TaxTMI 
TaxTMI 
2009 (4) TMI 505
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....sessee had actually concluded contracts and has consequently erred in concluding that its activities were merely in the nature of liaison. (iv) The learned CIT(A) has failed to appreciate that the approval given by the RBI was in the context of fulfilment of conditions laid down under the Foreign Exchange Management Act, 1973 and was not given in certification of the non-prosecution of actual business, as understood in terms of provisions of the IT Act, 1961. (v) The learned CIT(A) ought to have appreciated that the conclusions reached by the AO were based on statements recorded during the survey operation and was not merely a decision without any tangible basis. (vi) The learned CIT(A) is not justified in holding that mandating of a price-band by the South Korean company amounted to the conclusion of that contract in South Korea, simultaneously holding that the activities in India amounted to purely liaison activities. Further, she is not justified in not taking into account the actual price finalisation done by the Liaison Office." 3. The assessee is a South Korea based company and is dealing in trading of semi-conductor components manufactured by various companies ac....
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....employee of the customer to ascertain the product specifications, quantity required and the time available for delivery. On receipt of such information, the enquiry is converted into a request for quotation and the same is forwarded to the head office. The head office after consulting the supplier reverts back to the LO with purchase price, technical details, availability and lead time. The concerned sales person of the LO communicates the same to the customer after adding the sales margin. This is followed by price negotiations of LO sales personnel with the customers. The order is then clinched by the LO sales personnel. If the customer asks for a discount on the quoted price then the suppliers are approached through the head office for discount and if the supplier agrees then such discount as obtained from head office is quoted by the LO sales personnel to the customer. If this is found to be acceptable by the customer then the deal is finalized by the LO sales personnel. However, if the supplier fails to give the discount or the discount offered by the supplier is not acceptable to the customer, then such deal falls through. After clinching the sale, the LO sales personnel obta....
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....ness connection and therefore, the income is deemed to accrue in India and is taxable in the hands of non-resident company. 5. As per art. 7 of DTAA certain profits of an enterprise of South Korea are taxable in India in case that enterprise carries on business in India through a PE. So much of the profits as are attributable to that PE can be taxed in India. The AO thereafter has referred to para 5 of the art. 5 of the India-South Korea DTAA. The para as mentioned in the assessment order is reproduced as under: "(5). Notwithstanding the provisions of paras 1 and 2, if a person-other than an agent of independent status to whom para 6 applies-is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a PE in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in para 4, which if exercised through a fixed place of business, would not make this fixed place of business a PE by virtue of that para." The AO held that the LO is not an In....
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....ctly on Jebon Corporation, South Korea and after acceptance of terms by both parties, proforma invoices are raised by the LO on the Indian customer if the payment terms are as per purchase order. Copies of airway bills, packing bills and commercial invoices raised by Jebon Corporation, South Korea on the Indian customers revealed that on wire transfer of payments in advance by the customers, the LO arranged the shipments/airfreight from Korea/China/Hong Kong as the case may be directly to the concerned customers simultaneously forwarding the commercial invoice/packing list/airway bill to the respective customers. From the above, the learned CIT(A) concluded that the LO is merely liaisoning between the buyer and the supplier and thereby only facilitating the transactions and not carrying on any trading activity per se. The AO's finding that LO has habitually exercised the authority to conclude contracts on behalf of the non-resident is completely misconceived as the LO was having only limited flexibility in fixing its own margin subject to the condition that it is within the minimum and maximum margins fixed by the head office. The conclusion of fact that the LO has a right to co....
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....Act, 2002 w.e.f. 1st April, 2002. In the instant case, the LO is a fixed place of business and accordingly the requirements of the definition of PE as contained in s. 92F of the Act or in Circular No. 14 of 2001 are met. On the basis, the learned Departmental Representative submitted that the non-resident company is having a PE in the form of a LO. The tax liability of a LO depends on the nature of activities carried on by it. In the assessee's case, the activities carried on by it has been elaborately brought out in the assessment order from paras 5 to 16 on pp. 2 to 6 on the basis of findings in the course of survey conducted on 23rd March, 2007. The learned Departmental Representative drew our attention to the statement of Shri V. Natarajan. A copy of the statement is available at pp. 7 to 9 of the paper book filed by the learned Departmental Representative containing 19 pages. Shri H.B. Raghumaran working as senior engineer marketing in the LO has also explained the activities of the LO. The head office at South Korea would not have been able to carry out its business activities in India without the aid of LO in India. The presence of the LO in India performing the marketing an....
