The Delhi bench of Income Tax Appellate Tribunal ( ITAT ) held that liaison offices of non-resident printing entities in India could be treated as Permanent Establishment ( PE ) under Article 5(2) of India-Germany Double Taxation Avoidance Agreement ( DTAA ).
The assessee Springer Verlag GmbH is a non-resident corporate entity incorporated in Germany and a tax resident of Germany. The assessee is a pioneer in publishing scientific, technical, medical books and journals. The assessee got an approval from Reserve Bank of India ( RBI ) on 08.12.1997, to open a Liaison Office ( LO ) in India.
For the assessment years 1999-2000 to 2001-02, the assessee did not file any return of income under section 139(1) of the Act. A survey under section 133A of the Act was conducted at the premises of the LO on 23.10.2002. In the course of the survey, certain documents were impounded.
Based on the information gathered in course of survey operation, the Assessing Officer recorded reason to believe that income chargeable to tax has escaped assessment in assessment years 1999-2000 to 2001-02
Accordingly the assessment was reopened under section 147 of the Act and notice issue to assessee.in response assessee filed return and declared that income earned by the assessee from sale of books/journals in India cannot be made taxable in India, as such income is in the nature of business income and in absence of Permanent Establishment ( PE ), not taxable in India.
Therefore the assessee submitted that LO cannot be treated as PE, as it had not carried on any commercial activity in India. Without convincing the submissions of assessee AO held that LO constitutes a PE of the assessee in India. Having held so, the Assessing Officer attributed 15% of the total sales as income of the LO.
Aggrieved, the order assesee filed an appeal before the First Appellate Tribunal who upheld the decision of the Assessing Officer in treating the LO as the PE of the assessee in India. Accordingly the assessee filed a second appeal before the tribunal.
Assesee representative, Sanjeev Chaudhary argued that the Assessing Officer has concluded the existence of PE purely relying upon the statements recorded from certain employees working at LO, in the course of survey proceedings. Moreover section 133A(3)(iii) of the Act does not authorize the Income-tax Authority to record any sworn statement.
Furthermore the counsel for assessee argued that the role of LO is that of a communication channel in terms of forwarding distributors’ credit applications to Germany. Thus he orders for books are directly placed upon the assessee and not on the LO. The sale of books happens outside India.
Therefore the counsel concluded that LO is not a fixed place of business of the assessee, as it does not satisfy the basic conditions for constituting a PE under Article 5(1) of India-Germany treaty. Article 5(2) cannot override the basic conditions of Article 5(1) that a PE has to be a place of business. Whereas, LO is merely a representative office in India, through which, no part of the business of the assessee is carried out.
Sanjay Kumar, the Department representative argued that documents found during the survey proceedings indicated that the LO is involved in commercial activities of procuring orders for the head office. Further the statements recorded from the employees working at LO, it is revealed that the LO is involved in commercial activities
Therefore the two-member bench of G.S. Pannu, ( Vice President ) and Saktijit Dey, ( Vice President ) observed that the activities of the LO with regard to printing of books at EPZ is of much wider magnitude than mere preparatory and auxiliary character. Hence LO plays an active role with regard to printing of books in the EPZ, deciding their cost component and their sales.
Therefore the LO constitutes a PE in terms of Article 5(1) read with Article 5(2) of the treaty, at least, in relation to reprinting of books at EPZ.
Accordingly the bench allowed the appeal filed by the revenue.
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