Springer Verlag GmbH Vs DCIT (ITAT Delhi)
ITAT Delhi held that Liaison Office playing an active role with regard to printing of books treatable as Permanent Establishment in terms of Article 5(2) of India-Germany Double Taxation Avoidance Agreement (DTAA).
Facts- The assessee 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.
A survey u/s. 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, which included loose papers and compact discs (CDs) containing records of emails and other correspondences from LO to Head Office and others. Based on the information gathered in course of survey operation, AO recorded reason to believe that income chargeable to tax has escaped assessment.
AO held that the LO is involved in activities, which are something more than mere preparatory and auxiliary services. Thus, LO constitutes a PE of the assessee in India. Accordingly, AO attributed 15% of the total sales as income of the LO. First appellate authority granted partial relief.
Conclusion- Held that the LO plays an active role with regard to printing of books in the EPZ, deciding their cost component and their sales. Therefore, in our view, 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. The exceptions provided under Article 5(4) would not be applicable, as, in our view, the activities undertaken by the LO is not merely limited to preparatory or auxiliary character of a communication channel between the clients in India and HO.
FULL TEXT OF THE ORDER OF ITAT DELHI
Captioned appeals by the assessee arise out of two separate orders of learned Commissioner of Income-tax (Appeals)-XXIX, New Delhi pertaining to assessment years 1999-2000, 2000-01, 2001-02 and 2002-03.
2. Since, the issues in dispute arising in all these appeals are identical and relate to the same parties, the appeals have been clubbed together and disposed of in a common order, for the sake of convenience.
3. Having gone through the grounds raised by the assessee in these appeals, we find that following issues arise for consideration :
(i) Validity of reopening of assessments under section 147 of the Income-tax Act, 1961;
Validity of assessment orders due to non-service of notices purportedly issued under section 143(2) of the Act;
(ii) Whether liaison office (LO) in India can be treated as permanent establishment (PE) of the assessee in terms of Article 5(2) of India-Germany Double Taxation Avoidance Agreement(DTAA); and
(iii) Validity of attribution of income to the alleged PE by applying net profit rate of 10% on the total sales and further non-allowance of deduction of expenses in terms of section 44C of the Act.
4. As far as the first issue of validity of reopening of assessment under section 147 of the Act is concerned, briefly, the facts are, the assessee is a non-resident corporate entity incorporated in Germany and a tax resident of Germany. As stated, 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. As per the assessee, the LO was opened to carry out solely liaisoning activity or to act as a communication channel between the Head Office and clients 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 course of survey, certain documents were impounded, which included loose papers and compact discs (CDs) containing records of emails and other correspondences from LO to Head Office and others. Summons under section 131 of the Act were also issued to the assessee on the date of survey and statements were recorded from certain officers/persons working in the LO. 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. Therefore, he reopened the assessments under section 147 of the Act by issuance of notices under section 148 of the Act.
5. In response to notices issued under section 148 of the Act, assessee furnished returns of income declaring nil income. It was the case of the assessee that the 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. It was the case of the assessee that the LO cannot be treated as PE, as it had not carried on any commercial activity in India. Assessing Officer, however, was not convinced with the submissions of the assessee. He held that the LO is involved in activities, which are something more than mere preparatory and auxiliary services. Thus, he 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. Against assessment order so passed, the assessee preferred appeals before learned first appellate authority, inter alia, challenging the validity of proceedings under section 147 of the Act.
6. Learned first appellate authority, however, did not find merit in the legal ground raised by the assessee relating to validity of reopening of assessments. Even on merits also, learned first appellate authority upheld the decision of the Assessing Officer in treating the LO as the PE of the assessee in India. However, he granted partial relief with regard to attribution of profit to the LO. (In assessment year 1999-2000, he applied net profit rate of 10% on the gross revenue and out of that he attributed 15% in respect of sale of journals and books to the PE in India. In assessment years 2000-01 and 2001-02, learned first appellate authority applied net profit rate of 15% and made attribution of 15% of sale of journals and books printed abroad and 80% for sale of books for EPZ of PE. In assessment year 2002-03, for journals and books printed abroad, he directed the Assessing Officer to compute income as per Rule 10 and thereafter to attribute 15% of the net profit to PE. For sale of books published in EPZ, he directed the Assessing Officer to determine the profits on net income basis and thereafter attribute 80% to the PE.) Accordingly, he decided the appeals.
7. Before us, learned counsel appearing for the assessee, drew attention to the reasons recorded for reopening of assessments placed in the paper book and submitted that in the reasons recorded, the Assessing Officer has simply referred to the statements recorded from P.N. Venkatraman and Shri Sanjeev Goswami, working in LO and concluded that commercial activities were carried on by the LO. He submitted, the business activities carried on by the assessee in India are the following :
(a). Journals subscription
(b). Direct import of books in India
(c). Sale of books printed at export processing zone (EPZ) in India.
