Earlier Liaison Office Findings Cannot Automatically Decide Branch Office Taxability: ITAT Delhi

DDIT Vs Mitsubishi Corporation (ITAT Delhi)

ITAT Remands Mitsubishi Branch Office Taxability Dispute Due to Unexamined Attribution Issues;  ITAT Sends Back Assessment After Dispute Over Profit Attribution to Indian Branch Office; Delhi ITAT Orders Fresh Review of Branch Office PE Income Attribution Under India-Japan DTAA; ITAT Remands Mitsubishi Case Over Alleged Excessive Attribution of Indian Operations Income; ITAT Orders Fresh Assessment in Dispute Over DMRC Project Office and Branch Office Income; Delhi ITAT Restores Cross Appeals for Fresh Examination of PE and Transfer Pricing Issues; ITAT Holds Branch Office Was Continuation of Liaison Office but Sends Taxability Issues Back to AO.

In a cross-appeal concerning Assessment Year 2009-10, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, considered disputes raised by both the assessee and the Revenue against the final assessment order passed under Sections 144C(3) and 143(3) of the Income Tax Act.

The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)] on the issue of attribution of income to the Indian Branch Office (BO). The Revenue argued that the gross profit rate from consolidated head office accounts should have been adopted instead of standalone branch office financials.

The assessee, a Japan-based company and tax resident of Japan, raised multiple grounds relating to branch office taxability, attribution of profits, transfer pricing adjustments, project office taxation, deduction of expenses, and levy of interest. The assessee contended that the Transfer Pricing Officer (TPO) had already examined the functions of the Indian BO and that no further attribution of profits was warranted. It also argued that the BO catered only to the Machinery Division and not all divisions of the head office.

The assessee further disputed the attribution of income from Delhi Metro Rail Corporation (DMRC) contracts to the project offices. It argued that arm’s length mark-up had already been offered to tax and no further income could be taxed in India. The assessee also challenged the application of principles similar to Section 44BBB and the attribution of 50% of profits to Indian project office activities as arbitrary and excessive.

For AY 2009-10, the assessee declared total income of Rs.3.79 crore comprising income from the branch office, project offices RS1 and RS3, and fees for technical services taxable under the India-Japan DTAA.

During scrutiny assessment, the TPO proposed a transfer pricing adjustment of Rs.1.15 crore. Subsequently, the Assessing Officer (AO) assessed total income at Rs.172.51 crore and made additions relating to branch office income, project office income for DMRC sales, undeclared supervisory fees, and transfer pricing adjustments.

The assessee accepted the addition relating to undeclared supervisory fees but challenged the remaining additions before the CIT(A), who partly allowed the appeal. Both parties thereafter approached the ITAT.

The Tribunal examined the history of litigation between the parties. Earlier, the assessee operated liaison offices (LOs) in India. Following a survey under Section 133A conducted in 2005, the tax authorities treated the liaison office as a Permanent Establishment (PE) under the India-Japan DTAA. An attribution formula was agreed upon for AYs 1998-99 to 2004-05, under which 2.75% profit rate and attribution of 50% of sales and purchases to India were accepted by the assessee to settle disputes.

For AYs 2005-06 to 2008-09, the assessee continued filing returns based on the earlier attribution formula. However, during appellate proceedings, the assessee raised additional grounds challenging the taxability and extent of attribution. The ITAT, in its earlier order dated 30 May 2019, held that the issues required adjudication on merits rather than merely on the basis of consistency with prior years. Since many new claims had not been examined by the AO, the Tribunal remanded those years to the AO for fresh consideration.

Subsequently, in proceedings arising from the remand, the AO declined to entertain fresh claims that would reduce the returned income below the originally disclosed amount. The Delhi High Court, by order dated 30 July 2024, held that once the Tribunal had admitted the issues and remanded them, the AO could not refuse consideration merely because the return had not been revised. The High Court quashed the assessment orders and directed fresh consideration.

The assessee also explained that the liaison office had been closed after March 2008 and that AY 2009-10 was the first year of operation of the branch office established pursuant to RBI approval dated 26 February 2008. The assessee stated that the BO rendered support services only to the Machinery Division under a service agreement with the head office and received service fees on a cost-plus basis. The TPO’s own findings recorded that the BO primarily provided marketing support services for EPC business related to the Machinery Division.

