ORDER
D.K. Tyagi, Judicial Member :
The assessee has filed this appeal against the order of the learned CIT(A) dt. 21st March, 2006 for the asst. yr. 2002-03. The assessee initially took nine grounds of appeal, whieh were on the direction of the Bench modified as under :
1.
" Based on the facts and circumstances of the ease and in law, the learned Commissioner of Income-tax (Appeals)-XL ["CIT(A)"] has erred in disregarding the fact that the liaison offices ("LOs") operate in India in accordance with the specific approval granted by Reserve Bank of India ("RBI") and carry on the specified activities as permitted by RBI.
2.
Based on the facts and circumstances of the case and in law, the learned CIT(A) has erred in concluding that the appellant has business connection in India within the meaning of s. 9 of the IT Act, 1961 (''Act").
3.
Based on the facts and circumstances of the ease and in law, the learned CIT(A) has erred in concluding that the appellant has Permanent Establishment ("PE") in terms of art. 5 of the Double Taxation Avoidance Agreement between India and Japan ("tax treaty").
4.
4. Without prejudice to above grounds, based on the facts and circumstances of the case and in law, the learned CIT(A) has erred in attributing income to the PE
of the appellant in India on an unreasonable and arbitrary basis disregarding the provisions of art. 7 of the tax treaty."
2. The assessee vide his application dt. 30th Jan., 2007 also applied under r. 29 of the ITAT Rules for production of additional evidence in the form of following documents :
(i)
" Copy of auditor's certificate dt. 19th Aug., 2002 certifying that no income was earned/accrued by the liaison offices for the year ending 31st March, 2002;
(ii)
Copy of the auditor's certificate dt. 19th Aug., 2002 certifying that all the; expenses of the liaison offices were incurred out of the inward remittances received from abroad;
(iii)
Copy of assessment submission dt. 30th Nov., 2005 for asst. yr. 2004 05 detailing the nature of activities carried out by the liaison offices;
(iv)
Copy of letter dt. 2nd Dec, 1983 to RBI for opening of liaison office at Pune;
(v)
Correspondence from the RBI dt. 19th Jan., 2002."
3. After hearing both the parties in the matter, the assessee was allowed to produce the additional evidence as this evidence throws light on the undisputed facts of the case and will help us in disposing of this appeal.
4. Brief facts of the case as emerged from the assessment order are that M/s Nissho Iwai Corporation (now known as M/s Sojitz Corporation) is a topnotch trading and export house of Japan which has its presence in different parts of the globe including India. The 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, the assessee company initially set up four branch offices in New Delhi, Kolkata, Mumbai and Chennai in the year 1957. Subsequently, new offices were established at Bangalore, Pune and Jamshedpur. Last such office located at Jamshedpur was opened in the year 1974. Branch offices at four metros were headed by an expatriate officer of the rank of General Manager and was assisted by other expatriate officers of the 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 a period of three years or more. During the period under review, assessee incurred cumulative establishment expenses of Rs. 18,00,02,031 for Indian operations.
The AO further observed that assessee had been carrying on its Indian operations for last 45 years at the 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 the Government of India and furnishing of the same to the 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 the assessee company had been admitted to be one of the main assignments of the Indian offices. Officers/officials of Indian establishments had been doing the job of interpreters of English-Japanese and vice versa. They had been assisting the visiting delegates of the company in India and also doing liaison work on behalf of various overseas establishments of the company with the 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 the 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 the global profit.
According to AO s. 9(1)(i) of the 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 the previous year to a non-resident is taxable in India by virtue of s. 5(2) of the 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 the Indo-Japan treaty means "a fixed place of business through which the business of an enterprise is wholly or partly carried on". In the instant case assessee did have fixed places of business in India. Further OECD Model Convention Commentary on art. 5 says that a fixed place of business whose general purpose is identical to the general purposes of the whole enterprise does not exercise a preparatory and auxiliary activity. It goes on to add that such fixed place of business which has the function of managing an enterprise or even only a part of an enterprise or of a group of the concern cannot be regarded as doing a preparatory and auxiliary activity. If an enterprise with international ramifications establishes a so-called 'management office' in States in which they maintain subsidiaries, PEs, agents or licensees etc. a 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 the art. 5 of the Indo-Japan treaty.
