TaxTMI 
TaxTMI 
TaxTMI 
2017 (8) TMI 79
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.... 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 ('DESU Power Project'). In its return filed for the AY in question on 30th November, 1994 the Asse....
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....oject 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 regards the decision of the ITAT for the earlier AYs, the AO noted that they did not involve income from the ....
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....e. "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 reference was returned unanswered by this Court by order dated 10th March, 2007. 13. As regards the other issue regarding b....
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....he 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 admitted having business turnover, importing goods and selling them in India. This Income was taxable in India as Assessee had permanent establishment in India. VII. Because the Ld. ITAT for the ....
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....n 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 is only where the maintenance of such LO is solely for the purposes of an activity of preparatory or auxiliary character, it would exempt it from being considered as PE. According to him, since the Assessee has been carrying on busi....
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....tence 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, or the CIT(A) or even before the ITAT. The Court declines to permit the Revenue at the stage of final arguments in these appeals to urge such a ground for the first time. Provisions of the DTAA 28. Before beginning to discuss the centra....
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....erchandise 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 enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment." 30. There have been protocols developed in relation to DTAA and one such protocol which seems to explain Article 7(1) reads as under: "6. With reference to paragraph 1 of article 7 of the Convention, it is understood that by....
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....e. 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 definition of the term "permanent establishment" and specifically lists out places of business that fall within the meaning of that expression. The use of the word "especially" underscores the intention of the authors of the treaty to remove any doubts that the places listed in sub-paragraphs (a) to (i) fall within the definition of the term "permanent establishment". Normally an inclusive definition is us....
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....al 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 5 (1) and 5 (2) of the DTAA. In other words, it was not enough for the Revenue to show that the Assessee had an office, factory or a workshop etc. within the meaning of Article 5 (2) of DTAA. For the purpose of Article 5 (1), the Revenue was required to show that such place was "a fixed place of business through which the business of an enterprise is wholly or partly carried out." 33. For the AYs in question, the L....
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.... 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 permission continuing during the AYs in question, the Assessee's LO should be construed to be a PE in terms of Articles 5 (1) and 5 (2) of the DTAA. 38. The Court has undertaken the exercise of again examining the factual position since in the impugned order the ITAT has merely relied upon its order for an earlier AY. While the Court appreciates the contention put forth by the Revenue that the facts of each AY has to be separately consi....