TaxTMI 
TaxTMI 
2012 (10) TMI 245
X X X X Extracts X X X X
X X X X Extracts X X X X
....lhi, (hereinafter referred to as "the AO") assessing the income of the appellant for the relevant assessment year at Rs. 79,353,253, as against the returned income of Rs. 19,718,810. 2. CREATION OF PERMANENT ESTABLISHMENT ("PE") 2.1 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO concluding that the appellant had a PE in India as per the provisions of paragraph 7 of Article 5 of the Double Taxation Avoidance Agreement between Indian and Japan ("the treaty"). 3. ATTRIBUTION OF PROFITS 3.1 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO attributing profits of Rs. 59,634,440 to the alleged PE of the appellant in India without any cogent basis and without considering the provisions of the Act. 3.2 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO attributing profits of Rs. 59,634,440 to the alleged PE and not appreciating that an arm's length commission had been paid to the alleged dependent agent, Daikin Air-conditioning India Pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The assessee did not submit any document to prove that enquiries, proposals from the customers were received by it, it clearly indicates that no such enquiries or proposals were received from the customers by the assessee and these functions were performed by DAIPL and for these functions DAIPL is not being remunerated. Without prejudice to the above and without accepting, even if the assessee was receiving enquiries/proposals from customers forwarded by DAIPL for these functions also DAIPL is not being remunerated. 5.2 The reason for direct import by the customers are certainly on account of exemptions from customs duty. 5.3 The assessee has contended that the sales made to various customers were not less than Rs. 1 lakh, but more than that. Even if this being so, the same does not change the fact that, assessee, did not submit any objective documents to support its contention that, with these parties it has negotiated the prices. 5.4 The claim that the consultant/contractor/architect represents several price and are in contact with assessee generally for their requirements on a regular basis and the discussion about the prices take place generally between the consultant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an enterprise in transactions may be indicative of a grant of authority to an agent. For example, an agent may be considered to possess actual authority to conclude contracts where he solicits and receives (but does not formally finalize) orders which are sent directly to a warehouse from which goods are delivered and where the foreign enterprise routinely approves the transactions." [Emphasis supplied] In arriving at the prices with the customers, the assessee could not prove that it was actively involved in negotiating the prices, which lead to the contracts. Therefore it is held that the assessee has PE in India considering the provisions of Paragraph 7(a) and 7(c) of the tax treaty between India and Japan." 4. Before the ld. CIT(A), assessee inter-alia submitted that the assessee company was incorporated in Japan and it has a wholly own subsidiary in the name and style Daikin Air-conditioning India Pvt. Ltd. The Indian company does trading in AC machine in as much it purchases the machine from the parent company and sells to Indian customers. The appellant, the parent company also directly sells its product to the resident customers. The Indian company provides after s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....posals were performed is also to be decided but there is no shred of doubt that the appellant has grossly failed to discharge its onus which has been placed on it by the statute itself. The Ld AO has brought on record that regarding the claim of the appellant that the consultant /contractor represent several price and are in contact with the appellant could not be verified as not a single documentary evidence in this respect was filed before the Revenue in spite of specific requisition. The AO has also come to the conclusion from the material evidence that business meeting will not be only for the purpose of direct sales by the appellant but also through the DAIPL. In absence of any such document the Revenue was constrained to conclude that DAIPL secured orders in India for the appellant, the appellant is the controlling authority for DAIPL and DAIPL also negotiates and finalizes the prices with the customers of the appellant in India. The authority for such act although not vested in them through any agreement but in all practical purposes they were deciding the prices and such prices later on confirmed by the appellant through document at a routine manner. It has been decisively ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if (a) he has and habitually exercises in" that Contracting State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph ... " The phrase "authority to conclude contracts" implies that an agent of a non resident can be construed to constitute a PE of the non-resident, if the agent can act independently on its own in the matter of concluding contracts on behalf of its principal. If the agent cannot conclude or enter into a contract on its own or without the final confirmation / approval from its principal, it negates the said power to conclude contracts. The commission agreement between the appellant and DAIPL (page 48 to 57 of paper book) makes it clear that DAIPL did not have this freedom and the role of DAIPL is limited to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pendent agent of the appellant, if at all it is held to be an agent. The Department representative ("DR"), during the course of the hearing, has stated that the appellant, inter alia, has a PE in India under Article 5(7)(c) of the India-Japan tax treaty, which reads as follows: " ... (c) he habitually secures orders in the first-mentioned Contracting 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 ... " There is no guidance in the India-Japan tax treaty on what constitutes 'securing orders'. Attention is, however, drawn to the Protocol to the India-USA tax treaty which explains the term 'securing orders' as follows: " ... a person shall be considered to habitually secure orders in a Contracting State, wholly or almost for an enterprise, only if: 1. such person frequently accepts orders for goods or merchandise on behalf of the enterprise; 2. substantially all of such person's sales related activities in the Contracting State consist of activities for the enterprise; 3.