Jebon Corporation vs The Commissioner Of Income-Tax on 8 February, 2011

[Cites 1, Cited by 5]

Karnataka High Court

Jebon Corporation vs The Commissioner Of Income-Tax on 8 February, 2011

Bench: N.Kumar, Ravi Malimath

W1"

IN THE HIGH CQURT GF KARNﬁ3sT£7~\i<A AT BANGALORE DATEDT}ﬂSTHEEggpAYcm:FEa&uARv2o11 PRESENT THE HC§N"BLE MR. 3uST:§:,EV ;31.:<u:«1;a;:»z--~'Ii'_f . "

AND THEH0N%LEMR3u§ﬂCERAVéMAuM§:3m_i §TA.NO.4«51'~f)F..2009 V AND *_ _ 'g ! ITAJVQS_?O4-?U8(E:2GQ9 BETvvE§Ns Jebcm Corpératavon -_ A Endiaija$0rzC§ﬁCé' 2 _301v_~i3«Q2,_% 'Barton E"<£:.1.'8é--%, E\?E.:G._R0ad, Bang-al0vre"T-»'S6G----£325 ij~Re«g§ref'serj'%:ei<:§ bfy.~M::V,Natarajan, COii§'i§'§F3f f'~'Ef::':"i§;£5Ti%:r) ' -V ._.APPEi_LA¥'x1"?

VV'{E'§yTLSri..r<.;i5,KL;ma;" for M/s.King 8: Patrédge, Advocates) 1, Tha C@?Y':§"%"£§SS§G!"EE§' 3;? Incameﬁax zjfniemaiiezzaé Taxatisn} R,!T:$%'2a2;a;'2, Férugaihzsnga Read, Bangaéore '- 560 001.

2. The Aclditéonai Qirector of §r:come~Ta>< (lnternationai Taxatien) CEr<:ie--1E(1) NCL14/3A, 6"' Fioor, I R.P.Bhavan, Nrupathunga Roach-__ Bangaiore ~-- 550 001. _ (By Sr': K.V.A:'avEnﬁ for Sri M.v;':~:},é's%hac?{aia.,_'Ad§z_c£a,{éé) 3 **Vp:c_....

TheseITA1%ea undersecﬁon 25O€A1dﬂIJZACL 1961, praying to formuiate_tV%7e..:sui3'::Ata'ntia1'imegtions of iaw stated therein; 'al._iQ'_'w the ;3_r.j.;:»@aE set aside the order passed by ﬁm;I§AT wiI:Am«x1101"tb 1106/BNG/2008 dated "

Théseé' for admission this day, NKUMAR J.L;-..deiE\ger_ed._tE"iefoilowmg:» "*.-Hv3UDGMENT .....

' --f§E%_és%év'~a:§peaIs are by the assessee chaiienging the 0fd.e"rV'pa:Ssné;°§ the tribunal haidirag that as per' Dcsubie '._Ta:<'z:j"tiof{gixvoiéance Agreement, the profit attributabie to V' 'v.:Lj'i§}éL"!-néaisen office heid as a permanent egtabiishment in '7 ﬁxﬁ$,Etaxame.

3, $3 § 1 ., _. 3 ..

2. The assessee is 3 Smith Kareem €nt€ir"p§"%Se origirsaiiy engaged in the business 91' trading i:'z.._Se:rri.é__- conducter componentg manufactured byif"véi_'rf~i~!§i3£»-.__"_ Companies across the world, mover} into this:"m..éir::sfa.tt4iireVL_ii 'V of PCB (Printed Circuit 8<3ards):,=_ ('4L;ii,q{a...-.;'d"-4C'rysra.5; A Dispiayss) and SEVEPS {Switch .Me.§e i>£me';-- Su~;;'g5'EiV;g::$;:')_V:Enﬁiitrs} factory in China fram 2003. liaison office at Bangalore =;%§_ifte;rii'.c'ib_t»e3iii":~iiifig the required a p p rovai from the . _Reser::.e.. éank V--Qt':,I n6 ' --- ayuéthei;§éEiiii§sii§nvJ._.fiétéd 02.12.1999, the RBI accorded pér-rjn':::sior} fer' 'cdhtinuing the liaison office for a I _p_§%r'%Qd or""t~hreev years i.e. upto 04.08.2002. The "ac:§:e"2.d:)e=:idV'~t§*:§*ie request of the assessee for setting Liﬁ ari'.a"'a'ditiC:i'éé'i }f'iais0n office at New Delhi vide apgrevai ihdatecia 0i;.;2.2GO1 on séméiar terms and Cenditions. The V' 'r~:ifi:%s§rh*ii--:;sion was €><'E€¥%§ed by the REE Qeriodicaiiy upte Qéiasﬂzmag.

