DELHI BENCH D ASSISTANT DIRECTOR ROLLS ROYCE PL. v. OF INCOME TAX CIRCLE 2(1) April 19, 2005 JUDGMENT PerN.V. Vasudevan, Judicial Member - This is appeal filed by assesseeagainst order dated 19-11-2004 of CIT(A)-XXIX New Delhi relating to theassessment year 2001-02. 2.The first two grounds of appeal of assessee challenges validity ofreopening of assessment under section 147 of Act. assessee is acompany incorporated in United Kingdom. In India assessee is engaged inthe business of supplying of engines, spare parts and rendering technicalservices mainly to Hindustan Aeronautics Ltd. (HAL), Indian Navy and Indian AirForce. There was another company of M/s. Rolls Royce group incorporated in theU.K. under name and style Rolls Royce India Ltd. (RRIL). This company isengaged in liaisoning activities on behalf of Rolls Royce Plc. (theassessee herein). RRIL's immediate parent company is Rolls Royce InternationalLtd. which is subsidiary of assessee company. RRIL is therefore to beconsidered as Subsidiary of assessee company. RRIL has its offices inIndia at New Delhi and additional Offices in Bangalore, Kanpur and Goa. Asalready stated RRIL was engaged liaisoning activities on behalf of theassessee. There is written agreement dated 1-7-1979 between assessee andRRIL for rendering services in territory of India, Nepal, Bangladesh,Bhutan and Shri Lanka. RRIL was to be paid remuneration calculated at 5 percent and marked over cost incurred. nature of services to be renderedby RRIL were as follows: i.Toobtain and report to Rolls Royce on regular basis such marketing informationas is considered to be relevant to Rolls Royce interest. ii.Todisseminate such marketing and commercial information relating to Rolls Royce'sproducts as Rolls Royce may require. iii.Toprovide administrative and secretarial assistance locally for servicesrepresentative deployed in territory. iv.Toprovide liaison service between Rolls Royce and relevant departments ofGovernment of India and other customers of Rolls Royce in territory in allmatters of supply of products and services. v.Tomonitor effectiveness of Rolls-Royce's commercial... vi.Tolook after Rolls Royce visitors in India and arrangements for stay anditinerary. 3.In light of aforesaid facts, we have to examine validity ofreopening of assessments under section 147. reasons recorded beforereopening assessment are relevant in this regard and they read as follows: "RollsRoyce Plc. O/S UK Reasonsfor reopening assessment under section 148 for assessment year 2001-02. Informationavailable with this officer (called from HAL) shows that Rolls Royce Pl., UK,has entered into contract for sale of 20 Jaguar aircrafts and other sparesand accessories with HAL, Bangalore, during financial year 2000-01. Thecontracts were negotiated and signed in India, UP, International Contracts inRR plc. UK, Ms. Peter D. Healey was present at these negotiations with HAL RRPlc. has not filed any return in India for income earned from thiscontract. Itis probable that RR Plc. has also supplied engines, aircrafts, spares andaccessories to other parties in India during financial year 2000-01. The'income' from these sales is unlikely to be less than Rs. 1 lac, it willdefinitely be more than that figure. Itherefore have reason to believe that income exceeding Rs. 1 lac has escapedtax. Noticeunder section 148 is hereby issued." 4.Before CIT(A) assessee challenged reopening of assessmentscontending inter alia that on basis of information that was availablebefore Assessing Officer, he could not have entertained belief regardingescapement of income chargeable to tax and, therefore, there were no validreasons for reopening assessment. It was submitted that so calledagreement referred to in reasons recorded was signed in financial year2000-01 and no sales had taken place during that P.Y. and, therefore, it wasnot possible for Assessing Officer to entertain belief that income of theassessee liable to tax has escaped assessment. There was also allegationbefore CIT(A) that assessee was not furnished with reasonsrecorded. On consideration of submissions made on behalf of assessee theCIT(A) gave his conclusions as follows: "Para2.1 I have considered submissions of appellant and facts of casecarefully. I have also gone through reasons which have been recorded forissuing notice under section 148. It has been duly mentioned in reasonsthat on basis of information collected from HAL appellant has enteredinto contract of sale of 20 Jaguar aircraft and other spare accessories withHAL, Bangalore. It has also been mentioned that appellant has suppliedengines, aircraft, spares and accessories to other parties in India during therelevant financial year. Therefore, Assessing Officer had information thatthe