TaxTMI 
TaxTMI 
2022 (9) TMI 528
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....s filed by the assessee and the Revenue for assessment year 2003-04 against the impugned order dated 21/12/2006, passed by the learned CIT(A)-33, Mumbai, which in turn has arisen from the assessment order dated 28/02/2006, passed by the Assessing Officer ("AO") under section 143(3) of the Act. ITA No. 1805/Mum./2007 Assessee's Appeal - A.Y. 2003-04 3. In this appeal, assessee has raised following grounds: "Based on the facts and circumstances of the case, Nagase and Company Limited, Japan (hereinafter referred t as the Appellant') craves leave to prefer an appeal against the order passed by the learned of Income-tax (Appeals)-XXXIII, Mumbai (hereinafter referred to as the learned CIT(A) under section 250 of the Income-tax Act, 1961 (hereinafter referred to as the "Act) in respect of the order passed by the Assistant Director of Income-Tax, International Taxation Range 321 Mumbai (hereinafter referred to as the 'learned AO) under section 143(3) of the Act, on the following grounds: 1. The learned CIT(A) has erred in holding that the Appellant's Liaison office constitutes its Permanent Establishment (PE) in India under Article 5 of the Double Taxation Avoidance Agr....
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....s carrying out only support activities and is, thus, engaging in carrying out all the preparatory and auxiliary activities. Therefore, it was submitted by the assessee that it does not constitute PE in India. Vide assessment order dated 28/02/2006, passed under section 143(3) of the Act, AO did not agree with the submissions of the assessee. The AO on the basis of documents/books of accounts and other papers impounded during the course of survey under section 133A of the Act came to the conclusion that liaison office"s activities are not confined to the liaison work only, but it is also actively engaged in business activity (i.e. sales in India). The AO by referring to its findings rendered in assessee"s own case for assessment year 1996-97 to 2002-03, which were also upheld by the learned CIT(A), held that Mumbai office of the assessee i.e. the liaison office constitutes PE of the assessee in India. The AO, further, treated 10% of the total turnover from India as taxable profit under Rule 10 and accordingly, made an addition of Rs. 8,23,07,287. In appeal, learned CIT(A) vide impugned order dismissed the appeal filed by the assessee on the issue of existence PE by relying upon its ....
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.... behalf of the assessee. Therefore, the liaison office was rightly considered as PE of the assessee in India by the lower authorities. 8. We have considered the rival submissions and perused the material available on record. As per Article 7 of DTAA, profit of foreign enterprise shall be taxable in India only if such enterprise carries on business in India through a permanent establishment situated therein. Article 5 of the DTAA defines the term permanent establishment. Further, as per the provisions of Article 5(6)(e), maintenance of a fixed place of business solely for the purpose of carrying on, for the foreign enterprise, any other activity of a preparatory or auxiliary character shall not be considered as permanent establishment. While dealing with the meaning of the term "preparatory" and "auxiliary" in context of India UAE DTAA, Hon"ble Supreme Court in Union of India vs UAE Exchange Centre, [2020] 425 ITR 30 (SC), observed as under: "The expression "preparatory" is not defined in the 1961 Act or the DTAA. The dictionary meaning of that expression can be traced to term "preparatory work" and "travaux preparatoires", which in the Black's Law Dictionary (Eleventh Editio....
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....ng, negotiating and concluding business contracts in India for and on behalf of its parent office. As a result, the AO, in all the assessment years, considered the liaison office as PE of the assessee in India. On the contrary, it has always been the case of the assessee that the liaison office was involved in only liaison and representative activities and was not involved in any trading or commercial activities to be construed as PE of the assessee in India. Further, as per the assessee, the Head Office had appointed commission agents in India who are independent entities and the Head Office was also making sales to Indian customers directly. 10. The first order, in the line of decision on this issue, was passed by the coordinate bench of the Tribunal in assessee"s own case in Nagase & Co. Ltd. vs ADIT, in ITAs No. 1800/Mum./2007 and 115/Mum./2006, dated 12/01/2017, for assessment year 1998-99, wherein the Co-ordinate Bench, after perusal of performance review report of the staff, agreement entered between third-party and the Head Office, letter amongst assessee"s employee and the Head Office, letter from a third party viz. Musk and Fragrance to the liaison office, minutes of mee....