The case of the assseesee is that, it ie eeg_e;'g77e€f-«i.%;seieig__'v _ in Eiaisori activities as permitted by the RBI as 13;"

communication chaneei between the and the parties iii India by-.__.<:oii*i'i:fi.Lj'i1icat%.:i'ej_iieeiingicei epecificatiens, cpmmerciei ._a:'id-. the Eanguege barrier. :r.e'p.,ee.I.>of Foreign Exchange Reguiaiion "'t'ii.e&'>':e,ea;ctment of the goreign the regufetions governing to those tifidﬁf' the former;

The liiiaisevn Voffice bernprised five employees and their "V,_'i'C}§*5Zi:ik&faES_:.iif1ji{€dAV't(}...f§_£'s§iiﬂg out prospective buyers for the 'asSes$ee'S ;e"rt=.:§"c:E:;iCt$, obtaining enquiries in that regard end p'é:;ss':'ng 'it tiie Heeé Office in Korea. After obtaining [the tieoviteitiens for the products from the Head Cifﬁce, the A CfEiei'is7ii..rji office wpele communicate tiie same to the intending ' eeyere. ea iimee, tiie iieee Gffiee weizici indieete a price eerie ioi eeeii ei the preeecte te eiiabie the iieéeeri eiiiee te pereiieee the iriteneirig peyeie te eiier the eeei: piiee ax' within the permitted range. Eventuaiiy, ti'ie__;'i':';;:'ai5§_;;r.éf:2e'v"_§u wouiﬁ piece orders dérectiy to the Head 0ffi.<;e..A4_:aV:ﬁ;d'incst on"

the liaison office. Invoices wouid::__be:.raA'i§;e::i Dffice white the iiaisen efficefweuid Vi"<:«_iv_i'd\.rv u;>;'er';d':4_n€on;éte:' the realization.

The assesses: Esta'__'nene}'{g:gia--e'n:3«.:."carrying on no business in En§i.Ea:;aind office stréctiy and mereiy; 't_hVe"--"natufe'ef a communication charanei" the assesses: had no §nc0me"*.i_i¢ai>i_e ijeéia. Therefore, it did not fiie any returnxsaptf ~inco-me.+ta«>§.~'t'in Endia. $5:-,¥i:'i0\}éii¥}g a cenducted on the premises of the iA,aa.:;as.s¢ai.fiia£fi¢ain~it[-ém 2303,2997, the Additionai Director (In't.em:f;tie§:i"ai Taxation), Circiewi, Ezangaieree, iesued a rmjacez under Section me far the years 233102 '(:0 2005433 '' ~..ars»d_.a netice under Section 142 fer the year 2006-0?, The etatemente at varieee emeieyeee at the iéaieee effiee were reeardee} eean: trem ceiieeting detaéie with regard to saies and expenees from the emeio_yje'ee--.§,V'_~..__'T§%e42 assessee was calied upon to fiie its I'EEtUFEf1i3----»?."T€;:)':t'.VV'tf1é four"

years;. However, no return was filed. ,.FrC;n'a:_th.e'--efer.re§aE.r3of material, the Asseeséng Officer-4_tookV"no't'e efrVt'h7erfeet tghet the eay structure of the tiaEsovn"w..o;ffEc;Ve that the senior most empéoyee,";r_t_2«--,'tt--iVe {;e,oeta<¥,r"'t4enagVVerhas seen te be drawing a saiary of whiie his deputy, viz.,_Vt3he"%§§e'ne.r:et to be drawing a saiary or According to the Assessing todnvctioras wouéd not iead to such oa3A{o..1;t'$. that there Coutd be other non- §§3§E5Oji':"fUﬁCt§VO§}SV§IH!3t the empéoyees ¢:r;::,:_E<:*§. be doing, for 'h'vmAi"c:h. E§'ochr~.'sa%arie'§" were being oaid. It is in this I tr;-e.1~'statereents of Shré.\f.Natarajan, Country MeI'tr.age_r".er1d Shré,H.B,Raghumaran, Senior Engineer :"'{tMar§<eii.:ig} were recorded '' "x0e eepreeiatéen of the gietemeetef the ﬁaeseeeing '"€¥f§%eer reeereed e férediee that the Eieégen office tree a very eieesweet eeeroech ie the beeirzeee is ever: zine erérrsery K...' task {if identifying customers. The primacy ef__f:h'e«'..'1'ri.rj:ieiflV"

iiaisoii office in riegetiatiens, procurement en~d»st'e.pV stee"

execiitien of the erder is cleariy Vi$ibiEi...s'A?--iiEb iieiseiii. is eat at eli iiito liaising, .r'ai"._iier int-5;»'""fiii,if_Vtied_};;etﬁ business activities. The fiiiai is eecided at the Indian end without rtVi_;e'"§-.-e'uthliierean end. The margin ef the liaise.n.,:'_effieeVA the liaison office itself. is:_"th:Vei'V'e'rii-yjivariabie eiement, while other tziz., purchase price! freight;:vvete.:,ere §iEei:l e:n:i'..VVri0_n~_-inievgjotiabie. The conciusion of the eontrect' is'A:--iiAo»i§'g§-..:_é'x:'lusively by the iiaisen office eeiesw';3egrsenVriei'."'The Smith Korea office piays he reie deteiriiiining the actuai price cf the product. ' the purchase price from the suppiier and ieaires v__theV'.3aActuai price determliiatioii, negotiation and :";:eiiciuzsi.r;i:h of the deai te the liaison office. These wouici ' "hVa'¥¥I§§"'§€eﬁ no seies targets, uniess eciuai series were eeiiig ....eenei "Finis, the iieiseii eftice undertakes aciuei sates. ihe seies eeiseiiiiei ei the iieiseii eiiice ere iriireiiied ei eii E. '2':

stages tn' prgcazrement and suppty.