8. He submitted, at no stage, the Assessing Officer has recorded the reasons why such activities should be constituted as commercial activity of the LO. He submitted, in the reasons recorded, the Assessing Officer has not referred to any document found in course of survey, which indicates that the LO is involved in commercial activities of sale, appointment of dealers, securing dealers, signing of contracts, negotiation of price etc. He submitted, the departmental authorities except making general observations, have not given any substantive finding as to how the statements recorded or the information/documents collected can lead to an inference that income has escaped assessment. Drawing our attention to the sequence of events starting from application made to RBI for opening of LO in India and ending with the survey action carried out on 23.10.2002, learned counsel submitted, for exercising power under section 147 of the Act, the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment. He submitted, the expression ‘reason to believe’ and ‘escapement of income’ would mean that the reason for formation of belief must have rational connection with the information received. He submitted, there must be some direct nexus and live link between the material and the formation of belief that there is escapement of income in a particular assessment year. He submitted, in the facts of the present appeal, that live link and direct nexus is missing. Thus, he submitted, in absence of such nexus between the information available and formation of belief, reopening of assessments under section 147 of the Act is invalid. In support of such contention, learned counsel relied upon following decisions :
(i) CIT v. Kelvinator India Ltd. (2010) 187 Taxman 312 (SC).
(ii) ACIT vs. Sur Buildcon (P) Ltd. (2021) 90 ITR(T) 300.
(iii) Calcutta Discount Company Ltd. v. ITO (1961) 41 ITR 191 (SC)
(iv) Sheo Nath Singh v. AAC (1971) 82 ITR 147 (SC)
(v) Lakhmani Mewal Das (1976) 103 ITR 437 (SC)
(vi) Gangasaran & Sons (P) Ltd. vs. ITO (1981) 130 ITR 1 (SC)
(vii). CIT v. Lucas TVS Ltd (2001) 117 Taxman 366 (SC)
(viii) United Electricals Company (P) Ltd. vs. CIT (2002) 178 CTR 192(Delhi HC).
9. Strongly relying upon the observations of learned first appellate authority, learned Departmental Representative submitted, admittedly, the assessee had not filed any return of income for all these assessment years. He submitted, only because of survey action, certain documents were impounded, which indicated that the LO is involved in commercial activities of procuring orders for the head office. He submitted, even in the statements recorded from the employees working at LO, it is revealed that the LO is involved in commercial activities. He submitted, had the survey action not taken place, all these facts would not have come to notice. Thus, he submitted, while recording the reasons for reopening of assessments under section 147 of the Act, the Assessing Officer had tangible material in his possession, which reflected escapement of income. Thus, he submitted, reopening o assessment under section 147 of the Act is valid.
10. We have considered rival submissions in the light of decisions relied upon and perused materials on record. It is a fact on record that in the assessment years under dispute, the assessee had not filed any return of income voluntarily under section 139(1) of the Act. It is also a fact that a survey action under section 133A of the Act was carried out at the premises of the LO, in course of which, certain documents/CDs were impounded, which contained communication between the LO and head office. On the date of survey itself, statements under section 131 of the Act were recorded from the Country Head and Manager, Promotion and Publicity, who were working at the LO. In the statements recorded, the extent of work/activities performed by the LO with regard to promotion and sales of books, journals etc. produced and printed by the HO could be ascertained. Undisputedly, the HO has earned substantial amount of income from sale/subscription of its books/journals in India. The information contained in the impounded documents found at the time of survey operation coupled with revelation made regarding activities of the LO from the statements recorded from two of the officers working at the LO, certainly gave an insight not only with regard to the business activities carried on by the HO in India but the extent of involvement of the LO in such business activities of the HO. Thus, in our view, the information gathered at the time of survey operation, either from the documents impounded or from the statements recorded from the officers working at LO certainly constitute tangible material to hold a prima facie view that the income chargeable to tax has escaped assessment. Whether the information contained in the documents and the statements recorded would ultimately result in assessment of escaped income, is a factor which need not be gone into at the time of recording reasons for forming the belief that the income chargeable to tax has escaped assessment. What is required at the stage of recording of reasons is whether there are tangible materials available on record to form a belief that income has escaped assessment. Having examined the facts on record, we are firmly of the view that the Assessing Officer, at the time of forming the belief regarding escapement of income, had tangible material available with him. Thus, in our view, there is a direct nexus/live link between the material available on record and the formation of belief for reopening the assessments under section 147 of the Act. Therefore, we do not find merit in the submissions made by the assessee that reopening of assessments under section 147 of the Act is invalid.
