recorded that in asstt. order far asstt. year 2001-02, it was found that the assessee has PE in India in the form of RRIL and the supplies are made to customers in India is attributable to it. The assessee has not filed return Under Section 139 of the Act. As per Explanation 2 to Section 147, where no return of income has been furnished although his total income assessable is exceeding the maximum amount not chargeable to tax. On the basis of such reasons, the AO formed an opinion and issued notice Under Section 148. Shri Vikas Srivastava submitted that effectively reasons recorded for all these years are similar to reasons recorded for four years. Since there was no material while issuing notice Under Section 148 to form an opinion that income has escaped assessment particularly when the Tribunal by its order dated 19.4.2005 has held that there is no PE in India. Thus, the ground for re-Opening is non existent and hence, assessment framed pursuant to incorrect assumption of jurisdiction should be annulled. ....
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....he meeting held that RRIL is a dependent agent of appellant and to that extent, such dependent agent is to be considered as PE in India. It is to be noted that under Article 5(4) of Indo-UK Treaty, an agent of dependent status can be considered as PE only if (a) he habitually exercises any such authority to negotiate and enter into contracts for and on behalf of the enterprises; or (b) he habitually secure orders wholly or almost wholly for such enterprise. From the minutes of the meeting and other documents, it is clear that the employees of RRIL has no authority to negotiate and enter into contracts leave apart exercising such authority habitually. The activity of RRIL are merely of a preparatory or auxiliary character. He also submitted that there is no fixed place PE in India. Article 5(1) of the Treaty defines 'permanent establishment' as a fixed place of business through which the business of the enterprise is wholly or partly carried on. However, to apply this Article, the premises should belong to or must be at the disposal of the enterprise whose business is being carried on. In the present case, the premises belonged to RRIL and not the appellant and the premises ....
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....ncipal's business activities in India are wholly channelled through his agent, (ii) the contracts to sell are made outside India, and (iii) the sales are made on a principle-to- principal basis. In the assessment of the amount of profits, allowance will be made for the expenses incurred, including the agent's commission, in making the sales. If the agent's commission fully represents the value of the profit attributable to his service; it should prima facie extinguish the assessment. Even the Transfer Pricing Officer has held that for the activities of RRIL cost plus 14.51% is the arm's length price. Thus, attribution of any further income is not justified. 12. Without prejudice to all the above submissions, it was submitted that even if any income is to be attributed to the operations in India, the same cannot be as high as 75% of the profit on the sales made in India. Reference was made to the decision in the case of Carborandum Co. v. CIT 108 ITR 335. He also submitted that the core activity of the assessee is not in marketing the products in India. The core activity is manufacturing which is in UK. The contract of the nature executed in India does not requ....
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.... were agreed to in the agreement. The activities of RRIL also includes marketing services, liaison services, market analysis, technical support, customer relationship/interface, strategic planning etc. on behalf of assessee. These facts would not have been noticed but for the survey conducted and the statement of MD of RRIL Mr. Tim Jones being recorded. Various documents found during survey were examined by the AO as well as learned CIT(A) in detail and the inescapable conclusion that could be drawn was that (i) the appellant has a fixed place of business in India in the form of premises of RRIL. Hence, under Article 5(1) of Indo UK DTAA, it has PE in India; (ii) Under Article 5(2)(f), premises used as a sales outlet or for receiving or soliciting orders will also be includible in the term 'permanent establishment'. Though at first instance, the premises are used by RRIL, RRIL recovers the entire cost for use of such premises from appellant. Such premises are also used for receiving and soliciting orders. Thus, even under Article 5(2)(f), the assessee has a PE in India; (iii) Under Article5(4) of Indo UK DTAA, an agent if he is of a dependent status and if habitually, secur....
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....hrough RRIL and who are the personnel designated for such action. It reveals that for identifying key players for relationship, mapping the key influence and decision makers and various other actions Mr. Tim Jones, MD of RRIL and Mr. Prakeek Dabral of RRIL are assigned such job. Various other actions revealed that the relationship to the maintained with IAF and particularly with various key decision makers of IAF are to be handled by the employees of RRIL only. Even some of the personnel in Ministry of Defence like Defence Secretary, Joint Secretary and others are to be handled by Mr. Tim Jones, the MD of RRIL. These documents relate to all the years under appeal which gives an impression that but for the involvement of RRIL at each and every level i.e. from identifying the key players for relationship till negotiating and convincing IAF to convert letter of intent into orders, the employees of RRIL are involved at all stages. This fact came to light only after survey was conducted. Thus, it will be incorrect to hold that in respect of first four years there were no other documents to hold the assessee as having any business connection or having PE in India. On the contrary, the Tr....