5. Assessee took following arguments before the AO :
(i)
Indian offices were doing liaison work under the 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 the manufacturers representatives from Japan under the instructions of the head office in Japan.
6. After taking these submissions into consideration AO was of the 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. A portion of such profits is remitted back to India for sustenance of the Indian offices. Hence, Indian offices will constitute PEs of the non-resident enterprise in the facts of the case. Para 1 of art. 7 of the DTAA between India and Japan states that so much of the profits of an enterprise of a Contracting State may be taxable in other Contracting State as is directly or indirectly attributable to the 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 the 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 the 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 the profits attributable to the PE in India. The AO calculated operating profit/ret 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 the Act r/w art. 7 of the DTAA between India and Japan.
7. Aggrieved by this order of the AO, assessee went in appeal before the first appellate authority.
8. Before the learned CIT(A) assessee reiterated the stand taken by him before the AO and filed written submissions on which comments of the AO were sought. After taking into consideration the submissions of the assessee and comments on them by the AO, learned CIT(A) confirmed the stand taken by AO by observing as under :
"6. I have carefully considered the rival submissions with reference to facts of the case, is involved and material placed before me. It is observed that it is the essence of an activity and not nomenclature which is material. In other words, what is decisive is not the form but the substance of an activity or transaction. The argument that massive expenditure was incurred only on 'liaison activities' and so to say collection of information' as such, fails my logic. If the 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 an activity which is not likely to yield any income. Such a plea therefore, does not impress me. Illogicality of appellant's claim, as above, becomes more pronounced by the fact that the appellant carried out its principal activities through a large number of highly specialized subsidiaries as well as regimentalised departments headed expatriate officers of the rank of DGM/AGM. I am not inclined to accept that all those special subsidiaries and departments would be necessary merely for the purpose of collecting and sending the information to its head office in Japan. Further, the 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 the returns of income that a sizeable part of remittances from Japan was utilized for meeting TDS liability on substantial amount of fees paid to expatriate Japan staff on deputation in India. The amount of TDS on such payments to expatriate staff stands Rs. 3,01,98,462 for the year in question. The 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. The 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 the fact in no uncertain terms that appellant carried out its activities through a 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 the character of principal activities carried out by the appellant in India.
6.1 Having regard to the facts discussed above, I find myself in agreement with AO's finding that activities of the 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 the 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. The appellant had fixed places in India through which it carried out its principal activities. As per art. 5 of DTAA between Indian and Japan, the Indian offices of the appellant which were the fixed places were the "PE" and therefore, art. 7 of the said treaty read with ss. 5(2) and 9(1)(1) of the 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 the given contest.
6.2 As it has emerged that the activities of the 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 been substantiated by appellant's Authorised Representative. There is no undenying the fact that general purpose of appellant's Indian offices which constituted "PEs", being fixed places of business, was identical with the general purpose of appellant enterprise as a 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 the decision in the case of CIT v. V.R. S.R.M. Jirm is found to be out of context and hence, appellant does not receive any assistance from the said decision in this regard.
6.3 As regards the plea that returns of income filed by the appellant in the past were accepted, it is observed that simply because the issue was not scrutinized in the past does not mean that appellant's stand was necessarily correct. Such a plea fails to take the substance out of the matter.
6.4 Since no challenge has been posed in respect of method of calculation of operating profit/net profit adopted by the AO, no intervention is called for in this respect.
