SOJITZ CORPORATION v. ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)
[Citation -2007-LL-1030-4]

Citation 2007-LL-1030-4
Appellant Name SOJITZ CORPORATION
Respondent Name ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)
Court ITAT
Relevant Act Income-tax
Date of Order 30/10/2007
Assessment Year 2002-03
Judgment View Judgment
Keyword Tags deemed to accrue or arise in india • avoidance of double taxation • business connection in india • principles of res judicata • permanent establishment • computation of income • educational institute • non-resident company • scientific research • additional evidence • business of trading • business activity • foreign exchange • letter of credit • foreign company • general manager • liaison office • accrued income • export house • reserve bank • liaison work • head office • port trust • know-how • plant
Bot Summary: In the case of UAE Exchange Centre LLC also it was argued on behalf of the assessee that he has not violated any RBI guidelines but pointing out certain activities done by the assessee which were essential and vital to the business of the assessee it was held that assessee in the name of liaison work was doing other work and was held to be having PE to avoid Indian tax laws. Learned Departmental Representative submitted that res judicata is not applicable in the IT proceedings and the assessee s plea that since the assessee s LOs were being maintained for the last 45 years and they were not treated as PE of the assessee should have been accepted by the Department does not preclude the Department to take a different stand during the year under appeal. Coming to the argument taken by the assessee that AO has mainly estimated the income of the LOs from the total profit of the Japan entity as set out in the company s website, learned Departmental Representative submitted that the website of the company and the same is not denied by the assessee at any stage of the proceedings nor the figures reflected in the website were disputed on behalf of the assessee. In reply learned counsel of the assessee submitted that reliance placed by the Department on the decision in the case of UAE Exchange Centre LLC is misplaced as the Hon ble Authority for Advance Rulings in the case of UAE Exchange Centre LLC, In re has held that where activity carried on by the LO is an activity that is preparatory or auxiliary in character, the same cannot be characterized as a PE. A distinction has been made by the Hon ble Authority between the activities that are auxiliary and peripheral and those that are closely connected and vital to the business carried on by the assessee. The assessee could have engaged itself in such activities at the cost of approval of RBI. Since till date approval by RBI is being granted to the assessee, it can be safely presumed that LOs are not indulging in any other activity other than collecting information and sending it the same to Japan which are preparatory/auxiliary in nature. The AO as well as CIT(A) have not pointed out any other activity other than claimed by the assessee in which these LOs indulged, though they referred to huge expenditure incurred by the assessee on these LOs and the organizational set up of these LOs, to treat these LOs as PE of the assessee in India. We have further noted down the fact that assessee was engaged in the similar operation for the last 45 years and Department has been consistently accepting the fact that LOs of the assessee in India were not PE of the assessee.


D.K. Tyagi, J.M. ORDER assessee has filed this appeal against order of learned CIT(A) dt. 21st March, 2006 for asst. yr. 2002-03. assessee initially took nine grounds of appeal, which were on direction of Bench modified as under : "1. Based on facts and circumstances of case and in law, learned Commissioner of Income-tax (Appeals)-XL ["CIT(A)"] has erred in disregarding fact that liaison offices ("LOs") operate in India in accordance with specific approval granted by Reserve Bank of India ("RBI") and carry on specified activities as permitted by RBI. 2. Based on facts and circumstances of case and in law, learned CIT(A) has erred in concluding that appellant has business connection in India within meaning of s. 9 of IT Act, 1961 ("Act"). 3. Based on facts and circumstances of case and in law, learned CIT(A) has erred in concluding that appellant has Permanent Establishment ("PE") in terms of art. 5 of Double Taxation Avoidance Agreement between India and Japan ("tax treaty"). 4. Without prejudice to above grounds, based on facts and circumstances of case and in law, learned CIT(A) has erred in attributing income to PE of appellant in India on unreasonable and arbitrary basis disregarding provisions of art. 7 of tax treaty." 2. assessee vide his application dt. 30th Jan., 2007 also applied under r. 29 of ITAT Rules for production of additional evidence in form of following documents : "(i) Copy of auditor s certificate dt. 19th Aug., 2002 certifying that no income was earned/accrued by liaison offices for year ending 31st March, 2002; (ii) Copy of auditor s certificate dt. 19th Aug., 2002 certifying that all expenses of liaison offices were incurred out of inward remittances received from abroad; (iii) Copy of assessment submission dt. 30th Nov., 2005 for asst. yr. 2004- 05 detailing nature of activities carried out by liaison offices; (iv) Copy of letter dt. 2nd Dec., 1983 to RBI for opening of liaison office at Pune; (v) Correspondence from RBI dt. 19th Jan., 2002." 3. After hearing both parties in matter, assessee was allowed to produce additional evidence as this evidence throws light on undisputed facts of case and will help us in disposing of this appeal. 