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....at he would inform the RBI about the violations made by the liaison office in conducting its activities. 11. In the next decision, the coordinate bench of the Tribunal in assessee"s own case in M/s Nagase & Co Ltd. vs DDIT, ITA No.4654/Mum./ 2010, vide order dated 30/11/2017, for assessment year 2007-08 held that no document has been referred by the lower authorities to prove that transaction entered into by the liaison office establish the fact of existence of business connection of the assessee in India. The Co-ordinate Bench also held that there was no business connection of the assessee in India and there is no evidence that can lead to the conclusion that liaison office was executing the agreements independently with the customers. 12. In another decision, the coordinate bench of the Tribunal in assessee"s own case in Nagase & Co Ltd. vs DDIT, in ITA No. 134/Mum./2009 etc., for assessment years 1996-97, 1997-98, 2005-06 and 2006-07, vide order dated 27/04/2018, inter-alia, after considering the document i.e. letter of M/s Musk and Fragrance addressed to the liaison office, in respect of appeal for assessment year 1996-97, held that the document does not indicate any business....
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....independent agent of the assessee in India. These communications dated 2nd December 2002 and 21st August 2002 are placed at Page-277 and 278 of the paper book. The communication dated 2nd December 2002 depicts the achievement of sales target for the period 2001-02 and 2002-03. In fact, this communication is an agenda for a meeting arranged for one Mr. Kazuhiko Ijarashi, from the Tokyo Head Office of the assessee company and the representative of M/s Musk and Fragrance. Incidentally, some of the employees of the Liaison Office also attended the meeting held from 4th December to 7th December 2002. The next impounded document pertaining to the impugned assessment year is letter dated 21st August 2002, of M/s Musk and Fragrance to the Liaison Office at Mumbai. A perusal of the said letter indicates that it pertains to the sharing of demurrage charges and reduction of commission to 0.5% with reference to certain invoices raised for the period 2002-03 and 2003-04. On a perusal of the aforesaid impounded documents, we are unable to find any clue to conclude that they establish the involvement of the Liaison Office at Bombay in carrying on any commercial activity on behalf of the Head Offi....
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....aid letter, M/s Musk and Fragrance also ask the liaison office to seek any further information if required. Thus, we are of the view that said letter is nothing but sharing of information by M/s Musk and Fragrance and same does not indicate that the liaison office was conducting any commercial activity in India. We find that letter regarding similar information from M/s Musk and Fragrance was considered by the coordinate bench of Tribunal in assessee"s own case for assessment year 1996-97 (cited supra), wherein the coordinate bench came to the conclusion that the document does not indicate that the liaison office has carried out any business activity in India. 16. At page No. 90 is copy of FAX dated 18/09/2002 by the aforesaid agent to the liaison office, wherein quantity and price of a chemical named "Linalool" from a company M/s Pharmaco Flavours & Fragrances is mentioned. Further, it is also mentioned that on receipt of confirmation indent will be issued. As per the assessee, the said information was received from the independent agent, which was passed on to the Head Office. Apart from the copy of aforesaid FAX, nothing has been brought on record to prove that indent was sough....
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....son office to its Head Office. Therefore, the liaison office merely acted as a communication channel and has not conducted any business activity in this regard. 21. At page 98 and 99 of the factual paper book is an email from employee of the liaison office to its Head Office intimating about the inspection of the factory of supplier of food colours to the Head Office. From the said communication, it is evident that the same refers to the steps taken by the supplier after certain defects were found in its products. We further find that employee of the liaison office also sought suggestions from the Head Office. Therefore, from this document it is evident that no negotiations of business dealings were carried out by the liaison office in this regard. 22. At page 100 of the factual paper book is the email communication between the liaison office and the Head Office. Much has been made before us of the words "please start to negotiate with the above prices" appearing in the said communication to say that the liaison office was involved in price negotiations. From the perusal of the said email communication, we find that it refers to collecting the information regarding the pricing of....
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....on"ble Delhi High Court, in aforesaid decision, are also available on record in the present case. 25. Further, we find that nothing has been brought on record to suggest that the RBI has found activities of the liaison office as being non-compliant with the terms and conditions of its permission and, therefore, the said aspect supports the assertion of the assessee that liaison office was performing activities as permitted by the RBI, which were preparatory and auxiliary in nature and not the core business activity independent of the Head Office. We also find that apart from the aforesaid documents impounded during the course of survey action, neither statement of the employees of the liaison office or the agents/customers in India was recorded nor any information under section 133 (6) of the Act was sought by the AO in order to support its conclusion that the liaison office constitutes PE of the assessee in India. Further, the Revenue though vehemently submitted that liaison office was negotiating price and doing sales activity in India, however, has not brought any sales agreement in support of the claim. It is highly doubtful that sales transaction of such a large scale can be ....
