Principal Officer, L. G. Electronics Inc. v. Assistant Director of Income-tax, International Taxation
[Citation -2014-LL-0805-56]

Citation 2014-LL-0805-56
Appellant Name Principal Officer, L. G. Electronics Inc.
Respondent Name Assistant Director of Income-tax, International Taxation
Court HIGH COURT OF ALLAHABAD
Relevant Act Income-tax
Date of Order 05/08/2014
Judgment View Judgment
Keyword Tags avoidance of double taxation • business connection in india • carry forward and set off • reassessment proceedings • income chargeable to tax • permanent establishment • wholly owned subsidiary • associated enterprise • computation of income • financial consultancy • isolated transaction • scientific research • condition precedent • business operation • subsidiary company • issuance of notice • foreign enterprise • business activity • reason to believe • indian subsidiary • business profit • royalty income
Bot Summary: The learned senior counsel submitted that it is of crucial importance to note that the said transactions between the petitioner company and its subsidiary were referred to the Transfer Pricing Officer under section 92CA and that the Transfer Pricing Officer by his order dated December 28, 2006, held that the prices at which the said transactions took place between the petitioner and its subsidiary in India were at the arm's length prices and no transfer pricing adjustment was required to be made under Chapter X of the Act. The learned senior counsel submitted that the Assessing Officer had no jurisdiction or authority in law to raise any contention, which was contrary to or inconsistent with the order of the Transfer Pricing Officer passed under section 92CA. The learned senior counsel further contended that the reasons recorded by the first respondent in issuing the impugned notice under section 148 of the Act is that the petitioner's Indian subsidiary LGIL is in fact a permanent establishment of the petitioner company and the transactions between the petitioner and its permanent establishment gives rise to income attributable to the permanent establishment, which is assessable in the hands of the petitioner company in India. The reasons to believe recorded by the Assessing Officer that the income of the petitioner chargeable to tax had escaped assessment allegedly on account of these transactions relating to supply of raw materials, finished goods, commission and reimbursement was patently erroneous inasmuch as these transactions between the petitioner and its Indian subsidiary has already been accepted by the Transfer Pricing Officer and such findings have attained finality. With effect from April 1, 1989, section 147 underwent an amendment to the effect that if the Assessing Officer had reasons to believe that any income chargeable to tax had escaped assessment, the Assessing Officer could assess or reassess such income. The Assessing Officer found that the employees of the petitioner were using the office of the subsidiary company as a front for conducting their own business and found that the office of the Indian company was functioning as a permanent establishment and was a fixed place of business available to the petitioner as per article 6(1) of the DTAA between India and Korea. The Assessing Officer, in view of the facts, concluded that the petitioner has a fixed place of business available to it in the office of its subsidiary company and is carrying on its business in India. The order of Transfer Pricing Officer will not come in the way for the reason that the Transfer Pricing Officer's order is in relation to the transactions between a subsidiary company and the petitioner.


JUDGMENT judgment of court was delivered by Tarun Agarwala J.-In this group of writ petitions, petitioners have challenged validity and legality of notice issued under section 148 of Income-tax Act, 1961 (hereinafter referred to as "the Act"). For facility, facts of Writ Petition No. 1366 of 2012 are being taken into consideration. petitioner is company incorporated under laws of South Korea and is engaged in business and manufacture of sale of refrigerators, washing machines, air-conditioners and other household electronic appliances. petitioner has wholly owned subsidiary company in India known as LG Electronics India P. Ltd. (hereinafter referred to as "LGIL") and has entered into several transactions relating to sale of raw materials, finished goods and has received royalty income, fees for technical services, etc. These transactions have been carried out between two companies every year since its inception. For assessment year 2004-05, petitioner was in receipt of royalty income and fees for technical services of which tax due was duly deducted and deposited. petitioner, however, did not file any return of income for period under consideration since full tax as per provisions of Double Taxation Avoidance Agreement (DTAA) had been deducted by Indian subsidiary on such payments. On June 24, 2010, survey was carried out by Income-tax Department on premises of Indian subsidiary under section 133A of Act. In this survey statements of expatriate employees of Indian subsidiary were recorded by survey team. On basis of statement recorded, Assistant Director of Income-tax (International Taxation), Noida, formed belief that petitioners income was chargeable to tax in India and had escaped assessment and, accordingly, issued notice dated March 30, 2011, under section 148 of Act indicating that there was reasons to believe that income of petitioner had escaped assessment within meaning of section 147 of Act. In compliance with said notice, petitioner filed nil return of income under protest and, in terms of procedure laid down by Supreme Court in GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19 (SC), applied for copy of reasons recorded, which was duly provided to petitioner. Upon receipt of reasons, petitioner filed his objections objecting to initiation of reassessment proceedings contending that there was no material to form belief that income chargeable to tax had escaped assessment. It was contended that statements of employees have been misconstrued to form opinion that permanent establishment (PE) of petitioner was existing in India. petitioner contended that transactions in respect of which it is alleged that there has been escapement of income had already been