4. Brief facts of case as emerged from assessment order are that M/s Nissho Iwai Corporation (now known as M/s Sojitz Corporation) is topnotch trading and export house of Japan which has its presence in different parts of globe including India. principal activities were carried out through plant and project company, industrial and automotive company, aerospace, marine and rolling stock company, metals company, energy company, chemicals company, housing materials and general merchandise company, consumer products company, construction and urban development company, etc. In order to carry on its business activities in India, assessee company initially set up four branch offices in New Delhi, Kolkata, Mumbai and Chennai in year 1957. Subsequently, new offices were established at Bangalore, Pune and Jamshedpur. Last such office located at Jamshedpur was opened in year 1974. Branch offices at four metros were headed by expatriate officer of rank of General Manager and was assisted by other expatriate officers of rank of DGM/AGM as heads of various departments like, administration accounts and general affairs, metal department, machinery department, automotive department, general commodities department, chemical department, food department, etc. Expatriate employees had been in India on deputation for period of three years or more. During period under review, assessee incurred cumulative establishment expenses of Rs. 18,00,02,031 for Indian operations. AO further observed that assessee had been carrying on its Indian operations for last 45 years at relevant point of time and had been spending crores of rupees every year for maintenance of these establishments. Expatriate Officers had been engineers and other experts in their respective fields of specialization. Offices in India were found to be engaged in collection of necessary information on economic and industrial policy of Government of India and furnishing of same to head office in Japan and at other locations of its operations. Procurement of tender documents and related information and sending them to different overseas establishments of assessee company had been admitted to be one of main assignments of Indian offices. Officers/officials of Indian establishments had been doing job of interpreters of English-Japanese and vice versa. They had been assisting visiting delegates of company in India and also doing liaison work on behalf of various overseas establishments of company with Indian clients. Under these circumstances, learned Authorised Representative s contentions that branch offices did not carry on any business activity in India were incorrect and far from convincing. It cannot be said by any stretch of imagination that operations of these offices were limited to preparatory and auxiliary activities. On contrary, it is noted that activities of these branch offices in India did contribute effectively towards assessee s worldwide operations and thereby helped directly or indirectly in earning global profit. According to AO s. 9(1)(i) of Act states that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed to accrue or arise in India. All income which is deemed to accrue or arise in India during previous year to non-resident is taxable in India by virtue of s. 5(2) of Act. Therefore, profit attributable to assessee s offices i.e. PEs in India, is liable to be taxed in India. Term PE , as defined in art. 5 of Indo-Japan treaty means "a fixed place of business through which business of enterprise is wholly or partly carried on". In instant case assessee did have fixed places of business in India. Further OECD Model Convention Commentary on art. 5 says that fixed place of business whose general purpose is identical to general purposes of whole enterprise does not exercise preparatory and auxiliary activity. It goes on to add that such fixed place of business which has function of managing enterprise or even only part of enterprise or of group of concern cannot be regarded as doing preparatory and auxiliary activity. If enterprise with international ramifications establishes so-called management office in States in which they maintain subsidiaries, PEs, agents or licensees etc. PE will normally be deemed to exist. From this according to AO it was apparent that operations of these offices were not limited to preparatory and auxiliary activities. Thus, assessee cannot take refuge under para 6(2) of art. 5 of Indo-Japan treaty. 5. Assessee took following arguments before AO : (i) Indian offices were doing liaison work under approval of RBI which did not allow charging of any commission/fee/remuneration for such activities. No business activity was conducted by these Indian offices. (ii) Entire expenses of Indian offices were met exclusively from inward remittance received from abroad through normal banking channels. (iii) Indian offices did not make any contract. Neither it opened any letter of credit nor did it make any remittance outside India. (iv) They collected necessary information on economic and industrial matters which were furnished to various parties/organizations. (v) They attended manufacturers representatives from Japan under instructions of head office in Japan. 6 . After taking these submissions into consideration AO was of view that operations of Indian offices were not limited to preparatory and auxiliary activities. They did contribute effectively towards assessee s worldwide operations and thereby helped directly or indirectly in earning global profit inclusive of profits from Indian clients. portion of such profits is remitted back to India for sustenance of Indian offices. Hence, Indian offices will constitute PEs of non-resident enterprise in facts of case. Para 1 of art. 7 of DTAA between India and Japan states that so much of profits of enterprise of Contracting State may be taxable in other Contracting State as is directly or indirectly attributable to permanent establishment (PE) situated therein through which business is carried on. In this respect, information was gathered from assessee s official website http.www.nisshoiwai.co.jp. It is seen that board of directors meeting was held on 16th May, 2002. Consolidated business results for year ended 31st March, 2002 revealed that operating profit was one per cent of net sales of JPY 5464524 millions. In other words, operating expenses incurred were 99 per cent of net sales. Therefore, expenses : profit ratio can be worked out at 1 per cent (1/99 x 199). This ratio can safely be applied to expenses incurred in India to arrive at profits attributable to PE in India. AO calculated operating profit/net profit amounting to Rs. 15,48,848 @ 1 per cent of operative expenses of Rs. 15,84,84,800 in India as attributable to PE of non-resident enterprises in India holding it as liable to tax in India under s. 9(1)(i) of Act r/w art. 7 of DTAA between India and Japan. 7. Aggrieved by this order of AO, assessee went in appeal before first appellate authority. 