Korea office receives the payment, the e:i.t%-re.":;3ri3'c§§ss is ' constantly monitareé 33:23 faifowedﬁsg Therefore, from the afores.-:aEd__'maVter'i'ai,V Authority heid that the Indiar1'V'Viiz3..r§e.:nq o1'wf;iCe'«_Vw:if.;V':se2.'§;§n to be virtuaéiy running its :'a._;';».v.iz§"d§y '{<v3 d;=:y basis, as afso for the It Eeaves a Efmited rate _i;ci~_: Eiaison afﬁce does not Korea. Rather, the activiticér A'gﬁg_AV__.V;~§4r§uﬁ[r§~».:j,';g;'ore_:frVVr)ffice are seen to be depenc£e'ritV_c$1thei'r':-L%ii--ari"Q'§jer'at:i0ns. !j'aise'ri'-Qffir:x=2 performs the functions such as ':d.ét':tifyvE.r}"gr :vn§w.._customers, pursuit and foéfowwjp of the ::i;ssfi'r;*2r:*:r":er,*V~ j;;'»riTi:e negotiation and finaﬁzatiors, securing c:>r6ers., Rprovcessing <31' orders, gayment for material and A {f::i<:zé*:«--..A$aie supgert. "§'hu$, the liaison offiﬁe ig seen is pferférm about 5?'% 0? {ﬁe functémg, ieavirzg oniy thé H §a%§:*':c@ 43% ix the Hem Gffite. ﬂrgerefsre, it wag ézeéﬁ ihai ihaasgé: we afﬁce estabiégheé ﬁarzgaigra wag traaiea? ee a Eiaisoe effitte, it hes an the aharaacter_i_:;t'i'<:«r3.V'_~ef:7aft permanent estebiishmerit as defined eeeer _A.:-tietev '5i--t{)f._tr;e"' D'%"AA. Therefere, the Assessifjg I-Qefficet assessment ereet directing .irt,_i.;e pwésyfthe income earned by the assessee.u*~«.i Aggrieved by the ffsafigj' etﬁeeessee preferred an apeeei to tijeiﬁemrfgigéeetehes'.:ef::r3_ce'rf'z;eTex Appeaisﬂ/, Barigaiere. '"?he_ﬁx-:3'.fzei1ate__;'!3x~=_f:Vtf*§'r:2r*«E,tyeh re-appreciation of the eht;re"re--xrViAdje'nt'e;:.:eh"-r.ez:.ere to the conclusion that the iiaiéon'" _.'Ii:*:'aited fiexibiiity in fixing its own margwfh.._Véu.b}er:_t ftp; coriditieh within the minimum ~'"~e_V_endfiE«ee>§izeym'rﬁarg_i_rjis fixed by the Head Office, which in 'tr;:Vtfa-..isivtjepeveieent on the modeis, their unit price and set tJi3.€:§féatVg'e*§;*;_ ffherefete, the fiedinge cerseet he arrived et eurefly. the basis of the Cetmtry Maeegefs deposition VA "V~:f_*v{{heteieV'he has remarked that the Heae Office has no role fig eetieéhg the eatee teergéh eeiess it is euitebiy bacéaee by éheeetrevettibie etzéeehce, which $3 net the cage. fherefere, the eeeefiete eetherte; was ef the View that the $1 ' _ _.

income Cannot be deemed to accrue or arise in indie ithreegh er from any business cennection in India sin.;f'ei_it dees net constitute a business activity Carried iiaison office on behaif of the Heae Gffice-bsffha'ei§:Li.ai§i,('"

exercising an authority te coeciude c:o:rf2.tr&ac:ui';--s the raeri-resident: within the»i'njeani'eg"'r>f .(a)T; 53"

Explanation 2 E0 Section 9 the Tnierefore, the appeai was eiEowed.i,._"j-Hence..AtiheV__'Qiriier passed by the Assessing Officeajwas se.t_asiGe._.V by the same, the reigenueiiA'ii':-eferred*4.V:ae___apggeai to the tribunal. The tribunai rave-ess:ég..itiife--jiiegr-.~.'ént of the Appenate Authority heir.' aiieer refer.ring"'ti":e'jssgriierzt of the Apex Ceamrt fer the "Q.£'d@E'SHm§i'iOi' to assessment year 2004435, A*iiif1eJre"ivs.fa. 'i:iLisiriess connection in respect of source of incomeV___v're,§?i{rieie of «me rion-resident: assessee and 'therefeIi'e: the income from such activity is cieerned to be ei'i:i<:ri,re er arise arid wiii therefore, be taxabie in mere: E':

...e.i§so izeie that the besieess erefii: ef the Seem Kerea eerrieeiiy car: he iexee in Eizeia iii eeee {he §§Uf§'i Kerea . '-/ 'V in V a"i§;3i;)el:iéi'.

