Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Perfetti Spa on 31 October, 2007
Equivalent citations: (2008)113TTJ(DELHI)701
ORDER
Bhavnesh Saini, J.M.
1. This appeal by the Revenue is directed against the order of CIT(A)-XXIX, New Delhi, dt. 22nd Dec, 2000, for asst. yr. 1997-98, on the following grounds:
On the facts and circumstances of the case, the learned CIT(A) has erred in:
1. Holding that no part of the profits are taxable in India.
2. Holding that the assessee does not have a business connection or PE in India.
2. The facts of the case are that enquiry in this case was initiated in the month of June, 1998 wherein the Indian subsidiary i.e., Perfetti India Ltd. (hereinafter described as PIL) was asked to produce the details of import made by it from assessee. Subsequently notice under Section 163(1)(a) was issued to PIL asking the assessee to submit its objection in this regard. During the enquiry proceedings summons were issued to the managing director, PIL asking the assessee to file return. Ultimately representatives of the assessee appeared before the AO in connection with the notice issued in the case of the assessee for the assessment year in question. It is stated that the assessee is a company incorporated in Italy. It has 100 per cent subsidiary in the form of PIL. The managing director of PIL is appointed by the assessee company and received part of the salary abroad. During the year the assessee company supplied machinery to its Indian subsidiary amounting to Rs. 7,74,45,858 and raw-material worth Rs. 11,46,525. The assessee has not filed any return on profit earned by it on these supplies. It has taken a plea that the income is not taxable in India. The assessee has taken protection under Indo-Italian Treaty.
3. The AO held that income of the assessee is taxable both under the treaty as well as under the IT Act. The AO observed that the assessee has business connection in India and its income is deemed to accrue and arise in India due to the following reasons:
1. It has supplied machinery on a continuous basis. It started from 24th April. 1996 and continued till 17th March, 1997. The transaction is not an isolated transaction, but is spread over a long period.
2. The managing director and other expatriates in the Indian company are receiving salaries from the assessee company. In this way the assessee company has total control over management and affairs of the Indian company.
3. The orders for the machinery have been placed from India and there is no written contract and no negotiations have been carried out, which shows close business connection between the assessee and the Indian company which is importing the machinery.
4. The machinery is over-invoiced and assessee has also not confirmed that the machinery supplied were new ones.
5. The supplies are made on CIF basis and it is the responsibility of the assessee company to supply the goods in New Delhi. This is confirmed by the purchase order submitted by the Indian company No. POIM/H001/96000013. dt. 8th July, 1996.
4. The AO by referring to provision of Section 9(1) of the IT Act and referring to Article 5 of the DTAA between India and Italy held that income of the assessee is taxable in India. The AO further observed that the assessee company paying salaries to a number of employees who were working in India. The assessee company could not give any reasons why it was making payment of salaries to the employees of PIL. In fact, PIL was a fixed place of business for the assessee company where its employees were permanently sitting and protecting the interest of the assessee company. The AO further observed that these experts were managing directors of the company and a number of technicians. The Indian company has confirmed that it did not make any payment to technicians and mechanics from the assessee company. The AO further observed that the machinery was sold by the assessee company and installation of running work was also carried out by its employees in India. It was not a simple FOB sale, rather its installation and running work were also carried out by the assessee company. The AO further observed that the supply is on CIF basis and Article 5 of DTAA para (1) says that PE means a place of business through which a business is wholly or partly carried out. It is clear that from the premises of the Indian company, the business is carried on. The AO observed that it is not necessary that assessee should have a branch or an office to have a PE. It is sufficient if it has a place of management. The definition of PE itself clarifies that place of management can be different from an office. The AO held that in the case of the assessee the managing director of Indian company is an employee of assessee company and further other expatriates posted in India who were providing technical assistance are also employees of assessee company. The assessee submitted before AO that expatriates and technicians cannot become a PE as they are not dependent agents. The AO however did not accept contention of the assessee because these expatriates and technicians were watching the interest of the assessee and are taking decisions on behalf of the assessee company. The AO, therefore, observed that that is why no inter-corporate contract has been executed between the parties. In fact the managing director of the Indian company represents the Indian company as well as the assessee company and therefore it would show close business connection between the Indian company and the assessee company. The AO further observed that in fact the transactions are not based on arm's length principle rather they are carried on in such a fashion that the assessee company gets maximum profit. The AO therefore held that Indian company is a PE of the assessee company because it is just not a subsidiary but has a close business connection with the assessee company. The AO further observed that in the case of the assessee company it is not only the holding company of the Indian company but has employees who are sitting in Indian company and protecting the interest of the assessee company and carrying on business on behalf of the assessee company. Therefore all these facts are beyond the fact of mere subsidiary. The AO therefore held that both the companies are having close business connection. The AO ultimately held that PIL is the PE of assessee company. The assessee company has not supplied its global balance sheet nor has it supplied the Indian accounts, therefore the AO concluded that the profit at the rate of 20 per cent is estimated on the supplies of machinery and raw material. The income of the assessee was accordingly assessed.
5. The assessee challenged the assessment order before the CIT(A) and several grounds were taken challenging the findings of the AO. The learned CIT(A) considered all the grounds of appeal in the impugned order. The learned CIT(A) considering the issue of no proper opportunity granted by the AO to the assessee had gone through various dates fixed before the AO at the assessment stage and held that no sufficient opportunity of being heard was allowed to the assessee during the course of the assessment proceedings. The learned CIT(A) considering the decision of the Hon'ble Supreme Court in the case of CIT v. Kanpur Coal Syndicate held that the first appellate authority has plenary powers in disposing of an appeal. The learned CIT(A) accordingly proceeded to decide the appeal of the assessee on merits.