8 . Before learned CIT(A) assessee reiterated stand taken by him before AO and filed written submissions on which comments of AO were sought. After taking into consideration submissions of assessee and comments on them by AO, learned CIT(A) confirmed stand taken by AO by observing as under : "6. I have carefully considered rival submissions with reference to facts of case, is involved and material placed before me. It is observed that it is essence of activity and not nomenclature which is material. In other words, what is decisive is not form but substance of activity or transaction. argument that massive expenditure was incurred only on liaison activities and so to say collection of information as such, fails my logic. If plea of operations of Indian offices did not result in any income in India and that their activities were only preparatory and auxiliary character, is to be believed, then no prudent businessman would like to spend crores of rupees on activity which is not likely to yield any income. Such plea therefore, does not impress me. Illogicality of appellant s claim, as above, becomes more pronounced by fact that appellant carried out its principal activities through large number of highly specialized subsidiaries as well as regimentalised departments headed expatriate officers of rank of DGM/AGM. I am not inclined to accept that all those special subsidiaries and departments would be necessary merely for purpose of collecting and sending information to its head office in Japan. Further, appellant would not have to depute expatriate officers from Japan, who were experts in various fields, merely to collect and send information. It is seen from returns of income that sizeable part of remittances from Japan w s utilized for meeting TDS liability on substantial amount of fees paid to expatriate Japan staff on deputation in India. amount of TDS on such payments to expatriate staff stands Rs. 3,01,98,462 for year in question. returns filed by expatriate Japanese officers in India reveal that they were paid substantial amounts by way of fees, certainly not for mere collection of information and sending it to Japan. job of collection of information could very well be done by local personnel and would not necessitate deputing highly specialized and technical person from Japan. Close look at organizational chart of appellant establishes fact in no uncertain terms that appellant carried out its activities through number of subsidiaries and department headed by specialized and technical expatriate officers deputed from Japan. Mere use of term liaison work would not by itself change character of principal activities carried out by appellant in India. 6.1 Having regard to facts discussed above, I find myself in agreement with AO s finding that activities of appellant were not limited to collection of information in India and could not be termed as preparatory or auxiliary in nature. It is needless to point out in circumstances that activities carried out in India through Indian branches/offices effectively contributed towards applicant s worldwide operations, thereby helping in earning of global profits by it. appellant had fixed places in India through which it carried out its principal activities. As per art. 5 of DTAA between Indian and Japan, Indian offices of appellant which were fixed places were "PE" and therefore, art. 7 of said treaty read with ss. 5(2) and 9(1)(1) of Act come into play. Appellant s reliance on para 6(e) of art. 5 of said treaty is accordingly found to be inappropriate and improper in given contest. 6.2 As it has emerged that activities of appellant were not of preparatory and auxiliary character it cannot be said that OECD Model Convention Commentary on art. 5 is bad and inapplicable. This plea has not b e e n substantiated by appellant s Authorised Representative. There is no undenying fact that general purpose of appellant s Indian offices which constituted "PEs", being fixed places of business, was identical with general purpose of appellant enterprise as whole and therefore, AO s action in placing reliance on OECD Model Convention Commentary on art. 5 is found to be in order. Appellant s reliance on decision in case of CIT vs. V.R. S.R.M. firm is found to be out of context and hence, appellant does not receive any assistance from said decision in this regard. 6.3 As regards plea that returns of income filed by appellant in past were accepted, it is observed that simply because issue was not scrutinized in past does not mean that appellant s stand was necessarily correct. Such plea fails to take substance out of matter. 6.4 Since no challenge has been posed in respect of method of calculation o f operating profit/net profit adopted by AO, no intervention is called for in this respect. 6.5 In view of above discussion and in circumstances, grounds of appeal preferred by appellant fail and are dismissed accordingly, confirming action of AO in determining total income of appellant at Rs. 15,48,850 by invoking provisions of s. 9(1)(i) of Act read with art. 7 of DTAA between India and Japan." 9. Aggrieved by these orders of lower authorities now assessee is in appeal before us. At time of hearing learned counsel of assessee submitted that assessee is non-resident foreign company incorporated under provisions of law relating to companies in Japan. assessee is engaged in business of trading of goods. assessee had applied for permission to RBI to open liaison office in India on 30th of January, 1974. Accordingly permission was granted by RBI vide its letter dt. 21 July, 1974 to start four liaison offices in New Delhi, Kolkata, Mumbai and Chennai. Subsequently, assessee sought permission to open three more liaison offices in Bangalore, Pune and Jamshedpur which was also granted by RBI vide its communication dt. 8th Feb., 1975. RBI s approval specifically stipulates that activities of liaison offices are restricted to only collection and sending of information from India to Japan. permission was granted by RBI subject to following conditions as specifically stipulated in approval itself : (a) entire expenses of offices in India will be met exclusively out of remittances received from abroad through normal banking channels; (b) No commission/fee will be charged or any other remuneration received for liaison activities to be rendered by Indian offices; (c) Excepting said liaison work, offices will not undertake any activity of trading, commercial or industrial nature without prior permission of Reserve Bank. (d) liaison offices will furnish to RBI on yearly basis details of remittances received from abroad to meet their expenses in India, together with bank certificates showing receipt of funds and certified copy of final accounts of office, quoting reference to RBI s letter. 