However, the AO rejected the assessee’s contention and treated the BO as involved in all divisions’ sales activities in India, relying heavily on assessments made in earlier years. The assessee argued that the conclusions drawn during the 2005 survey on the liaison office could not automatically apply to the branch office established later.

The ITAT noted that the branch office was established after RBI approval for upgrading the liaison offices into branch offices. The RBI permitted the BO to undertake expanded activities including import-export, consultancy services, research work, technical support, and acting as buying or selling agent in India.

After considering the submissions, the Tribunal held that the BO was essentially a continuation and expanded version of the earlier liaison office and constituted a PE in India. The Tribunal further observed that the issues in the present appeals were substantially similar to those pending before the AO for AYs 2005-06 to 2008-09 pursuant to earlier remand directions.

Accordingly, the ITAT restored the matter to the AO for de novo consideration with directions to pass a fresh assessment order after examining the assessee’s submissions, including the claim that the BO catered only to the Machinery Division of the head office. Both the assessee’s and Revenue’s appeals were allowed for statistical purposes. The order was pronounced on 23 April 2026.

FULL TEXT OF THE ORDER OF ITAT DELHI

The cross appeals filed by the assessee and the Revenue are directed against the final Assessment Order (AO) passed u/s 144C(3) r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 24.05.2013 for A.Y. 2009-10.

2. The Revenue has raised the following grounds of appeal in

“1. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in holding that G.P. rate from standalone financials of the Indian Branch Office should be adopted.

2. In respect of the above and on the facts and in the circumstances of the case, the ld. CIT(A) has failed to appreciate that financials of Branch Office in the Audit reports do not qualify such standalone turnover and gross profits.

3. On the facts and in the circumstances of the case, ld. CIT(A) has erred in not appreciating that for the purpose of attribution of income, gross profit on consolidated accounts of the Head Office has rightly been adopted by the AO.”

3. The assessee has raised the following grounds of appeal in ITA No. 194/Del/2015:

“Grounds relating to Corporate tax matters – MC Branch office (MC BO)

1. That on the facts and circumstances of the case, the Hon’ble Commissioner of Income Tax (Appeals) – XXIX, New Delhi [hereinafter referred as “Hon’ble CIT(A)”] has:

1.1 grossly erred in fact and law, in rejecting the returned income which declared correct profits attributable to appellant’s branch office (BO). The Hon’ble CIT(A) further erred in holding that TPO’s role is limited and Transfer Pricing Officer (“TPO”) cannot determine profit attributable to Permanent Establishment (“PE”).

1.2 grossly erred in fact and law, in assuming that functions of MC BO carried out for effecting sales in India were not before TPO and were not analysed by the TPO.

1.3 failed to point out which functions were not analysed by TPO which required further attribution. Thus, the order passed by Hon’ble CIT(A) is non­speaking on facts.

2. That the Hon’ble CIT(A) has erred in assuming that MC BO has worked for all the divisions of the appellant and therefore profit needs to be attributed to MC BO in respect of ‘Direct sales’.

2.1 That the Hon’ble CIT(A) has:

2.1.1 erred in holding that no specific qualification is required for performing activities which MC BO is performing

2.1.2 erred in holding that the appellant has furnished only a few selective emails – when appellant had not only furnished sample .emails but also monthly reports for the entire year clearly establishing that MC BO has worked only for machinery group.

2.1.3 failed to understand the business model of the appellant while assuming that customers will be dealing with MC BO and not Head Office directly. The Hon’ble CIT(A) failed to consider the evidences that MC BO was not required as interface as generally manufacturers were already in contact with the Indian customers.

3. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) was not justified and erred in allowing the deduction for the expenses incurred by the BO in India only to the extent of 50% without recognizing the fact that the said expenses were allowable in full as per the provision contained under Article 7 of Double Taxation Avoidance Agreement (“DTAA”) between India and Japan.

4. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in upholding attribution of 50% of the total income to the activities of the BO in India as the same is unreasonable and excessive based on the functions performed by BO in India.