6. The learned CIT(A) considered the first issue in appeal of the assessee whether the assessee is liable to tax in India in respect of the goods sold to PIL. The assessee in the written submission before the CIT(A) submitted that PIL had imported machinery and raw material from the assessee with a view to install a plant for manufacturing items such as chewing gums and toffees. The AO held that the income is taxable under Section 9 of the IT Act and Article 7 r/w Article 5 of the DTAA. It was clarified that PIL was not wholly owned subsidiary of the assessee, but it held 63.6 per cent of the equity of the subsidiary. The balance capital was held by BN Holdings Ltd., Mauritian OCB. This fact was accepted by the AO in the written submission filed during the course of appellate proceedings. It was submitted that the finding of the AO that the transactions between assessee and PIL were not conducted at arm's length principle was not based upon any evidence from record and such an observation was made without giving the assessee an opportunity of being heard. It was submitted that such an observation defies reasons because in the case the machinery was over-invoiced, it would mean that it was sold at a price higher than the fair market price, leading to levy of higher amount of customs duty. The assessee in support of its contention that machinery and goods were supplied at fair market value relied on the order dt. 23rd Oct., 1997 passed by the Commr. of Customs, New Delhi. It was submitted that no violation was noted by the customs authorities and that their assessments were finalized under Customs Act at the same price. It was submitted that customs duty is leviable on the value of the goods imported and the value is deemed to be the price at which such goods or like goods are ordinarily sold or offered for sale in the course of international trade. It was therefore argued that there was positive evidence in favour of the assessee to prove the price of the machinery and goods sold to the subsidiary company in India but there was no evidence available in favour of the findings of the AO. It was therefore submitted that findings of the AO are not based on any material. It was further submitted that AO has not brought any evidence on record that in such under-valuation was detected even subsequently. It was therefore submitted that findings of the AO are not based on any material on record and even no comparable sales were brought on record by the AO to prove that goods were over-invoiced. The learned CIT(A) considering submission of the assessee and material on record accepted the submission of the assessee and allowed the ground of appeal of the assessee in its favour.
7. It was further submitted before the learned CIT(A) that as regards findings of the AO that installation work and running work of the machinery was carried out by the employees of the assessee, there was no material on record to show that assessee's employees installed the machinery or that they assisted in running the plant. The assessee denied that any of its employees got involved in installation and running of the supplied machinery. It was clarified that machinery supplied by the assessee did not require high level of technical expertise for installation and running. A letter from PIL dt. 31st Oct., 2000 was filed, in which it was clarified that the assessee had no responsibilities in this regard and that no technicians or experts were sent for installation of machinery etc. The assessee further clarified that it sent technicians, food technologists and process specialists for developing products and processes best suited for Indian environment and customers and they w6re not at all connected with the installation of the machinery or its running. The learned CIT(A) considering the submissions of the assessee and material on record held that there was no evidence on record that the employees of the assessee were involved in erection or running of the machines. The learned CIT(A) also held that there was no material on record to conclude that assessee's employees installed the machinery of PIL. This ground of appeal of the assessee was also allowed. It was further submitted before the CIT(A) as regards assessee's total control over management and affairs of PIL and it was submitted that the material whatsoever was brought on record by the AO was not confronted to the assessee. It was submitted that PIL acts as independent legal entity even though it is a subsidiary of the assessee company. It takes its own decisions in day to day financial matters. It was submitted that they were importing raw-material and machinery. The learned CIT(A) considering the submission and material on record held that there is no evidence on record to show that the assessee used its dominant position to over-invoicing the goods sold to PIL. The findings of the customs authorities have not been challenged by the AO. The learned CIT(A) observed that it is a matter of fact that assessee holds the majority stake in the joint venture company i.e., PIL. There are four common directors between two companies and as per orders of the customs authorities, the assessee is in a position to control the PIL in the areas of quality control, sub-licensing franchise and management. The learned CIT(A) therefore held that it cannot be said that assessee has no control over the management and affairs of PIL. Learned CIT(A) further observed that it is another matter that control may not be total but partial but that does not mean that the assessee has no control over the management and affairs of the assessee company. This issue was therefore, partly allowed in favour of the assessee.
8. It was further submitted before the CIT(A) that the AO failed to appreciate the fact that managing director was appointed by the board of directors of the PIL and not by the assessee company. Learned CIT(A) noted that the AO has not made any comments on this submission at the appellate stage. Therefore, learned CIT(A) held that there is nothing on record to show that managing director of PIL was appointed by the assessee company. The learned CIT(A) further observed that it is another matter that through 4 common directors, assessee may be in a position to influence the decision of appointment of a particular person as a managing director of PIL but that does not mean that the assessee had an authority or power to appoint the managing director of PIL under the article of association. The learned CIT(A) therefore held that managing director was appointed by the board of directors of PIL and he worked under the control of PIL. Thus, it cannot be said that the said managing director was appointed by the assessee. This ground of appeal of the assessee was also decided in favour of the assessee.
9. The learned CIT(A) further considered the issue whether the assessee had a business connection in India as mentioned in Section 9(1)(i) of the IT Act. It was submitted before CIT(A) that provisions of Section 9(1) are not applicable. It was submitted that matter was examined by the Hon'ble Supreme Court in the case of CAT v. R.D. Aggarwal & Co. wherein the Hon'ble Supreme Court mentioned that the aforesaid expression undoubtedly means something different than a business. A business connection involved a relationship between a business carried on by a non-resident person, which yields profit or gain and some activity in the taxable territories, which constitutes directly or indirectly to the earning of these profits or gains. Hon'ble Court further mentioned that the business connection may take several forms i.e., it may include carrying on a part of main business, incidental activity to the main business of the non-resident person through an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territories which facilitates or assists the carrying on that business. In each case the question whether there is a business connection through or from which income, profits or gains arise or prove to the non-resident person must be determined on the facts and circumstances of the case. The assessee submitted before the CIT(A) that the aforesaid expression connotes a real and intimate relation between activity carried on outside the taxable territories and the activity carried on within the taxable territories, which leads to profits etc. directly or indirectly to the non-resident person. The assessee further relied upon Circular No. 23 of the CBDT, which clarified the scope of Section 9 of the IT Act in the light of the decision of Hon'ble Supreme Court in the case of R.D. Aggarwal (supra). It was mentioned therein that the income will not be deemed to accrue or arise under Section 9(1)(i) provided that three conditions are satisfied, namely, that No. (i) the contract to sell the goods is made outside India, (ii) the sale is made on principle to principle basis at an arm's length, and (iii) the subsidiary company does not act as an agent of the parent company. The mere existence of business connection arising out of parent - subsidiary relationshipwill not give rise to an assessment nor will the fact that the parent company might exercise to control over the affairs of the subsidiary company.