10. She further submitted that as per stipulation of Reserve Bank set out in point (d) above, assessee has been furnishing to RBI complete details of remittances and copy of final accounts along with auditor s certificate confirming that conditions stipulated by RBI have been observed. She further submitted that activities of liaison offices in India are restricted to collection of information within India and relaying to head office of same. This activity is clearly of preparatory/auxiliary nature, and no income/revenue has been generated out of same. In fact there is statutory bar on earning of income by liaison offices (LOs) in India by RBI and admittedly this requirement is under constant monitoring by RBI and has been found to be in order till date. 11. learned counsel of assessee submitted that AO took view that LO was PE of Japanese entity in India. This conclusion was reached by AO even while admitting in assessment order that main activity of LO was collection of necessary information on economic and industrial policy of Government of India and furnishing of same to head office at Japan, acting as courier of documents between Indian establishments and Japanese head office and assisting delegates and officials of head office, particularly with respect to English Japanese translation during their visits to India. It is pertinent to note that no evidence has been brought on record by either AO or CIT(A) to justify their conclusion that LO is PE of assessee. conclusion of AO is, therefore, totally baseless insofar as same is not in consonance with specific directions of and permission granted by RBI and without any evidence brought on record concerning any other activity carried on by LO that would render it PE. This submission of assessee is further strengthened by computation of income by AO who has merely estimated income of LO from total profits of Japanese entity as set out in company s website. AO proceeded on surmises and presumptions in making said estimate and very fact that he had to resort to this method of estimation reflects lack of material and evidence to substantiate such assessment. 1 2 . Learned counsel of assessee referred to provisions of Double Taxation Avoidance Agreement between India and Japan. Art. 5 defines "PE". Reliance was placed on sub-cl. (e) of cl. 6 which excludes maintenance of fixed place of business for purpose of carrying on activity of preparatory or auxiliary character from purview of "PE". It was submitted that activity permitted by RBI to be carried on by LO is merely collection and supply of information to Japan which is clearly of preparatory/auxiliary nature. Admittedly, LO does not have powers of concluding contracts on behalf of assessee and does not carry on any other activity wherein it assumes decision making authority on behalf of head office. activities, therefore, clearly fall within exclusionary clause of art. 5, cl. 6(e) of DTAA. She further submitted that OECD Commentary on Model Tax Convention supports assessee s stand insofar as it clarifies that even fixed place of business shall not be deemed to be PE, if overall activity carried on therein is of preparatory or auxiliary character. 1 3 . She further relied on Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000, pursuant to which notifications have been issued by RBI setting out guidelines concerning establishment in India of branch office or other place of business for person resident outside India. annexure at internal p. 180 of above stipulates that LO shall not carry on any other activity other than activity for which approval has been granted by RBI. compliance of this is evidenced by auditor s certificate filed before RBI and same has been consistently accepted. She further submitted that above submissions would establish that LOs of assessee have been authorized only to collect and furnish information to Japan from India and they have not been carrying on any other activity except same. This is admitted position insofar as Department has not produced any material to contrary. These activities clearly constitute operations that are preparatory and auxiliary and admittedly LOs do not have any contract concluding/decision making authority. They would, thus, fall within exclusionary clause i.e. sub-cl. (e) of cl. 6 of art. 5 of DTAA between India and Japan. She further submitted that provisions of IT Act also support assessee s case. learned Authorised Representative of assessee placed reliance on following decisions : (i) Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC); (ii) CIT vs. P.V.A.L. Kulandagan Chettiar (Dead) Through LRs (2004) 189 CTR (SC) 193 : (2004) 267 ITR 654 (SC); (iii) CIT vs. Visakhapatnam Port Trust (1984) 38 CTR (AP) 1 : (1983) 144 ITR 146 (AP); (iv) Gutal Trading Est., In re (2005) 198 CTR (AAR) 417 : (2005) 278 ITR 643 (AAR); (v) Angel Garment Ltd., In re (2006) 206 CTR (AAR) 393 : (2006) 287 ITR 341 (AAR); (vi) Western Union Financial Services Inc. vs. Addl. Director of IT (2006) 101 TTJ (Del) 56; (vii) UAE Exchange Centre LLC, In re (2004) 189 CTR (AAR) 467 : (2004) 268 ITR 9 (AAR); and (viii) Educational Institute of American Hotel & Motel Association, In re (1996) 132 CTR (AAR) 40 : (1996) 219 ITR 183 (AAR). 14. Learned counsel for assessee further submitted that assessee has been engaged in identical operations for last 45 years. This is admitted fact as set out in assessment order itself. Accordingly, since Department has accepted fact that LO of assessee, in India, has been carrying on only preparative and ancillary activities and is not PE for last many years, it is now estopped from questioning this established factual and legal position in absence of any other material or evidence to support deviation from establishment position. She further placed reliance on following decisions of Supreme Court and High Courts : (i) Parashuram Pottery Works Co. Ltd. vs. ITO 1977 CTR (SC) 32 : (1977) 106 ITR 1 (SC); (ii) Radhasoami Satsang vs. CIT (1991) 100 CTR (SC) 267 : (1992) 193 ITR 321 (SC); (iii) Berger Paints India Ltd. vs. CIT (2004) 187 CTR (SC) 193 : (2004) 266 ITR 99 (SC); (iv) Dunlop Rubber Co. Ltd. vs. ITO (1971) 79 ITR 349 (Cal); and (v) Shree Hanuman Sugar & Industries Ltd. vs. CIT (2004) 187 CTR (Cal) 455 : (2004) 266 ITR 106 (Cal). In above cases Hon ble Courts have laid down proposition that though strict principles of res judicata are not applicable to IT proceedings, factual and legal positions that are accepted by Department consistently should not be reopened or disturbed on mere whim unless there are additional and compelling facts that are brought on record by Department to do so. In instant case, no new material has been brought on record by assessee and lower authorities merely change their stance on same facts that has been accepted by Department for last nearly five decades. 