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....uble taxation of the income if the transaction is not at arm's length. Thus, even if income of RRIL is enhanced, to that extent, income of appellant RRPLC cannot be reduced. He accordingly pleaded that the order of learned CIT(A) maybe upheld. 16. We have heard the parties at length. In our opinion, following questions arise for consideration: (1) Whether the AO was justified in issuing notice Under Section 148 so as to frame an assessment Under Section 147? (2) Whether the assessee has any income chargeable to tax in India Under Section 5(2) of the Act and whether the assessee has any business connection in India as per Section 9(1)(i) of the Act? (3) If the answer to Question No. 2 is in affirmative, whether, in terms of DTAA between India and UK, the appellant has any PE in India? (4) If answer to Question Nos. 2 & 3 are in affirmative what is the extent of income earned in India and whether the same can be held as paid by the appellant to RRIL and no further income is attributable to the PE in India? (5) If the answer to Question No. 4 above is in negative, to what extent the income arises in India which can be charged to tax ....
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....ection 147 of the Act. 18. The next question before us is whether there is any business connection in India within the meaning of Section 9(1)(i) of the Act. The scope of total income is described in Section 5 of the Income-tax Act. As per Section 5(2), the total income of a person, who is a non resident to the extent which is received or deemed to be received in India, or accrue or arise or deemed to accrue or arise in India is taxable in India. As per Section 9(1)(i) of the Act, all income accruing or arising whether directly or indirectly through or from any business connection in India shall be deemed to accrue or arise in India. As per Clause (a) of Explanation 1, in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be such part of the income as is reasonably attributable to the operations carried out in India. Thus, as per the conjoint reading of Section 5(2) and Section 9(1)(i) of the Act, only if the income is arising directly or indirectly through or from any business connection in India, can be taxed in India. The expression 'business connection'....
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.... intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by Section 42, income, profit or gain which accrues or arises to a nonresident outside the taxable territories is sought to be brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by Section 4(1)(a) and 4(1)(c) of the Act, whether the person earning is a resident or non-resident. If the agent of a nonresident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in Section 40(2). Income not taxable under Section 4 of the Act of a non-resident becomes taxable Under Section 42(1) if there subsists a connection between the activity in the taxable territories. Hon'ble Bombay High Court in the case of Blue Star Engineering Co. v. CIT 73 ITR 283 at page 291, after referr....
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....tionship with Indian Government and business leaders. Arranging discussions between Rolls-Royce and its current and potential customers and suppliers as requested by Rolls-Royce business units and Indian entities. Administrative support: Assisting with Visa applications Assisting with arrangements for travel and accommodation Facilitation of discussions with professional advisers Assisting with in-country support of expatriate employees and their families based in India Technical support: Coordinating the provision of technically competent personnel to advise Rolls-Royce, its customers and its suppliers on technical issues elating to Rolls-Royce products. Apart from the above, during the course of survey some papers were found. These papers were not available when the Tribunal decided the appeal of assessee for Asstt. year 2001-02. Annexure 4 which was found during survey outlined the detailed RRPL-IAF relationship as under: "RR-IAF Relationship: S.No. Action By 1 Identify key players for relationship TPFJ/CS/PD 2 Map key influencer and decision maker PD/TPFJ 3 ....
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....PD/Usha 4 Mr. Chopra Bank PD/Usha" It is to be noted that TPFJ i.e. Mr. Tim Jones is Managing Director of RRIL and MD is Mr. Prateek Dabral, General manager, Defence Division. A letter was issued by appellant through Mr. L.R. Morgan incharge of International business addressed to Prateek Dabral. In the said letter, it was emphasized that Indian Air Force should not send any request for quotation/extension to the appellant in UK directly. It was stated that all the request for quotation/extension and other correspondence should be issued through the office of RRIL only. Once RRIL scrutinize and analyze details of the correspondence received, only then the same is to be forwarded to the appellant. This is true for all sorts of correspondence received from the customers in India. This shows the extension of operation of appellant in India. The contention of appellant is that this material was found during survey carried out in 2006. The assessment for Asstt. year 1997-98, 1998- 99, 1999-2000 and 2000-01 were completed prior to survey being conducted. Thus, this material cannot be used in an assessment framed prior to conducting of survey. We are unable to agree to....
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....well, quarry or other place of extraction of natural resources; (i) an installation or structure used for the exploration or exploitation of natural resources; (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment; continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment; (k) the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within a contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-month period; or (ii) services are performed within that State for an enterprise within the meaning of paragraph 1 of....
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....te and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (b) he habitually maintains in the first mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first- mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to ....
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....ree of permanence; (iii) the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. The term 'place of business' covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place. Again, the place of business may be situated in the business Facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereon owned by the other enterprise. 21. As noted above, the mere....
