TaxTMI 
TaxTMI 
2024 (1) TMI 548
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....notices purportedly issued under section 143(2) of the Act; (ii). Whether liaison office (LO) in India can be treated as permanent establishment (PE) of the assessee in terms of Article 5(2) of India-Germany Double Taxation Avoidance Agreement(DTAA); and (iii). Validity of attribution of income to the alleged PE by applying net profit rate of 10% on the total sales and further non-allowance of deduction of expenses in terms of section 44C of the Act. 4. As far as the first issue of validity of reopening of assessment under section 147 of the Act is concerned, briefly, the facts are, the assessee is a non-resident corporate entity incorporated in Germany and a tax resident of Germany. As stated, the assessee is a pioneer in publishing scientific, technical, medical books and journals. The assessee got an approval from Reserve Bank of India (RBI) on 08.12.1997, to open a Liaison Office (LO) in India. As per the assessee, the LO was opened to carry out solely liaisoning activity or to act as a communication channel between the Head Office and clients in India. For the assessment years 1999-2000 to 2001-02, the assessee did not file any return of income under secti....
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....n respect of sale of journals and books to the PE in India. In assessment years 2000-01 and 2001-02, learned first appellate authority applied net profit rate of 15% and made attribution of 15% of sale of journals and books printed abroad and 80% for sale of books for EPZ of PE. In assessment year 2002-03, for journals and books printed abroad, he directed the Assessing Officer to compute income as per Rule 10 and thereafter to attribute 15% of the net profit to PE. For sale of books published in EPZ, he directed the Assessing Officer to determine the profits on net income basis and thereafter attribute 80% to the PE.) Accordingly, he decided the appeals. 7. Before us, learned counsel appearing for the assessee, drew attention to the reasons recorded for reopening of assessments placed in the paper book and submitted that in the reasons recorded, the Assessing Officer has simply referred to the statements recorded from P.N. Venkatraman and Shri Sanjeev Goswami, working in LO and concluded that commercial activities were carried on by the LO. He submitted, the business activities carried on by the assessee in India are the following : (a). Journals subscription ....
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....CIT (2002) 178 CTR 192(Delhi HC). 9. Strongly relying upon the observations of learned first appellate authority, learned Departmental Representative submitted, admittedly, the assessee had not filed any return of income for all these assessment years. He submitted, only because of survey action, certain documents were impounded, which indicated that the LO is involved in commercial activities of procuring orders for the head office. He submitted, even in the statements recorded from the employees working at LO, it is revealed that the LO is involved in commercial activities. He submitted, had the survey action not taken place, all these facts would not have come to notice. Thus, he submitted, while recording the reasons for reopening of assessments under section 147 of the Act, the Assessing Officer had tangible material in his possession, which reflected escapement of income. Thus, he submitted, reopening o assessment under section 147 of the Act is valid. 10. We have considered rival submissions in the light of decisions relied upon and perused materials on record. It is a fact on record that in the assessment years under dispute, the assessee had not filed any return of i....
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....essments under section 147 of the Act is invalid. 11. So far as the decisions cited by learned counsel are concerned, on careful examination, we have found them to be factually distinguishable, hence, not applicable to assessee's cases. 12. The next issue, which arises for consideration is whether the assessee had a PE in India in the relevant assessment years. As discussed earlier, in December, 1997, the assessee opened the LO in India with prior approval of RBI. As per letter dated 08.12.1997, RBI granted permission for opening the LO with the following conditions : (i). Except the liaison work, the representative will not undertake any other activity of a trading, commercial or industrial nature nor shall he enter into any business contracts without our prior permission. (ii). No commission/fees will be charged or any other remuneration received/income earned by the representative for the liaison activities/services rendered by the representative or otherwise in India. (iii). The entire expenses of the representative office will be met exclusively out of the funds received from abroad through normal banking channels. (iv). The representa....
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....pany has completely been taken over by the LO for all purposes. Referring to a report of an official of the assessee namely Conny Schindewolf, the Assessing Officer observed that the LO has contributed enormously to achieve the growth rate of 190% and 80% in books segment and 20% in journal segment. He further observed that in March, 2002, the assessee has set up a subsidiary company in India, namely Springer (India) Pvt. Ltd., which is being compensated @ 11% of gross revenue earned by the assessee from India from distribution of original titles and trading profits in respect of titles printed in India. Whereas, for similar activities carried out by the LO, no revenue is shared. He observed that even in appointment of distributors in India, the LO plays a very important role, as it ascertains the creditworthiness of distributors situated in India. Thus, based on the aforesaid reasoning, the Assessing Officer ultimately concluded that the LO constitutes a PE of the assessee in India. Having held so, he proceeded to attribute profit @ 15% of the gross revenue to the LO. Against the aforesaid decision of the Assessing Officer, the assessee preferred appeals before learned first appel....