14.1 Concluding her arguments learned counsel has prayed that since LOs of assessee in India have been carrying on only preparatory and auxiliary activities, same may not be treated as PE of assessee for income-tax purpose. 15. Learned Departmental Representative on other hand relying on orders of lower authorities submitted that mere approval of RBI for activities carried out by LOs is not sufficient for not treating them as PE of assessee in India. What is important is actual activity carried out by LOs. Making reference to pp. 24 and 25 of paper book, he further submitted that assessee has spent Rs. 49 crores during year on LOs maintained in India which shows value of information furnished by LOs, otherwise no businessman would incur huge expenses only for gathering insignificant information only. Referring to pp. 32 to 35 of paper book wherein organization chart of Kolkata office has been shown learned Departmental Representative submitted that officials of company are responsible for not only administration work but also responsible for handling metal items, machinery items and general commodities which shows that this office is dealing in specialized and technically sound areas to gather specialized information to be sent to their head office. head office in turn uses this information to enter into contract with Indian principals. Thus according to learned Departmental Representative assessee camouflaged word liaison and used specialized information collected directly for its business purposes. In case of UAE Exchange Centre LLC (supra) also it was argued on behalf of assessee that he has not violated any RBI guidelines but pointing out certain activities done by assessee which were essential and vital to business of assessee it was held that assessee in name of liaison work was doing other work and was held to be having PE to avoid Indian tax laws. facts of instant case are similar and, therefore, he pleaded that LOs maintained instant case are similar and, therefore, he pleaded that LOs maintained by assessee have rightly been treated as PE of assessee. 16. Coming to question of how profits are taxed and basis for that learned Departmental Representative referred to Explanation to cl. (i) of s. 9(1) that only such part of income as is reasonably attributable to operations which are carried out in India should be treated as deemed accrued income of assessee from business connected (sic) in India. AO in his order has been very reasonable in estimating income of assessee. 1 7 . Coming to point of res judicata to IT proceedings learned Departmental Representative relied on following case law : (i) M. Chettiappan vs. ITO (1968) 67 ITR 106 (SC); (ii) Karnani Properties Ltd. vs. CIT (1971) 82 ITR 547 (SC). Learned Departmental Representative submitted that res judicata is not applicable in IT proceedings and, therefore, assessee s plea that since assessee s LOs were being maintained for last 45 years and they were not treated as PE of assessee should have been accepted by Department does not preclude Department to take different stand during year under appeal. 18. Learned Departmental Representative, referring to p. 36 wherein assessee has mentioned, "the LO specialized in their respective areas to enable them to receive and send information to our head office in Japan" submitted that it is clear from this that establishments in India are not only sending information but also receiving information from head office which is violation of RBI guidelines. Referring to same page learned Departmental Representative further submitted that this LO was not only sending information to Japan but also to local parties obviously for not as charity but for some other benefits which is not clearly included in RBI guidelines hence, it is violation of RBI guidelines. Taking care of argument of assessee that no evidence has been brought on record by either assessing authority or CIT(A) to justify their conclusion that LO is PE of assessee learned Departmental Representative referred to p. 17, para 6 of paper book to show that CIT(A) clearly brought out facts on record and discussed point after point which is of logical conclusion drawn by CIT(A) based on circumstantial evidence and submissions of Authorised Representative. Similarly AO discussed in his assessment order at pp. 2 to 9 reasons for holding these LOs as PE of assessee. 19. Coming to argument taken by assessee that AO has mainly estimated income of LOs from total profit of Japan entity as set out in company s website, learned Departmental Representative submitted that website of company and same is not denied by assessee at any stage of proceedings nor figures reflected in website were disputed on behalf of assessee. Therefore, assessee now cannot take plea that AO has not (sic) estimated income without any basis or evidence. While making this submission he relied on case of Dy. Director of IT vs. Set Satellite (Singapore) Pte. Ltd. (2007) 108 TTJ (Mumbai) 445 : (2007) 106 ITD 175 (Mumbai). 2 0 . Learned Departmental Representative also referred to expatriate agreement available at pp. 38 to 42 of paper book to show that LOs were indulging not only in collecting information but also were involved in inventions or improvements of equipment, machinery, process or other things which also comes under violation of RBI guidelines. 21. Learned Departmental Representative further submitted that facts of cases relied by assessee were different from facts of this case and, therefore ratio of those decisions is not applicable in instant case. 2 2 . Concluding his argument learned Departmental Representative submitted that lower authorities have rightly estimated income of company by treating LOs as PE of company in India. 