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....business which has the function of managing an enterprise or even only a part of an enterprise or a group of the concern cannot be regarded as doing a preparatory or auxiliary activity, for such a managerial activity exceeds this level. Relevant documents that were found during course of survey are following, over and above. Some of the above documents are extracted hereinabove. (i) The mail sent by Mr. Ajit Thosar of RRIL to the appellant wherein Mr. Thosar states that the Navy has placed the order and our acceptance needs to be communicated with certain observations as Mr. Ajit Thosar considered relevant. He also draws the attention of the appellant as to the insertion of arbitration clause. He also insist for advance being paid. He also reports as to what should be delivery schedule etc. (ii) A letter issued by Ms Usha of RRIL reports about receiving the order and also request for early delivery. She also draws attention to some contract clauses which should be taken care of or otherwise the contract is final. The correspondence shows how RRIL plays its part in the sale of products in India. The activities are not merely preparatory or auxiliary in character bu....
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....support. - To solicit RFQ's/Purchase orders for required parts at lead time. - To monitor RFQ's issued by MOD including Rolls-Royce acknowledgement date, quotation date and firm order date. - To provide advice and feed back on commercial proposals issues to MOD and progress the proposals in conjunction with the relevant commercial department. - To expedite orders and order amendments from MOD, - To advise RRDA on parts delivery data requirements on current purchase orders/contracts, expedite on behalf of MOD and keep them appraised of the status of deliveries. - To manage and expedite invoice and payments. - To manage the activities of other Rolls-Royce support personnel associated with RRDA,s products within the Indian Army, Naval Aviation and Air Force. - To manage the in-country Service Representative dealing with Indian Air Force, Indian Navy and Indian Army. The responsibility specifically includes to solicit request for quotation/purchase order. If the job is only to supply information or of preparatory or auxiliary character, such functions will not be performed by RRIL. Even the other a....
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....documents are found. (viii) The correspondence from RRIL to the appellant are in the form of request to the appellant to confirm acceptance for extension of time for considering the quotation. Another correspondence suggests discrepancy in invoice issued by appellant. The discrepancy could not have been noticed but for the fact that record is maintained by RRIL in respect of various contracts undertaken by the appellant for supply in India and the supply and invoices are matching with the terms of contract. All such activities cannot be merely held as solely of preparatory or auxiliary character but are in the form of marketing the product manufactured by appellant in India. Therefore, the exclusion granted under Article 5(3) is not available to the appellant. 23. It is also seen that the appellant has a dependent agent in India in the form of RRIL. The fact that RRIL is totally dependent upon the appellant is not denied. However, the contention of the appellant is that even though RRIL is a dependent agent and such agency is to be deemed as a PE, so long as such dependent agent has no authority to negotiate and enter into contracts, under Article 5(4), there is no PE i....
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....ous locations in India and they report to the Director of RRIL in India. (G) The personnel functioning from the premises of RRIL are in fact employees of Rolls Royce Plc. This has been admitted by the MD Mr. Tim Jones, GM, and can be discerned from statement of Mr. Ajit Thosar and documents like terms of employment of GMs. Thus, the appellant can be said to have a PE in India within the meaning of Article 5(1), 5(2) and 5(4) of the Indo UK DTAA. Since we have found that the appellant has a business connection in India as well as PE in India, the income arising from its operation in India are chargeable to tax in India. 24. As per Section 9 (1)(i) of the Act, income accruing or arising whether directly or indirectly through or from any business connection in India shall be deemed to accrue or arise in India. As per Clause (a) of Explanation 1, in a case of a business of which all the operations are not carried out in India, the income of the business deemed to accrue shall be only such part as is reasonably attributable to the operations carried out in India. Article 7 of the Indo UK DTAA provides a mechanism as to how the business profits of the permanent establishme....
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....ch PE is situated. The profits are to be computed as if the PE is a distinct and separate enterprise and dealing wholly independently with the enterprise of which it is a PE. Such profits are treated as directly attributable to the PE and are brought to tax. Under Para 3 of Article 7, where a PE takes an active part in negotiating, concluding or fulfilling contracts, notwithstanding that other part of the enterprise have also participated in those transactions, the proportion of the profit arising out of those contracts shall be treated as profit indirectly attributable to the PE and will be taxable in such contracting State where the PE is situated. Thus, the direct as well as indirect income attributable to the PE is chargeable to tax. Hence, for the purpose of our present discussion, it will be immaterial as to whether in negotiating the contracts, representatives of the appellant were also present. Profit in respect of all such contracts will be taxable in India as indirectly attributable to the PE in India. In such a situation, the total profits of the enterprise has to be apportioned on the basis of various factors affecting accrual of income. The first of that approach requi....