10. The assessee also relied upon Circular No. 17, dt. 17th July, 1953 which dealt with the question regarding sale or purchase of goods made in the case of import or export. It was mentioned that in the case of nonresident exporter, where the transaction of sale or purchase is made on principal to principal basis, no liability will arise in the case of exporter in India on accrual basis and the resident importer cannot be held to be the agent of the exporter on the basis of such a transaction. It was further mentioned that it is difficult to lay down any hard or fast criteria for determining whether the transaction was on principal to principal basis. The real relation will have to be looked into from the existing agreement. But, where purchase is made by the resident importer on its own account on outright basis, the transaction is an arm's length at a price which will normally be charged from the other customers, the nonresident person exercises no control over the business of the resident, the sale is made by the resident person on his own account, and the payment to the non-resident person is made on delivery of document and is not dependent in any way on the sales to be effected by the resident, it can be inferred that the transaction is on principal to principal basis.
11. It was a case of the assessee before the learned CIT(A) that the sale is made on principal to principal basis by a non-resident parent company to its subsidiary in India and the transaction is undertaken at an arm's length, then as per Board circular no liability to the income-tax arises in the case of the parent company and that Board circulars are binding on the Revenue authorities. The assessee relied upon decision of the Bombay High Court in the case of CIT v. Gulf Oil (Great Britain) Ltd. in which it was held that when transaction between non-resident company and the Indian subsidiary was on a principal to principal basis and the Indian subsidiary could not be regarded as the agent of the non-resident company so as to attract the provisions of Section 42(3). The assessee company did not derive any income from the business connection in India chargeable to tax." The assessee also relied upon decision of the Karnataka High Court in the case of CIT v. Energomach Exports (1999) 151 CTR (Kar) 71 : 118 Taxation 371 (Kar) in which it was held that merely because the foreign company provided technical personnel and assistance to an Indian company for erection and commissioning of equipment or trading of technical staff, no income can be said to accrue or arise in India. The assessee also relied upon decision of the Madras High Court in the case of CIT v. Fried Krupp Industries , in which it was held that the term 'business connection' postulates a continuity of business relationship between the foreigner and the Indian. There is no such continuity where machinery is purchased abroad and thereafter used in India. The foreigner had played his part wholly outside India and, therefore, there was no business connection.
12. It was further mentioned that assessee did not carry out any business activity in India. PIL placed orders in Italy and sample purchase order was placed before learned CIT(A). The orders were accepted outside India. The bill was drawn on the Indian company in Italy. The goods were shipped at Milan airport in Italy. The learned CIT(A) noticed that the bills show that assessee to be the shipper of the goods, the Indian company at Gurgaon to be the consignee of the goods and the goods were to be delivered at Bombay. It was therefore submitted that once the bill was drawn in the name of the Indian company and the goods were delivered at Milan airport, there was no further right retained by the assessee company in disposal of the goods and therefore the property in goods passed to the Indian company at the Milan airport outside India. It was further submitted that the sales were made on principal to principal basis and at arm's length. It was pointed out that Indian company made outright purchases in its own account. The payments were also made to the non-resident on delivery of documents and the payment was not in any way affected by the sales made by the resident purchaser. It was submitted that machinery and raw-material were purchased to set up its plant for manufacturing these items. The raw-material was consumed by the Indian company in the process of manufacture. Therefore the purchases were made by the business of PIL. The customs authority had examined the valuation aspect of the goods and the valuation was found to be an arm's length, though, it was wholly owned subsidiary company of the appellant, yet it is independent legal entity. It was therefore submitted that the mere relations would not ipso facto lead to the conclusion of the agency as mentioned in Circular No. 23. It was submitted that the transaction of each sale of machinery and raw material was an independent transaction. The mere fact that supplies were made over a long period of time would not lead to the conclusion that there was a business connection in India. It was submitted that the AO has not brought any evidence on record that assessee company had control over the management and affairs of PIL. It was submitted that PIL appointed its managing director and other employees and had full control over the financial matters and that none of the employees of the assessee company rendered any services and that subsidiary company also did not render any service for the assessee company. Therefore the same cannot constitute the PE of the assessee company. It was further submitted that assessee company did not conduct any business in India and therefore did not earn any income or profit. The assessee relied upon decision of the Supreme Court in the case of Mahabir Commercial Co. Ltd. v. CIT 1972 CTR (SC) 375 : (1972) 86 1TR 417 (SC) in which the Tribunal held that the sale took place in Pakistan and the income thereon accrued to the assessee. The view of the Tribunal was confirmed by the Hon'ble Supreme Court. It was argued before CIT(A) since the bill of lading was taken in the name of the Indian buyer and no right of disposal was retained by the seller therefore the fact that goods were shipped on OF basis does not itself lead to the conclusion that the property passed in India, in fact the property in goods passed in Italy only, when the goods were unconditionally handed over for shipment in Milan.