6.5 In view of above discussion and in the circumstances, grounds of appeal preferred by the appellant fail and are dismissed accordingly, confirming the action of the AO in determining the total income of the appellant at Rs. 15,48,850 by invoking the provisions of s. 9(1)(i) of the Act read with art. 7 of DTAA between India and Japan."
9. Aggrieved by these orders of the lower authorities now the assessee is in appeal before us. At the time of hearing learned counsel of the assessee submitted that the assessee is a non-resident: foreign company incorporated under the provisions of law relating to companies in Japan. The assessee is engaged in the business of trading of goods. The assessee had applied for permission to the RBI to open a liaison office in India on the 30th of January, 1974. Accordingly permission was granted by the 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 the RBI vide its communication dt. 8th Feb., 1975. The RBIIs approval specifically stipulates that the activities of the liaison offices are restricted to only the collection and sending of information from India to Japan. The permission was granted by the RBI subject to the following conditions as specifically stipulated in the approval itself :
(a)
The entire expenses of the 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 the liaison activities to be rendered by the Indian offices;
(c)
Excepting the said liaison work, the offices will not undertake any activity of a trading, commercial or industrial nature without the prior permission of the Reserve Bank.
(d)
The liaison offices will furnish to the RBI on yearly basis details of the remittances received from abroad to meet their expenses in India, together with the bank certificates showing receipt of funds and certified copy of the final accounts of the office, quoting a reference to the RBI's letter.
10. She further submitted that as per the stipulation of the Reserve Bank set out in point (d) above, the assessee has been furnishing to the RBI the complete details of the remittances and a copy of the final accounts along with an auditor's certificate confirming that the conditions stipulated by the RBI have been observed. She further submitted that the activities of the liaison offices in India are restricted to the collection of information within India and relaying to the head office of the same. This activity is clearly of a preparatory/auxiliary nature, and no income/revenue has been generated out of the same. In fact there is a statutory bar on the earning of income by the liaison offices (LOs) in India by the RBI and admittedly this requirement is under constant monitoring by the RBI and has been found to be in order till date.
11. The learned counsel of the assessee submitted that the AO took the view that the LO was a PE of the Japanese entity in India. This conclusion was reached by the AO even while admitting in the assessment order that the main activity of the LO was the collection of necessary information on economic and industrial policy of the Government of India and furnishing of the same to the head office at Japan, acting as a courier of documents between Indian establishments and the Japanese head office and assisting delegates and officials of the 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 the AO or the CIT(A) to justify their conclusion that the LO is a PE of the assessee. The conclusion of the AO is, therefore, totally baseless insofar as the same is not in consonance with the specific directions of and the permission granted by the RBI and without any evidence brought on record concerning any other activity carried on by the LO that would render it a PE. This submission of the assessee is further strengthened by the computation of income by the AO who has merely estimated the income of the LO from the total profits of the Japanese entity as set out in the company's website. The AO proceeded on surmises and presumptions in making the said estimate and the very fact that he had to resort to this method of estimation reflects the lack of material and evidence to substantiate such an assessment.
12. Learned counsel of the assessee referred to the provisions of the Double Taxation Avoidance Agreement between India and Japan. Art. 5 defines "PE". Reliance was placed on sub-cl. (e) of cl. 6 which excludes the maintenance of a fixed place of business for the purpose of carrying on activity of a preparatory or auxiliary character from the purview of "PE". It was submitted that the activity permitted by the RBI to be carried on by the LO is merely the collection and supply of information to Japan which is clearly of a preparatory/auxiliary nature. Admittedly, the LO does not have powers of concluding contracts on behalf of the assessee and docs not carry on any other activity wherein it assumes decision making authority on behalf of the head office. The activities, therefore, clearly fall within the exclusionary clause of art. 5, cl. 6(e) of the DTAA. She further submitted that the OECD Commentary on the Model Tax Convention supports the assessee's stand insofar as it clarifies that even a fixed place of business shall not be deemed to be a PE, if the overall activity carried on therein is of preparatory or auxiliary character.