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....Expln. 2 and therefore, business connection stands established. It was therefore submitted that the learned CIT(A) has erred in holding that no income was deemed to accrue or arise to the assessee in terms of provisions of s. 9 of the IT Act or in terms of provisions of art. 7 of the DTAA. 10. The learned Departmental Representative further submitted that the approval given to the Liaison Office by the RBI is only in the context of fulfilment of conditions laid down under the Foreign Exchange Management Act, 1973. By the said approval, the RBI has not given any certification of the non-prosecution of actual business as understood in terms of provisions of the IT Act. The learned Departmental Representative submitted that for tax purposes, the issue needs to be examined independently. The learned Departmental Representative further submitted that the learned CIT(A) has also observed that approval of RBI has a persuasive value and RBI is not supposed to examine the approval from the income-tax angle. 11. The learned Departmental Representative further pointed out that the AO has collected facts after conducting survey at the premises of the LO and it cannot be said that the con....
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....siness activities/services rendered by it. The entire expenses of the office are to be met exclusively out of the funds received from abroad through normal banking channels. Thereafter, the learned Authorised Representative drew our attention to the relevant extract from FEMA Regulation in respect of LO. Copy of such relevant extract is available at p. 10 of the paper book. The permitted activity for LO is to act as communication channel between the parent company and the Indian companies. The LO can represent the parent company/group companies in India. Pages 11 to 24 of the paper book contain the copies of the e-mail correspondence with the head office. The head office communicates the unit price. The minimum and maximum margin is also communicated by the head office. The LO has to work within these parameters. Thereafter, the learned Authorised Representative drew our attention to letter dt. 12th Nov., 2007 addressed to the AO. It was mentioned that the LO does not directly make any sales to customer's either in India or abroad. The LO also does not have any purchases directly from Indian suppliers or through imports. The LO has not prepared any P&L a/c as no direct revenue is e....
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....rised Representative therefore stated that in case the price quoted by the head office is not reasonable or is not acceptable to the customer then the LO has to revert back to the head office. There is another message dt. 22nd June, 2006 by which the LO required the acceptance of contract price of PCB at US dollar 20. The head office intimated that the price 21.50 per dollar. From this correspondence, the learned Authorised Representative submitted that La has no independence in finalizing the contract. It is acting merely a communication channel between the Indian customers and the head office. 15. Alternatively, the learned Authorised Representative also argued that in case it is held that the assessee LO is a PE then the issue of reopening of assessment and the attribution of profit relating to LO are required to be restored back on the file of the CIT(A), as the learned CIT(A) has not decided such issues. 16. We have heard both the parties. The Hon'ble apex Court in the case of CIT vs. P.V.A.L. Kulandagan Chettiar (Dead) Through LRs (2004) 189 CTR (SC) 193 : (2004) 267 ITR 654 (SC) had an occasion to consider the impact of DTAA on provisions of IT Act. The Hon'ble apex Co....
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....ngaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India; (d) ........ Explanation 2: For the removal of doubts, it is hereby declared that 'business connection' shall include any business activity carried out through a person who, acting on behalf of the non-resident,- (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity ca....
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....p; | v Interested customers send enquiries to Jebon |-----> Korea with a CC to Jebon Corp.(Liaison Office) --->| | Bangalore | | | | | &n....
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....bsp; | | | | | | v | ----------------------------- | &....
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.... | | | v ---- Seeks special pricing Customer places order to and special delivery required with HO accepted by both the parties | &n....
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....sp; | | v Jebon Corporation Liaison Office will forward the same documents to respective customers &n....
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....xable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity." 20. The Hon'ble Supreme Court in the case of Anglo French Textile Co. Ltd. vs. CIT (1953) 23 ITR 101 (SC) held that where there was a continuity of business relationship between the person in India who helps to make the profits and the person outside India who receives the profits, business connection exists. 21. The Hon'ble Andhra Pradesh High Court in the case of G.V.K. Industries Ltd. & Anr. vs. CIT & Anr. (1997) 228 ITR 564 (AP) enumerated the following principles in respect of business connection after discussing the various case laws on that subject: (i) whether there is a business connection between an Indian company and a non-resident (company) is a mixed question of fact and law which has to be determined on the facts and circumstances of each case; (ii) the expression "business connection" is too wide to admit of any precise definition; however, it has some well-known attributes; (iii) the essence of "business connection" is the existence of close, real, intimate relationship and ....
