Liaison Office having active role treated as Permanent Establishment in terms of Article 5(2) of India-Germany DTAA

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 :

19. Learned counsel further submitted that there are various misstatement of facts both by the Assessing Officer and first appellate authority as under :

20. He submitted, though, the Assessing Officer has relied upon the appointment letter of the country head, Shri Sanjiv Goswami, however, that cannot lead to the conclusion that LO is more than a communication channel. Further, he submitted, the appointment letter of Shri Sanjiv Goswami was signed on 21.10.1997 prior to approval of RBI. Hence, it will not be correct to relate RBI’s letter with the documents signed earlier. Without prejudice, he submitted, the terms ‘ marketing’ and ‘sales’ mentioned in the appointment letter are not to be interpreted in their strict legal sense. He submitted, since, the LO has no permission to do business activities in India, Shri Sanjiv Goswami could not have undertaken such activities. He submitted, the responsibility of Shri Sanjiv Goswami was only focussed on planning and communication building between the assessee and potential customers in India. He submitted, the reliance placed by the Assessing Officer on an inter-office email written by Shri Rajiv Salwan, Area Manager, South India is of no relevance, as the LO employees cannot identify a title which may be taken up for reprinting and mass circulation. They can at best make a market survey of what are the titles in demand. He submitted, employees during their promotion work at the institutions generally get suggestions from academicians and researchers regarding titles that they are interested in or require for inclusion in their syllabi. Similar suggestions during book fairs, conferences and seminars are gathered. However, employees of the LO neither have authority/capacity nor the occasion to decide as to which title has to be taken up for reprinting and mass circulation. Thus, this email is a mere opinion on viability based on cost consciousness and cannot be interpreted as a decision, as the assessee is nowhere involved in the entire communication. He submitted, the LO had no role to play once it forwarded the cost computation inputs to Germany. He submitted, occasional and stray involvement of the LO in forwarding a printing instruction or a delivery instruction to the printer or communication with the distributor, based on the instructions of the assessee, cannot be considered as involvement of the LO in the entire business process. If at all, such involvement of the LO is only as a conduit for transmission of information and cannot lead to a PE situation.

21. Drawing our attention to Article 5 of India-Germany treaty, learned counsel submitted that the LO is not 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. He submitted, 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. Therefore, even if LO can be considered as an office, it cannot be treated as PE, as it is not a place of business.

22. Without prejudice, he submitted, in respect of books and journals directly imported from outside India, the LO had no role to play. Even in respect of the books printed in India, the LO did not conclude contracts on behalf of the HO, neither had stock of books for delivery to customers nor did it secure orders for assessee. Therefore, in terms of Article 5(5), there is no PE of the assessee in India. He submitted, assessee’s case falls purely under the exceptions provided in Article 5(4) of the treaty, as the nature of activities is preparatory and auxiliary. Further, he submitted, the approval granted by RBI clearly mandated that the assessee should not undertake any commercial activity. He submitted, there is no allegation by the RBI regarding violation of the conditions of approval. Therefore, the department cannot allege undertaking of any commercial activity by the LO. In support, he relied upon following decisions :

(i). Union of India v. U.A.E. Exchange Centre Ltd. [2020] 273 Taxman 122 (SC)

(ii). IAC v. Mitsui & Co. Ltd. [1991] 39 ITD 59 (Delhi) (SB)

(iii). DIT v. Mitsui & Co. [2018] 407 ITR 294 (Delhi) [SLP Dismissed/Rejected in [2019] 111 com 215 (SC)]

(iv). DIT (Intl. Taxation) v. Morgan Stanley & Co. Inc. |2007] 292 ITR 416 (SC)

(v). Sojitz Corporation v. ADIT [2008] 117 TTJ 792 (Kolkata)

(vi). Metal One Corpn. v. DD1T [2012] 52 SOT 304 (Delhi)

(vii). S.R. Technics Switzerland Limited v. ACIT (2022) ITA No. 6616/Mum/2018.

23. Without prejudice, he submitted, in assessment year 2002-03, the first appellate authority in addition to his finding that the LO constitutes a PE, has also held that the assessee had business connection in India. He submitted, while coming to such conclusion, the first appellate authority has relied upon incorrect facts while observing that the assessee is engaged in several activities like printing, publishing and sales of foreign titles independently and on a regular basis. Whereas, in reality, the activity of printing and sales are carried out by third party printers and distributors. The LO does not have any role to play in these activities. Thus, learned counsel submitted that the LO cannot constitute a PE of the assessee in India.

24. Per contra, learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned first appellate authority. Drawing our attention to the statements recorded from two employees of LO and certain other documents, he submitted that the LO was carrying out wholesome commercial activities, which resulted in phenomenal increase in the business of the assessee in India. He submitted, the activities carried out by the LO is akin to the activities undertaken by Indian subsidiary of the assessee, which came into existence in the year 2002. He submitted, though, for carrying out similar activities, the Indian subsidiary was remunerated by 11% of the gross revenue, however, the LO was not paid anything. Thus, he submitted, the decision of learned first appellate authority should be upheld.