_. 11 ._ company is having a permanent @S*C3f3H'3§'il"i"i{E'EE§ti After V"

referring to the terms of DTAA in particuiar 1i\rti<:EeV ::;rarjd the statemerits ef Sri.\f.i\Jatarejan heid that office is engaged in promotion of im;;=o_ri:..i"ri:~~.VVIr€~%§:ia.. procuring purchaee orders after riego:t.i4€:ii:finug>fi9ie'----.deai.._:eAri§fu therefore the Assessing Officer was jesfifieﬁ in"'iﬁoi;jMirig ij:ii"e'ii the iiaisori office is a perrriia.r§ en_t eetai_§'iiie'iin'iient arid therefore, the income'eﬁi:%;%ibu.ifeig.ieVi"to~tVi9i'e.%iiaisori office wiii be taxabie as per Articie D"i'Arf\;~:V._'j_T§3us the aopeai was aiiowecfiierée o'r,c§er__of the Appeiiate Authority was set aeide_f' _ Thei'5e:3se--s»éi'i'i'ei"it orders were resstored. Aggriseved bi} i'-fie' 'seid order cf the tribiinai, the assessee is "5'.__%i3".:v4:°=.,,:_"i"%i'e~""iearriee Senior courisei SriiK.P.Kureer, ass'a--iiiog"i:h«:e impugned order gassed by the tribimai .m"-]C§3f7§;€f1€§E;'ij that the iiaisori office was carrying or: its 1e_%::.ftie.i'§ies St§"§CE§'y' érieoriforrriity with the eerrriieeiori granted Ref. "She iieisezi effice free rie authority re eorieiede the eoeireet eerereeri Erie eeeeeeee end rise euszemere iri Erieie, § §'%/ .,., 12 ., The purchase erclers were placed by the customers directly ta the Head Office at Kerea aee supplies were madefrem Kerea ta the custemers and the F§i'i"iC)t3i"i'E was to the Head Office at Korea and the only office was to make enqeires, cornreLirii«C.ate wile' «!"i"le'l*i'eai:1 Office the price queted by £:he._earstomeVr'v;:A"'aed'V':.e':'t:er~.VVL conclusion of the contract, "'t4a:V""see ti':-af_"tP%e3 afnaléweriai is' supplied arid aise tna.t'"tif3e pa3}n1'eeffu iVas"i':fnade.'V"'it"i's purely a iiais-30:1 werk. They werenet2:nf;rel_\{ei:i_';~i.;ﬁ'gay cemmerciai activity and l%.%"a'e'r.eVfere}.;_tiae .:la.iiaiseri".effi_E::eVfat Bangalore could not be Ce"nsi;leire'<":li?as"aL'j'--p'é'rrr§aner:testabiishmenl: as per Arti<:le, 5-.0?' such, the assessment orders passed, l;P§;'~§fi'iCh_ by the tribunai, is erroneous and reqrgires 're be 'si-etv aside.

' .,Per centre, the Seamed counsel for the revenue theiigh the assesssee was granted rje..;miseéeri'j'..i:'lem Rel re taper: the liaison effice in aangaiere en terrfis aria cenclitiees, the eature of the activities ::a_rr'i'ea eat by the liaiserr effiee arie its emeieyees working %/,,..i...

-13..

therein makes it Clear that they were actually selling the groducts of the assessee including entering Ento_4.c;{§:'-r1§lr=3_Ct and premoténg ins business of the asses_s4§é."55.';ifte'.:.,_"'. conclusion of the contract, they sgglght t0"'st.l:'{§e'tnalE_t§":lé transactiztms emanated from the i-l.ga<:i..-~(Z*fi'lcf3e3..él~:f'ét':l:l3?VfEs:?:_t:l'1Veé custcmerg in erder to ClaEm.7tEt.e @><-EZf'T]_§f)'t§O¥1 avn'd.,':t.h_erel?0rel he submits on the facts of tlllléh'fEvl1.ﬁflﬁgVﬁil'E3C{)FCf8é by the authorities that _l'la'_l:fso;V:_*lA.vi§ffi_c:§:'A:'af_}>Bangalare was a permanent estai3_iéshm;e::3t.:._2;l:s Article 5 of the DTAA Rl_l;?je:§§'§.s::l:.j§_:.asfi€iei:l is based on the legal evlde'n..ge'T._3Vnd no célsée inlzjerference with the said questétsn of'fact'E241"-:nadé"'0\£lni----in "these appeals. ﬁi'n_lor'dé'r to ailpreciate the rival contentiensf ll: ""~-,l$ n:é1::es'$ar'y..Ato :"éfé:* to the relevant previsions in DTAA. __A"rf:_l_<:uE'e "t4ne f;'~.TAA explains the pmvégion ef a permanent e§;la44l§lisl;.r:é§n.l',lV.which reads; as :.méer:-- "';<1{§§iC!e 5: Permanent Establishment Far {Eve gzurposes as' this Cenlrerztznn, the term ",a@rmar2er2a' es;éabfighmenf" means 5 ..:L4_ fixed place of business through which fhe busine§s :32' an enterprige is whoiiy oril.

partiy carried on, The term "permanent esfabli3hme.n.f%"3if;;éiI:' inciucje especia/iy: _

(a) 3 place cf rrianager:7'3'ei#f;i "

(:2) abranch; A (C) an office;

{ (1:1) 3 fact<3:="y;_ (ea) 3 war/<S'.ﬁJA';3;A 4 _ 2 V

(f) a. mine, gail or Q3 quarry f5_Vor piété of extraction of ' _h5i'turai,'res:é':i_rcés.

5»:-3rrnA'=_ 'Qiermanent estabiisi7merit"

iii§ewi$é~ve_n.compasses a building site, a Aiigoristruction assemb/y or installation ' vv..'}pjra3j,@:=(:i' or supervisory activitieg in V. .€io€rwi*%.ecti'on therewith, but oniy where such Qsite, project or activities continue for a V " period sf more than nine manths.