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....communication between the LO and the subscribers in India is also very rare, as mostly, there is direct communication between the subscribers and the assessee. Orders are directly placed on the assessee and not on LO. In this context, learned counsel drew our attention to a sample copy of proforma invoice placed in the paper book. He submitted, in some cases, orders are also placed on subscription agent, who in turn handles the communication with the assessee. Even the payment is directly made to the assessee and the LO has no role to play. In this context, learned counsel drew our attention to a communication between the assessee and Tata Institute of Fundamental Research and Informatics (India) Ltd. Thus, he submitted, the LO did not maintain stock of journals, from which the journals are regularly delivered to the subscribers on behalf of the assessee. Thus, he submitted, in so far as the sale of journals is concerned, the LO has no role to play. In so far as import of books printed and published outside India is concerned, learned counsel submitted, these books are highly technical, scientific and pertain to subject areas like medicine, mathematics, engineering, computers, life....
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.... authors of such prints, the LO used to get the details of costing of such printing in India. Final decision whether to print at such cost or not was always taken by the assessee and the LO has no role to play. He submitted, in case the assessee is of the view that low-priced edition can be published, then the assessee instructs the LO to obtain the printer quotes and forward to the assessee for approval. Further, the purchase orders are directly issued to the printers with printing instructions and the LO has no role to play. The contract with printers, printing instructions, payment to printers and instructions for delivery of printed books to dealers were done by the assessee only and the LO had no role to play in it except for communicating to printers to make delivery to the dealers based on communication from the assessee. He submitted, the printers raised the bills on the assessee and remittance is made directly by the assessee to the printers. Of course, at times, instructions are communicated through LO. 18. Thus, learned counsel submitted, the LO is merely a communication channel between the HO and clients in India. Better flow of information through the LO helped HO i....
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....e LO has done calculation which is more a clerical work. 4 Upon receiving quotations from printers, LO obtains other cost component of publishing to be incurred e.g. royalty, etc. on the basis of all cost components it works out the cost with regard to each title The quotations received by LO on behalf of the Appellant, as explained above, were for various quantities with different production costs. The Appellant asked the LO to compute the cost components for realizable revenue so that the same clerical calculations were not required to be done by the Appellant. The Appellant analyzed the various cost components and asked the LO to get final quotes from the printer. The LO after receiving the final quotes informed the Appellant and made suggestions based on statistical analysis 5 Thereafter, the LO asks the Appellant to issue the purchase order directly to the printers, which Appellant invariably does in accordance with the terms and conditions agreed to between printer and the LO It is improper to draw this conclusion that the Appellant approval was a matter of pure formality. Rather, it was an indication of the fact that standard process set by the Appellant we....
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....Conny's report states as under: * Management has set highest growth rate of 40% for the emerging South Asian market which is supposed to be taken care of by the LO * From 1973 up till 1997, India was exclusively handled by a joint venture company that was owned by Springer with 49% stake The aforesaid statements are absolutely false and without any basis for the following reasons: * Springer's only exposure to India in the period pre 1998 was in the form of a distributorship for Springer's books given to a private limited company called Springer Books India P. Ltd. ('SBIPL'). * Appellant had no shareholding in SBIPL. This is evidenced by copies of annual returns filed by SBIPL with the Registrar of Companies ('ROC') as required under the Companies Act, 1956. The said company was the distributor for Springer titles and the relationship was that of a principal-toprincipal basis. Relevant portion of Conny's report on page 242 Certificate of incorporation of SBIPL dated 29 September 1980 on page 275 Annual return of SBIPL for AGM held on 27 September 1993, annual return for AGM held on 23 September 1996 and annual return for AGM held on 27 September 2000 on page ....