13. She further relied on the Foreign Exchange Management (Establishment in India of a Branch or Office or Other Place of Business) Regulations, 2000, pursuant to which notifications have been issued by the RBI setting out guidelines concerning the establishment in India of a branch office or other place of business for a person resident outside India. The annexure at internal p. 180 of the above stipulates that the LO shall not carry on any other activity other than the activity for which approval has been granted by the RBI. The compliance of this is evidenced by an auditor's certificate filed before the RBI and the same has been consistently accepted. She further submitted that the above submissions would establish that the LOs of the 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 the same. This is an admitted position insofar as the Department has not produced any material to the contrary. These activities clearly constitute operations that are preparatory and auxiliary and admittedly the LOs do not have any contract concluding/decision making authority. They would, thus, fall within the exclusionary clause i.e. sub-cl. (e) of cl. 6 of art. 5 of the DTAA between India and Japan. She further submitted that the provisions of the IT Act also support the assessee's case. The learned Authorised Representative of the assessee placed reliance on the following decisions :
(i)
Union of India v.
Azadi Bachao Andolan [2003] 184 CTR (SC) 450 : [2003] 263 ITR 706 (SC);
(ii)
CIT v.
P.V.A.L. Kulandagan Chettiar (
Dead)
Through LRs [2004] 189 CTR (SC) 193 : [2004] 267 ITR 654 (SC);
(iii)
Commissioner Of Income-Tax, A.P-I v. 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. v.
Addl. Director of IT [2006] 101 TTJ (Del)56;
(vii)
UAE Exchange Centre LUC, 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 the assessee further submitted that the assessee has been engaged in identical operations for the last 45 years. This is an admitted fact as set out in the assessment order itself. Accordingly, since the Department has accepted the fact that the LO of the assessee, in India, has been carrying on only preparative and ancillary activities and is not a PE for the last many years, it is now estopped from questioning this established factual and legal position in the absence of any other material or evidence to support a deviation from the establishment position. She further placed reliance on the following decisions of the Supreme Court and High Courts :
(i)
Parashuram Pottery Works Co. Ltd. v.
ITO 1977 CTR (SC) 32 : [1977] 106 ITR 1 (SC);
(ii)
Radhasoami Satsang v.
CIT [1991] 100 CTR (SC) 267 : [1992] 193 ITR 321 (SC);
(iii)
Berger Paints India Ltd. v. Commissioner Of Income Tax, Calcutta [2004] 187 CTR (SC) 193 : [2004] 266 ITR 99 (SC);
(iv)
Dunlop Rubber Co. Ltd. v.
ITO [1971] 79 ITR 349 (Cal)
; and
(v)
Shree Hanuman Sugar & Industries Ltd. v.
CIT [2004] 187 CTR (Cal) 455 : [2004] 266 ITR 106 (Cal).
In above cases Hon'ble Courts have laid down the proposition that though the strict principles of res judicata are not applicable to IT proceedings, factual and legal positions that are accepted by the Department consistently should not be reopened or disturbed on a mere whim unless there are additional and compelling facts that are brought on record by the Department to do so. In the instant case, no new material has been brought on record by the assessee and the lower authorities merely change their stance on the same facts that has been accepted by the Department for the last nearly five decades.
14.1 Concluding her arguments learned counsel has prayed that since LOs of the assessee in India have been carrying on only preparatory and auxiliary activities, same may not be treated as PE of the assessee for income-tax purpose.