25. We have considered rival submissions in the light of decisions relied upon and perused materials on record. We have also painstakingly perused all facts and materials on record including the documents submitted in the factual paper books. The precise issue arising for consideration is whether the LO of the assessee in India can be treated as PE in terms of Article-5 of India-Germany DTAA. Before we delve into the issue, it is necessary to look into the definition of PE as per Article 5 of India-Germany DTAA, which reads as –

Article 5 : Permanent establishment

1. For the purposes of this agreement, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially:

(a) place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, including an installation pr structure used for the exploration or exploitation;

(g) a warehouse or sales outlet;

(h) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; and

(i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months.

3. An enterprise shall be deemed to have a permanent establishment in a contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery or hire used for or to be used in the prospecting for or extraction or exploitation of mineral oils in that State.

4. Notwithstanding the preceding provisions of this article, the term establishment” shall be deemed not to include:

(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

(f) the maintenance of a fixed p lace of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 6 applies—is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the first mentioned State, if this person.

(a) has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprises;

(b) has no such authority, but habitually maintains in the first mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or

(c) habitually secures orders in the first mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise.

6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business and in their commercial and financial relations to the enterprise no conditions are agreed or imposed which differ from those agreed between independent persons.

7. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.”

26. As can be seen, paragraph No. 1 of Article 5 defines PE to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. Thus, paragraph 1 of Article-5 of the treaty sets out two conditions. Firstly, the PE must be a fixed place of business and secondly, through such fixed place of business, the business of an enterprise is either wholly or partly carried on. Paragraph No. 2 of Article 5 sets out what comes within the ambit of PE, such as place of management, branch, an office, a factory, a workshop, a warehouse or sales outlet, a building site or construction, installation or assembly project or supervisory activities in connection therewith etc. etc. Paragraph No. 3 of Artilce-5, since, is not applicable to the facts of assessee’s case, there is no need to go into that. Paragraph 4 of Article-5 carves out certain exceptions to the definition of PE by providing that the PE, inter alia, shall not include the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. Paragraphs No. 5, 6 and 7 of Article-5 are not applicable to assessee’s case, hence, there is no need to discuss them.

27. Thus, it requires examination, whether the assessee has a fixed place of business in India, through which it carries out its business either wholly or partly or even if there is fixed place of business, it is only for the purpose of carrying out activities of preparatory or auxiliary character. It is the consistent stand of the assessee from the assessment stage that the LO in India has been established only for activities of preparatory or auxiliary character. However, in course of survey conducted at the premises of the LO, certain documents were impounded and statements were recorded from two employees of the assessee working at the LO, where from, it was found that the LO effectively was involved in various activities. In the assessment order, the Assessing Officer has described the nature of activities undertaken by the LO as under :

a. The employees of the liaison office visits various institutes, libraries and individuals to discuss and promote the publications of the assessee and to ascertain their exact requirements.

b. These all requirements are consolidated and discussed the distributor about the profitability and willingness of the distributor to undertake the sales.

c. The quotations are obtained from the printers asking for printing of exact no. of copies.

d. Upon receiving the quotations from printers, the L.O. obtains cost component of publishing to be incurred outside viz royalty etc. On the basis of all the cost component received, it works out the profitability with regard to each title. Normally the gross profitability in all cases are worked out at more than 50%.

e. Thereafter the L.O. asks the H.O. to issue the purchase order directly to the printers, which the H.O. invariably do in accordance with the terms and conditions agreed between printer and L.O.

f. In the purchase order issued by H.O. also, the printers are asked to take instructions from Mr. Sanjeev Goswami.

g. After the books are printed, the Liaison office instructs the printer to supply the books to the specific publishers.

h. The printer raises the invoice on Springer Germany on the basis of agreement reached with L.O. and receive payments from overseas. The distributors after making the sales make the remittance to Springer Germany.

28. Further, the Assessing Officer has also referred to statements recorded on oath from Shri Venkatraman, working as Manager, Promotion and Publicity, in the LO and Shri Sanjeev Goswamy, the country Head working at the LO. In the statement recorded, on a query raised with reference to the printing activities carried on in India in EPZ, Shri Venkatraman has specifically stated that employees working at LO identify a title which may be taken up for reprinting and mass circulation. He admitted that once, the identification of the title is done, the distributors are contacted by the LO to determine their readiness to purchase the said titles. He has stated that once the distributor shows the readiness to procure the identified titles, the LO obtains the price, on which they are willing to buy the titles and number of prints they want. After completion of this exercise, the LO contacts the HO to find out the cost component in terms of royalty payable and e-file costs. Thereafter, the printing quotes are taken from the printer by the LO. He stated that once, the LO procures the cost components, the number of confirmed orders and the selling rates, the net price and gross margin are determined by the LO and the quote is sent to the Head Office for acceptance. After acceptance of the quote by the Head Office, printing order is placed with the concerned EPZ. Shri Venkatraman has further stated that in very rare instances, some queries are raised by the head office, otherwise, in 90 to 95% of cases, the quotes sent by the LO are accepted by the HO.