appellant had supplied spare parts and accessories to HAL as well as toother parties in India from which income has accrued to appellant and theincome relating to sale of Jaguar aircrafts was also likely to accrue duringthis year. On these reasons Assessing Officer had reasonable belief thatincome chargeable tax has escaped assessment. Considering facts thatconditions of section 147 have been duly fulfilled and Assessing Officerhad reason to believe on basis of proper information that income chargeableto tax has escaped assessment, Assessing Officer was justified in issuingnotice under section 148 to appellant and, therefore, I hold that theproceeding were validity initiated by Assessing Officer and, accordingly,ground Nos. 1 and 2 are without any substance and merit and, accordingly,rejected." 5.In appeal before us ld. counsel for assessee reiterated submissionsas were made before CIT(A). Referring to statement in reasonsrecorded that assessee has entered into contract for sale of 20 JaguarAir Crafts and other accessories with HAL, ld. counsel for assesseesubmitted that there exists no contract for supply of aircrafts. In this regardhe referred to minutes of meeting referred to in reasons recordedby Assessing Officer and submitted that there was never contract tosupply 20 jaguar aircrafts and belief entertained by Assessing Officeron basis of information viz., Minutes of meeting (a copy ofwhich is placed at pages 13 to 15 of assessee's paper book) cannot be correct andsubmitted that there were only negotiations for supply of spare parts and notaircrafts. Referring to second paragraph in reasons recorded, hesubmitted that Assessing Officer merely surmised that assessee wouldhave supplied engines, air crafts, spares and accessories and other partsduring financial year 2000-01 and that he would have earned income which ismore than income liable to tax in India. ld. counsel for assessee,therefore prayed, that reopening of assessment cannot be sustained andconsequently entire assessment is liable to be annulled. ld.Departmental Representative on other hand submitted, that reasons recordedby Assessing Officer before reopening were enough to sustain validityof reopening. He also highlighted fact that assessee has not filedreturn of income for assessment year in question, therefore, case ofescapement of income is clearly made out as per provisions of section 148 ofthe Act. He relied on order of CIT(A) in this regard. 6.We have considered rival submissions. Under section 147 read withExplanation 2(a), where no return of income is furnished by assesseealthough his total income in respect of which he is assessable under Actfor P.Y. exceeds maximum amount which is not chargeable to income-tax,then it will be case of escapement of income chargeable to tax. In thepresent case it is not in dispute that assessee did not file his return ofincome. question is whether assessee's total income for P.Y. wasmore than amount, which is not chargeable to income-tax. We may alsoclarify here that at time of reopening assessment, Assessing Officeris not expected to reach final conclusion regarding quantum of incomethat escapes assessment or final conclusion regarding chargeability of suchincome to tax under Act. prima facie conclusion would suffice. Theinformation that was in possession of Assessing Officer was minutes ofthe meeting between HAL and assessee. This meeting was held on 6-10- 2000 atBangalore. minutes of meeting discussed about various supplies to beeffected by assessee to HAL. This information was sufficient for theAssessing Officer to come to conclusion that income chargeable to tax inIndia of assessee had escaped assessment. fact that contractswere executed in India could reasonably lead to conclusion that income hasaccrued to assessee in India and was therefore chargeable to tax in India.Though there are certain vague observations in reasons recorded, that byitself will not lead to conclusion that belief entertained by theAssessing Officer was non-existent or was vague or had no nexus with theinformation in his possession. It cannot therefore be said that initiationof reassessment proceedings was invalid. assessee had placed reliance onthe following decisions. i.AnilKumar Satish Kumar Nahta v. IAC [2000] (MP) ii.SagarEnterprises v. ACIT [2002] 173 CTR (Guj.) 528 iii.ITOv. Lakhmani Mewal Das [1976] iv.GangaSaran & Sons (P.) Ltd. v. ITO [1981] 130 ITR 1 v.CalcuttaDiscount Co. Ltd. v. ITO [1961] (SC) vi.CITv. Ram Lal Manohar Lal [1986] 158 ITR 9 vii.CITv. Jeskaran Bhuvalka [1970] (AP) viii.BhimrajPannalal v. CIT [1957] (Pat.) 7.We have considered ratio laid down in aforesaid decisions and are ofthe view that requirement for assuming jurisdiction under section 148existed in present case and test laid down in various decisionsreferred to above have been duly fulfilled. We therefore hold that theprovisions of section147 were validly invoked in present case. lack ofopportunity pleaded by assessee is again without any basis. first twogrounds of assessee are therefore dismissed. 