The Mumbai bench of the Income Tax Appellate Tribunal(ITAT) has held that the Liaison office doesn’t constitute PE in India and Income tax addition is not permissible.
Nagase And Company Ltd., the assessee and Revenue challenged the separate impugned orders passed under section 250 of the Income Tax Act, 1961, (the Act) by the Commissioner of Income Tax (Appeals), Mumbai, [CIT(A)], for the assessment years 2001-02 and 2003–04.
The assessee is a public company incorporated in Japan, which is engaged in the business of import/export as well as domestic sales of dyestuffs, chemicals, plastic, machinery, electronic materials, cosmetics, health foods and medical equipment. In 1974, the assessee opened a liaison office in Mumbai after obtaining necessary approvals from the Reserve Bank of India (RBI).
In terms of the permission of RBI, the liaison office‟s activities are confined to the liaison and representative activities and it is not permitted to carry out any business/commercial activities in India. The return of income was accompanied bya statement of computation of taxable income, profit and loss account, balance sheet, receipt and payment account and auditor‟s report.
A survey under section 133A of the Act was conducted at the office premises of the liaison office on 06/02/2003 and certain books of account/documents were impounded. During the course of the assessment proceedings, the assessee was asked to explain why there is no PE in India. In reply, the assessee submitted that the liaison office is carrying out only support activities and is, thus, engaging in carrying out all the preparatory and auxiliary activities.
The AO based on documents/books of accounts and other papers impounded during the course of the survey under section 133A of the Act concluded that the liaison office‟s activities are not confined to the liaison work only, but it is also actively engaged in business activity (i.e. sales in India). The AO held that the Mumbai office of the assessee i.e. the liaison office constitutes the PE of the assessee in India.
The AO, further, treated 10% of the total turnover from India as taxable profit under Rule 10 and accordingly, made an addition of Rs. 8,23,07,287. In appeal, CIT(A) granted partial relief to the assessee in respect of the computation of taxable profit and directed the AO to consider only 4.29% as against the 10% profit determined vide assessment order and upheld the conclusion of AO on Liaison.
As per Article 7 of DTAA, the profit of foreign enterprise shall be taxable in India only if the such enterprise carries on business in India through a permanent establishment situated therein. Article 5 of the DTAA defines the term permanent establishment.
Further, as per the provisions of Article 5(6)(e), maintenance of a fixed place of business solely to carry on, for the foreign enterprise, any other activity of a preparatory or auxiliary character shall not be considered as a permanent establishment. The Head Office had appointed commission agents in India who are independent entities and the Head Office was also making sales to Indian customers directly.
A Coram of Shri Prashant Maharashi, AM and Shri Sandeep Singh Karhail, JMobserved that nothing has been brought on record to suggest that the RBI has found activities of the liaison office as being non-compliant with the terms and conditions of its permission. It was observed that neither statement of the employees of the liaison office nor the agents/customers in India was recorded nor any information under section 133 (6) of the Act was sought by the AO to support its conclusion that the liaison office constitutes PE of the assessee in India. The Tribunal held that the liaison office in Mumbai does not constitute the PE of the assessee in India under the provisions of DTAA and allowed the appeal.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to TaxscanAdFree. Follow us on Telegram for quick updates.