disclosed by Indian subsidiary, which has been considered by Transfer Pricing Officer (TPO) and found to be at arm's length basis. objection of petitioner was duly considered and was disposed of by Assistant Director of Income-tax, respondent No. 1 by order dated November 2, 2012, contending that survey clearly indicated that petitioner had permanent establishment in India and, consequently, profits were required to be attributed to permanent establishment in India in terms of functions performed, risks assumed and assets deployed by permanent establishment. petitioner, being aggrieved by initiation of proceedings under section 148 of Act has consequently, filed present writ petition. We have heard Sri S. Ganesh, learned senior counsel assisted by Sri Deepak Chopra, Sri Gaurav Mahajan and Sri Amit Mahajan, learned counsels for petitioner and Sri G. C. Srivastava along with Sri Ashok Kumar, learned counsel for Income-tax Department. Sri S. Ganesh, learned senior counsel contended that impugned notice has been issued in gross violation of provisions of section 147 of Act and that basic ingredients for assuming jurisdiction under section 147/148 of Act was not satisfied. learned senior counsel submitted that reasons to believe has been formed on premise that certain income had escaped assessment which is based on certain transactions, which has already been accepted by Transfer Pricing Officer as having met arm's length price. learned senior counsel submitted that assumption of jurisdiction under section 147 of Act can be assumed when Assessing Officer has reasons to believe that any income chargeable to tax had escaped assessment. learned senior counsel submitted that, in facts of given case, it is established that no income chargeable to tax had escaped assessment and that respondents were unable to cross very threshold for assuming such jurisdiction. It was submitted that there was no new material, which had come into possession of respondents, which could reasonably led them to infer that income chargeable to tax had escaped assessment. learned senior counsel submitted that reasons recorded was only suspicion on basis of which reassessment proceedings could not be initiated and, consequently, there has been complete non-application of mind. learned senior counsel submitted that it is of crucial importance to note that said transactions between petitioner company and its subsidiary were referred to Transfer Pricing Officer (TPO) under section 92CA and that Transfer Pricing Officer by his order dated December 28, 2006, held that prices at which said transactions took place between petitioner and its subsidiary in India were at arm's length prices and, therefore, no transfer pricing adjustment was required to be made under Chapter X of Act. learned senior counsel submitted that order of Transfer Pricing Officer was binding on Assessing Officer under section 92CA(4), which has not been considered by authority while issuing notice under section 148 of Act. learned senior counsel submitted that Assessing Officer had no jurisdiction or authority in law to raise any contention, which was contrary to or inconsistent with order of Transfer Pricing Officer passed under section 92CA. learned senior counsel further contended that reasons recorded by first respondent in issuing impugned notice under section 148 of Act is that petitioner's Indian subsidiary LGIL is in fact permanent establishment (PE) of petitioner company and, consequently, transactions between petitioner and its permanent establishment gives rise to income attributable to permanent establishment, which is assessable in hands of petitioner company in India. learned senior counsel hands of petitioner company in India. learned senior counsel contended that belief that subsidiary company of petitioner is in fact permanent establishment is based on no evidence rather is based on surmises and conjectures. learned senior counsel contended that even assuming without admitting that petitioner had permanent establishment in India, even then no income or profit could be determined or taxed in India in view of order of Transfer Pricing Officer. learned senior counsel contended that this reasoning of Assessing Officer was contrary to decision of Supreme Court in DIT (International Taxation) v. Morgan Stanley and Co. Inc. [2007] 292 ITR 416 (SC) wherein Supreme Court held that where Indian permanent establishment has received or paid arm's length prices for transactions into by it with foreign principal, then in law no further income assessable to tax in India could be attributable to permanent establishment, which could be assessed in hands of foreign principal. learned senior counsel contended that first respondent, while considering Morgan Stanley's case (supra), had committed manifest error in holding that prices at which permanent establishment's transactions took place were not at arm's length without considering order of Transfer Pricing Officer. learned senior counsel submitted that Assessing Officer bypassing order of Supreme Court in Morgan Stanley's case (supra) has made desperate attempt to justify notice under section 148 of Act, which was wholly illegal and without any authority of law and contrary to order of Transfer Pricing Officer. learned senior counsel submitted that petitioner had entered into various transactions with its Indian subsidiary with regard to supply of raw materials, export of finished goods and capital goods, receipts of royalty income, receipts of fees on technical services, commissions, reimbursement, etc. These transactions have been noticed by Assessing Officer from Form 3CEB filled by Indian subsidiary disclosing related party transactions under provisions of Chapter X of Act. Indian subsidiary has already deducted tax at source and deposited same with Government. Thus, there could not be any escapement of income. reasons to believe recorded by Assessing Officer that income of petitioner chargeable to tax had escaped assessment allegedly on account of these transactions relating to supply of raw materials, finished goods, commission and reimbursement was patently erroneous inasmuch as these transactions between petitioner and its Indian subsidiary has already been accepted by Transfer Pricing Officer and such findings have attained finality. learned senior counsel submitted that by