Grounds relating to Corporate tax matters – MC Project offices (MC POs)

5. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in not appreciating the methodology adopted by the appellant for attribution of income from Metro contracts revenue to tax (to the extent attributable to activities performed by the POs) in India. In doing so:

5.1 the Hon’ble CIT(A) has erred in law in not appreciating that once arm’s length mark-up has been attributed to the PE in India, no additional income can be brought to tax in India.

5.2 the Hon’ble CIT(A) has failed to appreciate that appellant’s income pertaining to activities of the MC-RS1 PO in India has been offered to tax on cost-plus arm’s length mark-up basis i.e. 9 percent; and that income pertaining to activities of MC- RS3 PO in India has been offered to tax on cost plus arm’s length mark-up of 9% and further for local supplies being made under Contract RS3, project management and testing & commissioning activities has been offered to tax on net income basis.

6. Without prejudice to Ground No. 5 above, the Hon’ble CIT(A) has erred in holding that “DMRC sales” are effected through appellant’s PO when the sales contracts were entered before Project Offices came into existence. Further:

6.1 the Hon’ble CIT(A) has grossly erred in law in holding that principle of restricted force of attraction is applicable to “DMRC sales” and even “direct sales made by Head Office will be attributed to the PO” when Supreme court in case of Ishikawajima Harima Heavy Industries Ltd. vs DIT [2007] [3 SCC 481] has clearly held that there is no force of attraction in the DTAA between India and Japan.

6.2 the Hon’ble CIT(A) has erred in holding that unless equipment are successfully tested, installed and commissioned, mere manufacturing and supply is not of much significance.

7. Without prejudice to Ground No. 5 above, the Hon’ble CIT(A) has erred in law and on the facts of the case in applying the principles laid under section 44BBB of the Act holding that since the nature of job includes testing and installation, provisions of section 44BBB are applicable in principle.; and consequently computing profits from “DMRC sales” at a deemed profit rate of 10 percent and not as per the provisions contained under Article 7 of DTAA between India and Japan. He further erred in not considering the actual gross profit rate of 1.69 percent as per the standalone financial statement of the appellant.

8. Without prejudice to Ground No. 5 above, on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in upholding attribution of 50% of the total income to the activities of appellant’s POs in India without mentioning any reason for same. Such 50% rate being highly excessive, exorbitant and arbitrary, and unreasonable based on the functions performed by appellant’s POs in India. The Hon’ble CIT(A) has failed to provide any basis for adoption of such exorbitant attribution rate of 50 percent.

9. Without prejudice to Ground No. 5 above, on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in directing the Assessing officer to verify and not deleting appellant’s claim for double taxation of:

9.1 receipts in respect of DMRC Contract RSI for Cost Center ‘G’ and ‘J’ which have been suo-moto offered to tax by appellant as ‘Fees for Technical services’ on gross basis and receipts offered to tax as revenue of MC-RS1 PO (under cost-plus methodology); and

9.2 receipts in respect of DMRC Contract RS3 offered to tax by the appellant as revenue of MC-RS3 PO (under cost-plus methodology and for local supplies being made on net income basis).

Other grounds relating to Corporate tax matters

10. The Hon’ble CIT(A) has erred in law and in fact, in levying interest under Section 234B and 234C of the Act on the appellant ignoring the fact that the appellant is a non-resident and tax is deductible from the income of the appellant.

10.1 The Hon’ble CIT(A) erred in not following jurisdictional High Court order in appellant’s own case.

11. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in directing the Assessing officer to verify appellant’s claim for grant of prepaid taxes and not exercising his powers conferred under section 250 of the Act in respect to examine the documents already available on record, and not allowing the credit of such prepaid taxes.

12. The Ld. AO erred in law in initiating penalty proceedings under section 271(1) (c) of the Act.

13. That on the facts of the case and in law, the order is bad in law and liable to be quashed.

Grounds relating to Transfer Pricing matters – MC Branch Office (“MC BO”)

1. That on the facts and in the circumstances of the case and in law, Hon’ble CIT(A) erred in upholding order under section 92CA(3) the Act passed by the Ld. Transfer Pricing Officer (“Ld. TPO”).

2. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) erred in understanding BO’s business model and functional & risk profile.

3. That on the facts and circumstances of the case and in law, without prejudice to any other ground, the Hon’ble CIT(A) erred in considering companies functionally different from branch office, as comparables.

4. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) erred in disregarding the functional comparability of the companies considered comparable at the time of documentation by the appellant.

5. That on the facts and circumstances of the case and in law, without prejudice to any other grounds, the Hon’ble CIT(A) has erred in upholding the order of the Ld. Transfer Pricing Officer without considering appellant’s contentions with regard to the application of turnover filter to reject companies having income less than INR 1 Crore.

6. That on the facts and circumstances of the case and in law, and without prejudice to any other grounds, the Hon’ble CIT(A) erred in upholding the order of the Ld. Transfer Pricing Officer without considering appellant’s contentions with regard to the rejection of certain comparable companies having different financial year ending.

7. That on the facts and circumstances of the case and in law, and without prejudice to any other grounds, the Hon’ble CIT(A) erred in upholding the order of the Ld. Transfer Pricing Officer without considering appellant’s contentions with regard to making appropriate adjustments to account for differences in working capital employed by the appellant vis-à-vis the comparables and in the process also ignoring the provisions of the Indian transfer pricing regulations and judicial pronouncements on this subject.

8. That on the facts and circumstances of the case and in law, and without prejudice to any other grounds, the Hon’ble CIT(A) erred in upholding the order of the Ld. Transfer Pricing Officer without considering appellant’s contentions with regard to non-allowance of economic adjustments for differences on account of risks assumed by the appellant vis-à-vis the comparable companies.

9. That on the facts and circumstances of the case and in law the Hon’ble CIT (A) erred in not considering the fact that, the appellant did not have any incentive to transfer the profits to the tax jurisdiction of Japan.

10. That on the facts and circumstances of the case and in law, without prejudice to the any other grounds, the Hon’ble CIT(A) erred in upholding the order of the Ld. Transfer Pricing Officer without considering appellant’s contentions with regard to usage of single year data as against the multiple year data used by the appellant, to compute the arm’s length price of the international transaction of the appellant using TNMM method.

11. That on the facts and circumstances of the case and in law, and without prejudice to the any other grounds, the Hon’ble CIT(A) erred in not applying the Proviso to section 92C(2) of the Act and not allowing the benefit of an upward variation of 5 percent in determining the Arm’s Length Price to the appellant.

12. The above grounds are independent and without prejudice to each other unless mentioned specifically.

Grounds relating to Transfer Pricing matters – MC RS3 PO

1. That on the facts and in the circumstances of the case and in law, Hon’ble CIT(A) erred in upholding order under section 92CA(3) the Income Tax Act, 1961 (“the Act”) passed by the Ld. Transfer Pricing Officer.

2. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) erred in understanding PO’s business model and functional & risk profile.

3. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) erred by not taking cognizance of the fact that same international transactions of the appellant has been accepted by revenue authorities to be at arm’s length in previous years.

4. That on the facts and circumstances of the case and in law, and without prejudice to any other ground, the Hon’ble CIT(A) erred in considering companies functionally different from MC – RS 3 PO, as comparable.

5. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in disregarding the functional comparability of the companies considered comparable at the time of documentation by the appellant.

6. That on the facts and circumstances of the case and in law, and without prejudice to any other grounds, the Hon’ble CIT(A) erred in upholding the order of the Ld. Transfer Pricing Officer without considering appellant’s contentions with regard to the application of turnover filter to reject companies having income less than INR 1 Crore.

7. That on the facts and circumstances of the case and in law, and without prejudice to any other ground, the Hon’ble CIT(A) erred in upholding the order of the Ld. Transfer Pricing Officer without considering appellant’s contentions with regard to the rejection of certain comparable companies having different financial year ending.

8. That on the facts and circumstances of the case and in law, and without prejudice to any other ground, the Hon’ble CIT(A) erred in upholding the order of the Ld. Transfer Pricing Officer without considering the appellant’s contentions with regard to making appropriate adjustments to account for differences in working capital employed by the appellant vis-à-vis the comparables and in the process also ignoring the provisions of the Indian transfer pricing regulations and judicial pronouncements on this subject.

9. That on the facts and circumstances of the case and in law, and without prejudice to any other grounds, the Hon’ble CIT(A) in upholding the order of the Ld. Transfer Pricing Officer without considering appellant’s contentions with regard to not allowance of economic adjustments for differences on account of risks assumed by the appellant vis-à-vis the comparable companies.

10. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) erred in not considering the fact that the appellant did not have any incentive to transfer the profits to the tax jurisdiction of Japan.

11. That on the facts and circumstances of the case and in law, and without prejudice to any other ground, the Hon’ble CIT(A) erred in upholding the order of the Ld. Transfer Pricing Officer without considering appellant’s contentions with regard to usage of single year data as against the multiple year data used by the appellant, to compute the arm’s length price of the international transaction of the appellant using TNMM method.

12. That on the facts and circumstances of the case and in law, and without prejudice to any other ground, the Hon’ble CIT(A) erred in not applying the Proviso to section 92C(2) of the Act and not allowing the benefit of upward variation of 5 percent in determining the Arm’s Length Price to the appellant.”

4. Brief facts are that the assessee is a company based in Japan and is a tax resident of Japan. It carried out trading activities catering to different industries and has different business groups, catering to energy business, Chemicals, machinery, metals etc. For A.Y. 2009-10, the assessee filed its return declaring total income of Rs.3,79,81,919/- as under:

The case was thereafter selected for scrutiny. During course of assessment a reference was made to the TPO to verify the Arm’s Length Price (ALP) of the international transactions reported by the ‘A. Vide order dated 28th January 2013 the TPO proposed a Transfer pricing Adjustment of Rs 1,15,18,552/-. Thereafter vide order of assessment dated 24th May 2013 the AO assessed the total income of the ‘A at a sum of Rs 172,51,39,948/-. In the order of assessment AO has made following additions/ adjustments to the total income declared by the ‘A’:

2. ‘A’ accepted addition made by AO on account of Undeclared Supervisory Fees but challenged other additions / adjustments in appeal before CIT(A). Vide impugned order dated 30th October 2014 the CIT(A) has partly allowed the appeal filed by the ‘A.”

4.1 Aggrieved with the order of ld. CIT(A), both the assessee and the Revenue are in appeal before us.

5. These cross appeals need to be considered in the backdrop of the history of litigation between the assessee and the Revenue as the issues are by and large legal issues. In this regard, Ld. AR has at the outset submitted the following details regarding earlier years’ assessments:

“4. There is a history of litigation between A’ and revenue. Earlier A’ had a Liaison Office {“LO” for short} which was established on 02 February 1976. A survey u/s 133A of the Act was conducted by the AO on 24th February 2005 on the LO. Post survey assessments were framed for AYs 1998-99 to 2004-05. It was held that LO was A’s PE’ in India as per provisions of Article 5 of India – Japan DTAA. An attribution formulae was also agreed upon between the A’ and tax department. A agreed to apply profit rate of 2.75% and attribute 50% of sales to India & purchases from India and paid tax thereon. Despite A contention that there was no PE in India taxes were paid with the objective to buy peace with the tax department and the orders of assessment for AYs 1998­99 to 2004-05 were accepted.

4.1 For AYs 2005-06 to 2008-09, return of income was filed by the A based on the attribution formulae adopted by the AO while framing assessment for AY 1998-99 to AY 2004-05 for maintaining the consistency with earlier years and ‘A’ paid taxes on all sales made by it to India. However, during assessment, AO refused to follow settlement formulae. Therefore, in appellate proceedings additional grounds were raised by the ‘A before ITAT and CIT(A) to determine the correct taxability of LO in India. When the appeals for AYs 2005-06 to 2008-09 came up for consideration before ITAT vide order dated 30th May 2019 (copy enclosed at pages CT-343 to CT-356) it held as under:

“7. Undisputedly, initially assesses has sought relief from Id. CIT (A) by applying the agreed formula for AYs 1998-99 to 2004-05 by following the rule of consistency. It is also not in dispute that during the appellate proceedings, assessee raised additional grounds which were admitted. For ready perusal, additional grounds are extracted as under:-

“1……..

2………..

3. Without prejudice to the appellant’s mere intention to buy peace and avoid litigation in not challenging the assessment order, the Assessing Officer erred in not appreciating that the LO of the appellant handled only the Machinery Division and since LO was held to be a PE, the sales made by other divisions of MC Japan (without any involvement of LO) should not be included in the turnover for the purpose of computing the total income.