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....the cross appeals filed by the assessee and the Revenue for assessment year 2001-02 against the common impugned order dated 31/10/2005 passed by the learned CIT(A) - 33, Mumbai for assessment years 1996-97 to 2002-03, which, inter-alia, in turn has arisen from the assessment order dated 30/03/2004 passed by the AO under section 143(3) r/w section 147 of the Act. ITA No. 118/Mum/2006 Assessee's Appeal- A.Y. 2001-02 33. In this appeal, the assessee has raised following grounds: "Based on the facts and circumstances of the case, Nagase and Company Limited, Japan (hereinafter referred to as the "Appellant') craves leave to prefer an appeal against the order passed by the learned Commissioner of Income-tax (Appeals)-XXXIII, Mumbai [hereinafter referred to as the "learned CIT(A)] under section 250 of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') in respect of the order passed by the Assistant Director of Income-Tax, International Taxation-Range 3(1), Mumbai (hereinafter referred to as the 'learned AO) under section 143(3) read with section 147 of the Act, on the following grounds: 1. The learned CIT(A) has erred in holding that the Appellant's....
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....inal return of income was filed by the assessee on 25/10/2001 declaring nil income. Subsequently, the reassessment proceedings were initiated under section 147 of the Act on the basis of documents found during the course of survey action under section 133A at the business premises of the liaison office. In response to notice under section 148 of the Act, the assessee filed return on 28/03/2003 declaring nil income. The AO vide order dated 30/03/2004 passed under section 143(3) r/w section 147 of the Act, after referring to the documents found during the course of survey action, held that liaison office constitutes PE of the assessee in India. The AO treated 10% of the turnover as taxable income under Rule 10 and accordingly, made an addition of Rs 17,11,20,000. In appeal, learned CIT(A), after consideration of remand report from the AO, vide common impugned order dated 31/10/2005 for assessment years 1996-97 to 2002-03 dismissed the appeal filed by the assessee on the ground of existence of PE. Further, learned CIT(A) granted partial relief to the assessee and directed the AO to adopt gross profit rate at 8% and allowied the expenditure incurred by the assessee on actual basis. Bei....
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.... letter of credit was issued in the name of the liaison office in Mumbai instead of Head Office in Japan or that it was obligation of the liaison office to supply the goods in such large quantity. No agreement in respect of alleged sale transaction is also brought on record by the Revenue. Thus, we are of the view that this letter is another communication sent through the liaison office. 39. At page 49 is a letter dated 19/03/2001 from the Head Office to Mr. Rajani in liaison office, wherein certain instructions were given by the Head Office to the liaison office. This letter supports the case of the assessee that the liaison office was acting as the communication channel and was providing support services to the Head Office. 40. At page 50 is a letter dated 10/08/2000 by Oswal Chemicals to the liaison office in India. As per the AO, said letter reflects direct dealing by the liaison office. On the other hand, it is the submission of the assessee that the liaison office has merely acted as a communication channel under the instructions and on behalf of the Head Office. Further, the said communication is in respect of a deal which never fructified, since the same was not acceptabl....
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.... do active marketing investment except for existing customers. Further, it is stated that the liaison office should involve more in actual business activity, instead of merely acting as tour guide or as an escort. The statements made in the aforesaid PVA report appear to be mere suggestions. Nothing has been brought on record to show that these suggestions were actually implemented by the liaison office in this year or subsequent. We are further of the considered view that all the suggestions in the PVA report runs contrary to the permission granted by the RBI and thus the moment the suggestions will be implemented the liaison office will be at risk of losing its license issued by RBI. Further, at the same time this report substantiates the claim of the assessee that at the moment liaison office is acting as tour guide or as an escort. 43. At page no. 70 is a minute of meeting amongst employees of liaison office and Directors of Yes Fashion Private Ltd. The meeting was also attended by one Mr Jani, who is an employee of Associated Agencies, an independent agent. From the document, it is evident that same pertains to some product and price negotiation. However, it cannot be said th....
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....vities of the liaison office as being non-compliant with the terms and conditions of its permission and, therefore, the said aspect supports the assertion of the assessee that liaison office was performing activities as permitted by the RBI, which were preparatory and auxiliary in nature and not the core business activity independent of the Head Office. As noted above, apart from the aforesaid documents impounded during the course of survey action, neither statement of the employees of the liaison office or the agents/customers in India was recorded nor any information under section 133 (6) of the Act was sought by the AO in order to support its conclusion that the liaison office constitutes PE of the assessee in India. Further, the Revenue though vehemently submitted that liaison office was negotiating price and doing sales activity in India, however, has not brought any sales agreement in support of the claim. Therefore, in view of aforesaid factual and legal position, we are of considered opinion that the liaison office in Mumbai does not constitute PE of the assessee in India under the provisions of DTAA. Accordingly, grounds no. 1 to 3 raised in assessee"s appeal is allowed. ....