resorting to reassessment proceedings Assessing Officer was seeking to sit on judgment and review findings of Transfer Pricing Officer, which could not be done. learned senior counsel submitted that transactions relating to sale of raw materials, etc., between petitioner and its subsidiary stood already disclosed by Indian subsidiary and was accepted by tax authorities and, consequently, tax authorities having themselves accepted same transactions in subsidiary company's case were precluded from attributing any further income in hands of petitioner so as to allege that any income chargeable to tax had escaped assessment for assessment year under consideration. learned senior counsel further submitted that respondents have patently ignored provisions of DTAA between India and Korea, which is applicable in instant case, as petitioner is tax resident of Korea and entitled to be governed by provisions of such DTAA and laws of Korea. learned senior counsel submitted that cardinal principle is that if transaction has been submitted by one arm of Government then it was not open to income-tax authorities to question same. On other hand, Sri G. C. Srivastava, learned counsel for Income-tax Department, submitted that Assessing Officer has reopened assessment proceedings on basis of material uncovered in survey proceedings dated June 24, 2010, which indicated that petitioner has permanent establishment (PE) in India for purpose of Income-tax Act. learned counsel submitted that survey under section 133A of Act was conducted on premises of Indian subsidiary in which statements of various heads and expatriate employees were recorded and subsequent inquiries were carried out on basis of which opinion was formed that petitioner was having business connection as per section 9(1)(i) of Act and has fixed place of business as per article 5(1) of DTAA. It was further submitted that this survey was carried out subsequent to order of Transfer Pricing Officer and that survey findings are not part of order of Transfer Pricing Officer. learned counsel submitted that petitioner has also not filed returns for assessment year in question raising possibility that income had escaped assessment under Act. notice issued under section 148 of Act has only been issued on basis of fresh materials uncovered in course of survey and, consequently, Assessing Officer was within its jurisdiction and had authority of law to issue notice. learned counsel submitted that transfer pricing order does not prohibit Assessing Officer from initiating proceedings under section 148 of Act. learned counsel submitted that once it is established that there exist permanent establishment of petitioner in India, then any income of non- resident, namely, petitioner, has to be determined and profits need to be attributed and taxed in India as per provisions of rule 10 of Income-tax Rules. Sri Srivastava submitted that under DTAA, if involvement of permanent establishment in India is established, then extent of income that can be taxed can be determined. Article 7 of DTAA is similar to section 9 of Income-tax Act, which spells out extent to which income of non- resident could be liable to tax in India. Section 9 has direct territorial nexus and relief under double taxation treaty having regard to provisions contained in section 90(2) would arise only in event, taxable income of assessee arises in one Contracting State on basis of approval of income in other Contracting State on basis of residence. learned counsel submitted that in attracting tax statute, there has to be some activity through permanent establishment and if income arises through permanent activity, principle of arm's length are required to be applied. mandate of provisions of section 10 empowers tax authorities to scrutinise all related transactions. In support of their submissions, learned counsel for parties have placed reliance on several decisions, which would be referred hereinafter at appropriate place. Income chargeable to tax that has escaped assessment has been provided under section 147 of Act. With effect from April 1, 1989, section 147 underwent amendment to effect that if Assessing Officer had "reasons to believe" that any income chargeable to tax had escaped assessment, Assessing Officer could assess or reassess such income. "Reasons to believe" has been subject matter of interpretation by various courts in various decisions. Division Bench of this court in Indra Prastha Chemicals P. Ltd. v. CIT [2004] 271 ITR 113 (All), after considering various decisions of Supreme Court and other High Courts, culled out following (page 118): "Under section 147 of Act, proceedings for reassessment can be initiated only if Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. question whether Assessing Officer had reasons to believe is not question of limitation only but is question of jurisdiction, vital thing, which can always be investigated by court in application under article 226 of Constitution as held in Daulatram Rawatmal v. ITO [1960] 38 ITR 301 (Cal); Jamna Lal Kabra v. ITO [1968] 69 ITR 461 (All); Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC); C. M. Rajgharia v. ITO [1975] 98 ITR 486 (Patna) and Madhya Pradesh Industries Ltd. v. ITO [1965] 57 ITR 637 (SC). words'has reason to believe' are stronger than words'is satisfied'. belief entertained by Assessing Officer must not be arbitrary or irrational. It must be reasonable or, in other words, it must be based on reasons which are relevant and material as held by apex court in Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1 (SC). expression'reason to believe' in section 147 does not mean purely subjective satisfaction on part of Assessing Officer. belief must be held in good faith; it cannot be merely pretence. It is open to court to examine whether reasons for belief have rational connection or relevant bearing to formation of belief and are not extraneous or irrelevant to purpose of section. To this limited extent, action of Assessing Officer in starting proceedings under section 147 is open to challenge in court of law as held in S. Narayanappa v. CIT [1967] 63 ITR 219 (SC); Kantamani Venkata Narayana and Sons v. First Additional ITO [1967] 63 ITR 638 (SC); Madhya Pradesh Industries Ltd. v. ITO [1970] 77 ITR 268 (SC); Sowdagar Ahmed Khan v. ITO [1968] 70 ITR 79 (SC); ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC); ITO v. Nawab Mir Barkat Ali Khan Bahadur [1974] 97 ITR 239 (SC); CST v. Bhagwan Industries (P.) Ltd. [1973] 31 STC 293 (SC) and State of Punjab v. Balbir Singh [1994] 3 SCC 299. formation of required opinion and belief by Assessing Officer is condition precedent. Without such formation, he will not have jurisdiction to initiate proceedings under section 147. fulfilment of this condition is not mere formality but it is mandatory. failure to fulfil that condition would vitiate entire proceedings as held by apex court in case of Johri Lal (HUF) v. CIT [1973] 88 ITR 439 (SC) and Sheo Nath Singh v. AAC of I. T. [1971] 82 ITR 147 (SC). reasons for formation of belief must have rational connection with or relevant bearing on formation of belief. Rational connection postulates that there must be direct nexus or live link between material coming to notice of Assessing Officer and formation of his belief that there has been escapement of income of assessee from assessment in particular year. It is not any and every material, howsoever vague and indefinite or distant, remote and far fetched, which would warrant formation of belief relating to escapement of income of assessee from assessment, as held by hon'ble Supreme Court in case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC). If there is no rational and intelligible nexus between reasons and belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain belief, conclusion would be inescapable that Assessing Officer could not have reason to believe. In such case, notice issued by him would be liable to be struck down as invalid as held in case of Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1 (SC). Thus, it is well settled that the'reason to believe' under section 147 must be Thus, it is well settled that the'reason to believe' under section 147 must be held in good faith and should have rational connection and relevant bearing on formation of belief and should not be extraneous or irrelevant. Further, this court in proceedings under article 226 of Constitution of India can scrutinize reasons recorded by Assessing Officer for initiating proceedings under section 147/148 of Act. sufficiency of material cannot be gone into but relevancy certainly be gone into." In Hindustan Lever Ltd. v. R. B. Wadkar, Asst. CIT (No. 1) [2004] 268 ITR 332 (Bom), Bombay High Court held (page 337): "The reasons recorded by Assessing Officer nowhere state that there was failure on part of assessee to disclose fully and truly all material facts necessary for assessment of that assessment year. It is needless to mention that reasons are required to be read as they were recorded by Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for Assessing Officer to reach to conclusion as to whether there was failure on part of assessee to disclose fully and truly all material facts necessary for his assessment for concerned assessment year. It is for Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. reasons recorded should be clear and unambiguous and should not suffer from any vagueness. reasons recorded must disclose his mind. Reasons are manifestation of mind of Assessing Officer. reasons recorded should be self-explanatory and should not keep assessee guessing for reasons. Reasons provide link between conclusion and evidence. reasons recorded must be based on evidence. Assessing Officer, in event of challenge to reasons, must be able to justify same based on material available on record. He must disclose in reasons as to which fact or material was not disclosed by assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between reasons and evidence. That vital link is safeguard against arbitrary reopening of concluded assessment. reasons recorded by Assessing Officer cannot be supplemented by filing affidavit or making oral submission, otherwise, reasons which were lacking in material particulars would get supplemented, by time matter reaches to court, on strength of affidavit or oral submissions advanced." In Jamna Lal Kabra v. ITO [1968] 69 ITR 461 (All), Division Bench of Allahabad High Court held (page 464): "It is clear that Income-tax Officer is bound to record reasons for issuing notice under section 148. requirement is mandatory. Before assessment can be had, Income-tax Officer must issue notice under section 148 and before that notice can be issued, he must record his reasons for doing so and must also upon those reasons obtain satisfaction of Board or Commissioner. recording of reasons is, in my opinion, prerequisite to assumption of jurisdiction by Income-tax Officer for initiating proceedings, for assessing or reassessing income which has escaped assessment. Those reasons are of particular significance when action is taken under clause (a) of section 147 because they indicate reasons which Income-tax Officer has in mind for believing that income has escaped assessment for assessment year by reason of one or other default of assessee specified in that clause. Sub-section (2) of section 148 requires Income-tax Officer to record his reasons for issuing notice under that section and it is necessarily envisaged that he will record all reasons he has in mind. This consideration acquires importance when question is raised as to what were reasons on basis of which Incometax Officer invoked jurisdiction conferred under clause (a) of section 147. To justify action by reference to clause (a) of section 147 it is not open to Income-tax Officer, in my opinion, to refer to reasons other than those recorded by him pursuant to sub-section (2) of section 148." There is no quarrel with aforesaid proposition. reason to believe does not mean purely subjective satisfaction on part of Assessing Officer. It means that belief must be held in good faith. Further, formation of opinion and belief is condition precedent without which Assessing Officer will not have jurisdiction to initiate proceedings for reassessment. reasons for formation of belief must have rational connection, which is germane to issue and must have direct nexus. Normally, there must be some fresh material, which would give rise to formation of belief that income had escaped assessment and, therefore, fresh material, which comes to notice of Assessing Officer has to have direct nexus or live link with formation of belief that there has been escapement