13. The learned C1T(A) considering submissions of the assessee, material on record decided both the issues in favour of the assessee and held that assessee did not have any business connection in India as referred to in Section 9 of the IT Act. The learned CIT(A) further held that Article 5 of DTAA could not be applicable in the case of the assessee because assessee has no PE in India. The learned CIT(A) accordingly deleted the entire additions and allowed the appeal of the assessee. The findings of the learned CIT(A) in paras 8.11, 8.12, 9.1, 9.2 and 9.3 are reproduced as under:
8.11 I have considered the facts of the case and rival submissions in this regard. The facts are that PI is a subsidiary of the appellant in India and it has four common directors with the board of the directors of the appellant. By virtue of holding the major portion of the equity of PI and the fact that there are four common directors, the appellant is in a position to control the affairs of PI. The PI was established with a view to manufacture confectionery items in India under the brand name of Perfetti. It is not stated either by the learned Counsels or by the learned AO whether any amount was charged as royalty by the appellant from PI for the use of its brand name. The Indian subsidiary purchased machinery and raw material from the appellant over a period of time. There is no evidence on record that the goods were over-invoiced or under-invoiced, though the connection between the buyer and seller was such that it involved the application on the rules of valuation, applicable to connected concerns under the Customs Act. However, the Commr. of Customs did not find that the relationship led to distortion in prices, which could lead to change in the values for the purpose of the levy of customs duty. A case can be made that if the goods were over-invoiced, there could be no occasion for the Customs Department to disturb the valuation as that Department will only stand to gain by such over-invoicing. This could at best be a theoretical argument as no evidence exists on record regarding actual over-valuation and, therefore, the allegation in this behalf remains unsubstantial. It may be mentioned here that the onus to prove that the goods were over-invoiced lies with the Department and no evidence has been brought on record to discharge this onus. Therefore, it is taken for the purpose of ensuring discussion that there was no over-invoicing of goods. The goods were shipped from Milan airport on GIF basis to Mumbai airport and the bills of lading were taken in the name of Indian subsidiary company. In support of this, the learned Counsels have filed only one bill of lading and this bill by itself may not lead to the conclusion that all bills of lading were taken in the name of the buyer. Nonetheless, in this connection also, the learned AC) did not file any evidence that one or more bills were taken in the name of seller and subsequently endorsed the buyer in India. In absence of such an evidence or even assertion, it is taken that all the bills of lading were taken in the name of the buyer. The sale of goods on CIF basis does not by itself lead to the presumption that the sale was effected in India if otherwise there was intention to pass property in goods in Italy. It was the case of the learned Counsels that as the bills of lading were taken in the name of buyer, the property in goods passed in Italy as per decisions in the cases of aforementioned Gulf Oil and Mahabir Commercial Co. In the case of Gulf Oil, the indents were placed from India and the goods were shipped from UK on CIF basis. The decision was that if no reservation is kept in disposal of goods by the seller, the property passed in UK. In the instant case, there could have been no reason to retain any reservation by the seller over disposal of goods for the reason that the machinery was to be used by PI to set up its own plant. The raw material was to be used for manufacture of its goods in India. In any case, no such reservation of right was proved or alluded to by the learned AO in the assessment order or in the representation made. Therefore, it is held that the property in goods, namely, the machinery and the raw material passed in Italy and not in India. The appellant also charged arm's length price for sale of goods as seen earlier from the order of Commr. of Customs. This brings us to the issue of expatriates deputed by the appellant to the Indian company for various purposes. The managing director was deputed by the appellant and it appears from the facts canvassed by the learned Counsels that such deputation was made after the managing director was selected by the board of directors of PI. After deputation, he became the employee of PI and he worked under the control and supervision of PI. Thus, he did not act as agent of the appellant to control and manage the affairs of PI. Apart from the assertion of the appellant in this behalf, it may be mentioned that the learned AO did not bring any evidence on record to show that he so acted. Therefore, it is held that the managing did not constitute the PE of the appellant in India. The appellant also sent quality control manager, technologists and good specialists for setting up processes and products suited to the Indian environment. It was claimed that these persons stayed in India for short periods. Though they were paid by the appellant, but they worked under the control and supervision of the appellant. Though, there may be no evidence for this assertion, yet it is felt that this fact (sic) does not have any bearing in deciding the issue of the accrual etc. of the income, because no income can be said to accrue etc. to the appellant by their presence in India. What can be said at best is that as a majority stakeholder, the appellant was willing and eager to assist PI in maintaining standards, adopting best practices and thereby enhance its profitability. The various subsidiaries of the appellant also sent its trainees to PI in the period of installation of machinery and thereafter. This was probably done so as to develop the technical and managerial pool for setting up subsidiaries elsewhere in India or abroad. It is no doubt true that there is a close connection between the appellant and PI because of the latter's capital structure, which may afford the appellant to take some advantage in such matters. But, that does not lead to the conclusion that the appellant's business was carried out in India in any manner. In this view of the matter, it is held that the appellant does not have any business connection in India, and therefore, ground No. 7.1 of the appeal is allowed.
8.12 We may also refer to the provision of Section 92 wherein regarding income from transactions with non-residence, how computed in certain cases, wherein it is enacted that where a business is carried on between a resident and a non-resident and it appears to the AO that, owing to close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profit or less than the ordinary profits which might be expected to arise in that business, the AO shall determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident. It is an admitted fact that there is a close connection between the appellant and the PI. However, it is not known whether the course of business has been arranged in a manner so that no profit or less than normal profits arise to PI. In the course of appellate proceedings, a copy of the assessment order of PI for asst. yr. 1997-98, passed by Jt. CIT, Spl. Range-15, New Delhi, was filed. In this order loss of PI was determined at about Rs. 12.92 crores. Thus, it is clear that no profit arose to PI in this year. If it is the case of learned AO that transactions between PI and the appellant were coloured because of close relationship between the appellant and PI, then this section provides a remedy for bringing normal profits of PI to tax in the hand of PI.
9.1 Having decided that the appellant does not have any business connection in India, as understood under Section 9(1)(i), it is not really necessary to decide ground Nos. 1 and 2 regarding its PE in India. This is because the treaty is entered into with a view to avoid double taxation of income, and it does not fasten any liability on an assessee by itself. If an assessee is not liable to pay tax under the domestic law, it cannot be made liable to tax on the basis of the tax treaty. Nonetheless, the issue of PE may be examined for the sake of completeness.
9.2 Under Article 5, PE means a fixed place of business from which the business of the enterprise is wholly or partly carried on. The expression fixed place does not mean a place which is owned by the enterprise, rented by it or which will exist for all times to come. The expression should be understood in its normal sense, namely, that there is some certainty in the minds of customers that such a place exists, where they can go to transact business with the enterprise. The enterprise should be carrying on business from such a place. We have seen that parent subsidiary relationship does not lead to business connection per se, unless it is shown that the subsidiary acted as the agent of the parent company. If the two companies carry on their respective business at an arm's length, then no assessment can be made. The learned Counsel pointed out that similar considerations will prevail while deciding the existence or otherwise of the PE of the appellant in India. The learned Counsels relied on Article 5.6 of the Indo-Italian Treaty, which provides that where a company which is a resident of a Contracting State is controlled by a company which is resident of the other Contracting State, or which carries on business in that other State, this fact shall not by itself constitute other company a PE of the other. In view of this article, it is held that parent subsidiary relationship in this case does not make PI as the PE of the appellant.