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....o the collection of news and views in India for transmission out of India in respect of a person engaged in the business of running a news agency or of publishing newspapers. Thus, the profit element from the collection of news and views has been made excludible as per s. 9(1) of the IT Act. Collection of specifications and requirements Of the customers is one of the parts of the trading activity and it cannot be said that no profit clement can be attached to it and that is why an exception was provided in Expln. 1 (c) of s. 9(1). Hence, for the assessment years prior to asst. yr. 2004-05, it is held that there is a business connection in respect of source of income in India of the non-resident assessee and therefore, the income from such activity is to be deemed to accrue or arise in India and therefore is taxable in India. 23. Article 7 of the DTAA between India and South Korea [available at (1987) 59 CTR (St) 37 : (1987) 165 ITR (St) 191] deals with taxability of business profit. Article 7 reads as under: "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State throu....
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....construction assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than nine months. (4) Notwithstanding the preceding provisions of this article, the term "PE" shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, the supply of information, scientific research, or any other activity, if it has a preparatory or auxiliary character in the trade or business of the enterprise; (f) the maintenance of a fixed place of business solel....
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....liary activities in the trade or business of the enterprise. The word 'solely' has been used in art. 4(e). The activities of the LO should be strictly restricted to the activities mentioned in art. 5(4)(e). In order to see as to whether the activities carried on by the LO are solely restricted to the activities mentioned in art. 5 (4)(e) of the DTAA, we have to understand the activities carried on by the LO. The Revenue has conducted survey and statement of Shri V. Natarajan, country manager was recorded. In question No. 3, Shri V. Natarajan was asked to explain the modus operandi of operations carried out by the Indian LO. Shri V. Natarajan replied as under: "The establishment in India consisting of a LO in Bangalore alone was established in 1998. Here it consists of five employees as of now, three of them directly related to sales (including me) and two administrative assistants. We have three divisions-viz., product lines-printed circuit board, liquid crystal displays, electronic component and thermal printers in order to promote the marketing and sales of the above products. We generate enquiries by way of telephone calls to prospective customers and also make cold calls to ....
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....s an attachment. The purchase team at the head office will process and place the order Lo the supplier and then wait for the goods to be ready. Once the goods arc ready, they will be inspected by the quality control team at the headquarters to ensure that the specifications are properly met. After that the goods are packed and shipped to the freight forwarder appointed by the customer. The same will be shipped directly to the customer by the first available flight or sea. Our head office will send a copy of the commercial invoice, packing list and House Airway Bill/Bill of Landing to this office at Bangalore bye-mail/Fax. We, in turn, send these three documents to the customer. Then the responsibility of getting the goods cleared lies with the customers. The payments will be made by the customer through telegraphic transfer through bank to our head office account at Korea. Our work also involves following up of payments from the customers and offer after sales support if necessary". 27. Shri V. Natarajan was asked to explain what is the freedom or liberty they have in price-negotiation with the customers. It was stated that they have cent per cent freedom in deciding the marg....
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....r as to whether LO can be considered to be involved in the purchase of goods and thereafter its exports. In that case, the actual export was done by the Indian seller and it was held that there was intimate link between purchase and export and therefore, the goods fell under Expln. 1(b) to s. 9(1)(i). Applying the same analogy we therefore feel that LO is carrying part of the trading activity in India. 29. The case of the assessee would have been covered under art. 5(4)(e) if the LO is maintained solely for the purpose of advertising, supply of information, scientific research or any other activity if it has a preparatory or auxiliary character in the trade or business of the enterprise. The dictionary meaning of auxiliary is "providing extra help and support" while the dictionary meaning of preparatory is "done in order to prepare for something". We have already mentioned various aspects of the trading activity. The preparatory activity may be the activity like identifying the customers. Supply of information in respect of requirement in number and specification is also a preparatory exercise in trading activity. In the instant case, the LO is having a freedom to fix the sale p....
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....nce offered by the petitioner was also earned in UAE. Now from the above it is clear that if the activity carried out in India contributes directly or indirectly to the earning of profits or gains by the non-resident then extent of contribution is to be taxed in India. In the instant case, head office was giving the cost of the item to be supplied and was also giving the option to conclude contract between the minimum and maximum margin of profit. Negotiations were being done by the LO in India. They were having complete freedom to negotiate between the price band and therefore such an activity was contributing to the income of the non-resident assessee. Hence, activities carried on by LO in India were to be considered for the purpose of income accruing to the non-resident in India. The quantum is to be ascertained on the basis of the profit attributable to such LO. 31. The Kolkata Bench in the case of Sojitz Corporation vs. Asstt. Director of IT (2008) 11 DTR (Kol)(Trib) 428 : (2008) 117 TTJ (Kol) 792 : 2008-TIOL-451-Tribunal-KOL also had an occasion to consider the taxability of income in India on account of the non-resident having a LO in India. While deciding in favour of th....