15. Learned Departmental Representative on the other hand relying on the orders of the lower authorities submitted that mere approval of RBI for the activities carried out by the LOs is not sufficient for not treating them as PE of assessee in India. What is important is the actual activity carried out by the LOs. Making reference to pp. 24 and 25 of the paper book, he further submitted that assessee has spent Rs. 49 crores during the year on the LOs maintained in India which shows the value of information furnished by the LOs, otherwise no businessman would incur huge expenses only for gathering insignificant information only. Referring to pp. 32 to 35 of the paper book wherein the organization chart of Kolkata office has been shown learned /Departmental Representative submitted that the officials of the 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. The head office in turn uses this information to enter into contract with the Indian principals. Thus according to the learned Departmental Representative the assessee camouflaged the word liaison and used the specialized information collected directly for its business purposes. In the case of UAE Exchange Centre LLC (supra) 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. The facts of the instant case are similar and, therefore, he pleaded that the LOs maintained by the assessee have rightly been treated as PE of the assessee.
16. Coming to the question of how the profits are taxed and the basis for that learned Departmental Representative referred to Explanation to cl. (i) of s. 9(1) that only such part of the income as is reasonably attributable to the operations which are carried1 out in India should be treated as deemed accrued income of the assessee from the business connected (sic)in India. The AO in his order has been very reasonable in estimating the income of the assessee.
17. Coming to the point of res judicata to the IT proceedings learned Departmental Representative relied on following case law :
(i)
M. Chettiappan v.
ITO [1968] 67 ITR 106 (SC);
(ii)
Karnani Properties Ltd. v. Commissioner Of Income Tax, West Bengal [1971] 82 ITR 547 (SC).
Learned Departmental Representative submitted that res judicata is not applicable in the IT proceedings and, therefore, 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.
18. Learned Departmental Representative, referring to p. 36 wherein the 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 the establishments in India are not only sending information but also receiving information from head office which is violation of RBI guidelines. Referring to the same page learned Departmental Representative further submitted that this LO was not only sending information to Japan but also to the local parties obviously for not as a charity but for some other benefits which is not clearly included in the RBI guidelines hence, it is violation of RBI guidelines. Taking care of the argument of the assessee that no evidence has been brought on record by either assessing authority or the CIT(A) to justify their conclusion that LO is a PE of the assessee learned Departmental Representative referred to p. 17, para 6 of the paper book to show that CIT(A) clearly brought out the facts on record and discussed point after point which is of logical conclusion drawn by the CIT(A) based on circumstantial evidence and submissions of the Authorised Representative. Similarly the AO discussed in his assessment order at pp. 2 to 9 the reasons for holding these LOs as the PE of the assessee.
19. 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. Therefore, the assessee now cannot take the plea that the AO has not (sic) estimated the income without any basis or evidence. While making this submission he relied on the case of Dy. Director of IT v. Set Satellite ( Singapore) Pte. Ltd. [2007] 108 TTJ (Mumbai) 445 : [2007] 106 ITD 175 (Mumbai) .
20. Learned Departmental Representative also referred to expatriate agreement available at pp. 38 to 42 of the paper book to show that the 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 the violation of the RBIguidelines.
21. Learned Departmental Representative further submitted that the facts of the cases relied by assessee were different from the facts of this case and, therefore the ratio of those decisions is not applicable in the instant case.
22. Concluding his argument learned Departmental Representative submitted that the lower authorities have rightly estimated the income of the company by treating the LOs as PE of the company in India.
23. 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 (supra) is misplaced as the Hon'ble Authority for Advance Rulings in the case of UAE Exchange Centre LLC, In re (supra) 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 earned on by the assessee. She further submitted that amount of money spent by the company on their LOs is not relevant to decide the issue in the instant case. The business activity of the assessee is restricted to the activity mentioned in the approval of the RBI and is restricted to preparatory activities, and only this is relevant to decide the nature of LOs.
24. Coming to the reference made by the learned Departmental Representative to the organizational chart of the personnel of the LOs learned counsel of the assessee submitted that mere fact that the assessee has an organizational set up with personnel dealing with the different aspects of the administration is of no consequence to the legal issue agitated in this appeal as would be evident from the approval of the RBI, the LO has been approved only to collect information and relay the same back to its head office in Japan. It is for this purpose that the personnel are deputed and this does not change the nature of activities of the LO which acts only as a post office for collecting information and transmitting the same to and from the head office in Japan. As far as the reliance placed by the learned Departmental Representative on the activities carried out by the LO in the case of UAE Exchange (supra) is concerned, learned counsel of the assessee submitted that in the instant case there is only one approval from the Government of India which approves the activities concerning the collection and relay of information to Japan. No other activity is approved by the RBI which places the facts of the instant case on a totally different footing from those in the case of UAE Exchange Centre LLC (supra).