29. In the statement recorded from Shri Sanjeev Goswami, country head, working at LO, he has stated that the LO has visited 200 to 250 institutions during the year and met the scientists and academicians to inform them about the existing new products of the company to enable them to procure the required products through companies distributors in India. He has further stated that the LO provides market research information and market feedback to HO for pricing of the products. From the aforesaid statements, particularly, the statement of Shri Venkatraman, it becomes very much clear that in so far as the reprinting of low priced editions at EPZ in India is concerned, the activities of the LO is much more than mere preparatory and auxiliary character. The LO not only procures orders, but also works out the cost components and margin of the books to be reprinted in EPZ and sends for acceptance of the HO. It is also evident, in majority of cases, almost 90 to 95%, the price and margin fixed by the LO in respect of specific titles to be published/reprinted at the EPZ are accepted by the HO. Thus, the aforesaid facts clearly reveal that the LO has a major say with regard to not only the titles to be reprinted in India, but their pricing also. It is also a fact on record that in a report submitted by Conny Schindewolf, the achievement of the LO in increasing the sale of products of the assessee has been appreciated. Though, learned counsel for the assessee has submitted before us that much importance cannot be attached to the said report, as it was for internal consumption , however, we are not impressed. From various invoices placed in the paper book, it is observed that Conny Schindewolf was in an authoritative position of the company, hence, her report carries much weight.

30. So far as contention of learned counsel for the assessee that there is no allegation by RBI that the assessee has violated the conditions of their approval by indulging in commercial activities is concerned, we are of the view that such argument is without any substance, as what we are required to decide is whether the assessee had a PE in terms of Article 5 of India-Germany treaty. Though, the LO may not be involved in direct sale of products, however, the facts on record clearly reveal 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. At this stage, it will be pertinent to observe that while examining the issue relating to existence or otherwise of PE, learned first appellate authority has recorded a factual finding that the LO plays an active role with regard to printing of books in the EPZ, deciding their cost component and their sales. The assessee has not been able to rebut the concurrent factual finding of the departmental authorities in so far as it relates to activities of the LO in printing of books in EPZ. 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. In our view, the decision of the coordinate Bench in case of Nagase & Company Ltd. v DDIT(IT), (2018) 96 taxmann.com 504 would be of no help to the assessee, as in that case, the facts on record did not indicate that the role of LO is not limited to preparatory and auxiliary work. In aforesaid view of the matter, we hold that the LO constitutes PE of the assessee in India.

31. Having held so, now, it is necessary to deal with the issue relating to attribution of profit to the PE. As could be seen from the facts on record, learned first appellate authority has given a factual finding that the role of PE has been very limited in the sale of journals and books printed abroad. In fact, on perusal of materials on record, we are convinced that the PE had no role to play in sale of journals and books printed abroad, as, these are direct transactions between the assessee and subscribers/buyers in India without any intervention of the LO. Therefore, in our view, no part of the income derived by the assessee from sale of journals and books imported to India can be attributed to the PE. The attribution of income to PE should only be with reference to the books printed at EPZ and sold to distributors/customers. It is observed, with regard to EPZ sales, learned Commissioner (Appeals) has determined net profit rate at 15% of the total sales made in India and out of that has attributed 80% to the PE. In our view, the attribution of profit by learned Commissioner (Appeals) appears to be irrational and not in consonance with the facts on record. From the assessment order, it is evident that the assessee has incorporated a subsidiary in India in the year 2002. The Assessing Officer has himself observed that the subsidiary is remunerated with a mark up of 11% of the gross receipts while rendering similar nature of services as rendered by the LO. Thus, in our view, the profit rate, at which the Indian subsidiary was remunerated, can be taken as an yardstick to determine the quantum of profit attributable to PE. The Assessing Officer has attributed 15% of the gross revenue as profit to the PE. Whereas, learned first appellate authority has determined the net profit rate at 15% of the total sales and attributed 80% out of that to the PE. In our view, it will be reasonable to estimate the net profit at 11% of the total sales made in India and out of that attribute 80% as income of the PE, as major role was played by the PE with regard to EPZ sales. Of course, while computing the income of the PE, the Assessing Officer must consider assessee’s claim of expenses incurred towards making sales in India and other deductions such as depreciation, head office expenses, turnover discounts etc. While undertaking such exercise, the Assessing Officer must provide reasonable opportunity of being heard to the assessee.

32. Before parting, we must observe, though the assessee has taken an argument that no profit is attributable to PE with regard to EPZ sales in terms of Article 7(5) of the treaty, however, on careful consideration, we are not convinced with the submissions of the assessee. We have discussed in detail the role of LO in procuring orders for EPZ sales. In that view of the mater, it cannot be said that no profit can be attributed to the PE. We order accordingly.

33. In the result, appeals are partly allowed.

Order pronounced in the open court on 04/01/2024.