Nafwithgiandirig the greceding pravigiaiw sf éffiig Arficie, Erie féfmﬁ "peri?':a;*:erzi' esteﬁaiishmerit" shall be deemed not to'.----._

-15..

include,' (6)

(b) (C) the use of faciiities soieiy for;""'t'§eV'_~ purpose of storage, display orMc_;feiiyer;{w.

of goods or mercherztﬁse. beipng.irfgu.'4toV' the enterprise,' the mainteher,u:*e.__.of a'Tst0.:?k ef"§;'r2<:§_:fs or merchandise. V' 'b.elongin.g to the H enterprise," soieiy fer-- the ptirpose/jof storage, id-.i<:{p_/ay Oi'{fVc,T'6§i=f*.V/}E'£f'}'=.';--_ the me:'hteri'enceV._ bf goods got' _:f:'?é?F::.7'i'7cE.?;'7C1'ei':S<£*"<. to the 1A"i'e:?terprisei'sgnieiy for the purpose 0:' ;;rQt*e;ssirig:it;»)£ another enterprise; % the ~me:ihfefrance of a fixed place of V'i::'Li_sirIess safely for the purpose of ~,_.purc:hesing goods or merchandise or collecting information, for the ' * f'er:terprise,' re) the maintenance 02' a fixed piece of the cf advertising, the suppiy es' information, business for purpose sc£er2t:'f;'C research, er any ether ei:tivi't:«', if it hes e ereperetary er W16.» atzxiiiary Character in the trade Of businesa at the antarprise;

(if) buafnesa soiaiy far any cornt2i'nati€3n activities mentioned in" '"

paragrap/75(5) toil» j; j paragraph, projvidac/'that thaafzérail V' activity of the g::i!a'£:e.__of.V£5usii*:..as:;wV resulting from tnié'-¢aint)inati'an:i'5 a prapara fa. or fa uxiliary. , tfnara star, V /Votwittrstandingv.'. j ting '' ﬁtaéﬁiafans of 2, VaVper*son-otner than an .inda;iantfent status to whom 'ptarag:;rap_hk nangaiiesmis acting bahaif of an antamtisa and has, and hatﬁtuaiiy exarcisaag """ "in a Contracting State an to concfude cantracts in the t"';f,».3n¢i§3"V..of the enterprise, that enterprise "'3tiai'i be daamaa' to have a permanent " . aatabiisnment in that State in raspact of which undertakes far the antarpriaa an/ass the any activities that persan astivitias of anti'; aarsan are ismitad ta thaaa naantianaa' in gatagraan it watch it axatttaaa tntaugn a fixaa' aiata at tna maintenance sf a fixed _1*;._ baisinesg, would not rnake this fixed of business a permanent estcsblisijnfiéni" z':%j2=. L" % virtue of that paragraph:-< A

6. An enterprise shall mat befdééméd hﬁk/{E V' a permanent Vesfébiishnéent Contracting State mer;é'?y._b'c3§a uné '-it icjnrfiés on business a broker, general com mis3'iA(3ni'V" gént: .é:ff3 y other agent _ an: Si"£i:9Vii§, where sw}. " ar;-fig" ordinary 'Company which is 52' " V~V{"'é>'0:."¢')-'I"de'f'V}"f'V(}\<>f.iV'€',.3:"E;?{§:fjt£;éCtf'ng State Controls or iﬁcnisfrd-lien? a company which is a . n;_=sidén't«:i_f..ti7e other Contracting State, or V carrieg on business in that ether (whether through a permanent ..'ef;§§"aV;£2ii5hrnent <3!' otherwise) Sheff not, of ifseif, constitute either Company or a V ' permanent estiabfishment of the other. "

6. '?he agsegsea apniieti to tine REE far nerméggénn in Sat ans 3 Eiaégan Qfﬁce §}f'éﬁ€E" Sactian 2% {1} §a§ sf {he E h %%V/'' __ $3 villi!' Foreign Exchange Reguiatéorz Act, 1973 and the same_ was acceded as DE? i--\nne:mre~A on 05.08.1996, It wasvso"o;js<:t to the terms and conditions menttoneo permission. Ciause 2 of the same reads as_-Li":*ic§.:*.--%_;'«+ ".2. We advise that we aré"':agr§*eeibls._fo~ establishing a iiaiison oliios at ,.."«7u:;:j?'zl:£§si "

and Bangalore iniﬁsilfy for"a.V_pe.}i'oc:?i.:oiV three years for---- ...';héV"~-.sA.puroose ./Eof undortakinVg'--.solel';/L li.aison;'i.=i't:ti,vities w'2., to act as icoi*é7njun'i'caiion. channel """ parties in India.

V _ -'this permission has 4'b_een=.oi;;3:rzféa:i':LV"sL}bjeCf to the following 4't:onVo'i£?ons';~.~V".

f)""i3,>ricept the proposed liaison work, _ the office in India will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name L*£ffl7OUi" ow prior pormission.

ii} No foininission/fess wiii os aiiisrgso' or any oziioi rsn?iinersfi'on _.3_9W.

reeeivecéf Income earned by the ofﬂce in India for the !:'af5Q{3'e',_ "'e ez:i'iw't:'e5/services rendered otherwise in India.

iii) The entire expenses 9:52' the India will be met"'3x:;?es;VeJ!y Dr he' the funds "re:feived'-V. from through norrheé barzkine ' chVV3?r.r}7e/:55.

iv) The ;{,ief:é'O:'?'--§?ff7!C'{-'e '4r"n'%jv!i§d,f;3 shah' not Vborroweer V/Va1:=h_c_? from/to """ aéigtfzy ;9er*§:o:7"m»--ihd£e without oer V V V. 'pefrrz_isesion, VA v)vV"Fhe*._V"o:§'}ce in India shall not 'A..He(,'c;L:,r:'re, hoid, (cztherwise than by of lease for 53 period not exceeding five years) transfer or dispose of any immovable property in India witheut <::rbfa/'n1'ng prior permresion of the Reserve Bank of India under Sectieifr 31 02' the Fereigrs Exehenge Reguieéieh A51'; 1923.