9.3 Coming to the dependent agent PE, it was pointed out that PI carries on its own business. It neither sets nor it is entitled to act on behalf of the appellant. It neither maintains stock of goods of the appellant nor it habitually secures orders on behalf of the appellant. The raw material bought by PI from the appellant is used in the process of its own manufacture. PI also does not process or manufacture the goods of the appellant. The fact that it buys its raw material from the appellant will not make it. as the PE of the appellant. The arguments of the learned AO in this behalf were same as in regard to the business connection. In fact, Section 9 of the IT Act and Article 5 of the DTAA are similar in contents. Relying on the arguments given in connection with Section 9 of the IT Act, it is held that the appellant does not have a PE in India, and therefore, there are no profits attributable the PE, which can be taxed in India. In this view of the matter, these grounds of appeal are allowed.
14. The Revenue is in appeal on the grounds mentioned above. Learned Departmental Representative relied upon order of the AO and submitted that assessee obtained a permission for the foreign collaboration through Ministry of Industry vide letter dt. 21st Oct., 1992, copy of which is filed at p. 87 of the paper book of the assessee. Subsequently the assessee's subsidiary company PIL was formed and foreign equity participation of 63.6 per cent was allowed by the Ministry of Industry, copy of which is filed at p. 85 of the paper book of the assessee. Learned Departmental Representative submitted that machinery and raw-material was transferred by the assessee company to PIL to start manufacturing products. Learned Departmental Representative submitted that assessee entered into an agreement with Indian company PIL for license to produce and sale of chewing gums, bubble gums, candies, toffees and any other food items which may be developed by the assessee company over the period of agreement and it may belong to the assessee. Learned Departmental Representative therefore submitted that it would show that it was a continued agreement. Learned Departmental Representative referred to the copy of the agreement which is filed at p. 106 onwards in the paper book of the assessee and submitted that the assessee right from the beginning of the getting permission from Government of India to manufacture and sale of variety of the products and had close supervision of the business carried out in India. Learned Departmental Representative while referring to the said agreement submitted that assessee has given license to PIL for most products and as well as additional products to manufacture and has control over the production, production standard and also provided training to salesman. Learned Departmental Representative submitted that assessee was having right to advise on production and selling and also provided in the agreement that technical employees of the assessee would visit India to inspect the production. Learned Departmental Representative submitted that even for the visit of the employees of the assessee, Indian company PIL shall have to make the payment. The learned Departmental Representative submitted that even the advertising and copyright have to be subjected to the control of the assessee company. Learned Departmental Representative submitted that even the assessee was entitled for royalty. The learned Departmental Representative therefore submitted that the above facts would indicate the close supervision of the business carried out in India and in fact they indicate how closely controlled and monitored business for all practical business of the assessee. Learned Departmental Representative therefore submitted that the above facts would prove that there is no reason to say that there is no business connection between the assessee and Indian company. Learned Departmental Representative also referred to decision of the Hon'ble Supreme Court in the case of R.D. Aggarwal & Co. and Ors. (supra) and also referred to Barendra Prasad Ray v. ITO . Learned Departmental Representative submitted that everything is controlled by the assessee starting from the grant of license upto the selling of the products and therefore there is commonness of interest between assessee and Indian company and that there is a continuation of activities and operations. The assessee also controlled the management and financial affairs of the Indian company. Learned Departmental Representative submitted that assessee company was incorporated in Italy and its 100 per cent subsidiary in the form of PIL and that managing director of PIL is appointed by the assessee company who received part of the salary abroad. Learned Departmental Representative submitted that Section 9 is applicable in this case because business relations are established and that since assessee company supplied machinery and raw-material to the Indian company therefore the profits earned on these supplies are taxable income in India. Learned Departmental Representative further submitted that Article 5 of DTAA between India-Italy is applicable in this case and the place of the subsidiary company would be the PE of the assessee. Learned Departmental Representative submitted that even Article 5(2)(j) of the DTAA is applicable in this case because the assessee was supervising the activities in connection with the project of PIL and supervised for more than six months and has claimed charges, which exceed 10 per cent of the sale price of the machinery and equipment. Therefore since the assessee claimed exemption under the treaty therefore assessee shall have to prove the same. But since no evidence was laid before the AO therefore the AO was justified in computing the income of the assessee by taking profit rate of 20 per cent on the supplies of machinery and raw material. (Learned counsel for the assessee objected the submission of the learned Departmental Representative and submitted that assessee never claimed any exemption or any expenditure/charges of 10 per cent or more of the sale price of machinery). Learned Departmental Representative further submitted that provisions of Article 5(6) of DTAA would not give any benefit to the assessee because assessee company has control over the activities and affairs of the subsidiary company, Learned Departmental Representative submitted that assessee has PE in the name of a subsidiary company and as such Articles 5 and 7 of DTAA would apply in the case of the assessee. Learned Departmental Representative submitted that as per Article 7 of DTAA the income is attributable to the PE through PE and not by the PE. Learned Departmental Representative, therefore, submitted that learned CIT(A) was not justified in deleting the entire addition in the matter. Learned Departmental Representative submitted that assessee company is paying salary to number of employees who are working in India. The assessee company could not give any reason why it was making payment of salaries to the employees of PIL. In fact, PIL was a fixed place of business for the assessee company where its employees were permanently sitting and protecting the interest of the assessee company. Learned Departmental Representative submitted that managing director and other technicians of the assessee company were even appointed in the PIL. Learned Departmental Representative submitted that Indian company has confirmed that it did not make any payments to technicians and mechanics from the assessee company. The learned Departmental Representative submitted that machinery was sold by the assessee company and installation and running work was also carried out by its employees in India and that supply is on CIF basis. The learned Departmental Representative submitted that as per Article 5 part (1) the PE means a fixed place of business through which business is wholly or partly carried out. It is clear from the premises of the PIL, business is carried on. Learned Departmental Representative submitted that it is not necessary that assessee should have a branch or its office to have PE. It is sufficed if it has a place of management. Learned Departmental Representative submitted that this scheme of the arrangement and the activities of the assessee and subsidiary company would indicate existence of PE of the assessee company in India. Therefore, the income of the assessee to the extent, it is attributable to the business operations in India shall be liable to tax under Article 7 of Indo-Italian DTAA. Learned Departmental Representative submitted that since in the year under consideration assessee has supplied plant and machinery to Indian subsidiary for consideration, the profit derived from this transaction will be included in the profits of the assessee, even if the title to the goods passed outside the India. Learned CIT-Departmental Representative submitted that since assessee did not furnish details of the accounts, therefore, AO was justified in estimating profits at the rate of 20 per cent of the supply of machinery and raw-material. Learned Departmental Representative relied upon decision of the Supreme Court of Italy in the case of Ministry of Finance (Tax Office) v. Philip Morris Germany GmbH 4 International Tax Law Reporters 903. Learned Departmental Representative also relied upon order of Tribunal, Chennai 'A' Bench in the case of Ansaldo Energia SPA v. Asstt. Director of IT, Chennai in ITA No. 411/2006, dt. 11th May, 2007, on the premise that since the supervisory charges payment is more than 10 per cent of the sale price of machinery and the assessee has absolute control over the business of Indian company therefore, assessee has a PE in India and income is chargeable to tax.
