TaxTMI 
TaxTMI 
2017 (8) TMI 79
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....ctly or indirectly attributable to these branches/offices is not taxable in India? 2. Whether the Tribunal was right in law in holding that the assessee company does not have any permanent establishment in India and its income from business turnover/imports in India was exempt in view of Agreement for Avoidance for Double Taxation between Indian and Japan?" 3. ITA 334 of 2005 is directed against an order dated 12th October, 2004 passed by the ITAT in ITA No. 4095/Del/1998 for AY 1994-95. While admitting this appeal on 10th May 2005, this Court framed the following question of law for consideration: "Whether the Income Tax Appellate Tribunal was correct in holding that the assessee company is not having permanent establishment in India and therefore exempt under the provisions of the agreement for Avoidance of Double Taxation between India and Japan?" Facts relevant to AY 1994-95 4. The facts relevant to AY 1994-95 are that the Respondent/Assessee is a non-resident company having its headquarters in Japan. The Assessee had two projects in India viz., the Anpara Thermal Power Project of the UPSEB ('Anpara Power Project') and the New Delhi Cable Project of DESU ('....
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....closed upon completion of the project. Mr Adhikari stated that the books of accounts of the DESU Power Project would be in the warehouse somewhere but the person concerned, viz., Mr. David would be able to give the details about them. He claimed that he had no knowledge regarding the whereabouts of the books and stated that he would have to check with the concerned department of the Head Office that was in Tokyo. The books of accounts were, subsequently, produced by the Chartered Accountant (CA) appearing on behalf of the Assessee. 9. The Chief Representative of the Assessee in India, Mr. T. Ishibashi had a residential accommodation at 28A, Prithviraj Road, New Delhi. The AO noted that he looked after the entire operation of the LO at Le Meridien as well as the POs as and when the projects came up. Another factor which weighed with the AO to arrive at this conclusion was that the details of the telephone expenses of the DESU Power Project showed that some part thereof pertained to the LO. The AO concluded: "Therefore, it is very difficult to say that the liaison office is totally separated from the project operations, the imports and exports done by Mitsui & Co. etc." 10. As ....
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.... LO as well as the PO did not in any way alter the position with regard to the maintenance of the LOs by the Assessee. "There was no rule in the Income Tax Law that one person could not supervise the LO work as well as the work of the PO" (iii) No facts were marshalled by the AO in support of his conclusion that the LO was not totally separated from the POs. Considering that separate offices were maintained by the Assessee with regard to the project work and in view of the Article 5 (ii) of the DTAA, the AO had not been able to prove that the Assessee maintained either a place of management, branch office, factory, warehouse etc. Further, since the Assessee was showing the income from the project work separately, the question of treating the income from the project as that of the LO was not proper. 12. It should be noted here that the reference sought by the Revenue against the aforementioned decision of the Special Bench of the ITAT was returned unanswered by this Court by order dated 31st August, 2007 in ITR 326-327 of 1992 on the ground that the Revenue failed to file paper-books despite a lapse of 15 years. Likewise, as regards the orders for AY 1982-83, 1985-86, the refe....
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....d that both issues stood answered against the Revenue by its earlier order dated 4th June, 2002 in ITA 2939/Del/97 which pertained to AY 1993-94 and the order passed by the Special Bench reported in 53 lTD 59. A perusal of the impugned order reveals that the DR did not controvert the above position but supported the order of the AO. Grounds in ITA 334 of 2005 16. In the appeal filed before this Court by the Revenue for the AY 1994-95 i.e. ITA 334/2005, the grounds that have been highlighted by Mr Rahul Chaudhary, learned Senior Standing counsel for the Revenue are: "II. Because the Assessee had permanent establishment in India. III. Because the Assessee is carrying on business through its branch offices. IV. Because the provision of FERA and letter of RBI cannot be used as proof and evidence to determine and decide whether the Assessee had permanent establishment in India or not. V. Because the term "permanent establishment' has been given broad and wide definition in DTAA between India and Japan. It includes an office or a branch or a premises used for receiving or soliciting orders. VI. Because the Assessee had admitt....
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....Mr. Rahul Chaudhary, learned Senior Standing counsel for the Revenue, took the Court through the provisions of the first DTAA between India and Japan which was entered into on 5th January, 1960 and pointed out the distinction in the definition of PE contained therein when compared to subsequent DTAA entered into between the two countries on 1st March, 1990 and as amended from time to time. 22. Mr. Chaudhary advanced two lines of argument. The first was that the LO of the Assessee constituted a PE. He attempted an alternate submission that even assuming that the LO was not a PE, then the POs of the Assessee should be treated as PE themselves and, therefore the income of the Assessee was taxable under Section 9 of the Act. 23. Mr. Chaudhary reiterated the reasons that weighed with the AO in holding that the LO should be considered to be PE. First, the books of accounts of the POs were found in the warehouse of the Assessee. Secondly, Mr. Ishibashi was managing both the LO as well as the POs and thirdly, an analysis of the telephone expenses of the POs showed that some part thereof pertained to the LO. Mr Chaudhary also laid emphasis on the fact that under Article 5(6) (e), it i....