23. In reply learned counsel of assessee submitted that reliance placed by Department on decision in case of UAE Exchange Centre LLC (supra) is misplaced as Hon ble Authority for Advance Rulings in case of UAE Exchange Centre LLC, In re (supra) has held that where activity carried on by LO is activity that is preparatory or auxiliary in character, same cannot be characterized as PE. distinction has been made by Hon ble Authority between activities that are auxiliary and peripheral and those that are closely connected and vital to business carried on by assessee. She further submitted that amount of money spent by company on their LOs is not relevant to decide issue in instant case. business activity of assessee is restricted to activity mentioned in approval of RBI and is restricted to preparatory activities, and only this is relevant to decide nature of LOs. 2 4 . Coming to reference made by learned Departmental Representative to organizational chart of personnel of LOs learned counsel of assessee submitted that mere fact that assessee has organizational set up with personnel dealing with different aspects of administration is of no consequence to legal issue agitated in this appeal as would be evident from approval of RBI, LO has been approved only to collect information and relay same back to its head office in Japan. It is for this purpose that personnel are deputed and this does not change nature of activities of LO which acts only as post office for collecting information and transmitting same to and from head office in Japan. As far as reliance placed by learned Departmental Representative on activities carried out by LO in case of UAE Exchange (supra) is concerned, learned counsel of assessee submitted that in instant case there is only one approval from Government of India which approves activities concerning collection and relay of information to Japan. No other activity is approved by RBI which places facts of instant case on totally different footing from those in case of UAE Exchange Centre LLC (supra). 25. Learned counsel of assessee further submitted that learned Departmental Representative has attempted to distinguish case of Angel Garment (supra) which is not correct insofar as Hon ble Authority for Advance Rulings held in that case that where LO has been set up with approval of RBI to carry out certain demarcated activity same would not constitute PE. decision applies on all fours to facts of instant case. 26. With reference to case law in case of Educational Institute of American Hotel & Motel Association, In re (supra), learned counsel submitted that this case law supports assessee s contention insofar as Hon ble Authority for Advance Rulings after considering approval of RBI held that applicant in that case was entitled to benefit sought. 27. Learned counsel further submitted that contention of learned Departmental Representative that assessee is only authorized to send information and not to receive information is actually erroneous and wholly misconceived since LO is authorized to both receive and send information to and from Japan and, therefore, there is no reason of any violation of approval of RBI. 2 8 . Coming to official website of company learned counsel submitted that it is not disputed that this website would to extent reflect performance of entity however, it cannot be sole basis on which conclusion concerning existence of PE can be drawn in total disregard to legal and statutory principles. 2 9 . So far as reliance by Department on order of Mumbai Tribunal in case of Set Satellite (supra) is concerned learned counsel of assessee submitted that facts of that case are totally distinguishable to facts of instant case, insofar as it relates to dependent agent who as per DTAA itself is deemed to be PE. In instant case law is entirely different insofar as entity which is carrying on functions of preparatory nature has been specifically excluded from purview of PE by DTAA. said decision is, therefore, totally distinguishable both in law and on facts. Learned Departmental Representative s reference to agreement entered into by assessee with its expatriates is totally extraneous and irrelevant in present context, according to learned counsel of assessee. 3 0 . Coming to case law concerning non-applicability of principles of res judicata, learned counsel of assessee sumitted that they are entirely out of context insofar as they do not change position laid down by Supreme Court, various High Courts and Tribunals stating that position accepted by Department can be changed only where there is marked difference in fact from year to year and not otherwise. In instant case, as submitted earlier assessee is in same line of business for last 45 years and admittedly has not changed its line of operation. There is, therefore, no warrant for instant impugned proceeding. 31. Concluding her arguments learned counsel submitted that lower authorities were not justified in treating LO maintained by assessee as PE of assessee in India and accordingly not justified in estimating income of company on such basis. 32. Heard both parties, perused record, paper books filed by assessee and case law relied by both parties. only issue involved in this appeal is whether LOs maintained by assessee can be treated as PE of assessee in India. Before we proceed to decide this issue, we feel it convenient to make note of certain fundamental propositions which are now well- settled and are relevant to this case. Whenever there is double taxation avoidance agreement between India and any other country provision of DTAA will override those of IT Act. In Union of India vs. Azadi Bachao Andolan (supra) Hon ble apex Court has held as under : "A survey of aforesaid cases makes it clear that judicial consensus in India has been that s. 90 is specifically intended to enable and empower Central Government to issue notification for implementation of terms of DTAA. When that happens, provisions of such agreement, with respect to cases to which where they apply, would operate even if inconsistent with provisions of IT Act. We approve of reasoning in decisions which we have noticed. If it was not intention of legislature to make departure from general principle of chargeability to tax under s. 4 and general principle of ascertainment of total income under s. 5 of Act, then there was no purpose in making those sections subject to provisions of Act. very object of grafting said two sections with said clause is to enable Central Government to issue notification under s. 90 towards implementation of terms of DTAAs which would automatically override provisions of IT Act in matter of ascertainment of chargeability to income-tax and ascertainment