15. On the other hand learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that assessee did not earn any profit or income in India out of supply of the machinery or raw-material. Therefore Section 9 of the IT Act is not applicable in the case of the assessee. Learned counsel for the assessee submitted that initially proceedings under Section 163 of the IT Act were initiated in the case of PIL, which were dropped by the AO, which would prove that assessee company did not earn any income or profit in India. Learned counsel for the assessee submitted that learned CIT(A) held that AO has not given any opportunity of being heard to the assessee and such finding has not been disputed by the Revenue. Therefore CIT(A) correctly adjudicated the matter in issue by referring to the submission of the assessee. Learned counsel for the assessee submitted that assessee company did not send any employee, technician for the installation of the machinery. He has submitted that this fact was confirmed by the Indian company in the letter dt. 31st Oct., 2000 filed before the learned CIT(A). Learned counsel for the assessee submitted that only some of the employees came to India to assist in the production quality. Learned counsel for the assessee submitted that AO has not brought any evidence on record as to what business is conducted by the assessee in the year under assessment. Learned counsel for the assessee submitted that assessee never claimed 10 per cent being expenses in respect of sale of the machinery and the raw-material. The learned Counsel for the assessee referred to Board Circular No. 23 and submitted that since machinery and raw-material was supplied at arm's length on principal to principal basis and this fact was accepted by the customs authorities, therefore, the AO has no case to make out against the assessee that it was a case of underinvoicing of the price of the machinery and the raw-material. Learned counsel for the assessee submitted that since no income was earned during the year and that in this year only machinery and raw-material was supplied and shipment was made in Italy only, therefore, no part of the contract remains to be performed in India. Learned counsel submitted that the onus was upon the AO to prove that a particular income is earned and accrued to assessee company in India. But the AO merely on presumptions presumes certain facts and made the addition against the assessee. Learned counsel for the assessee submitted that AO has not brought any evidence or material on record to indicate price 'of the machinery or raw-material was not correct. Learned counsel relied upon order of Special Bench, Delhi in the case of IAC v. Mitsui & Co. Ltd. (1991) 41 TTJ (Del) (SB) 547 : (1991) 39 ITD 59 (Del) (SB) in which no activity was undertaken in India and therefore it was held that there was no violation found by RBI and as such provisions of Section 9(1) of the IT Act would not be applicable. Learned counsel for the assessee further submitted that since the transaction of the sale of the machinery and raw-material was completed in Italy, therefore, assessee did not earn any income out of such transaction in India and relied upon order of Tribunal, Special Bench, Delhi in the case of Motorola Inc v. Dy. CIT (2005) 96 TTJ (Del) (SB) 1 : (2005) 95 ITD 269 (Del) (SB). Learned counsel for the assessee further submitted that assessee never participated in the affairs of the Indian company and said company was already set up before the assessee made equity participation in the Indian company. Learned counsel for the assessee submitted that even if there is some control of the assessee with the subsidiary company but no income is earned by the assessee in India which is liable to tax in India during the year in appeal. Learned counsel for the assessee submitted that there is no supervision of the assessee and has no PE in India, therefore, Articles 5 and 7 of the Indo-Italian Treaty would not be applicable in this case. Learned counsel for the assessee submitted that details were filed before the authorities below that assessee sold machinery at cost of the purchase copy of which is filed at p. 74 of the paper book, which is certified by the chartered accountant also. Therefore no extra price was paid in the transaction and AO has not brought any evidence on record to support his contention. Learned counsel for the assessee submitted that learned CIT(A) has given specific finding of the fact in favour of the assessee and learned Departmental Representative during the course of arguments has not disputed the finding arrived at by the learned CIT(A), therefore, in the absence of contrary material on record at the second appellate stage before the Tribunal, it would not be legally correct to disturb the findings of the learned CIT(A). Learned counsel for the assessee submitted that since onus is not properly discharged by the AO in this case to prove income of the assessee is taxable in India and that no contrary material is brought before the Tribunal, therefore, order of the CIT(A) may be confirmed. In support of this contention he has relied upon following decisions of the Hon'ble Supreme Court:
1. Narayan v. State of Maharashtra ;
2. Hindustan Ferodo Ltd. us. CCE 106 STC 214 (SC);
3. Sounds N. Images v. CCE 117 ELT 538 (SC);
4. Raghubar Mandal Harihar Mandal v. The State of Bihar 8 STC 770 (SC).
Learned counsel for the assessee therefore submitted that finding of the CIT(A) may be confirmed and appeal of the Revenue may be dismissed.
16. Learned Departmental Representative in the rejoinder reiterated the same submissions as made earlier and submitted that Section 9 of the IT Act and Articles 5 and 7 of the India-Italian DTAA are applicable in this case.