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....pproval the observations in R. v. Hodge 168 ER 1136. He submitted that in view of the mandate of the RBI, there was no question of on any business or trade being carried on in the LO. 26. Mr Nagi submitted that the onus of showing existence of PE lay on the Revenue. Inter alia, reliance was placed on a decision Northern Network v. DIT 386 ITR 353 Del. He pointed out that during 30 years of the Assessee's functioning, the RBI has not found the LO to have violated any of the conditions on which, the Assessee was permitted to run such LO. Mr Nagi pointed out that the Survey conducted by the Revenue was not relevant to AYs 1994-95 and 1995-96. Lastly, he pointed out that no ground that the impugned order of the CIT(A) or the ITAT suffered from perversity was urged by the Revenue in either appeal. Alternative ground not permitted 27. As regards the alternative ground urged by the Revenue viz., that even assuming that the LO was not a PE, then the POs of the Assessee should be treated as PE themselves, the Court finds not a single ground anywhere in the two appeals that reflect the above alternative argument. It does not appear to have been urged by the Revenue before the AO....
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....t' shall be deemed not to include: (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 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 of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character." 29. Article 7 (1) which relates to attribution of the profits reads as under: "7 (1) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enter....
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.... or partially through the said fixed place of business. These two conditions must necessarily be satisfied for the existence of a permanent establishment. In addition, the word permanent in the term "permanent establishment" indicates that there should be some degree of permanency attached to the fixed place of business before the same can be construed as a permanent establishment of an enterprise. The word permanent does not imply for all times to come but merely indicates a place which is not temporary, interim, short-lived or transitory. In Re.P.No. 24 of 1996 [1999] 237 ITR 798 (AAR), the Authority for Advance Ruling referred to Baker's "Double Taxation Conventions and International Tax Law, second edition", wherein the author had cited the decision in Henriksen (Inspector of Taxes) V. Grafton Hotel Ltd. [1943] 11 ITR (E.C) 10 (CA) and explained that the expression "permanent" is relative and not synonymous with "everlasting" ; the Authority for Advance Rulings ruled that it was used only in "contradistinction to something fleeting, transitory, temporary or casual". 16. Paragraph (2) of article 5 of the Double Taxation Avoidance Agreement provides for an inclusive defi....
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....ment of an enterprise, if it falls within any of the exclusionary clauses contained in subparagraphs (a) to (e) of paragraph (3) of article 5 of the Double Taxation Avoidance Agreement. 20. It is clear from the plain language of paragraph (1) of article 5 as well as article 5(3)(e) of the Double Taxation Avoidance Agreement that the functions performed at an office maintained by an enterprise would be vital to determine whether the office could be construed to be the permanent establishment of that enterprise for the purposes of the double taxation avoidance agreement. First of all, the business of an enterprise must be carried on, wholly or partially through the office in question ; secondly, the business activity carried on must not be that of a preparatory or auxiliary character . The question, thus, arises is whether the activities carried out by the Assessee through its project office at Mumbai are that of a preparatory or auxiliary character. This is the bone of contention between the Revenue and the Assessee. Analysis and reasons 32. In the present case, the onus was on the Revenue to demonstrate that LO of the Assessee was a PE within the meaning of Articles ....
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....principal place of business and the entities in India and cannot undertake any commercial trading or industrial activity; a project office can play a much wider role. Regulation (6)(ii) of the aforesaid regulations mandates that a "project office" shall not undertake or carry on any other activity other than the "activity relating and incidental to execution of the project". Thus, a project office can undertake all activities that relate to the execution of the project and its function is not limited only to act as a channel of communication." 37. Indeed, the basic factual foundation for holding a LO of the Assessee as its PE has not been laid by the Revenue in the present case. The fact that the Assessee was adhering to the conditions imposed by the RBI for running a LO, and the RBI had accepted the functioning of the Assessee's LO for over three decades, points out to the fact that the Assessee has complied to the conditions, one of which was that it could not carry on any business or trading activity in the LO. While, it is a moot question whether this would be binding on the Revenue, it certainly increases the burden of the Revenue to show that notwithstanding the RBI permis....