of total income, to extent of inconsistency with terms of DTAC." In CIT vs. P.V.A.L. Kulandagan Chettiar (supra) Hon ble apex Court held as under : "Where liability to tax arises under local enactment provisions of ss. 4 and 5 of Act provide for taxation of global income of assessee chargeable to tax thereunder. It is subject to provisions of agreement entered into between Central Government and Government of foreign country for avoidance of double taxation as envisaged under s. 90 to contrary, if any, and such agreement will act as exception or modification of ss. 4 and 5 of IT Act. provisions of such agreement cannot fasten tax liability where liability is not imposed by local Act. Where tax liability is imposed by Act, agreement may be resorted to either for reducing tax liability or altogether avoiding tax liability. In case of any conflict between provisions of agreement and Act, provisions of agreement would prevail over provisions of Act, as is clear from provisions of s. 90(2) of Act. Sec. 90(2) makes it clear that where Central Government has entered into agreement with Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to assessee to whom such agreement applies, provisions of Act shall apply to extent they are more beneficial to that assessee meaning thereby that Act gets modified in regard to assessee insofar as agreement is concerned if it falls within category stated therein." 33. Coming to main issue now, we find, that assessee has been consistently taking stand that activities of LOs are restricted to only collecting and sending of information from India to Japan. This fact is also borne out, of approval dt. 8th Feb., 1975 granted to activities of LO with certain conditions by RBI. This approval reads as under : "M/s Nissho Iwai Company Ltd., 2, Brabourne Road (4th Floor), Calcutta 700 01. Dear Sirs, Sec. 29(2)(a) of Foreign Exchange Regulation Act, 1973 Permission to continue liaison offices in India. With reference to your letter No. L/NI/4303 dt. 30th Jan., 1975, we advise that we have no objection to continuing your offices in Calcutta, New Delhi, Madras and Bombay for undertaking liaison work for purpose of collecting n d sending information from India to Japan as stated in your letter No. L/NI/2654 dt. 21st July, 1974. Please note that this permission has been granted subject to following conditions : (a) entire expenses of offices in India will be met exclusively out of remittance received from abroad through normal banking channels; (b) No commission/fee will be charged or any other remuneration received for liaison activities to be rendered by Indian offices; (c) Excepting said liaison work, offices will not undertake any activity of trading, commercial or industrial nature without prior permission of Reserve Bank; (d) LO will furnish to us on yearly basis details of remittances received in India, together with bank certificates showing receipt of funds and certified copy of final accounts of office, quoting reference to this letter. Yours faithfully," In pursuance of cl. (d) of this approval assessee has been admittedly furnishing to RBI details of remittances and copy of final accounts along with auditors certificate confirming that conditions as laid down by RBI have been adhered to. These facts show that LOs were engaged in activities of collecting information of India and sending it to head office to Japan and no income/revenue has been generated out of these activities. assessee could have engaged itself in such activities (i.e. earning income/revenue) at cost of approval of RBI. Since till date approval by RBI is being granted to assessee, it can be safely presumed that LOs are not indulging in any other activity other than collecting information and sending it same to Japan which are preparatory/auxiliary in nature. AO as well as CIT(A) have not pointed out any other activity other than claimed by assessee in which these LOs indulged, though they referred to huge expenditure incurred by assessee on these LOs and organizational set up of these LOs, to treat these LOs as PE of assessee in India. It is also not case of Revenue that LOs were having powers of concluding contracts on behalf of assessee and were carrying on any other activities wherein they assumed decision-making authority on behalf of head office. 34. Now coming to provision of DTAA between India and Japan, we find that PE is defined in art. 5 of agreement which reads as under : "Article 5 1. For purpose of this convention, term PE means fixed place of business through which business of entity is wholly or partly carried on. 2. term PE includes especially : (a) place of management; (b) branch; (c) office; (d) factory; (e) workshop; (f) mine, oil or gas well, quarry or any other place of extraction of natural resources; (g) warehouse in relation to person providing storage facilities for others; (h) firm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) store or other sales outlet; and (j) installation or structure used for exploration of natural resources, but only if it is used for period of more than six months. 3. building site or construction, installation or assembly project constitutes PE only if it lasts for more than six months. 4. enterprise shall be deemed to have PE in Contracting State and to carry on business through that PE if it carries on supervisory activities in that Contracting State for more than six months in connection with building site or construction, installation or assembly project which is being undertaken in that Contracting State. 5. Notwithstanding provisions of paras 3 and 4 enterprise shall be deemed to have PE in Contracting State and to carry on business through that PE if it provides services or facilities in that Contracting State for more than six months in connection with exploration, exploitation or extraction of mineral oils in that Contracting State. 6. Notwithstanding provisions of preceding paras of this article, term PE shall be deemed not to include : (a) use of facilities solely for purpose of storage or display of goods or merchandise belonging to enterprise; (b) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of storage or display; (c) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of processing by another enterprise; (d) maintenance of fixed place of business solely for purpose of purchasing goods or merchandise or of collecting information, for enterprise; (e) maintenance of fixed place of business solely for purpose of carrying on for enterprise, any other activity of preparatory or auxiliary character. 