8.In ground Nos. 3 to 12 assessee has challenged action of AssessingOfficer in holding that assessee had business connection in India andthat assessee had Permanent Establishment (PE) in India and therefore theincome attributable to such PE was liable to be brought to tax in India. Theassessee has also challenged basis of determination of income as made bythe Assessing Officer. facts on basis of which Assessing Officercame to above conclusion are as follows. As already stated RRIL engageditself in liaisoning activities on behalf of assessee in India. RRIL hadits office in India and this fact is not in dispute. There is agreementdated 1-7-1979 between RRIL and assessee and details of services to berendered by RRIL to assessee have already been set out in Preamble ofthis Order. Before dealing with facts, as brought out in order ofassessment, it will be useful to refer to provisions of section 9 of theIncome-tax Act as well as provisions of DTAA between India and UK. Undersection 9(1)(i) of Act, incomes accrue or arise in India, where such incomeaccrues or arises, whether directly or indirectly through or from any businessconnection in India. Explanations 2 and 3 to section 9(1)(i) explains as towhat is business connection. These explanations are in pari materia sameas Article 7 of DTAA with UK. Article 7 of DTAA between India and U.K.,lays down that profit of enterprise of UK shall be taxable in India,only if UK enterprise, carries on business in India through PE situatedin India. Article 5 lays down as to when it can be said that there exists PEwhich refers to fixed place of business through which business of anenterprise is wholly or partly carried out and includes certain other instanceswhen it could be said that there exists PE. For present case what isrelevant for us and article which had been invoked by Assessing Officerin present case is Article 5(4) of Article DTAA with UK. said Articletogether with Articles 5(5) to (7) reads as follows: "4.A person acting in Contracting State for or on behalf, of enterprise ofthe other Contracting State - other than agent of independent status towhom paragraph 5 of this article applies - shall be deemed to be permanentestablishment of that enterprise in first mentioned State if; (a)hehas, and habitually exercises in that State, authority to negotiate andenter into contracts for or on behalf of enterprise, unless his activitiesare limited to purchase of goods or merchandise for enterprise; or (b)hehabitually maintains in first mentioned contracting State stock of goodsor merchandise from which he regularly delivers goods or merchandise for or onbehalf of enterprise; or (c)hehabitually secures orders in first mentioned State, wholly or almost whollyfor enterprise itself or for enterprise and other enterprisescontrolling, controlled by, or subject to same common control, as thatenterprise. 5.An enterprise of contracting State shall not be deemed to have PE in theother contracting State merely because it carries on business in that otherState through broker, general commission agent or any other agent of anindependent status, where such persons are acting in ordinary course oftheir business. However, if activities of such agent are carried outwholly or almost wholly for enterprise (or for enterprise and otherenterprises which are controlled by it or have controlling interest in it orare subject to same common control) he shall not be considered to be agentof independent status for purpose of this paragraph. 6.The fact that company which is resident of contracting State controls oris controlled by company which is resident of other Contracting State,or which carries on business in that other State (whether through PE orotherwise), shall not of itself constitute either company PE of other. 7.For purposes of this article term 'control', in relation to company,means ability to exercise control over company's affairs by means ofthe direct or indirect holding of greater part of issued share capitalor voting power in company." 