..ad"'¢Qg.W .

.,,.2{}",,»

vi) The ilieieon efﬁﬁte in fndie:v"**~;e§§{.__'__' furnish ti} ear Mumbai Regiiozjeel, Office (on as yea:fIy=~i3e.sfs);'

(e) e CertiﬁC;3t8::"'e..:ff€}s?}; auditors: {cs t'f':.e'*-- effe§:;€I...tfh.:§t "

during the. }?ear rzo'----ir}co;%:e 'weuS"

earned fl-Ia'/'f§f'~_ 3--c_c:rued' ~f".r,3 'five offT--c:«é:? in 'Inge; " ' .j (e_) :_'Aé'eVta}'§s «Vfemittences reteiixgd __f!:"€?I'?'r VVV"a$broad dufy "by In ward " A 7v 'V71J'Rémf't:':ar2CéV'Certiﬁcation:

copy of the audited ﬁ;?e'i'"ac:c:ountS of the office in V Z «..._....fndia and

(d) enrsuaf report of the wark done by the office in India, stating therein the detaiis of actuei export or fmgacart, if any, effected during peried in respect of whicf? the efﬁce bad rendered iiaieers eenrices.

M21...

('5) The number of engaged/appointed and K assigned to each staff,'; " = -.

vii) The liaison %%cfféz-e in fffﬁffé wt/"

not have ":'5_fgn/rig,/__conjh:{itrr§Vér:t"

powers exc:5<_2_;_::;Vf-..,t_I7'c*~?_»(f2 wriich are r'$3.;j':;«-,r:'re-if! f§),r r7Qrrjréa./ funcfrorving of lia:'son _ ;' 3 :eV/z3_.£:j:(.If of the Q. .

1[mfg})%' y v.:iV;j:»:"s"c,{¢ office will not _ r§}gr;:{éi=..V.:"arry'._""tfbnsu/fancy or any ' rfoéfhearf'rrsrén/ites directiy/indirect/y, * V Mt}? »-orﬂruithout any c:onsideration. jhe 'sa"i'<E"Vpermission is being renewed year 3:'-ﬁe': 1: is ciear from the Articie 7 of the DTAA the VG.F'ré__:'eT::enterprise of a Contracting State ghaﬁl be !:a><ab'ie°é9niy in that State uniess the enterprise carries on §:_.;§%";_?1e$$ in the ether Contracting State thi'(}Ugh a giermarueiét egtabiéshmemc situated therein. If the §ni%:'§r%sr.2 éarréeg an busénegg as amragaéé, ihe pmfétg <3? % $32..

the enterprise may be taxed in rm other State__§;é'£;:'i:«'.:;g;2.§.j«'V5'S_Ci4 muth of then": as is attributabie to t_b.~.3-*:..u_:':;*:aeVr%tf{ati"1e2ﬁt" establishment. Therefore, szettiéig §.§.§}d:v0f: é4.A.'{)'E?t't"§7?a§§V€VIT1tZ':A estabiishment by a Contracting-4__St.até.i§§'India»'i"§1Vais§ne'i';q£}a nor: for payment of income té':<_V'»:'unVder is a ﬁermanent esta:biishr3"¥e:;ﬁ't:«--i's Arttttétv S of the DTAA. Subﬁrticte 4 of:th_é%,fxr£.i'§:VA§:5 what shai! nat be deemed """ by the R81 aiso makes it dear 'é:._ office should not do. Re-tying on tgiese ,r2rr.Vwis;:,ét3's*s';9, it is centcarzded by the assessee that thé"!iai":%§;nVV%'effice was epened to act as a cemmunication 1 the Head Office at Korea and the parties in 'I«4r1dia:§v; ' have not undertaken any other activity 01' 3 tradinghr commerciai er industrial nature nor have they '--..Véu=*.t4=..>i*ed into any bugéness camtract it? their names; They = ..-§"'éave mt chargeé any cammissien car arty remuneratitm fatéé they gégave net eameé any Saab amaunt in Engéia far i/ $42'. //H

-33.,"

iéaisen activities. The entire existence of the 0ff§'?:'e4é.'rfa~..I_§1§ii§_a§ is made exclusive eut of the funds of the they have net berrewed any r'r4:,;3nej;x.tfjv acquired any properties, The'y.4_haveV"h_e":iireCt»"e::njn9:itr§;ae.nt with the customers and theretete', ee'htet§;Eed that the Eiaistfa efﬁce in as a permanent estabA3_isi*:me'tf.:.t_,se_at.s__teL Q.~{:'t.f.é§eff;:t§~;~g provisions of the Act. It "ha~';e to see what was unearthed Vievestigatéen by an 1hvesti_gat_E }3}.¢3eh{:§;. I