11. So far as the decisions cited by learned counsel are concerned, on careful examination, we have found them to be factually distinguishable, hence, not applicable to assessee’s cases.
12. The next issue, which arises for consideration is whether the assessee had a PE in India in the relevant assessment years. As discussed earlier, in December, 1997, the assessee opened the LO in India with prior approval of RBI. As per letter dated 08.12.1997, RBI granted permission for opening the LO with the following conditions :
(i). Except the liaison work, the representative will not undertake any other activity of a trading, commercial or industrial nature nor shall he enter into any business contracts without our prior permission.
(ii). No commission/fees will be charged or any other remuneration received/income earned by the representative for the liaison activities/services rendered by the representative or otherwise in India.
(iii). The entire expenses of the representative office will be met exclusively out of the funds received from abroad through normal banking channels.
(iv). The representative shall not borrow or lend any money from/to any person in India without our prior permission.
(v). The representative shall not acquire, hold, (otherwise than by way of lease for a period not exceeding five years), transfer or dispose of any immovable property in India without obtaining prior permission of the Reserve Bank of India under section 31 of the Foreign Exchange Regulation Act, 1973.
(vi). The representative office in India will furnish to the General Manager, Exchange Control Department, Reserve Bank of India, New Delhi (on a yearly basis):
a). a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India;
b). Details of remittance received from abroad duly supported by Inward Remittance Certificates;
c). Certified copy of the audited final accounts of the office in India; and
d). Annual report of the work done by the representative in India, stating therein the details of actual export or import, if any, effected during period in respect of which the representative had rendered liaison services;
e). The number of staff engaged/appointed and duties assigned to each staff.
(vii). The representative office will not render any consultancy or any other services, directly/indirectly, with or without any consideration.
(viii). The representative will not have signing/commitment powers except than those which are required for normal functioning of representative office on behalf of the Head Office.”
13. In course of assessment proceedings, based on certain documents/materials impounded at the time of survey action and statements recorded from Officers working at the LO, the Assessing Officer concluded that the LO constitutes a PE in terms of Article 5(1) read with Article 5(2) of India-Germany DTAA. According to the Assessing Officer, the activities/work performed by the LO is much more than carrying out any activity of preparatory or auxiliary character.
The Assessing Officer observed that the LO is involved in various activities, which has not only helped in expanding the growth of business of the assessee in India , but has also revealed active participation of LO in obtaining business for the assessee. He observed, earlier, the activities undertaken by a joint venture of the assessee with an Indian company has completely been taken over by the LO for all purposes. Referring to a report of an official of the assessee namely Conny Schindewolf, the Assessing Officer observed that the LO has contributed enormously to achieve the growth rate of 190% and 80% in books segment and 20% in journal segment. He further observed that in March, 2002, the assessee has set up a subsidiary company in India, namely Springer (India) Pvt. Ltd., which is being compensated @ 11% of gross revenue earned by the assessee from India from distribution of original titles and trading profits in respect of titles printed in India. Whereas, for similar activities carried out by the LO, no revenue is shared. He observed that even in appointment of distributors in India, the LO plays a very important role, as it ascertains the creditworthiness of distributors situated in India. Thus, based on the aforesaid reasoning, the Assessing Officer ultimately concluded that the LO constitutes a PE of the assessee in India. Having held so, he proceeded to attribute profit @ 15% of the gross revenue to the LO. Against the aforesaid decision of the Assessing Officer, the assessee preferred appeals before learned first appellate authority. While deciding the appeals, learned first appellate authority modified the assessment orders only to the extent of attribution of profit to the PE.
14. Before us, learned counsel appearing for the assessee submitted that the Assessing Officer has concluded existence of PE purely relying upon the statements recorded from certain employees working at LO, in course of survey proceedings. He submitted, section 133A(3)(iii) of the Act does not authorise the Income-tax Authority to record any sworn statement. He submitted, for this reason unlike statements recorded under section 132(4), the statements recorded in course of survey cannot be used as evidence. In support of such contention, he relied upon the following decisions :
(i). PCIT v. Meeta Gutgutia [2017] 395 ITR 526 (Delhi HC)
(ii). Paul Mathews & Sons v.CIT [2003]129 Taxman 416 (Kerala HC)
(iii). CIT v. S. Khader Khan Son [2008] 300 ITR 157 (Madras HC) approved by Hon’ble Apex
(iv). Court in CIT v. S. Khader Khan Son [2012] 210 Taxman 248 (SC)
(v). CIT v. Dhingra Metal Works [2011] 196 Taxman 488 (Delhi HC)
(vi). DCIT v. Bansal Credits Ltd. [2016] 74 com224 (Delhi – Trib.)