9.We shall first take up for consideration question as to whether Article 5(4 to 7) of DTAA were applicable in present case. This discussion will alsocover applicability of business connection as per section 9(1)(i) of theAct, though same may not be relevant in present case. facts whichwere considered by Assessing Officer in coming to conclusion that theassessee had PE in India were as follows. Assessing Officer made areference between agreement with assessee and RRIL and made anobservation that RRIL had in fact performed much more services than what theyhad agreed to perform under agreement dated 1-7-1979 of assessee. TheAssessing Officer thereafter made reference to few instance of suchactivities. first instance referred to by Assessing Officer is ameeting between Mr. Lodge MD of RRIL and Mr. P.V. Augustin, AGM of HAL,Bangalore. Assessing Officer then made reference to two more meetingviz., one that took place on 27-11-2000 and 29-11-2000 and another set ofmeeting which took place from 20 to 22 January, 2001. Assessing Officerafter making reference to aforesaid meetings concluded that RRIL hadauthority to act on behalf of assessee. Assessing Officer thereafterconcluded that RRIL for all practical purposes was face of assessee inIndia as it did aggressive marketing and sales activities in India on behalf ofthe assessee. Assessing Officer thereafter concluded that been thoughemployees of RRIL did not sign contracts on behalf of assessee, yet theytook initiatives and actively pursued and approved deals on behalf of theassessee. He also concluded that there was instance where they have alsosigned agreement with HAL which had binding influence on assessee and thiswas based on fact that there was no representative from assessee andonly representatives of RRIL were present in meeting held on 6-10- 2000. 10.The plea of assessee before Assessing Officer was that, except onemeeting held on 6-10-2000, representatives of assessee were present in allthe other meetings. assessee also pointed out that commercial decisionswere taken only in meetings where representatives of assessee werepresent. assessee also pleaded that area of discussion in meetings withrepresentatives of RRIL were mere liaison activities and were not enough toconclude that assessee through RRIL had PE in India. AssessingOfficer however rejected all these contentions and came to conclusion thatRRIL constitutes dependent agent PE of assessee in India. 11.On this issue we have heard submission of ld. counsel for assesseeas well as Ld. Departmental Representative. As can be seen from therequirements of Article 5(4) of DTAA, it was necessary that RRIL acting onbehalf of assessee should habitually exercise in India authority toconclude contracts on behalf of assessee and to habitually secure orders inIndia to assessee or to other non-residents who were subject to samecommon control as that of non-residents. It is in this context with thenature of services rendered by RRIL to assessee would be relevant. TheAssessing Officer had made reference to three meetings. As far as thefirst meeting between RRIL and M/s. HAL of Bangalore is concerned, held on6-10-2000, copy of minutes of said meeting is placed at page Nos. 13 to15 of assessee's paper book. In this meeting there was no representative onbehalf of assessee. points that were discussed in this meeting werethere was discussion regarding 20 Jaguar programme. discussion related todelivery schedule as well as quotations regarding this programme. It also hadreference to spares that may be required by HAL. Thee was also discussionwith regard to sending of request for quantities. There was same discussionabut supply of critical spares and RRIL assured HAL that all efforts were beingmade to ensure that there is proper supply. There was discussion ofnon-availability of spares for Adour 804 and 811 and assessee requested toexpedite supply and promise for quick supply was made. There were otherdiscussions also in this meeting. Conclusion of Assessing Officer on thismeeting was that no representatives of assessee were present, in thismeeting. We have perused said minutes and we find that these minutes of themeeting only talk about supply status of current orders already placed and thetime for starting negotiations for proposed orders were discussed. We find thatthe nature of services rendered by RRIL were in nature of liaisonactivities and it cannot be said that from this meeting with RRIL, they hadauthority to conclude contracts on behalf of assessee. Apart from aboveit is seen that only assessee wrote subsequent correspondences on theissues, that were discussed in this meeting held on 6-10-2000. Copies of suchcorrespondences are placed at pages 16 to 40 of assessee's paper book. 12.The next reference made by Assessing Officer is to meeting held on 27thand 29th January, 2001 at Bangalore between, assessee, RRIL and HAL. It isseen from copy of minutes of this meeting, that one Mr. AJ Kemp,Commercial Manager of assessee was present in meeting. Mr. Peter D.Healey, VP International Contracts of assessee was also present. pleaof assessee before Assessing Officer was that RRIL was not authorisedto conclude