of income. foundational requirement for reopening assessment is, that there must be reason to believe that income had escaped assessment. There has to be some tangible material on basis of which reason to belief can be formed that some income had escaped assessment. It is settled law that Assessing Officer having reasons to believe that there had been some omission or failure to disclose fully or truly all material facts necessary for assessment must be based on some material facts which, according to Assessing Officer, is based on some reasonable belief and which would have material bearing on question of underassessment. If there is no material for formation of any belief or where purported belief was nothing but mere change of opinion, in that case, Assessing Officer would have no jurisdiction to initiate proceedings under section 147 and section 148 of Act. Assessing Officer has power to reopen assessment where he has reasons to believe that income chargeable to tax has escaped assessment but such reassessment cannot be initiated on mere change of opinion to merely reexamine issue on basis of information or material which was already available to Assessing Officer at time of completion of original assessment. It is settled principle of law that "reason to believe" could never be outcome of change of opinion. Consequently, before taking any action, Assessing Officer is required to substantiate his satisfaction in reasons recorded by him. In CST v. Bhagwan Industries P. Ltd. [1973] 31 STC 293 (SC); AIR 1973 SC 370 Full Bench of Supreme Court held (page 299 of 31 STC): "Question in circumstances arises as to what is import of words'reason to believe', as used in section. In our opinion, these words convey that there must be some rational basis for assessing authority to form belief that whole or any part of turnover of dealer has, for any reason, escaped assessment to tax for some year. If such basis exists, assessing authority can proceed in manner laid down in section. To put it differently, if there are, in fact, some reasonable grounds for assessing authority to believe that whole or any part of turnover of dealer has escaped assessment, it can take action under section. Reasonable grounds necessarily postulate that they must be germane to formation of belief regarding escaped assessment. If grounds are of extraneous character, same would not warrant initiation of proceedings under above section. If, however, grounds are relevant and have nexus with formation of belief regarding escaped assessment, assessing authority would be clothed with jurisdiction to take action under section. Whether grounds are adequate or not is not matter which would be gone into by High Court or this court, for sufficiency of grounds which induced assessing authority to act is not justiciable issue. What can be challenged is existence of belief but not sufficiency of reasons for belief. At same time, it is necessary to observe that belief must be held in good faith and should not be mere pretence." At stage of examining validity of notice issued under section 148 of Act and reasons recorded by Assessing Officer, court is only required to see whether there was any tangible material before Assessing Officer to arrive at belief that income had escaped assessment. court is not to required whether tangible material would conclusively prove escapement of income as held by Supreme Court in Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 (SC). bona fide reason to believe is sufficient for Assessing Officer to issue notice under section 148 of Act as held by Supreme Court in Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC). Reasons to believe is on basis of tangible material which must have live link with formation of belief. reasons given by Assessing Officer for initiating action under section 148 of Act is that petitioner had entered into various transactions with its Indian subsidiary with regard to export of raw materials, export of finished goods, capital goods, receipts of royalty, receipts of fees for technical services, goods, capital goods, receipts of royalty, receipts of fees for technical services, receipts of alleged commissions and receipts of reimbursement. subsidiary company had deducted tax at source at payment made to it under heads "royalty" and "fees for technical services". petitioner had not paid any taxes on income earned by it from supply of raw materials, finished goods, etc. survey conducted under section 133A of Act revealed: (i) Indian company, LGIL, is 100 per cent. subsidiary company of petitioner and it does not function as independent corporate entity and is totally dependent on petitioner. (ii) All senior employees, i.e., heads of all departments are Koreans. hiring of these Korean expatriates is done by petitioner. (iii) While working in India, expatriates have lien over their employment over petitioner company and work on deputation in India clearly establishing continuous connection between subsidiary company and petitioner, which is nothing but business connection. (iv) employees do not report only to Indian management but also send reports to their principals in Korea. (v) Korean expatriates visit Korea and other countries very frequently for business purposes and implement decisions taken thereof. (vi) regional headquarters in Singapore monitors each and every function of Indian company. It provides business consultancy and financial consultancy to Indian company. (vii) regional director visits India regularly and monitors progress of Indian company. It also looks after interest of petitioner and other affiliates in region including India. (viii) order of raw material and finished products is placed from India on global portal provided by petitioner which is accessed by Indian company. This proves that there is continuity of business and office of LGIL is nothing but extension of petitioner company. (ix) petitioner company has menu card of products manufactured and launched by it. Indian company can only import and launch those products as independent business enterprise and cannot import or sell brands of any other company. (x) Indian company does not own brand. brand promoted in India is LG brand which is owned by petitioner. In India also brand is registered by petitioner. (xi) Indian company cannot hire expatriates from anywhere else other