Brief of the Case
ITAT Delhi held In the case of Kawasaki Heavy Industries Ltd. vs. ACIT that a plain reading of the power of attorney, makes it clears that the powers given therein are liaison office specific. The AO’s conclusion that the power of attorney granted unfettered powers to its liaison office’s employee, to do all or any acts for and on behalf of the assessee, is incorrect. Also, it is beyond the jurisdiction of the AO to adjudicate and conclude that the assessee has filed false declarations before the RBI. At best, he can bring his findings to the notice of the RBI which may consider the same in accordance with law. The AO has also not brought on record any material, other than his interpretation of the terms of the power of attorney, to demonstrate that the liaison office is carrying on core business activity warranting his conclusion that the assessee has a P.E. in India. Thus neither the documents produced by the assessee are rebutted by the Revenue, nor has the Revenue brought on record any evidence in support of its contention. Thus we have hold that the Revenue could not demonstrate that the assessee has a P.E. in India.
Facts of the Case
The assessee is engaged in diversified business of ship building, consumer product such as motor cycles and allterrain vehicles. It also manufactures personal water craft, ships, industrial plants, tractors, trains, small engines, and aero space equipment (including military air craft), sub contract work on jet air craft (including jumbo jets) Boeing, Embracer, and Bombardier. The assessee has two subsidiaries in India by the name of Wipro Kawasaki Precision Machinery Pvt. Ltd. and India Kawasaki Motors Pvt. Ltd.
The followings grounds were raised in this case – ground no.1 is general in nature. Ground no.2 pertains to the issue whether the liaison office (L.O.) of the assessee constitutes Permanent Establishment (P.E.) of the assessee in India. Ground no.3 is on the issue of attribution of business profits to the P.E. in India in terms of Article 7 of the India Japan Double Taxation Avoidance Agreement (DTAA), and ground no.4 is whether the fee for technical services earned by the assessee can be considered as effectively connected with the fixed place P.E. and attribution of income thereof. Ground no.5 is contribution of profits should be in line with transfer pricing principles and not on adhoc basis. Ground no.6 is against levy of interest u/s 234B of the Act and ground no.7 is against initiation of penalty proceedings.
Contention of the Assessee
The ld counsel of the assessee submitted that the findings that the L.O. of the assessee is carrying out the entire business activity is not based on any evidence or document, and the allegation that the assessee has violated the terms and conditions laid down by the Reserve Bank of India, while permitting opening of L.O., is perverse. He submitted that the finding as to whether the assessee had violated the conditions stipulated by the RBI and whether false declarations were given to the RBI is matter to be decided by the RBI and not by the A.O. Reliance was placed on the following case laws. DIT vs. Nokia Networks OY (2013) 358 ITR 259 (Del.), Mitsui & Co. Ltd. vs. ACIT (International Tax) 114 TTJ (Del) 903 , Motorola Inc. Vs. DCIT 95 ITD 269 (Del)(SB) and Jebon Corporation India 127 TTJ (Bang) 98 (2009).
Further on On the issue of tax on the off shore supplies made by the assessee, he submitted that, as the assessee has no P.E. in India, the question of attribution or bringing to tax the income from the off shore supplies made from Japan does not arise. He further argued that the A.O. was making totally a wrong allegation at para 6.3 of his order stating that, except manufacturing, all other functions like market survey, market research, customer education etc. are carried out in India and thereafter made a hypothetical determination of 60% of the profits from sales as attributable to the P.E. in India.
He relied on the decision of Hon’ble Supreme Court in the case of Ishikavajimaharima Heavy Industries Ltd. vs. DIT (2007) 288 ITR 408 (S.C.) as well as the judgement of the Apex Court in the case of CIT vs. Hyundai Heavy Industries Co.Ltd. (2007) 291 ITR 482 (S.C.) for the proposition that only such part of income as is attributable to the operations carried out in India is to be subjected to Indian tax and that off shore suppliers are to be excluded. He also relied on judgements of the Jurisdictional High Court in DIT vs. Nokia Networks OY 358 ITR 259 (Delhi) and DIT vs. Ericsson AB (2012) 343 ITR 470 (Del.) wherein it is laid down that, in case of transaction of sale of goods, the determinative factor would be as to whether the property in goods would pass in India or not. Once the sale has taken place outside India, then even in case of a composite contract, the supply is to be excluded from taxation.
On taxability of fee for technical services (FTS), he submitted that the assessee committed an error by filing his return of income in as much as, the income from FTS was not disclosed in the return of income. He submitted that the entire FTS received Rs.65.44 crores is taxable in the hands of the assessee on gross basis @ 10% in accordance with Article 12 of the Indo Japan DTAA.
