TaxTMI 
TaxTMI 
2017 (1) TMI 1098
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....il. Brief Facts: 2. A survey under section 133A of the Act was conducted at the office premises of the assessee on 06/02/2003. During the course of survey, certain books of accounts/documents were impounded. The AO issued notice under section 148 of the Act, on 25/03/2003. In response to the notice, the assessee filed its return of income on 28/03/2003 declaring nil income. The assessee contended that its LO was not a Permanent Establishment(PE) in India, as per the provisions of India-Japan Tax Treaty (Treaty). While computing the taxable income of the assessee, the AO invoked the provisions of Rule 10 of the Income Tax Rules, 1962 (Rules)and estimated the profit at 10% of the total turnover from India. For computing the total turnover, he adopted the figures mentioned in the performance review reports of one employee namely George Sunder(GS)as the sales figure for the AY. under consideration. During the re-assessment proceedings, the AO held that perusal of the documents impounded from 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....
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...., that the LO was indulging in full-fledged sales activity, that for the contravention of the permission of the RBI he would be informing the bank separately, that the papers found during the survey proceedings indicated that LO was being used to carry out sales and marketing activities in a big way, that the employees were contacting potential customers and were giving quotations about the rates, that they were passing on the requirements of those customers to the HO Japan, that they were forwarding the quarries of the customers to Japan, that they were pursuing shipment of the goods to be delivered to Indian customers and were following the payments, that the HO was only despatching the goods once the order was raised by the assessee, that in case of a LO the employees would just forward and receive the queries and would not go all out in the field fulfilling the sales targets, that the impounded material showed that employees of the LO were given specific sales target both as individual and as a group, that the targets were constantly reviewed by the appraisers, that they were supposed to increase/expand business and to develop new contacts, that the raising of final bills by th....
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....ed that it was a tax resident of Japan, that the provisions of Indo Japan Treaty would be applicable, that as per Article 7 of the Treaty the profits would be taxable in India only if it had a PE, that it was carrying out preparatory and auxiliary activities through its LO, that the said LO would not constitute a PE of the assessee in India [Article 5(6)of the Treaty], that sales would take place directly from Japan and the HO would deliver the goods directly to the customers, the customer would open a letter of credit in favour of the HO for making the payment, that sales were carried out through the independent agents, that approximately 80 to 85% of the assessee's export of goods to Indian customer was conducted through the independent agents, that the agents were unrelated to the assessee and would provide similar services to other parties, that the agents were paid commission for their services, that as per the permission of the RBI the assessee had set up a LO in India to represent the parent company to promote export from and import into India to act as a communication link between the assessee and its customers in India, that the LO was specifically prohibited from carrying....
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....ts would independently frame their business policies, that the only instruction the agents would receive from the assessee was regarding the overall term of identifying the new customer and the price to be charged to them, that such instruct - tions were normal in any agency relationship, that the agents would carry out similar activities for a number of principles, that each of the agents would conduct its business as independent entrepreneur according to his own views experties and methods, that the agents were not dependent upon the assessee for their economic viability, that the agents were unrelated entities and the remuneration paid to them was at arm's length basis. The assessee filed documents with regard to its key agents. The documents included the data available on the website of Musk and Fragrance (M&F) and on the website of associated agencies, list of customers agents wise and product wise. It was further argued that direct sales/sales through independent agents were not taxable in India, that the business of the assessee was structured in such a manner that a major part of its sales in India was affected through its independent agents that the agents had considerable....
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....he LO is not engaged in making purchases for the assessee in India, that as per the provisions of Article 7 (5) of the Treaty no profit would be attributable to the PE on account of purchases made by such PE in India, that purchases made by the assessee from India should be excluded while computing its total taxable income, that the AO had assumed that there was a 20% increase in the sales in the subsequent years, that the increase/decrease of 20% in the sales figure for the subsequent/ prior years could not be taken on an ad hoc basis, that the AO had attributed the entire 10% profits to the LO in India, that even if the LO was considered as a PE of the assessee the entire profit on sales could not be attributed to LO in India , that the amount of purchases and sales made through the agent should be reduced from the figures reflected in the achievement columns of the performance review reports. It relied upon the case of Annamalais Timber Trust and Company (41 ITR 781)and argued that even if the LO was regarded as a PE the scope of activities of the LO could not in any event be higher than that of an independent agent, that the average rate of commission paid to the agent should t....
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.... role of the independent agents was not different from the customers who negotiated directly, that during the survey operations details regarding the sales claimed to have been made by so-called independent agents were found to be reflected in the total sales figure of Mumbai office for the AY. 1999-2000 and 2000-2001, that the LO had played a role in sales made by the agents, that LO was involved in the agents' sales transaction, that the figures of the PRR, impounded during the survey operation, should be considered to be the turnover for those years, that the reconciliation submitted by the assessee with regard to the figure as per the exhibits vis a vis the PRR did not substantiate the claim that it also included purchases, that nowhere it had been certified by the assessee that reports also included agents' sales, that it had not filed details of purchases, that in respect of remaining AY. s the figures as per the certified exhibits should be considered as there was no justification for 20% ad hoc increase/ decrease to the sales figure of the those AY. s, that sales figure had been taken on the estimate basis for the AY. s 1996-97 to 1998-99 and AY. 2001-02 for which no refere....