9. V!Ea_§sc.n' effice of the assessee was opened in The o§3'er.ati_ens of the assessee at Bangafore were 'eéimedv._,4é*ut'vt.«e'u--rsuant to the approvzﬁ by the RBI. The iéaisen effiv-t:eV.'%?:Ves five empioyees in eii. The South Kerean based éiemvpeny is a trader in semi--cendu<:tor Components A rhantjfaetured by Various cempeeies egress the weed. In the ceurse ef tee semi sen/e*y end investigetéee, the Heettzer§t§es have reeerdee the statement :2? we Stéﬁéttéeterejen! the ietmtee ivteeegeza tie hes stetee ee

-23....

oath that cut of the five empioyees Wm are _ éiaison office, three ef them are dseectiy re:-eteiti eaters (inciuding him) and two adminEstéatiees 'as'eieta.tit-s;'="3f§1eg»<f E also identify new custome're.__.V by' ¥ej~.'r'e~;V '_ experiences in the field of _Venei""ee:mVetit'§f;es, the customers themse¥ves'e;.;%i':;t. retgetvrding the precincts based on Once this is G039; they right: person in the the exact requirement and aieo to_%$<§)_Evai.;jf3'the4.Veb'.e_i%ab;Fity of products' After this, the czustortier wit!' 9 requirement based en the :"od.u':_'teA eveiiebie' 'w%t.F= them. The customer expects their 'se_%e'stpetetﬁrnei to ttfttjete within as reasonabte time. After ,.._.ghé«s_, étE*.e:"'--semie.,enquiry is converted inte a request for a {1id¥C}i:,ati{?Vrj.f.iCi'AiF§L}fEEit: to the Head Office staff respensibie for ';2uVsrchese:'ac:tiv§ties from their suppiiers in Korea and China. =£§§s»--e.een as they get the request for a em::*:et%«::r": format ..,.feEéy féiéee up with eréee, eeiieen; eee epeeifieatiert in eeeeeéete ttweegh emeét, the eeiee eeteee wha Ee nast;

NlllM25OIIIIM responsibie fer generating the enquiry wiii reply to the § ' "rm gustemer with e quetatiee adding the sates mergihv.~.,_V"i..hiesg have e thumb ruie ':0 Calculate the series mergih . ueen the enthuse of the product Jé'I,.%TTi,Ci' the!t:oi'h:i3e.ti'ti:oi':.V iei the market and the volumes. They :;;"et:'oniy_i the 'EJVl:JV"§~'._§'£'fiCJ5'.":

price frem the Head Office arse the maa'-rgiizs as*'e'Ae.ee.i_gfVeié3 by the saiee team baeed in Bange_iofe.:on_»_a ceee. cefee basis depending upon the rriei-ri.it"s_ofLti2:i»ei<faS[eiiVAfter this, there win be a nego.tiation.Av"ferjfee'-chgen'qo§'rgi"' between the custemi.grs_ae'<}i'._~thVe3'.saEef3'~.personneé of the office and in some caé;e$',_to close the order to the ~..i..au satisfaetinn of theriistiemer and the Head Office. in other .ﬁ't:eg;es'i. cigstornein is not happy with the erice and if he A*aVs£«:s fos<.n1.e"ref'.hd,ié;ce1.3nt, the personnei at Korea wiii discuss theeamve w.iut'hthe eeppiiers to request fer more discount in ii""'--..VV"'theiLpri.C'e...: if the suppéier agrees for giving more oiscount, _.é'::.hee.eeeerdie§iyf they quote a new discounted price to the ..::.:§ste:'ee:"s ene eieee the ﬂeet After thief if the deai is V' ithreegh they have te ereeees the erder. they fiéi the 's _.25;._ details in the order ;3l'0C@SSll"lg Chart Elféé send _ the head effice through email as an Fine"

Purchase team at the Head office: wlilll;j1ro'ce.ss'"ahd"'V;;_EaV<:1e.' . the order to the supplier and»'th__e~h v.?aif:'3'er ready. Once the goods are .l;he3V}"wll§_'li:>e livhspected by the Quality C0ntre.i._.":'Tea:h'l :'..t§':Ue°'«.h_ead liddvarters ta erzsu re that the s_;3ecEfig;;3.i:i.§j_:}:~3 After that the goods afe: freight forwarder appeinted iby. xéame will be shipped dlrectiixg to! available flight or ship. The Heedﬁjfflce of the commercial invoice, pacE<;é::'vgl.listxa-nAd";é§'irwey billfblié of landing to the iéelson aE"'{:B:%jn.g;a§orev""hy email/tax. They in turn send these :('";i:lv:'}:'€";:.E:fvyVI"l"Vl,A€T'§"§,t":'5 to the customer. Then the respdnsibility of 'g.ett£__:ig goods cleared lies with the mstemers. The u"'4"~..:"'ggaymehlje will be made by the euetomer through «"l.tVe--lerd;"raphic tranefer threzggh bank lre the Head Office ....--:2{ecednt at Keree. "%"helr were also éiwelves feiidwleg me as? payments free": the emsiemere and effer geies eupgeri, if E;