than Korea. Every requirement of heads of various divisions is processed by petitioner. (xii) Before launch of particular product, employees of petitioner company visit India and understand market and do comprehensive market survey which is core business activity and not ancillary or auxiliary business activity. (xiii) Once decision is taken to launch particular product in India is decided by petitioner company, they provide technology and details of parts to be used which are mainly supplied by petitioner and its other affiliates. (xiv) petitioner through its employees in India takes decision as to what part can be localized or procured locally. (xv) Once imported parts are decided by petitioner, quantity is decided by LGIL and order is placed through portal without any price negotiation as price is strictly decided by petitioner. (xvi) contract for sale is concluded in India once orders are placed. No agreements are signed and no negotiation takes place. However, employees of petitioner visit India to finalise deal and in order to estimate total sale to be made by them during particular period. (xvii) As per petitioner sale is on C & F basis and, therefore, sale is concluded in India. (xviii) managing director of LGIL reports to headquarters at Singapore and Korea and is responsible to petitioner. (xix) For imports made by Indian company, it has not done any analysis of comparative pricing or price at which it can get product from any other company. On basis of aforesaid, Assessing Officer reasoned that assessee's income from above transaction was taxable in India as per section 9(1)(i) of Act. Assessing Officer found that employees of petitioner were using office of subsidiary company as front for conducting their own business and, consequently, found that office of Indian company was functioning as permanent establishment and was fixed place of business available to petitioner as per article 6(1) of DTAA between India and Korea. Assessing Officer, on basis of survey, drew following conclusions, namely:- (i) There is continuity of business between Indian company and non-resident. (ii) transaction of import is not isolated transaction but close business connection on regular basis. (iii) non-resident is doing business in India through its employees who are heading various divisions in Indian company and also through employees visiting India regularly. (iv) There is close business connection in terms of dependence of Indian company on non-residents for all imports as it does not have authority or choice to make imports from any other concerns other than LG affiliates. (v) whole transaction is so intermixed that supply of equipment cannot be segregated from supply of technology and marketing of product. Each transaction is dependent on other and has close nexus with India. (vi) products supplied including raw material and finished products are customized for India, e.g., sound system in television is customized for India as per local needs. Indian company is nothing but extension of Korean local needs. Indian company is nothing but extension of Korean company. If we analyse functioning of LG India it works as branch of LG Korea. (vii) LG India and LG Korea work as partners in business. (viii) transaction between both parties are so inter linked that Indian company cannot move inch without support and supplies of non-resident. (ix) function of Indian company is marketing for nonresident companies to build their brand and also manufacturing which is primarily assembly of products already launched by non-residents. (x) business arrangement between two company is something like partnership where roles are defined and divided but ultimate decision is taken by non-residents. On aforesaid basis, Assessing Officer concluded that assessee had business connection in India and was liable to be taxed under section 9(1)(i) of Act and income is taxable in India under article 7 of DTAA as petitioner has permanent establishment in India. Assessing Officer, in view of facts, concluded that petitioner has fixed place of business available to it in office of its subsidiary company and is carrying on its business in India. This fixed place of business was available to employees of petitioner, who are either stationed permanently or visited India for business purposes. Assessing Officer submitted that under normal circumstances, subsidiary cannot be recorded as permanent establishment if subsidiary has its own independent business function. But, in instant case, subsidiary company is also functioning as permanent establishment and since functions of subsidiary company are not independent of business of parent company, namely, petitioner, Assessing Officer concluded that from extracts of statements and documents impounded during survey operation it was established that petitioner not only had business connection but had permanent establishment in India and since no returns were filed, its income had escaped assessment as per provisions of section 147 read with section 148 of Act. Assessing Officer found that total value of transaction was Rs. 2,41,14,53,972 and if profit of 25 per cent. was applied income from above transaction would come to Rs. 60,28,63,493, which had escaped assessment. At this juncture, it would be relevant to reproduce certain provisions of DTAA (see [1987] 165 ITR (St.) 191, 193). "The Government of Republic of India and Government of Republic of Korea desiring to conclude Convention for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income, have agreed as follows: 5. Permanent establishment.