4…………..

4.1…………

4.2…………

4.3…………

5. That on the facts of the case and in law, the Assessing Officer erred in allowing the deduction for the expenses incurred in relation to the operations of the LO only to the extent of 50% inspite of the facts that as per the provisions of the law such expenses should be allowed to the extent of 100%.

6. That on the facts of the case and in law, the Assessing Officer erred in applying the rate of 50%o for the purpose of attributing income to the operations of La without considering the fact that the major revenue generating activities were performed outside India and not by the LO.”

7. Assessee by raising additional grounds sought not to decide the issue on the basis of settlement between the assessee and the Revenue for AYs 1998-99 to 2004-05.

8. By way of raising additional grounds, the assessee has challenged the taxability whereas Id. CIT (A) has only decided GP rate, so the issue as to challenging the taxability was In fact not before the AO earlier.

……….

12. We are of the considered view that when the Id. CIT (A) has admitted the additional grounds raised by the assessee to decide the issue on merit, the issue was not to be decided by the Id. CIT (A) on the basis of agreed settlement formula by applying the rule of consistency. The Id. CIT (A) has merely decided the issue pertaining to applicability of correct gross profit rate by applying the rule of consistency. The Id. CIT (A) has also decided the applicability of gross profit rate of 10% pertaining to DMRC project but has not decided the issue of exclusion from turnover. Ld. CIT (A) in order to test the applicability of gross profit rate of 10% has merely relied upon the order of AY 2006-07. All other grounds remained un-adjudicated.

13. In view of what has been discussed above, we are of the considered view that since the assessee has set up a new case by raising additional grounds by departing from the rule of consistency, all the grounds were required to be decided by the Id. CIT (A) on merits. However, at the same time, we are of the considered view that since the assessee has raised many of the new grounds first time before the Id. CIT (A) qua which no material was there before the AO at the time of framing assessment, it would be in the interest of justice to remand the case back to AO to decide afresh after giving an opportunity of being heard to the assessee. Consequently, the appeal being ITA No.4659/Del/2011 for AY 2005-06 is allowed for statistical purposes.

14. In the light of the findings returned in the preceding paras, we are of the considered view that since issue pertaining to AYs 2006-07, 2007-08 and 2008-09 are also identical to AY 2005-06 except the difference that for these years, the assessee has filed appeal before the Tribunal challenging the assessment order passed by the AO pursuant to the direction of Id. DRP but issues raised in the grounds are identical in AYs 2006-07, 2007-08 & 2008-09 to AY 2005-06.

15. In AY 2006-07, grounds as have been raised by the assessee before the Id. CIT(A) by way of additional grounds in AY 2005-06 have been raised before the Tribunal. Likewise, in AY 2007-08 and 2008-09, similar claim as has been raised by way of additional grounds in AY 2005-06 was made before the AO as well as Id. DRP which has been rejected by following the decision rendered by the Hon’ble Apex Court in Goetze India Ltd. 284 ITR 323 (SC) which is not applicable on the power of appellate authority to consider the revised claim as has been held in Rites Ltd. vs. CIT (2017) 83 com 267 (Del.) and CIT vs. Jal Parabolic Springs Ltd. – 306 ITR 42 (Del.).

4.2 ITAT therefore remanded the case back to the records of AO for a fresh consideration in accordance with law. In remand vide order dated 30th September 2021, the AO declined to entertain fresh claims which would have an effect of assessing total income of the ‘A’ falling below that was disclosed in the return of income. This was challenged by the ‘A’ before Hon’ble Delhi High Court and vide order dated 30th July 2024 in WP(C) 12911/2021 and others Hon’ble High Court held as under:

“18. As is evident from the enunciation of the legal position in the decisions aforenoted, while ordinarily an assessee may be bound by the Return of Income as furnished, in case the Tribunal were to admit a question and proceed to accord relief, the same cannot be denied or be made subject to a Return of Income being revised. The insistence of the respondents on a revision of the return being a precondition clearly fails to take into consideration the plenary powers which stand conferred upon the Tribunal by virtue of Section 254 of the Act.