17. We have considered rival submissions and material on record and also perused the findings of the authorities below. We do not find it to be a fit case for interference in the order of the learned CIT(A). The fact findings recorded by the learned CIT(A) have not been disputed before us during the course of argument through any material or evidence. The assessee made out the case before the learned CIT(A) that it did not carry out any business activities in India because the order for supply of machinery and raw-material was placed at Italy and the assessee company shipped the goods at Milan airport in Italy. The bills were also produced to show that assessee was shipper of the goods to the Indian company at Gurgaon and the goods were to be delivered at Bombay. The assessee also proved from the material on record that assessee did not retain any further right in the disposal of the goods. The learned CIT(A) on the basis of such material and evidence on record concluded that the contract was executed at Italy itself. The findings of the learned CIT(A) are not disputed through any material on record. The Hon'ble Madras High Court in the case of CIT v. Fried Krupp Industries (supra) held as under:
Held, that there were no operations in India which were attributable to the foreign company which could give rise to any profits being earned in India. The terms of the agreement made it clear that none of the three types of activities of the foreign company resulted in business connection in India:
(i) The supply of machinery was to be on FOB terms. The part played by the foreign company ended with putting the machinery on board and there was no operation by that company in India so as to envisage a business connection;
(ii) The supply of spare parts was also to be on FOB terms, and, as in the case of machinery, there was no operation by the foreign company in India to constitute business connection; and
(iii) So far as the deputation of the foreign personnel for erection of machinery is concerned, such personnel became employees of the Indian company and the foreign company was not responsible for the erection of the machinery as such. It was not like a turnkey project where the responsibility of the foreign company would continue till the machinery is actually run and proves its performance.
Thus, there was absolutely no operation in India which would give rise to a tax liability in India as far as the foreign company was concerned and the Tribunal was, therefore, right in its conclusion.
18. The assessee further explained before the learned CIT(A) that sales were made on principal to principal basis and at arm's length. The AO has made out a case that during the year under consideration assessee supplied machinery and raw-material to PIL. The assessee also explained that the machinery and raw-material was supplied to Indian company for which the contract was executed at Italy itself. The AO has not brought any evidence or material on record to prove that machinery or raw-material was having under-valuation. The assessee also brought on record the orders of the customs authorities who have checked the goods when the same were entered into territory of India and have not raised any such objection against the valuation of the goods. The same could therefore, support the contention of the assessee that the goods were supplied to Indian company on principal to principal basis and as such there was no evidence available on record to show that the invoices of the goods were undervalued. The assessee has filed details at p. 74 of the paper book in which in note A the costs of the sales were explained and it is provided that in case of new machinery, the costs of sales include the direct purchasing cost plus incidental expenses as resulting from the original purchase invoices. In the case of second-hand machinery, the costs of sales includes the written down value plus cost of improvement/refurbishment as resulting from the original purchase invoices. In the case of equipments spare parts and raw material delivered to PIL during the period from 1st April, 1996 to 31st March, 1997, the costs of sales include the direct purchase cost as resulting from the original purchase invoices. The cost of raw material and cost of machinery were stated to be on cost to cost basis which we find is also supported by the details given in the note A as noted above. The cost of the machinery and raw-material is also certified by the chartered accountant to show that price is reasonable. The above facts therefore would prove that assessee company sold the goods on principal to principal on cost to cost basis and such costs have also been accepted by the customs authorities. Therefore it appears that findings of the AO were merely based upon presumptions without bringing any materials against the assessee. We further find from the findings and materials on record that the AO has not brought any evidence on record that employees of the assessee company installed any machinery for Indian company i.e., PIL. No evidence on record was shown by the learned Departmental Representative to prove that assessee has used dominant position to over-invoice goods sold. PIL i.e., Indian company is an independent legal entity and that managing director of the same was appointed by their board of directors. These findings of fact recorded by the learned CIT(A), on perusal of the material on record, have not been disputed before us. As per Circular No. 23 of CBDT (supra), provision of Section 9(1) of the IT Act would not be applicable if contract to sale the goods is made outside India, sale is made on principal to principal basis at arm's length and the subsidiary does not act as an agent of parent company. Mere existence of business relation does not arise for assessment. In the facts and circumstances of the case noted above and as found by the learned CIT(A) would clearly prove that the case of the assessee is squarely covered by the aforesaid CBDT circular because in this case contract to sale the goods was made at Italy and sale is made on principal to principal basis at arm's length because price was verified by the customs authorities as well as the chartered accountant of the assessee firm and AO has not brought any evidence to prove contrary to this evidence and material on record. The AO has not made out any case that the subsidiary acted as agent of the assessee company. It would therefore prove that findings of the AO are merely based on the existence of business relation which in our view would not give any right to the AO to assess any income in India. The fact findings recorded by the learned CIT(A) in para 8.8 of the impugned order as such have not been controverted through any material on record. Likewise we have recorded the specific fact findings recorded by the learned CIT(A) in paras 8.11 to 9.3 above in this order which have not been controverted by the learned Departmental Representative through any material on record. The AO has not brought any evidence on record to prove if assessee is having any PE in India. The AO has not brought any evidence on record as to what business is conducted by the assessee during the assessment year in question. The AO has not brought any evidence or material on record to prove as to what profit or income was earned by the assessee in India on supply of machinery and raw-material. The findings of the AO are based upon presumptions only. The assessee also filed a certificate of subsidiary company i.e., PIL before the CIT(A) in which it was certified that no employee of the assessee company came to India for installation of the machinery in question. The AO has also not brought any evidence on record as to how assessee company has a control over the management of the assessee (sic-Indian subsidiary). The assessee also did not claim any charges payable for project or supervisory activities, which exceed 10 per cent of the sale price of machinery and equipment. Rather learned Counsel for the assessee contended categorically before us that assessee never claimed any exemption or any charges in respect of supervisory activities for installation of the machinery etc. The onus was upon the AO to prove that assessee earned income or assessee accrues any income during the assessment year in question. If the AO wanted a particular income of the non-resident to be taxed in India then the burden is upon the AO to prove that assessee has any income accrued or arose in India from any business connection in India. The case of the AO is that assessee supplied machinery and raw material to the PIL. However no evidence of income accrued or earned by the assessee in the transfer or supply of machinery or raw-material is brought on record. Since the machinery and raw-material was supplied on cost to cost basis and the AO has not brought any evidence on record with regard to undervaluation of the goods supplied to Indian company therefore we fail to understand as to what business was conducted by the assessee during the year under consideration. Since no business is conducted by the assessee in the year under consideration, therefore, there is no question of earning of any income either on accrual or paid basis arose to the assessee from any business connection in India. The AO has failed to make out any case of any business connection in India in the sense that assessee did not conduct any business in the year under consideration. Therefore the assessee having mere connection with PIL in India would be of no help to the Revenue. The assessee might have some control over the Indian subsidiary company i.e., PIL but no evidence brought on record by the AO as to what business was carried on by the assessee in India and as to what income was earned in India. The facts and circumstances noted above legally prove that no income accrues or arises to the assessee company out of any transaction of supply of machinery or raw material. Whatever documents have been referred to by learned Departmental Representative during the course of argument would be of no help to the Revenue because none of the documents would prove as to what business was conducted by the assessee company during the year under consideration. Learned CIT(A) very specifically noted that managing director of PIL was appointed by the board of directors of PIL and the managing director was having total control over the management. The AO has not brought any evidence on record to prove that how assessee company had total control over the management of the assessee (sic-subsidiary) company.
