Sharing insights. News Alert 31 May, No PE created by liaison office in absence of any violation noted by RBI. In brief. Facts.

Transcription

1 Sharing insights News Alert 31 May, 2012 No PE created by liaison office in absence of any violation noted by RBI In brief In the recent case of Metal One Corporation 1 (the assessee), the Income-tax Appellate Tribunal, Delhi (Tribunal) held that in the absence of any violation noted by the Reserve Bank of India (RBI) regarding activities of a liaison office (LO), it does not constitute a permanent establishment (PE) in India. Facts The assessee is a tax resident of Japan dealing in steel and steel products. The assessee had maintained a LO with the approval of the RBI, regularly submitting audited accounts along with annual activity reports to the RBI. During assessment year (AY) , the assessee submitted a return of income declaring nil income. The assessing officer (AO) issued a notice under section 143(2) of the Incometax Act, 1961 (the Act) directing the assessee to submit correspondence with 1 Metal One Corporation v. DDIT [TS-356-ITAT-2012(DEL)] 1

2 the clients in India, copies of invoices, s exchanged and profit & loss accounts of the head office (HO). The assessee informed the AO that the LO was closed down in May 2008 and therefore, information had to be obtained from the HO in Japan. The assessee filed a sample of the requisite documents based on the old available records. The AO passed a draft order under section 144C(1) read with section 143(3) of the Act holding that the LO was engaged in revenue generation activities. In the absence of any India specific financial statement or profit & loss account, the AO invoked the provisions of Rule 10(iii) of the Income-tax Rules, 1962 (the Rules) to attribute 50% of the sales made from India to the LO and sought to tax income by applying a gross profit rate of 10%. Proceedings before the Dispute Resolution Panel The assessee filed an objection to the Dispute Resolution Panel (DRP) against the draft order. The DRP confirmed the AO s observation on the ground that the assessee had only filed sketchy details. The DRP enhanced the attribution by including total sales made by the India office in comparison to total sales made from India as per the original draft order. Issues Does the assessee have a PE in India? If the answer to the above question is affirmative, what is the amount which can be attributed as profit to the activities carried on by the PE? Is the assessee liable to pay interest under section 234B of the Act? Revenue s contentions The assessee had filed required information on a sample and selective basis best suited to the assessee. Hence, the information did not represent the true and correct picture of activity undertaken by the office. The Revenue referred to the observation made by the DRP in the case of Mitsubishi Corporation Japan (MCJ), where it was held that a separate entity had been created in form of Metal One Corporation, which was assigned to deal with metal business in the same manner that the division of MCJ had done earlier. The office also functioned in a similar manner for the entire group for locating and negotiating agreements with potential buyers and sellers in the metal market and hence the activity of LO was not confined to auxiliary or preparatory activity. The Revenue referred to the mail written by the India office to certain customers to demonstrate that the LO was engaged in the negotiation of prices, which was one of the core business functions. Assessee s contentions The assessee relied on the copies of the s exchanged in respect of two customers and the India office regarding price negotiation, demonstrating that the role of the LO was limited to passing the information/concerns of the customers to the HO and vice versa. Further, it filed direct exchanged with the HO and the customers regarding fixing of prices. The assessee contented that the LO activity is limited to imparting information about requirements, etc. of the constituents by the India office to the HO or the customer about price, quantity, terms of supply, etc., which constitutes preparatory or auxiliary activities excluded under clause (e) of paragraph 6 of 2