25. Learned counsel of the assessee further submitted that the learned Departmental Representative has attempted to distinguish the case of Angel Garment (supra) which is not correct insofar as the Hon'ble Authority for Advance Rulings held in that case that where a LO has been set up with the approval of the RBI to carry out certain demarcated activity the same would not constitute a PE. The decision applies on all fours to the facts of the instant case.
26. With reference to the case law in the case of Educational Institute of American Hotel & Motel Association, In re (supra), learned counsel submitted that this case law supports the assessee's contention insofar as the Hon'ble Authority for Advance Rulings after considering the approval of RBI held that applicant in that case was entitled to the benefit sought.
27. Learned counsel further submitted that the contention of the learned Departmental Representative that assessee is only authorized to send information and not to receive the information is actually erroneous and wholly misconceived since the LO is authorized to both receive and send information to and from Japan and, therefore, there is no reason of any violation of the approval of the RBI.
28. Coming to the official website of the company learned counsel submitted that it is not disputed that this website would to an extent reflect the performance of the entity however, it cannot be the sole basis on which a conclusion concerning the existence of a PE can be drawn in total disregard to the legal and statutory principles.
29. So far as the reliance by the Department on the order of Mumbai Tribunal in the case of Set Satellite (supra) is concerned learned counsel of the assessee submitted that the facts of that case are totally distinguishable to the facts of the instant case, insofar as it relates to a dependent agent who as per the DTAA itself is deemed to be a PE. In the instant case the law is entirely different insofar as an entity which is carrying on functions of a preparatory nature has been specifically excluded from the purview of a PE by the DTAA. The said decision is, therefore, totally distinguishable both in law and on facts. Learned Departmental Representative's reference to the agreement entered into by the assessee with its expatriates is totally extraneous and irrelevant in the present context, according to the learned counsel of the assessee.
30. Coming to the case law concerning the non-applicability of the principles of res judicata, learned counsel of the assessee sumitted that they are entirely out of context insofar as they do not change the position laid down by the Supreme Court, various High Courts and Tribunals stating that a position accepted by the Department can be changed only where there is a marked difference in fact from year to year and not otherwise. In the instant case, as submitted earlier the assessee is in the same line of business for the last 45 years and admittedly has not changed its line of operation. There is, therefore, no warrant for the instant impugned proceeding.
31. Concluding her arguments learned counsel submitted that the lower authorities were not justified in treating the LO maintained by the assessee as PE of the assessee in India and accordingly not justified in estimating the income of the company on such basis.
32. Heard both the parties, perused the record, paper books filed by the assessee and the case law relied by both the parties. The only issue involved in this appeal is whether LOs maintained by the assessee can be treated as PE of the 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 the provision of the DTAA will override those of the IT Act. In Union of India v. Azadi Bachao Andolan (supra) Hon'ble apex Court has held as under :
"A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that s. 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a DTAA. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the IT Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under s. 4 and the general principle of ascertainment of total income under s. 5 of the Act, then there was no purpose in making those sections subject to the provisions of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under s. 90 towards implementation of the terms of the DTAAs which would automatically override the provisions of the IT Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC."