15. Without prejudice, he submitted that the statements relied upon by the departmental authorities only discuss about role of LO in printing the books in EPZ. Therefore, the statements cannot be relied upon to draw any inference about the role played in sale of journals and books printed outside India. Proceeding further, he submitted, the journals sold by the assessee are highly technical and scientific in nature, as they deal with high end research topics in subject areas like medicine, life sciences, mathematics, computer science, etc. Hence, these journals are sold directly and dispatched to the subscriber by the assessee from outside India. Therefore, the sale is concluded outside India. He submitted, these journals are being imported to India for more than 40 years. Since, the subscribers to journals are scientists and other highly specialist researchers, the employees of LO are not capable of communicating the contents of these journals to subscribers. The employees of LO only communicate to them that the assessee is engaged in publishing of journals and refer them to the assessee or educate them about the website.
16. He submitted, such communication between the LO and the subscribers in India is also very rare, as mostly, there is direct communication between the subscribers and the assessee. Orders are directly placed on the assessee and not on LO. In this context, learned counsel drew our attention to a sample copy of proforma invoice placed in the paper book. He submitted, in some cases, orders are also placed on subscription agent, who in turn handles the communication with the assessee. Even the payment is directly made to the assessee and the LO has no role to play. In this context, learned counsel drew our attention to a communication between the assessee and Tata Institute of Fundamental Research and Informatics (India) Ltd. Thus, he submitted, the LO did not maintain stock of journals, from which the journals are regularly delivered to the subscribers on behalf of the assessee. Thus, he submitted, in so far as the sale of journals is concerned, the LO has no role to play. In so far as import of books printed and published outside India is concerned, learned counsel submitted, these books are highly technical, scientific and pertain to subject areas like medicine, mathematics, engineering, computers, life sciences etc. He submitted, these books are being sold from Germany to the dealers/distributors of the assessee in India for more than 40 years. He submitted that LO has no authority to appoint dealers/distributors. The credit applications are sent to the assessee by the distributors. Only after undertaking a scrutiny process, if credit application is accepted, then the assessee sends a letter of appointment to the concerned distributor. He submitted, the acceptance of credit application is also signed by the assessee and the LO has no authority, whatsoever. The role of LO is that of a communication channel in terms of forwarding distributors’ credit applications to Germany. Even the discounts are standard discounts, which are agreed by the dealers at the time of signing the agreement and the LO has no role to play. The orders for books are directly placed upon the assessee and not on the LO. The sale of books happens outside India. In terms of the agreement with dealers, consignment is delivered by the assessee to the distributor’s nominated freight forwarder outside India. In rare cases, if LO receives any orders, it forwards the same to the assessee , as it has no access to the database of stock of books at Germany, which is sold all over the world. In this context, learned counsel drew our attention to sample copies of letters sent to dealers. He submitted, the LO is in no position to confirm the orders placed by the dealers/distributors because there are more than 20,000 titles sold by the assessee. Thus, he submitted, the LO has no role to play in respect of imported books printed and published outside India.
17. In so far as the sale of books printed at EPZ in India, learned counsel submitted, as per EPZ scheme, the assessee places printing orders of selected titles on Indian printing houses located in EPZ and books printed therein are supplied to Indian distributors, who then sell them to the final customers. He submitted, in this process, the final customers get the books at a much cheaper price than the price they had to pay while importing. He submitted, the titles to be published at low price edition are selected based on the expert opinion/recommendations by professors, authors, syllabus committee, universities etc. He submitted, once, the assessee communicated to LO that the titles can be printed in EPZ after referring to the agreement with authors of such prints, the LO used to get the details of costing of such printing in India. Final decision whether to print at such cost or not was always taken by the assessee and the LO has no role to play. He submitted, in case the assessee is of the view that low-priced edition can be published, then the assessee instructs the LO to obtain the printer quotes and forward to the assessee for approval. Further, the purchase orders are directly issued to the printers with printing instructions and the LO has no role to play. The contract with printers, printing instructions, payment to printers and instructions for delivery of printed books to dealers were done by the assessee only and the LO had no role to play in it except for communicating to printers to make delivery to the dealers based on communication from the assessee. He submitted, the printers raised the bills on the assessee and remittance is made directly by the assessee to the printers. Of course, at times, instructions are communicated through LO.
18. Thus, learned counsel submitted, the LO is merely a communication channel between the HO and clients in India. Better flow of information through the LO helped HO in Germany to provide information and services to clients in India. He submitted, the LO only receives information brochures on assessee’s products and some sample copies of books published by the HO, which have promotional use only. He submitted, the Assessing Officer has used certain statements of the employees working at LO selectively according to his convenience. In this context, learned counsel furnished his rebuttal to the findings of the Assessing Officer and learned Commissioner (Appeals) in a tabular format as under :