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at the parties were not undertaking their respective duties. Reliance in this regard is placed on the decision of the Delhi High Court in the case of D.S. Bist & Sons v. CIT [1984] 149 ITR 276. The appellant and DAIPL had entered into a commission agreement for direct sales to customers (refer page 48 to 57 of paper book). As per the agreement, DAIPL was - To forward the customer's request for procuring products from DIL to DIL - To forward DIL's quotation and contractual proposal to the customer From the above, it is clear that DAIPL was only responsible for acting as a medium through which appellant' used to communicate with customers in India. DAIPL acted as a communication channel between customers and DIL to facilitate flow of information and documents like enquiries, proposals, quotations, purchase orders, invoices, etc DAIPL did not have any authority to carry out negotiations with customers in India, which was exercisable only by the appellant. The AO has, without adducing any evidence to the contrary, held that DAIPL negotiated the prices on behalf of appellant, merely because the appellant has not proved to the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s were actually performed by DAIPL and a PE came into existence. The onus to show that a PE exists is on the Revenue. In this regard, kind attention is invited to the decision of the Delhi Bench of Income Tax Appellate Tribunal in the case of Dy. CIT v. Mis Sofema SA bearing [IT Appeal No. 3900 (Del) of 2002, dated May 5, 2006]. The ITAT inter alia held as under: " ... We are further of the considered view that in the absence of any evidence on record with regard to commercial activity having been done by the assessee company in India., its liaison office cannot be considered to be permanent establishment in India, as provided for in DTAA between India and Government of France...." The order passed by the ITAT in Sofema's case has since been upheld by the Jurisdictional Delhi High Court in ITA No. 1764/2006 vide order dated December 18, 2006. The SLP filed by Revenue has been dismissed by the Supreme Court (Civil Appeal No. 5260 of 2008 vide order dated 26th August 2008), wherein the Apex court has observed as follows: " ... In the present case, there a concurrent finding that Sofema SA, respondent herein, is not a PE under the DTAA. However, we find that this findi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f lading, insurance documents, certificate of fumigation were submitted before the AO in relation to sales made to some parties (refer page 103 to 167 of the paper book). It is pertinent to note that all documents are between the appellant and customers. The quotations were raised by the appellant on the customer and in turn the customer has given the acceptance to the appellant only. DAIPL was, thus, only responsible for forwarding the documents between the appellant and the customer. The AO/CIT(A) have, however, brushed aside all the documents and held that no evidence was produced by the appellant. If the AO was to reject such evidence then some positive evidence should have been brought on record to prove otherwise." 9. The submissions of the Ld. Departmental Representative are as under:- (A) Permanent establishment: The Department's stand is that Daikin Air-conditioning India (P) Ltd. (DAIPL) who is a 99.99% subsidiary of the assessee viz. Daikin Industries Ltd. (DIL) is a PE of the assessee within the meaning of paragraph 7(a) and (c) of article 5 of Indo- Japan Treaty (PB 222). This is for the following reasons:- 1. The assessee was repeate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ls etc was available in India). This is more so when there are large number of competitors selling air conditioners in India. It is also difficult to believe that in not single case the quoted price was not accepted by the end customer and the price had to be re negotiated. In view of the aforesaid it was imperative on the part of the assessee to produce clinching evidence in support of its claim. Failure to do so clearly proves that it is the Indian entity (DAIPL) which in effect concluded the price and other terms and conditions. 7. The commission agreement (PB 48 to 57) has been entered into and signed on 22-12-2005 (PB 49 and 56). The 'effective date' has been defined as date of execution of the agreement (PB 50 clause 1.1.3) and the terms and conditions clearly state that agreement would be deemed to come into force from the effective date(PB 53 clause 6.1). No independent person without any agreement in place would undertake the marketing activities. The fact that the Indian entity undertook the marketing activities for the period prior to the agreement viz. 1-4-2005 to 21-12- 2005 clearly shows that i) both the parties acted beyond the terms of agreem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ablishment may be deemed to exist irrespective of what the formal arrangements were, further support the department's case. Case Laws: The department relies on the following case laws:- (i) Aramex International Logistics (P) Ltd.; In re [2012] 208 Taxman 355. (ii) M/s. Rolls Royce PLC, ITAT, Delhi; 2007-TII-32-ITAT-DEL-INTL (para 23 page 20/21) (iii) M/s. Rolls Royce PLC, Delhi High Court 2011-TII-35-HC-DEL-INTL (para 17 page 7) (iv) M/s. Rolls Royce Singapore (P) Ltd.-2011-13 (para 29 & 30). During the hearing the learned AR referred to the AAR's decision in the case of TVM Ltd. This decision is not applicable as Indo- Mauritius Treaty (reproduced on page containing para 9 of TVM decision) does not contain clause (c) of article 5(7) of the Indo- Japanese Treaty ( PB 222) . During the hearing it was argued by the learned AR that the AO has no power to go beyond the Commission agreement or to re-write the agreement. It is submitted that the AO has not re-written the agreement. While an agreement forms the starting' point for examining a transaction but the conduct of the parties has to be seen. If the conduct of the parties....
X X X X Extracts X X X X
X X X X Extracts X X X X
....further noted assessee's response that "inspite of the limitations the assessee had furnished whatever documentation relating to specified customers, it has been able to search out so far. It is also respectfully submitted that the person responsible for handling tax matters of the assessee has not been able to attend office for sometime on account of ill health, which has also added to the difficulty in procuring and furnishing the required documents." However, Assessing Officer has not accepted the above. He observed that required documents were not supposed to be in the possession of person handling the tax matters. Assessing Officer has held that in absence of these documents one is required to draw the conclusion that the employees of DAIPL or the persons of the assessee, who are deputed with DAIPL only, are deciding the prices of the products and only those persons are securing the orders for the assessee. Ld. Commissioner of Income Tax (A) has also observed that the assessee did not supply any document before the Revenue to prove that enquiries, proposals, from customers were received by it. 10.5 The assessee has further claimed before the Assessing Officer that consu....