TaxTMI 
TaxTMI 
2012 (6) TMI 294
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....ng any cogent, acceptable material on record. 1.2 That on facts and in law the AO/DRP erred in holding that: (a) The LO of the Appellant was an "office" within the meaning of the term u/Art 5(2)(c) of the DTAA. (b) The Appellant was maintaining the LO as a fixed "place of business". (c) From the activities carried out by the LO it was apparent that the same were not solely restricted to the activities mentioned in Article 5(6) of the DTAA. (d) The Appellant was using the premises of the LO to undertake core revenue generating activities. (e) The business of the Appellant was partly carried on by the LO. 1.3 That on facts and in law while holding that the LO constitutes a PE the AO/DRP erred in: (a) Mechanically relying upon the findings recorded by some other AO in cases pertaining to M/s Mitsubishi Corporation and M/s Mitsubishi India Pvt. Ltd. (b) Holding that the LO was carrying out negotiations and conclusion of contracts for the assessee. (c) Not appreciating that the LO was only carrying out activities which were preparatory or auxiliary in....
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....nt occurs earlier. A condition was also imposed that the assessee shall not seek any adjournment in hearing of the appeal except on account of unavoidable circumstances. This interim order comes to an end with passing of this order. 2. The facts mentioned in the assessment order are that the return declaring nil income was filed on 26/09/2008. Assessment proceedings were initiated by issuing notice u/s 143(2) on 07/08/2009. The assessee has maintained a liaison office ("LO" in short) with effect from 16/04/2003 with the approval of the Reserve Bank of India. In this year sales of Rs. 699,51,34,489/- have been effected. The assessee was directed to file correspondence with the clients in India, copies of invoice, e-mail exchanged and profit & loss account of the Head Office ('HO' in short). The assessee furnished the details on a sample basis. It was informed that the LO was closed down in May, 2008 and, therefore, the information has to be obtained from HO in Japan. In the circumstances, it has tried to do the best it could do on the basis of old records. The legal argument of the assessee was that by its very nature, the LO cannot earn profits and, therefore, no tax is payable ....
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....ough an entity based in Singapore or Thailand, as such offices function in similar manner in respect of entire group for locating potential buyers, negotiating and selling the goods in the market. The tax residence certificates are of no consequence in such a business model. Further, the Assessing Officer concluded that the assessee has been functioning in the same manner as MCJ had been functioning earlier. Accordingly the taxability has to be decided in the same manner. 3.1 The activities carried on by the assessee are that potential buyers are located in different countries, negotiations are carried on with a view to settle contractual terms and the sales are effected. The documents prove that the India office locates potential buyers, conducts negotiations with them and then sells the goods through the HO. These activities are core business activities. They are not in the nature of preparatory or auxiliary activities. Thus, the existence of PE has been upheld. 3.2 The Assessing Officer had considered only the sales effected in India. He had not taken into accounts the sales made from India. These sales have been computed at Rs. 1,05,02,539/-. These have been taken into ac....
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..... 5.2 In the course of assessment, the assessee was required to file copies of correspondences with client, invoice, e-mail and profit & loss account of the HO. The compliance was made on a sample basis. In paragraph 9 of the assessment order, it is inter alia mentioned that it appears (emphasis supplied of the learned counsel) that the assessee's LO in India is in a sense not only undertaking preparatory and auxiliary work but also core revenue generating activities. It is argued that this is only a tentative conclusion as the word "appears" has been used. The conclusion is arrived on the basis that the assessee did not furnish sufficient evidence that it was carrying on only preparatory and auxiliary work. As a matter of law, this is not sufficient reason to hold that the assessee has set up a PE in India. The Assessing Officer has also made a mention of the LO of MCJ. Such a mention had been made in the order of the DRP. It is argued that the details in the case of MCJ were not furnished to the assessee and the assessee was not granted sufficient opportunity to distinguish facts or rebut the same. 5.3 The learned counsel took us through the evidence filed before the Assess....
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....customer responded mentioning that it will prefer increase of US$35 per mt. ton. Further increase can be considered subsequently depending on scrap price and other factors. This was followed by confirmation from the customer of the price and the quantity but LO informed that the required quantity may not be available. Subsequently the customer forwarded the revised requirement. 5.5 Page numbers 56 to 90 of the paper book contain direct correspondence between the HO and the customers and page numbers 96 to 111 contain e-mails exchanged regarding fixing of meeting between representatives of HO and the customers. 5.6 Coming to applicability of the DTAA, our attention has been drawn to paragraph number 6 of Article 5, which excludes from permanent establishment, the office which carry on activities of following nature: "(a) the use of facilities solely for the purpose of storage or display 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 or display; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise sol....
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....nterprise exercising such activity cannot get the benefit of this sub paragraph. A fixed place of business which has the function of managing an enterprise or managing a part of the enterprise or of a group of concern cannot be regarded as doing preparatory or auxiliary activity, because such a managerial activity exceeds this level. 5.10 The learned counsel relied on a number of decisions to support his case that the activity carried on by India office is only preparatory or auxiliary in nature. We may discuss these cases at this stage with a view to recapitulate the ratio decidendi thereof. 5.10.1 In the case of U.A.E. Exchange Centre Limited v. U.O.I. and ANR 313 ITR 94, the authority for advance ruling had come to the conclusion that the activity carried on by the liaison office in India did not have an auxiliary character as the option of remitting of funds through the liaison office in India was exercised by the NRI remitter, which was nothing short of, as in the words of the parties, performing contract of remitting the amounts. It is mentioned that this view is clearly erroneous. We are living in a global village where organizations and companies operate transnational....