19. As per Article 5(1) of Indo-Italian DTAA for the purpose of convention term PEmeans fixed place of business through which the business of the enterprise is wholly or partly carried on. As noted above the AO has not brought any evidence on record as to what business is conducted by the assessee company during the year under consideration except for supply of machinery and raw-material and for that contract was executed in Italy only. As per Article 5(2) of Indo-Italian DTAA, the term PE includes place of management, branch, office, factory, workshop, mines, etc., warehouse, premises used as sales outlet or for soliciting orders, installations or structure. All these terms are not applicable to the case of the assessee because AO has not proved any such items against the assessee. Learned Departmental Representative heavily relied upon Article 5(2)(j) of the treaty which provides PE includes "a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such sites, projects or activities (together with other such sites, projects or activities, if any) continue for a period of more than six months or where such projects or supervisory activity being incidental to the sale of machinery or equipment continues for a period not exceeding six months and the charges payable for the project or supervisory activities exceed 10 per cent of the sale price of the machinery and equipment. However, the learned Departmental Representative could not prove as to how the assessee was supervising the activities of PIL. Learned Departmental Representative tried to project a case of the Revenue by alleging that charges payable for the project or supervisory activities exceed 10 per cent of the sale price of the machinery. However, learned Counsel for the assessee disputed the contention of the learned Departmental Representative by saying that assessee never claimed any exemption or any charges payable as is argued by learned Departmental Representative. Despite the above arguments been taken by the learned Counsel for the assessee specifically, learned Departmental Representative failed to point out from any material as to where assessee claimed any exemption or the charges payable as is mentioned in Article 5(2)(j) of the IT Act (sic-DTAA). This would therefore prove that assessee never claimed any expenses and never claimed any supervisory activity in India in respect of PIL. Learned counsel for the assessee also submitted during the course of arguments that though after sometime assessee might be in a position to get some profit/royalty or income but in the year under consideration, assessee did not do any business activity in India and did not earn any income. The assessee only supplied machinery and raw-material on cost to cost basis and such costs have not been disputed even by the customs authorities. Therefore, it was for the AO to bring some evidence on record to prove that assessee undervalued the price of the machinery and raw-material in order to earn profit or income. Therefore in the absence of any material on record, we find that the AO has not made out any such case against the assessee for earning of any income. Merely because assessee was having business connection with the PIL but the assessee did not conduct any business in India during the assessment year in question therefore, provision of Section 9 of the IT Act would not be applicable against the assessee. Article 5(6) of Indo-Italian Treaty provides "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 other Contracting State or which carries on business in that other State (whether through a PE or otherwise) shall not of itself constitute either company a PE of others".
20. Learned Departmental Representative did not dispute the above article. However, learned Departmental Representative submitted that there is more evidence available on record not merely because subsidiary is established in India, the assessee has complete control over business activities of the Indian subsidiary i.e., PIL. However, we do not accept-submission of learned Departmental Representative because the AO has not brought any evidence on record to prove any such contention of learned Departmental Representative. Article 7 of the Indo-Italian Treaty provides that the profit of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries business in other Contracting State through PE constituted therein. If the enterprise carries on business as aforesaid the profit of the enterprise may be taxed in the other State but only so much of them as is attributable to the PE, sales in that other State of goods or merchandise of the same or similar kind as those sold through that PE or other business activities carried on in that other State of the same or similar kind as those effected through that PE. We do not find if AO brought any evidence on record to prove any of such conditions of Article 7 of DTAA mentioned above. The AO has not brought any evidence on record as to what profit was attributable to PE or through PE. The AO merely presumed that 20 per cent is the profit on the supplies of the machinery and raw-material.
21. Considering the above discussion and material on record, we find that the AO did not do anything in the matter in order to bring any material or evidence on record to prove his contention against the assessee. As per finding of the learned CIT(A) the AO did not give proper opportunity of being heard at the assessment stage. The findings of the learned CIT(A) are not challenged by the Revenue Department. No material or evidence is produced before the Tribunal to contradict findings of the learned CIT(A). The onus was upon the AO to prove that as to what income accrued or arose to the assessee in India. However, the AO has not discharged his onus in doing so. Learned counsel for the assessee submitted that even the AO framed regular assessment in the case of PIL in the same assessment year vide order dt. 16th Jan., 1999 and assessed the income which would prove that assessee company is not liable to tax in India. Such contention of learned Counsel for the assessee is not disputed by learned Departmental Representative.
22. Considering the above discussion and material on record, we are of the view that learned CIT(A) was justified in holding that no part of the profit is taxable in India and that the assessee did not have PE in India. We therefore, do not find any infirmity in the order of learned CIT(A). The decisions relied upon by the learned Departmental Representative are clearly distinguishable on facts because the fact findings recorded by the CIT(A) have not been disputed during the course of argument. Considering the above, we are of the view that Section 9 of the IT Act and Articles 5 and 7 of the Indo-Italian Treaty are not applicable in this case. The learned CIT(A) was therefore justified in deleting the entire addition.
As a result Departmental appeal is dismissed.