3 Article 5 of the Double Tax Avoidance Agreement (tax treaty) between India and Japan. The assessee referred to the dictionary meanings of the words preparatory and auxiliary. The assessee relied on the Organisation for Economic Co-operation and Development (OECD) commentary where it is mentioned that a fixed place of business having activity in of a preparatory or auxiliary character is not deemed to be a PE. Case laws relied by the assessee The Delhi High Court s (HC) decision in the case of UAE Exchange Centre 2, where it was held that the assessee's liaison office in India was confined only to downloading information from the main server located in the UAE, for drawing and disbursing cheques to clients. The LO, being engaged in auxiliary or aid and support of the main activity, was not a PE. The ruling of the Delhi Tribunal in the case of BKI/HAF V.O.F 3, where the meaning of the word auxiliary is explained as helping or aiding living support; subsidiary or additional supplementary power; a helper or an aid; a confederate; an ally. The Authority for Advance Ruling s (AAR) observation in the case of K.T. Corporation 4, where it observed that the company s LO did not perform any core business activity and hence there was no PE in India. The Delhi Tribunal ruling in the case of Mitsui & Co. Ltd. 5, where it was held that since no violation of RBI guidelines was noted the LO was engaged only in UAE Exchange Centre Ltd. v. UOI [2009] 313 ITR 94 (Del) BKI/HAM V.O.F. v. ACIT [2001] 79 TTJ 480 (Del) K.T. Corporation, In re [2009] 181 Taxman 94 (AAR) liaising work. The Tribunal held that there was absence of any material record brought out by the Revenue that the entire work was done by the LO. The Delhi Tribunal ruling in the case of Tokio Marine and Fire Insurance Co. Ltd. 6, where it was held that it cannot be held that any business is conducted by the LO only because two expatriate employees of the LO were witnesses to the joint venture agreement. The Calcutta Tribunal ruling in the case of Sojitz Corporation 7, where it was held that an auditor s certificate is a sufficient document to establish that the RBI guidelines have been followed by the LO. The AAR s observation in the case of Gutal Trading Est. 8, where it observed that the assessee's LO was not a business connection as it did not negotiate any sale transactions. Hence, no income was accrued in India through this office. The Delhi Tribunal ruling in the case of Sofema SA 9, which involved a Revenue civil appeal that was later dismissed by the Supreme Court (SC) on the ground that in the absence of evidence and justification from the Revenue to show the assessee had a PE in India the appeal could not be accepted. Tribunal Ruling India does not subscribe to the OECD model; hence, the commentary may have only persuasive value. However, it is needed to examine whether the India office was carrying on any essential and significant part of the activity in the scheme of business of the assessee Mitsui & Co. Ltd. v. ACIT [2008] 114 TTJ 903 (Del) DCIT v. Tokio Marine and Fire Insurance Co. Ltd. (ITA No.4696/Del/05, order dated 31 October, 2007) Sojitz Corporation v. ADIT [2008] 117 TTJ 792 (Cal) Gutal Trading Est., In re [2005] 278 ITR 642 (AAR) DCIT v. Sofema SA (ITA No.3900/Del/2002, order dated 5 May, 2006) 3

4 The Tribunal concurred with the decision of the case laws relied on by the assessee holding that where the RBI does not find any violation of an condition(s) imposed on its functioning, it shall be presumed to be carrying on preparatory or auxiliary activities until established otherwise. The Tribunal relied on the decision of the HC in the case of UAE Exchange Centre, where it was held that an LO cannot be construed as a PE unless its activities exceeds the permitted activities or the department is able to establish the contrary. Conclusion The Tribunal ruling is based on the specific facts of the case, however it lays down the ratio that Revenue is prima facie responsible for establishing that LO activity is not limited to being auxiliary or preparatory in character; especially in absence of contrary information or record to show that the LO was in violation of RBI guidelines. The Tribunal relied on the SC observation at the time of dismissal of the civil appeal by the department in the case of Sofema SA (above) that there has to be evidence on record that the assessee has carried on some essential activities from the LO. The assessee filed only selective and sketchy information. However, the AO has not brought on record any positive information to establish that the activity of the LO was substantial to the assessee s business. The similarity of activities of the assessee and MCJ mentioned in the draft order is not correct since this was not shown to the assessee and no chance was given to assessee to rebut the inference of similarity of functioning. In light of the above, the Tribunal held that the India office did not constitute a PE of the assessee in India. Further, in the absence of any PE in India no income accrues or arises in India. 4

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