or negotiate in contracts. It was also submitted that RRIL did nothave any necessary technical capability and information at its disposal to takedecisions on matters like prices and delivery schedules. It was also pointedout that RRIL's responsibility were restricted to provide information about theassessee's products to potential customers and organize meetings between theassessee and potential customers. role was purely as communicationchannel between assessee and costumer. Assessing Officer hashowever referred to fact that minutes of this meeting had been signedby employees of RRIL and therefore they were authorised to negotiate on behalfof assessee. In our view this conclusion of Assessing Officer iswithout any basis. fact that assessee was present in this meeting,would only go to strengthen plea of assessee that RRIL did not have anypowers to negotiate or conclude contracts on behalf of assessee. 13.The third meeting on which emphasis had been placed by Assessing Officer isthe meeting took place on 20, 21 and 22 January, 2001, copy of minutes ofthis meeting is placed at page Nos. 51 to 56 of assessee's paper book. In thismeeting Spares Business Manager and Sr. Commercial Manager of theassessee were present. For very same reasons given with reference to themeeting on 27 and 29th November, 2000 conclusion of Assessing Officerthat RRIL was fully authorised to negotiate on behalf of assessee is heldto be unjustified. 14.On consideration of evidence available on record, we are of view thatneither did RRIL have authority to conclude contracts on behalf of assesseenor did it habitually exercise such authority on behalf of assessee. Wetherefore hold that Article 5(4) did not apply to facts of present caseand Assessing Officer was not justified in concluding that assessee hada PE in India. 15.Another basis given by Assessing Officer was on applicability ofArticle 5(2)(k) of DTAA. said Article reads as follows: "(k)the furnishing of services including managerial services, other than thosetaxable under Article 13 (Royalties and fees for technical services), within acontracting State by enterprise through employees or other personnel, butonly if: (i)activitiesof that nature continue within that State for period or periods aggregatingto more than 90 days within any twelve month period; or (ii)servicesare performed within that State for enterprise within meaning ofparagraph 1 of Article 10 (Associated enterprises) and continue for period orperiods aggregating to more than 30 days within any twelve month period: Providedthat for purposes of this paragraph enterprise shall be deemed to have apermanent establishment in contracting State and to carry on business throughthat permanent establishment if it provides services or facilities inconnection with or supplies plant and machinery on hire used or to be used in,the prospecting for, or extraction or production of, mineral oils in thatState." Asfar as applicability of this Article is concerned, it is clear from theperusal of relevant article that to consider assessee as having servicePE in India it should be necessary that assessee should render services inIndia for other enterprises for time period specified in relevant article.In admitted facts of present case. RRIL alone rendered services to theassessee in India and it was never case of Assessing Officer that theassessee rendered any service in India. Admittedly RRIL is service providerand assessee is only recipient of service. It cannot therefore, besaid that RRIL was PE of assessee in India by invoking article 5(2)(k) ofthe DTAA. In view of above, we hold that RRIL cannot be said to be PEof assessee and since assessee did not have PE in India its businessincome is not chargeable to tax in India and therefore additions made bythe Assessing Officer is directed to be deleted. We may also incidently pointout that CIT(A) has merely endorsed view of Assessing Officer and,therefore no reference is made to conclusions of CIT(A). ld.counsel for assessee also placed reliance on several decisions, copies ofwhich have been placed in compilation of judicial pronouncements. We havenot made any reference to those decisions for reason that factually we havefound non-applicability of relevant provisions of DTAA with UK as was sought tobe made out by Assessing Officer. other grounds of appeal raised by theassessee regarding quantum on amounts that was brought to tax is thereforenot considered for adjudication. ld. counsel for assessee has alsofiled before us memo seeking to withdraw grounds 13 and 14 regardingchallenge to levy of interest under section 234A and B of Act. 16.In result, appeal by assessee is partly allowed. *** Rolls Royce Pl. v. Assistant Director of Income-tax Circle 2(1)