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....tual/customers and hence the figures mentioned were in respect of support given by the staff and did not relate to sales achieved by such employees in India, that the PRR. s were relevant for the subsequent AY. s. , that no adverse conclusion should be drawn from such documents not pertaining to the year to hold that assessee had a LO in India, that LO carried out the RBI permitted activities only and acted as a communication channel gathering market information, that the analysis of the documents for the year under appeal proved that LO was engaged in activities within the RBI permitted guidelines i. e. preparatory and auxiliary services, that Article 5 of the DTAA defined the concept of PE, that as per the DTAA preparatory and auxiliary services would not constitute PE, that no decision-making was done at the LO but was done at HO of the assessee i. e. at Japan, that the agents were pointed by the HO and the LO only acted as an information/commutation channel, that the LO's role assumed significance on account of the language barrier between the countries, that the staff of the LO was responsible for collecting the market information and relaying the same to the HO, that the docu....
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....n India should be excluded from the profits attributable to the PE of the assessee in India. He made a reference to pages 75 -78 and 81-85 of the PB. It was further argued that the profits attributable in respect of the direct sales of the assessee in India should be computed on the average rate of commission of the independent agents that even if the LO was considered as a PE of the assessee in India the scope of activities could not be in any event be wider than the activities of independent agents, that profits attributable to the PE of the assessee in India in relation to the direct sales in India should be computed on the basis of the average rate of commission paid by the assessee to such agents. Alternatively, it was argued that the profits attributable to the PE of the assessee in India in relation to the direct sales in India should be computed on the basis of the allocating the gross margin/net margins of the global operations of the assessee to the activities carried out by the PE in India, that in case the gross margins were apportioned to the PE the expenditure incurred by the LO should be allowed as a deduction while computing the profit attributable to a PE of the as....
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....ils of its global accounts for last six years, that the assessee had not produced any documents/details, that the AO was left with no other option but to estimate the profit, that the assessee changed stands constantly by filing the revised certified copies of the accounts and documents every now and then. 5. We have heard the rival submissions and perused the material available on record including the impounded documents and the remand reports filed by the AO. We find that an action u/s. 133A of the Act was carried out at the business premises of the assessee, that certain documents were impounded during the survey proceedings, that the AO held that the LO of the assessee was carrying out business activities and thus was its PE in India, that the business through the agents was procured through the LO, that that the LO had played a role in the sales made by the agents, that the figures of the PRR should constitute the part of the turnover for those years. The AO estimated sales adopting a particular formula( i. e. 20% increase or decrease in the sales figures for the subsequent or earlier years), the FAA held that the LO was the PE of the assessee in India, that the AO was not ....
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....from one of the employees to HO (Pg. 546)pertains to some information about purchases to be made as per the 'comments/ order' of the HO. Pg. 559of the PB is a letter from Musk and Fragrance (M&F) to LO. We have not come across any evidence that can prove that LO had directly dealt with the agent. The assessee had claimed that information received from M&F had been forwarded to HO. The AO had not commented upon the assertion made by the assessee. The next document (Pg. 567) talks about meeting of members of the LO with agent and one of the manufacturer. It does not prove that the LO was carrying out business activities. 5. 2. There is a very thin line between liasoning/providing auxiliary services and doing business. In the first instance support is given by LO to its HO who looks after the business. But, if the LO starts taking independent business decisions, including dealing with the customers, same could not be treated preparatory/auxiliary services. Providing/collecting information and acting as per the instructions of the HO will not definitely fall in the category of doing business independently. So, until and unless some reliable evidence is not brought on record it canno....
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.... 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. 5. 4. Here, we want to mention that we have taken note of a portion of order of the AO, wherein he has mentioned that he would inform the RBI about the violations made by the LO in conducting its activities. We are not aware as to what was the outcome of that exercise. The 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 ....
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....ment along with appended verification by the certified Public accountant accepting the mistake along with the reconciliation of the amounts. However, the AO was not satisfied with the explanation filed by the assessee. He stated that there were mistakes in the average commission paid to the agents, that the accounts of the assessee were not reliable. He estimated the turnover figure on the basis of the PRR of the employees applying plus/minus to the figures appearing in the reports. He also estimated the gross profit for the year under consideration at the rate of 10%, as stated in the earlier part of our order. 9. 1. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA and made elaborate submissions. He called for remand reports from the AO. After considering the submission of the assessee and the reports he held that turnover figures had to be considered as per the certified statements filed on record, that in a particular year the estimated turnover was less than the certified turnover, that there was no justification for rejecting the certified statements. 9. 2. During the course of hearing before us, the DR stated that the assessee itself had....
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....er of the Hon'ble jurisdictional High Court delivered in the case of NGC Network Asia LLC (313 ITR 187). We would like to reproduce the relevant portion of the judgment of the Hon'ble court and it reads as under- "Under the provisions of the present Act, the issue had come for consideration in the case of CIT v. Sedco Forex International Drilling Co. Ltd. reported in [2003] 264 ITR 320 (Uttaranchal). One of the questions was, as to whether interest could be levied on the assessee under section 234B of the Act in respect of tax which was not liable to be deducted at source. A learned Bench of the Uttaranchal High Court, after considering the provisions, held as under (page 328) : "Secondly, although section 191 of the Act is not overridden by sections 192, 208 and 209(1)(a)(d) of the Act, the scheme of sections 208 and 209 of the Act indicates that in order to compute advance tax the assessee has to, inter alia, estimate his current income and cal culate the tax on such income by applying the rates in force. That under section 209(1)(d) the Income-tax calculated is to be reduced by the amount of tax which would be deductible at source or collectible at source, whic....