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.... to which title has to be taken up for reprinting and mass circulation. Thus, this email is a mere opinion on viability based on cost consciousness and cannot be interpreted as a decision, as the assessee is nowhere involved in the entire communication. He submitted, the LO had no role to play once it forwarded the cost computation inputs to Germany. He submitted, occasional and stray involvement of the LO in forwarding a printing instruction or a delivery instruction to the printer or communication with the distributor, based on the instructions of the assessee, cannot be considered as involvement of the LO in the entire business process. If at all, such involvement of the LO is only as a conduit for transmission of information and cannot lead to a PE situation. 21. Drawing our attention to Article 5 of India-Germany treaty, learned counsel submitted that the LO is not fixed place of business of the assessee, as it does not satisfy the basic conditions for constituting a PE under Article 5(1) of India-Germany treaty. He submitted, Article 5(2) cannot override the basic conditions of Article 5(1) that a PE has to be a place of business. Whereas, LO is merely a representative off....
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....hus, learned counsel submitted that the LO cannot constitute a PE of the assessee in India. 24. Per contra, learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned first appellate authority. Drawing our attention to the statements recorded from two employees of LO and certain other documents, he submitted that the LO was carrying out wholesome commercial activities, which resulted in phenomenal increase in the business of the assessee in India. He submitted, the activities carried out by the LO is akin to the activities undertaken by Indian subsidiary of the assessee, which came into existence in the year 2002. He submitted, though, for carrying out similar activities, the Indian subsidiary was remunerated by 11% of the gross revenue, however, the LO was not paid anything. Thus, he submitted, the decision of learned first appellate authority should be upheld. 25. We have considered rival submissions in the light of decisions relied upon and perused materials on record. We have also painstakingly perused all facts and materials on record including the documents submitted in the factual paper books. The precise issue arisin....
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....ance 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; (f) the maintenance of a fixed p lace of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 5. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 6 applies-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 State, if this person. (a) has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprises; (b) has no such authority, but habitually maintains in the first mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the ....
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....n, whether the assessee has a fixed place of business in India, through which it carries out its business either wholly or partly or even if there is fixed place of business, it is only for the purpose of carrying out activities of preparatory or auxiliary character. It is the consistent stand of the assessee from the assessment stage that the LO in India has been established only for activities of preparatory or auxiliary character. However, in course of survey conducted at the premises of the LO, certain documents were impounded and statements were recorded from two employees of the assessee working at the LO, where from, it was found that the LO effectively was involved in various activities. In the assessment order, the Assessing Officer has described the nature of activities undertaken by the LO as under : a. The employees of the liaison office visits various institutes, libraries and individuals to discuss and promote the publications of the assessee and to ascertain their exact requirements. b. These all requirements are consolidated and discussed the distributor about the profitability and willingness of the distributor to undertake the sales. c. ....
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....the quote by the Head Office, printing order is placed with the concerned EPZ. Shri Venkatraman has further stated that in very rare instances, some queries are raised by the head office, otherwise, in 90 to 95% of cases, the quotes sent by the LO are accepted by the HO. 29. In the statement recorded from Shri Sanjeev Goswami, country head, working at LO, he has stated that the LO has visited 200 to 250 institutions during the year and met the scientists and academicians to inform them about the existing new products of the company to enable them to procure the required products through companies distributors in India. He has further stated that the LO provides market research information and market feedback to HO for pricing of the products. From the aforesaid statements, particularly, the statement of Shri Venkatraman, it becomes very much clear that in so far as the reprinting of low priced editions at EPZ in India is concerned, the activities of the LO is much more than mere preparatory and auxiliary character. The LO not only procures orders, but also works out the cost components and margin of the books to be reprinted in EPZ and sends for acceptance of the HO. It is also ....
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....in India and HO. In our view, the decision of the coordinate Bench in case of Nagase & Company Ltd. v DDIT(IT), (2018) 96 taxmann.com 504 would be of no help to the assessee, as in that case, the facts on record did not indicate that the role of LO is not limited to preparatory and auxiliary work. In aforesaid view of the matter, we hold that the LO constitutes PE of the assessee in India. 31. Having held so, now, it is necessary to deal with the issue relating to attribution of profit to the PE. As could be seen from the facts on record, learned first appellate authority has given a factual finding that the role of PE has been very limited in the sale of journals and books printed abroad. In fact, on perusal of materials on record, we are convinced that the PE had no role to play in sale of journals and books printed abroad, as, these are direct transactions between the assessee and subscribers/buyers in India without any intervention of the LO. Therefore, in our view, no part of the income derived by the assessee from sale of journals and books imported to India can be attributed to the PE. The attribution of income to PE should only be with reference to the books printed at E....