In CIT v. P.V.A.L. Kulandagan Chettiar (supra) the Hon'ble apex Court held as under :
"Where liability to tax arises under the local enactment the provisions of ss. 4 and 5 of the Act provide for taxation of global income of an assessee chargeable to tax thereunder. It is subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for avoidance of double taxation as envisaged under s. 90 to the contrary, if any, and such an agreement will act as an exception or modification of ss. 4 and 5 of the IT Act. The provisions of such agreement cannot fasten a tax liability where the liability is not imposed by a local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of s. 90(2) of the Act. Sec. 90(2) makes it clear that where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee meaning thereby that the Act gets modified in regard to the; assessee insofar as the agreement is concerned if it falls within the category stated therein."
33. Coming to the main issue now, we find, that the assessee has been consistently taking the stand that the activities of the LOs are restricted to only collecting and sending of information from India to Japan. This fact is also borne out, of the approval dt. 8th Feb., 1975 granted to the activities of LO with certain conditions by the RBI. This approval reads as under :
"M/s Nissho Iwai Company Ltd.,
2, Brabourne Road (4th Floor),
Calcutta 700 001.
Dear Sirs,
Sec. 29(2)(a) of the 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 the purpose of collecting and 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 the following conditions :
(a)
The entire expenses of the 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 the liaison activities to be rendered by the Indian offices;
(c)
Excepting the said liaison work, the offices will not undertake any activity of a trading, commercial or industrial nature without the prior permission of the Reserve Bank;
(d)
The LO will furnish to us on yearly basis details of the remittances received in India, together with the bank certificates showing receipt of funds and certified copy of the final accounts of the office, quoting a reference to this letter.
Yours faithfully,"
In pursuance of cl. (d) of this approval the assessee has been admittedly furnishing to the RBI the details of remittances and copy of the final accounts along with auditors' certificate confirming that the conditions as laid down by the RBI have been adhered to. These facts show that the LOs were engaged in the 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. The assessee could have engaged itself in such activities (i.e. earning income/revenue) 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. It is also not the case of the Revenue that LOs were having powers of concluding contracts on behalf of the assessee and were carrying on any other activities wherein they assumed decision-making authority on behalf of the head office.
34. Now coming to provision of DTAA between India and Japan, we find (hat PE is defined in art. 5 of the agreement which reads as under :
"Article 5
1. For the purpose of this convention, the term 'PE' means a fixed place of business through which the business of an entity is wholly or partly carried on.
2. The term 'PE' includes especially :
(a)
a place of management;
(b)
a branch;
(c)
an office;
(d)
a factory;
(e)
a workshop;
(f)
a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
(g)
a warehouse in relation to a person providing storage facilities for others;
(h)
a firm, plantation or other place where agriculture, forestry, plantation or related activities are carried on;
(i)
a store or other sales outlet; and
(j)
an installation or structure used for the exploration of natural resources, but only if it is used for a period of more than six months.
3. A building site or construction, installation or assembly project constitutes a PE only if it lasts for more than six months.
4. An enterprise shall be deemed to have a PE in a 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 a building site or construction, installation or assembly project which is being undertaken in that Contracting State.
5. Notwithstanding the provisions of paras 3 and 4 an enterprise shall be deemed to have a PE in a 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 the exploration, exploitation or extraction of mineral oils in that Contracting State.
6. Notwithstanding the provisions of the preceding paras of this article, the term 'PE' shall be deemed not to include :
(a)
the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise;
(b)
the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;
(c)
the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
(d)
the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;
(e)
the maintenance of a fixed place of business solely for the purpose of carrying on for the enterprise, any other activity of a preparatory or auxiliary character.
7…………..
8…………..
9…………."
35. Considering the facts of the case and material available on record, we are of the opinion that assessee's case falls within the exclusionary clause of art. 5, cl. (e ) of the DTAA. The assessee's case also gets support from the OECD Commentary on the Model Tax Convention which clarifies that even a fixed place of business shall not be deemed to be a PE if the overall activity carried on therein is of preparatory or auxiliary in nature. The relevant portion is extracted as under :
"It is recognized that such a place of business may well contribute to the productivity of the enterprise, but the services it performs are so remote from the actual realization of profits that it is difficult to allocate any profit to the fixed place of business in question. Examples are fixed places of business solely for the purpose of advertising or for the supply of information or for scientific research or for the servicing of a patent or a know-how contract, if such activities have a preparatory or auxiliary character."