-(1) For purposes of this Convention, term'permanent establishment' means fixed place of business through which business of enterprise is wholly or partly carried on. (2) term'permanent establishment' shall include especially- (a) place of management; (b) branch; (c) office; (d) factory; (e) workshop; and (f) mine, oil or gas well, quarry or any other place of extraction of natural resources. (3) term "permanent establishment" likewise encompasses building site, construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for period of more than nine months. (4) Notwithstanding preceding provisions of this article, term "permanent establishment" shall be deemed not to include: (a) use of facilities solely for purpose of storage, display or delivery of goods or merchandise belonging to enterprise; (b) maintenance of stock of goods or merchandise belonging to enterprise solely for purpose of storage, display or delivery; (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 for collecting information, for enterprise; (e) maintenance of fixed place of business solely for purpose of advertising, supply of information, scientific research or any other activity, if it has preparatory or auxiliary character in trade or business of enterprise; (f) maintenance of fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of this paragraph, provided that overall activity of fixed place of business resulting from this combination is of preparatory or auxiliary character. (5) Notwithstanding provisions of paragraphs (1) and (2) if person- other than agent of independent status to whom paragraph (6) applies-is acting on behalf of enterprise and has, and habitually exercises, in Contracting State authority to conclude contracts in name of enterprise, that enterprise shall be deemed to have permanent establishment in that State in respect of any activities which that person undertakes for enterprise unless activities of such person are limited to those mentioned in paragraph (4) which, if exercised through fixed place of business, would not make this fixed place of business permanent establishment by virtue of that paragraph. (6) enterprise shall not be deemed to have permanent establishment in Contracting State merely because it carried on business in that State through broker, general commission agent or any other agent of independent status, where such persons are acting in ordinary course of their business. (7) fact that company which is resident of Contracting State contracts or is controlled by company which is resident of other Contracting State, or which carried on business in that other State (whether through permanent establishment or otherwise) shall not of itself constitute either company permanent establishment of other... 7. Business profits.-(1) profits of enterprise of Contracting State shall be taxable only in that State unless enterprise on business in other Contracting State through permanent establishment situated therein. If enterprise carried on business as aforesaid, profits of enterprise may be taxed in other State but only so much of them as is attributable to that permanent establishment. (2) Subject to provisions of paragraph (3), where enterprise of Contracting State carried on business in other Contracting State through permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment profits which it might be expected to make if it were distinct and separate enterprise engaged in same or similar activities under same or similar conditions and dealing wholly independently with enterprise of which it is permanent establishment. (3) In determination of profits of permanent establishment, there shall be allowed as deductions expenses which are incurred for purposes of permanent establishment including executive and general administrative expenses so incurred whether in State in which permanent establishment is situated or elsewhere, which are allowed under provisions of domestic law of Contracting State in which permanent establishment is situated. (4) No profits shall be attributed to permanent establishment by reason of mere purchase by that permanent establishment of goods or merchandise for enterprise. (5) For purposes of preceding paragraphs, profits to be attributed to permanent establishment shall be determined by same method year by year unless there is good and sufficient reason to contrary. (6) Where income or profits include items of income which are dealt with separately in other articles of this Convention, then provisions of those articles shall not be affected by provisions of this article." Section 9 of Income-tax Act is similar to article 7 of DTAA. Section 9 provides that income accruing directly or indirectly, through or from any business connection in India shall be deemed to be income accruing or arising in India. Hence, where person entitled to such income is nonresident, it would be included in his total income. However, article 7 of DTAA further stipulates that permanent establishment must exists in India before income accrues and is taxable in India. Once permanent establishment exist and business is being carried out through permanent establishment then profits, being necessary consequence, needs to be attributed and taxed in India as per rule 10 of Income-tax Rules. establishment of permanent establishment presupposes that business operations are being carried out for profit. Clause (1) of article 7 provides that if income arises in Korea, which shall be taxable in that country unless enterprise carries on business in other Contracting State, i.e., in India through permanent establishment situated therein. From aforesaid, we find that what is to be taxed is profits of enterprise in India but only so much of it as is directly or indirectly attributable to that permanent establishment. For attracting taxing statute there has to be some activity through permanent establishment. If income arising through activity of permanent establishment is established in which case, profits would be attributed and taxed in India. Article 5 of DTAA defines "permanent establishment". Section 92F(iiia) of Act also defines "permanent establishment". Supreme Court in Morgan Stanley's case (supra) held that definition of permanent establishment in DTAA is exhaustive whereas definition under Act is inclusive. Section 9 of Act spells out extent to which income of nonresident, namely, petitioner would be liable to tax in India. In light of aforesaid and on perusal of reasons recorded by Assessing Officer, it is evident that there is rational and in live nexus between reasons recorded and belief that income had escaped assessment. Once Assessing Officer comes to conclusion that petitioner has permanent establishment and is carrying out its business activities through this permanent establishment for purpose of supply of raw materials and finished products and that permanent establishment was available to employees of petitioner, who were either permanently stationed or came to India for business purposes, we are of view that Assessing Officer has given valid reasons to believe that income had escaped assessment. court finds that