19. In light of our conclusions on the principal question which stood posited, we observe that the challenge to the Circular of the CBDT does not really merit further consideration. All that need be observed is that once the Tribunal had called upon the AO to examine the issue afresh, the said direction could not have been disregarded by reference to a Circular issue by the CBDT.

20. We accordingly allow the writ petitions and quash the final assessment orders dated 30 November 2021 insofar as they negate consideration of the additional grounds which had been urged by the writ petitioners. The AO shall consequently consider the same and pass fresh orders in accordance with law. We, in light of the above, also quash the consequential demand and penalty notices also dated 30 November 2021.”

Post High Court decision as above the AO has passed a draft assessment order dated 31-07- 2025 which is currently pending finalization as it is pending scrutiny by the DRP.”

5.1 Ld. AR has also submitted that the assessee has established a branch office in India after obtaining RBI’s approval vide letter dated 26.02.2008 and therefore A.Y. 2009­10 is the first year of operation of the BO. With regard to the closing of LO & commencement of operation of BO during the year under consideration, Ld. AR has made the following submissions:

5. Before proceeding further, it will also be relevant to submit that the LO has been closed, and no activities are being done in LO after March 2008. In his order of assessment for AY 2009-10 {at page 2, top para} it is alleged by AO that “no evidence of closure of LO has been furnished by the assessee”. Then at page 20, last para it is further erroneously held by AO that functions performed by LO are now being done by BO, therefore, there exists a PE in form of BO. These findings were challenged in appeal before CIT(A). CIT(A) accepts that LO has closed during the year under consideration (refer page 7, para 7). These findings / observations of CIT(A) have not been challenged by the revenue before ITAT.

6. As submitted above for the year under consideration i.e. AY 2009-10, income of BO pertaining to activities in India was offered to tax at a sum of Rs 2,48,38,609/-. {refer computation of total Income @ page CT-508}. BO accounts are enclosed at pages CT 457 to 471 and P&L account of BO is enclosed @ page CT-458 of PB. Income credited to P&L account is Service Fee of Rs 12,40,38,160/- reimbursed by HO to the BO. Service Fees received by BO are as per terms of Service Agreement dated 13th March 2009 (made effective from 01st April 2008) executed between HO and BO. Copy enclosed at pages CT-339 to CT- 341. Scope of Services to be Performed are stated at page CT-339, Article 1. Modus of services fee is stated in Article 2 to be “Full Cost plus appropriate mark-up on such cost as maybe agreed depending upon die market condition”. This was subsequently agreed at Cost + 16%.It will be relevant to note here that the TPO has a also examined the FAR of BO. TPO notes that BO is supporting only EPC business of Machinery Group. Reference is invited to paper book page CT- 20, para 6 of the TP order for AY 2009-10 wherein TPO has described the role of BO as follows:

“6. Mitsubishi Corporation – Branch Office (MC-BO)

6.1 The assessee is a branch office of Mitsubishi Corporation (‘MC’), Japan. On the basis of detailed scrutiny of the profile of the employees of MC- BO it has been observed that the activities carried out by MC-BO in India primarily relate to marketing support services for EPC business for MC Japan. MC-BO engages in carrying out activities such as collection of information, forwarding of various market enquires, tender notices/proposals from potential Indian customers to MC Japan, arrange meeting between visiting representatives from MC Japan and Indian Parties. The role of MC BO is limited to rendering support services in relation to MC Japan’s Machinery Division.”

7. The AO however refuses to accept that BO of the ‘A’ was only catering to Machinery Division. During the course of assessment AO show caused the ‘A’ {refer page 6, para 3.4 of assessment order} as to why assessment for AY 2009-10 not be framed in tune with conclusions recorded by his in earlier years and therefore “sales made in or through India can be attributable to the BO/LO in respect of all divisions, be not taxable in India”. After considering the reply filed by the ‘A’ it is held by AO that ‘A’ has undertaken substantial Sales “in or through India” income of which has not been offered to tax in ROI even though it has a BO in India and in earlier years upto AY 2008-09 the ‘A’ had offered such income to tax in ROI.