36. The Foreign Exchange Management (Establishment in India of a Branch or Office or Other Place of Business) Regulations, 2000 sets guidelines concerning the establishment or office or other place of business for a person resident outside India. According to that guideline LOs will not carrying out any other activity other than the activity for which approval has been granted by the RBI. The compliance of this condition is not in dispute in the instant case and it is also evidenced by auditor's certificate filed before the RBI.
37. The reliance placed by the Department on the decision of UAE Exchange Centre LLC, In re (supra) is misplaced. The Hon'ble Authority for Advance Rulings in this case has held that where an activity carried on by the LO is an activity of a preparatory or auxiliary in nature, the same cannot be characterized as a PE.
38. Similarly the facts of the case of Set Satellite decided by Bombay Tribunal (supra) are distinguishable from the facts of this case as that case relates to a dependent agent who as per the DTAA, is deemed to be a PE. While in the instant case the LOs which carry out the function of preparatory nature which has been specifically excluded from the purview of a PE by the DTAA as pointed out by us in earlier para.
39. The assessee on the other hand gets support from the decision in the case of Angel Garment Ltd., In re (supra) wherein Authority for Advance Rulings (Income-tax) held as under :
"The applicant, a non-resident company incorporated in Hong Kong, proposed to set up a LO in India for collecting information and samples of garments and textiles from manufacturers, traders and exporters and passing on the information to the head office in Hong Kong and coordinating and acting as the channel of communication between the applicant and Indian exporters and follow up with Indian exporters for timely export of goods. The entire expenses of the proposed LO were to be met through remittances from the applicant's head office in Hong Kong. On these facts the applicant applied to the Authority for Advance Rulings on the question whether the applicant could be said to have received income taxable in India. On the facts stated the Authority ruled that a plain reading of Expln. 1(b) to s. 9(1)(i) of the IT Act, 1961, indicated that no income would be deemed to accrue or arise to a non-resident through or from operations confined to the purchase of goods in India for the purpose of export. The proposed activities of the LO of the applicant in India were to be confined to purchase of goods for export. It was immaterial whether the export of goods was to Hong Kong or to any other country. The applicant company, could not, therefore, be said to earn income from the proposed activities under the provisions of the IT Act."
And the decision in the case of Educational Institute of American Hotel & Motel Association (supra) wherein Hon'ble Authority for Advance Rulings after considering the approval of the RBI, held that the applicant was entitled to the benefit sought. The relevant observation is extracted as under :
"So far as the activities in India are concerned, if the letter of the RBI granting permission to El to open a liaison office dt. July, 1994, and letter of the RBI to upgrade it to a branch office under s. 29(l)( a) of the 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 the same letter, the RBI exercises a certain amount of check over the applicant carrying out any other activity. By these the view that the applicant does not exist for 'purposes of profit' is strengthened."
We further find that the assessee's case also gets support from the decision in the case of Western Union Financial Services (supra).
40. 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. 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 the year under appeal. In this regard reliance is placed on the case of Parashuram Pottery Works (supra) wherein the Hon'ble Supreme Court held as under :
"……………It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realizing that price should familiarize themselves with the relevant provisions and become well versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a 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...."
The other two case law relied by the assessee also supports this proposition.
41. In view of above discussion we are of the considered opinion that the provisions of s. 9 of IT Act are not attracted to the facts of this case. The activities of LOs are preparatory and auxiliary in character and, therefore, cannot be treated as PE of the assessee in India and therefore in our considered opinion the 'action of authorities below in estimating the income of the assessee on the basis of having PE was not correct. We, therefore, set aside their orders and accept the grounds as raised by the assessee.
42. In the result assessee's appeal is allowed.