once permanent establishment comes into existence, which presupposes that business operations are being carried out for purpose of profit in which case profits or income needs to be attributed and taxed in India. Admittedly, no returns were filed by petitioner. Assessing Officer had tangible material to form belief that income had escaped assessment and, consequently, rightly issued notice under section 148 of Act. decision cited by learned counsel for petitioner in case of G. S. Engineering and Construction Corporation v. Deputy DIT (International Taxation) [2013] 357 ITR 335 (Delhi) is not applicable in facts of this case. contention that there was no fresh material before Assessing Officer to come to belief that income had escaped assessment is patently erroneous. analysis made from survey report and documents so impounded has led Assessing Officer to reasonably believe that income had escaped assessment on account of fact that petitioner was carrying on business operation in India through permanent establishment. contention that there was no application of mind is patently erroneous. reasons to believe recorded by Assessing Officer clearly shows that in depth study and analysis was made and reasons were recorded in detail in arriving at belief that income had escaped assessment. contention that as per provisions of Chapter X of Act Indian subsidiary, in terms of provisions of section 92E of Act, had disclosed all transactions with petitioner relating to purchase of raw materials, finished transactions with petitioner relating to purchase of raw materials, finished goods, commission and reimbursements and further, in terms of section 92CA of Act, Transfer Pricing Officer of Indian subsidiary had already examined said transaction and by its order dated December 20, 2006, found same to be meeting arm's length principle, consequently, Assessing Officer was precluded from drawing any inference that any further income of petitioner from same transactions was chargeable to tax had escaped assessment is erroneous and cannot be accepted. In Morgan Stanley's case (supra), Supreme Court held (page 442 of 292 ITR): "The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with permanent establishment In India. foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to permanent establishment in India. quantum of taxable income is to be determined in accordance with provisions of Income-tax Act. All provisions of Income-tax Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set off losses, etc." Once Assessing Officer is satisfied that permanent establishment of petitioner exists in India and business is being conducted from this permanent establishment, attribution of profits is necessary consequence. order of Transfer Pricing Officer will not come in way for reason that Transfer Pricing Officer's order is in relation to transactions between subsidiary company and petitioner. situation becomes different when subsidiary company also works as permanent establishment of petitioner. Once permanent establishment is established, petitioner becomes liable to be taxed in India on so much of its business profits as is attributable to permanent establishment in India. order of Transfer Pricing Officer is in relation with subsidiary company and not in relation with permanent establishment of petitioner. transfer pricing analysis is to be undertaken between petitioner and its permanent establishment which has not taken place as yet. Once transfer pricing analysis is done, computation of income arising from international transaction has to be done keeping in mind principle of arm's length price. Once this is done, there is no further need to attribute profits to permanent establishment. However, where transfer pricing analysis does not take into account all risk taking functions of enterprise and it does not adequately reflect function performed and risk assumed by petitioner, situation would be different and, in such situation, there would be need to attribute profits to permanent establishment for those functions/risk that have not been considered. This is precisely what was considered in Morgan Stanley's case (supra) wherein Supreme Court held (page 443 of 292 ITR): "As regards attribution of further profits to permanent establishment of MSCo where transaction between two are held to be at arm's length, we hold that ruling is correct in principle provided that associated enterprise (that also constitutes permanent establishment) is reimbursed on arm's length basis taking into account all risk taking functions of multinational enterprise. In such case nothing further would be left to attribute to P.E. situation would be different if transfer pricing analysis does not adequately reflect functions performed and risks assumed by enterprise. In such case, there would be need to attribute profits to permanent establishment for those functions/risks that have not been considered. entire exercise ultimately is to ascertain whether service charges payable or paid to service provided (MSAS in this case) fully represent value of profit attributable to his service." Further, we find that survey was made much after order of Transfer Pricing Officer, which survey and documents so impounded revealed existence of permanent establishment of petitioner and its business operations in India through its permanent establishment without disclosing its taxable income. We are of opinion that order of Transfer Pricing Officer is not binding at stage of issuance of notice and, in any case, it would be open to petitioner to take stand that transactions with subsidiary company and/or with permanent establishment, being same, no further tax could be levied. At stage of examining validity of notice issued under section 148 of Act, issue is limited only as to whether there existed under section 148 of Act, issue is limited only as to whether there existed any reasons for Assessing Officer to believe that income had escaped assessment. Consequently, for reasons stated aforesaid, we do not find any infirmity in issuance of notice under section 148 of Act. All writ petitions fails and are dismissed. In circumstances of case, parties will bear their own costs. *** Principal Officer, L. G. Electronics Inc. v. Assistant Director of Income-tax, International Taxation
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