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....he parent company/group companies in India, (ii)promoting export/import from/to India, (iii) promoting technical/financial collaborations between parent/group companies and Indian companies, (iv) acting as communication channel between parent and Indian companies. From the facts made available, it has emerged that the liaison office in this case has not performed any core business activity but it has confined itself to preparatory and auxiliary activities. All that it has done is supplying information which is preparatory and auxiliary to formation of final contracts. The activities of preparing reports on Indian market scenario, mobile and broadband segment is in aid or support of the main activity and, therefore, rest in the area of preparatory and auxiliary activities. 5.11 In the case of Mitsui & Co. Ltd. v. ACIT [2008] 114 TTJ 903 (Delhi), the question before the Tribunal was whether, the LO of the assessee constitutes PE in India? The assessee claimed exclusion under the aforesaid sub paragraph (e). The revenue and the assessee had differed on this issue in past and the Special Bench held in assessment years 1980-81 and 1981-82 that the LO was carrying out the work of supp....
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....ub paragraph (e). While coming to this conclusion support has been drawn from OECD commentary that the fixed place of business may contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realization of profits that it is difficult to allocate any profit to the fixed place of business. Further, the office had been following guidelines applicable to a LO, i.e., it will not carry out any activity other than the activity for which approval had been given by the RBI. That such guidelines have been actually followed is evidenced by the certificate of auditor filed by the assessee before the RBI. 5.14 In Re Gutal Trading Est. [2005] 278 ITR 642, the facts are that the applicant based in Dubai is owned by a non resident U.A.E. national and its local status is of "individual establishment" under the U.A.E. law. It is acting as agent of GVB, a group of foreign companies. It proposed to set up a communication channel in India, termed as LO by the RBI to perform - (a)hold seminars and conferences to cover information about general use by GVB in manufacturing reflective glass, (b) receive trade enquiries and pass on the same to Dubai or di....
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....liance on the assessment order. Our attention has been drawn towards the discussion in paragraph Nos. 4 and 5 of the impugned order. The assessee was required to file copies of correspondences with client, invoice, e-mail and profit & loss account of the Head Office. The details were file on a sample basis. The details were also sketchy. It was informed that the office was closed in May, 2008, and the information was to be received from Japan. Therefore, whatever best information is available, the same has been filed from the old records. It is argued that sketchy information was filed on a sample basis. Further, only selective information was filed, which best suited the assessee. Therefore, the information does not represent true and correct picture of activity undertaken by the office. 5.17 The fact of the matter is that the office has gone beyond the functions which were permitted to be undertaken by it by the RBI. In this connection, he referred to the observations made by the DRP in the case of MCJ in whose case it has been held that in the year 2003, it created a separate entity in the form of Metal One Corporation, which was assigned to deal with metal business in the sa....
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.... on by India office as Tractor Engineers Limited mentioned in correspondence to India office that they would prefer to have increase of US$35 per mt. ton in view of the data furnished and that in next LTA further increase in price can be accepted. 5.19 It is argued that even sketchy information filed by the assessee shows that the India office was engaged in price negotiation which is key to making a contract of sales. Thus, it is argued that the AO was perfectly justified in computing business profit in respect of India office. 6. We have considered the facts of the case and the submissions made before us. The facts of the case are that the assessee maintains an office in India, which under FRMA is known as LO. The office is maintained under the approval of RBI to carry out only certain activities. The assessee is required to furnish annually audited accounts to the RBI which have to be certified by a Chartered Accountant. Activity report has also to be filed to the RBI. This office has been closed in the year 2008. In the course of assessment, the assessee was required to file the details in respect of correspondence with clients, invoices, e-mails and profit & loss account....
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....to formation of contract. 6.3 In the first place, the learned counsel has relied on the OECD commentary, which frankly admits that it is often difficult to distinguish between activities which have a preparatory or auxiliary character and those which have not. The decisive criteria is whether or not the activity is essential and significant part of the enterprise as a whole. India does not subscribe to the OECD model and, therefore, this commentary may have only a limited force. Nonetheless it may be capitulated that according to this commentary what is to be seen whether India office is carrying on essential and significant part of the activity in the scheme of the business of the assessee. 6.4 The learned counsel has relied on a number of cases decided by the Tribunal in which it has been held that if the assessee maintains a LO with the permission of the RBI and the RBI does not find any violation of any condition(s) imposed on its functioning, a presumption can be drawn that the office is carrying on preparatory or auxiliary activity. We have discussed these cases but we may again state the names of these cases for the sake of completeness. These are BKI/HAM, Mitsui & Co.....
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.... carried on some essential activities of business from the LO. The court found that no such evidence was coming from the side of the Revenue which means that such evidence has to be brought on record by the Assessing Officer. In this case the Assessing Officer has rued that only selective and sketchy information has been furnished by the assessee in the course of assessment. This is in fact correct, and it may be a cleaver way of presenting facts. However, the AO has not taken any step to bring on record information that the activity was beyond the limit prescribed by the RBI. No doubt that the learned CIT(DR) referred to three pages in the paper book which, according to him, furnish a definite clue that India office was engaged in price negotiation. However, that is not correct as quotations were made on the basis of instructions from the Head Office. Some more information was added about internal dispute in the case of TOPY. But that does not form an essential part of the business of the sale of iron/iron material and iron product by the assessee in India. 6.7 On the basis of aforesaid discussion it can be concluded that the presumption which can validly be raised in this case....