In ground no.5, the assessee did not make any submissions on the ground that the attribution of profits to the alleged P.E. should be in line with the transfer pricing principles and not on an adhoc basis. On the levy of interest the Ld.Counsel argued only against the levy of interest u/s 234B of the Act and has not argued on other levies. He relied on the decision of Jurisdictional High Court in the case of Director of Income Tax (International Taxation) vs. G.E. Packaged Power Inc. In ITA 352/2014 judgement dt.12.1.2015.
Contention of the Revenue
The ld counsel of the revenue submitted that the so called L.O. in India is conducting core business activity. He submitted that salaries of 41.8 lakhs and 54 lakhs per annum are being paid to the employees in the L.O. and that though no adverse view can be taken keeping in view the quantum of salaries, he submitted that it is an indicator of the nature of functions rendered by the employees and that it is not merely for the purpose of news paper reading and report collection and that the employees are doing something more. He relied on the order of the AO as well as that of the DRP and submitted that a bare perusal of the power of attorney granted to the employees of the so called L.O. by the company permits core business activity and it is not restricted to L.O. specific activity. He argued that even otherwise, the stand of the Revenue that the employees of the assessee company in the L.O. are doing core business activity, is not contradicted by the argument that the power of attorney is L.O. specific.
On the arguments of the assessee that the findings of the AO that the conditions laid down in the RBI permission were violated and that the assessee has filed false compliance report with the RBI etc. are wrong and that it is not within the jurisdiction of the AO to give such a finding, he submitted that if an auditor certificate is taken as say all, then the requirement of investigation agencies such as Income Tax authorities etc. would not be there. He submitted that the AO can always verify whether the terms and conditions mentioned or stipulated by the RBI have been followed by the assessee. On the issue of taxability of sales he relied on the order of the AO. On FTS he pointed out that it is a composite contract and in the case of Afcons Gunanusa Joint Venure, the amount payable on FTS is a small portion as compared to the supplies. He submitted that these are composite contracts and cannot be segregated. He relied on the decision of the Hon’ble Supreme Court in the case of M/s Hindustan Ship Yard Ltd. vs. State of Andhra Pradesh judgement dt. 20.7.2000. On interest levied u/s 234B he relied on the order of the DRP.
Held by ITAT
ITAT held that A perusal of the order of the AO as well as the DRP takes us to a conclusion that the sole basis on which they had come to a conclusion that the assessee had a P.E. in India is the clauses in power of attorney executed by the head office in favour of its employee in the L.O. in India. Reliance was also placed on the permission granted by the RBI to the assessee for setting up the L.O.
A plain reading of the clauses in the power of attorney takes us to a conclusion that the powers given therein are L.O. specific. The AO’s conclusion that the power of attorney granted unfettered powers to its L.O. employee, to do all or any acts for and on behalf of the assessee, is incorrect. In our view the finding of the AO that the power of attorney is an open ended document, which is clearly outside the scope of initial permission granted by the RBI is also perverse. No doubt the AO can investigate, call for evidences and come to a conclusion where any income earning activity has been carried out by the L.O. so as to construe it as fixed P.E. but, in our view it is beyond the jurisdiction of the AO to adjudicate and conclude that the assessee has filed false declarations before the RBI. At best, he can bring his findings to the notice of the RBI which may consider the same in accordance with law. The RBI has not found any violation of conditions laid down by it while permitting the assessee to have an L.O. In such circumstances, no adverse inference can be drawn.
The assessee has furnished before the AO as well as before the DRP numerous documents, in support of his contention that all purchase orders would be raised directly by the Indian Customers on the Head Office of the assessee and that the Head Office had directly send quotations/invoices to its Indian customers and that these were signed and executed directly by the head office, without any involvement whatsoever by the LO in India. The AO has not given any adverse finding on the evidences filed before him nor did he point out from the evidences filed, as to why the claim of the assessee is not acceptable. There is no adverse comment by the D.R. on these voluminous evidences filed before us by the assessee to demonstrate that it does not have a P.E. in India. The AO has also not brought on record any material, other than his interpretation of the terms of the power of attorney, to demonstrate that the L.O. is carrying on core business activity warranting his conclusion that the assessee has a P.E. in India. Thus neither the documents produced by the assessee are rebutted by the Revenue, nor the Revenue has brought on record any evidence in support of its contention. Thus we have to necessarily hold that the Revenue could not demonstrate that the assessee has a P.E. in India.
Accordingly appeal of the assessee partly allowed.