7............ 8............ 9............" 35. Considering facts of case and material available on record, we are of opinion that assessee s case falls within exclusionary clause of art. 5, cl. (e) of DTAA. assessee s case also gets support from OECD Commentary on Model Tax Convention which clarifies that even fixed place of business shall not be deemed to be PE if overall activity carried on therein is of preparatory or auxiliary in nature. relevant portion is extracted as under : "It is recognized that such place of business may well contribute to productivity of enterprise, but services it performs are so remote from actual realization of profits that it is difficult to allocate any profit to fixed place of business in question. Examples are fixed places of business solely for purpose of advertising or for supply of information or for scientific research or for servicing of patent or know-how contract, if such activities have preparatory or auxiliary character." 3 6 . Foreign Exchange Management (Establishment in India of Branch or Office or Other Place of Business) Regulations, 2000 sets guidelines concerning establishment or office or other place of business for person resident outside India. According to that guideline LOs will not carrying out any other activity other than activity for which approval has been granted by RBI. compliance of this condition is not in dispute in instant case and it is also evidenced by auditor s certificate filed before RBI. 3 7 . reliance placed by Department on decision of UAE Exchange Centre LLC, In re (supra) is misplaced. Hon ble Authority for Advance Rulings in this case has held that where activity carried on by LO is activity of preparatory or auxiliary in nature, same cannot be characterized as PE. 3 8 . Similarly facts of case of Set Satellite decided by Bombay Tribunal (supra) are distinguishable from facts of this case as that case relates to dependent agent who as per DTAA, is deemed to be PE. While in instant case LOs which carry out function of preparatory nature which has been specifically excluded from purview of PE by DTAA as pointed out by us in earlier para. 39. assessee on other hand gets support from decision in case of Angel Garment Ltd., In re (supra) wherein Authority for Advance Rulings (Income-tax) held as under : "The applicant, non-resident company incorporated in Hong Kong, proposed to set up LO in India for collecting information and samples of garments and textiles from manufacturers, traders and exporters and passing on information to head office in Hong Kong and co-ordinating and acting as channel of communication between applicant and Indian exporters and follow up with Indian exporters for timely export of goods. entire expenses of proposed LO were to be met through remittances from applicant s head office in Hong Kong. On these facts applicant applied to Authority for Advance Rulings on question whether applicant could be said to have received income taxable in India. On facts stated Authority ruled that plain reading of Expln. 1(b) to s. 9(1)(i) of IT Act, 1961, indicated that no income would be deemed to accrue or arise to non-resident through or from operations confined to purchase of goods in India for purpose of export. proposed activities of LO of applicant in India were to be confined to purchase of goods for export. It was immaterial whether export of goods was to Hong Kong or to any other country. applicant company, could not, therefore, be said to earn income from proposed activities under provisions of IT Act." And decision in case of Educational Institute of American Hotel & Motel Association (supra) wherein Hon ble Authority for Advance Rulings after considering approval of RBI, held that applicant was entitled to benefit sought. relevant observation is extracted as under : "So far as activities in India are concerned, if letter of RBI granting permission to E1 to open liaison office dt. July, 1994, and letter of RBI to upgrade it to branch office under s. 29(1)(a) of FERA dt. 10th Feb., 1995, are closely seen, paras 3(ii), (iii) and (iv) put certain restrictions on activity other than those approved thereby. Further by cl. 3(ix) of same letter, RBI exercises certain amount of check over applicant carrying out any other activity. By these view that applicant does not exist for purposes of profit is strengthened." We further find that assessee s case also gets support from decision in case of Western Union Financial Services (supra). 40. We have further noted down fact that assessee was engaged in similar operation for last 45 years and Department has been consistently accepting fact that LOs of assessee in India were not PE of assessee. Therefore, in our opinion, Department was not justified in treating them as PE without bringing any material on record without pointing out any change of facts during year under appeal. In this regard reliance is placed on case of Parashuram Pottery Works (supra) wherein Hon ble Supreme Court held as under : "...........It has been said that taxes are price that we pay for civilization. If so, it is essential that those who are entrusted with task of calculating and realizing that price should familiarize themselves with relevant provisions and become well versed with law on subject. Any remissness on their part can only be at cost of national exchequer and must necessarily result in loss of revenue. At same time, we have to bear in mind that policy of law is that there must be point of finality in all legal proceedings, that stale issues should not be reactivated beyond particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity...." other two case law relied by assessee also supports this proposition. 41. In view of above discussion we are of considered opinion that provisions of s. 9 of IT Act are not attracted to facts of this case. activities of LOs are preparatory and auxiliary in character and, therefore, cannot be treated as PE of assessee in India and therefore in our considered opinion action of authorities below in estimating income of assessee on basis of having PE was not correct. We, therefore, set aside their orders and accept grounds as raised by assessee. 42. In result assessee s appeal is allowed. *** SOJITZ CORPORATION v. ASSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)
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