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9. AO and CIT(A) have erred in relying upon assessments framed for earlier years – Main thrust of case made out by both the lower authorities is structured on the fact that in proceedings years the ‘A’ acquiesced to taxability in India for direct sales made by all its divisions. AO has erred in adjudicating upon the issue in dispute premised merely upon outcome of earlier year assessment proceedings for AYs 2008-09 and earlier. As stated above in AYs 2005-06 to 2008-09 Hon’ble ITAT vide its order dated 20th May 2019 has held that “assessee has set up a new case by raising additional grounds by departing from the rule of consistency”. For the year under consideration both the AO and CIT(A) did not have the benefit of ITAT order for AYs 2005-06 to 2008-09. Moreover, it is also relevant to note that Survey u/s 133A was carried out on 24th February 2005 when the BO was not even in existence. Survey conclusion of the year based on what was noticed in the course of survey could not be extrapolated to the other years. {Refer CIT vs. Gupta Abhushan Ltd. 312 ITR 166 (Del) @ Para 5}. Moreover, merely because in earlier years it was held that A’ had a PE in India for all the divisions, that by itself cannot lead to the conclusion that a similar PE must be in existence in subsequent years and that too without looking into the additional facts which । were specifically filed by the ‘A’ to demonstrate that the BO was only catering machinery/ division. BO can’t be presumed to be functioning like LO.”

6. At the outset, we note that the issues mentioned in the cross appeals are largely legacy issues. As regards the contention regarding the BO coming into existence during the year under consideration, we note that the assessee while applying to RBI has made a request for permission to establish its branch office vide application dated 28.01.2008 stating, inter alia, as under:

“……………

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MC presently has liaison offices in New Delhi, Mumbai, Kolkata, Ban galuru & Bhubaneswar. MC has strengths in Project Development and Infrastructure related business which is another area of importance for us in this developing market such as transportation systems, machinery for steel production, and machinery for power generation etc, MC remains determined to grow even stronger while contributing to the enrichment of India through business activities.

In terms of the prevailing Foreign Exchange Regulations, the existing Liaison Offices cannot render professional or consultancy services, nor carry out research work for project development and infrastructure related business. Therefore, MC submits this Application along with requisite documents to close the. Liaison offices and setup new Branch Offices in New Delhi, Mumbai, Kolkata, Chennai, Bangaluru & Bhubanesh war.

Subject to the receipt of your approval, the Liaison Offices will be closed effective March 31, 2008 and we will open and operate new Branch Offices with effect from April 1,2008.1 hereby confirm that any of the liabilities of our Liaison Offices in India up to the period ending 31^st March, 2008, shall be discharged by MC.”

6.1 Accordingly, the RBI vide letter dated 26.02.2008 granted “Permission to upgrade Liaison Office in India to Branch  office” The permission letter further mentions as under:

“2. Having noted from the documents furnished herewith that your company is engaged in the business of general trading, Reserve Bank of India grants you permission for up gradation of your five Liaison Offices at New Delhi, Mumbai, Kolkata, Ban galore and Bhubaneswar into Branch Offices.”

The scope of activities of the Branch office approved by the RBI as per annexure to above letter is as under:

“2. The Branch Office may carry on the following activities in India:

i) Export/Import of goods

ii) Rendering professional or consultancy services.

iii) Carrying out research work, in which the parent company is engaged.

iv) Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

v) Representing the parent company in India and acting as buying/selling agent in India.

vi) Rendering services in information Technology and development of software in India.

vii) Rendering technical support to the products supplied by parent/group companies.

The Branch office shall not undertake Retail Trading activities in India or any nature.”

6.2 In view of these facts and circumstances and after hearing the rival submissions on this issue, we are of the considered view that the Branch office (BO) established is in continuation of the Liaison Office (LO) and its expanded version in terms of scope of activities. Admittedly, the BO is a PE of the assessee company in India. We further note that the issues raised in the present appeals are similar to the issues involved in A.Y. 2005­06 to A.Y. 2008-09 which are currently pending before the Assessing Officer for denovo consideration as per the direction of the co-ordinate bench as noted in para 5 hereinbefore.

6.3 Under these facts and circumstances, we deem it appropriate to restore the matter for denovo consideration by the ld. AO with direction to pass a fresh assessment order after duly considering and examining the assessee’s submissions including those relating to its contention that the BO was merely catering to the Machinery division of HO.

7. In the result, both the appeals are allowed for statistical purposes.

Order Pronounced in the Open Court on 23/04/2026.