an/' _2"}_ necessary. He iiee aleo depeeed that they have Cent percent freedom in deciding the margie or sellir1g'e':';:3'ri.ce previded they are net lecerring any less. It that the marketing man is givee the liberty:'_'~te'::;;eEl'4_the goedss on prefit within a band margin g,ire_fit'Aan.:d~.eun._;{:;§§jeVi' any discount is asked then he hasetoll'revertl--"l;.e¢l<;"tejti':e 'g Head Office. Hence, only in 'tlz»::>:ée case's._v§il'ielre.'il::he price quoted by the liaisenvef~fi_ce _«il::r_iiVe't:__<:ei"epetiti§Ee then they have to revert: bee-l<'_ .---tl'i"e.'.fe_f»_ Head Office. SriAH'El.Ra_gHi;a'.l#.i--varVee_ Was working as a Senior Engineer'.__('l»1erket'ii:le') :_4'l:«eS"".stated that he enjoys full freedom lne.e<:ltli'eg"the price 'F *1 material while \.A'I!! 1;. us Ll|\.4 ll"neAgj'et.iaEt'iiigj"with ttilellllcustemer, Once the selling erice is ,,,__a:~;<i-velcivv.e:'t...Vw§tlti-tine custemer, he does not need to discuss witi*:.__ti3e'l-'Eeedl Office or the eigariizatien. He immediately ll""--._ "':"ei:;i.zeet::. the customer to release the purchase order. The _ "E}VF'"tf7.¥§.nE?'iI sates target has aiee been fixed by the ..._e%"gei'i%zetien.

Z 33 /..

:3;

1 V,/"1 ._.28_...

10. it is on the basis of the aforesaid . tribuhai heie that the activities carriee on"i3y--:f'h,e""~iie'iseiii office is not confined eniy to the :i.i4ais:-gm.ievtirrie-i actually carrying tie the ceriiri'ae.r<:éai ta-<:ti\i*ities'V:'dr7.jisregguring -. ' purchase orders, identifying tii§._q'g§'ug(ers4hizegetiatfing with the buyers, agreeing Vtiohthe'A.V:pr%ee',.""t_iivefeefter, requesting them to place a pzechaee said purchase order is and then the material is and they foliow up regardéirig Customere and aiso offer after saiesL4'suppe.rt:'«.A_Vffhgfeitire, it is clear that mereiy because the is-uyiers piece orders directiy with" i;i'"'ai.;--3 iieae' .«'VOff§Vii"€V.a§é§ eagrrrient eirectiy to the Head Office and it which dérectiy sends goods he the butreirs, _'_»f'iI(>L1iAi«:f}AFiC){ be sufficient to heid that the work done the".§i"aisen office is oeiy iiaisoh and it does; not the-.<:}'r:--et.i.tute e permanent estebiishmeet: ae defined ie ﬁrticie Ere? ewe. in feet, the Asseesieg Gfficer has eéeariy set (set 'ahet eihet was eiseevered eiiriee the ieveetigetiee eiici 1/ W29"

the same has been property appreciated and it came te the conctusien that though ?:i'tev-£:i.:a*'i.s£j'ri: efficeé '* it was set Li? in Bangaiore with the e:=.erit:_-i~ssi1en'--gt-the in spite cit the conditions <be.i__:jig stiip'LiiaVte<ijin:the iglsavétci permission preventing the Eiaisi'ci'«n effice 'fi'ein_9i'car§rying on coremerciai activities,--..iithejg ;ha.v"e_'a.ibeien carrying on commerciat activities. ' 11, ;:'t" i."V\{'€iV§"f"iiii}ifftii1é.fftit}i'1?t€:ii'iCi»é3C§,. that the RBI has not taken arty '"t.h'erefdi*e;~-'such interference is not }'ustifiet§.i Ohfi record cieariy establishes that the iieisijri ei'fi_ce..Vis'«ii~'ndertaking an activity of trading anrji"t:he;{efQ%re e'n'teir._i_ngv into business contracts, fixing price 'fer"3ajie..,40~i;gi::i&3c£_s and mere-Ey because, the officiais of the Eiéiisbn efiiee. ate net signing any written contract wouid eot absd'i\<.et'then't from iiabiiity. Now that the investigation has V' "..jjr:eVeeéieti' the facts, we are sure that the same wilt be ' ftgriiierdeé tie the RBI fat apprepriate eetiee in the matter ii"? aeeetdenee wétt; iaizia But mereiy because me ectien is initiates? st: REE tiii teeey wetiie net tender the timings i.

ii .

'es /' ggiv 32"

M39...

recoréed by the autharities under the §n<:eme_.?§é'>%:" §%i'»g;:*§!:__j'ee;r;__". errenecus or iilegaix

12. We are satisfied Vfrom'1't.hé'-_:j*§aateEiv;3%iA't::n= that the finding recerded bywtiw-::'e:V:"'i:ribuah";§a'!-. Eégat evidence and that the:"f%.§1diﬁ.§""tE%'éjL4 '£vf~'.+;~*«=,._ |iai"séG'h" 0'f{'ice §s a ifﬁermanent estabiishméht.35"L-3.,;é§f§'ne;;f;§ .:A;;.%1§i1¢_r Articie S of DTAA and 'che re--f:¢r_e, tijéH§::'L§'§§in.§é;;§ '_j;3:j§§'fEﬁ$ earned in Endéa through thiss"tVi;'§2T>:_=;::§AA'i~;v-'§%;r<,tax is established, 3:3. _ _Fé'r '._{:hacfe'3'afo'r.§§?sa._%dwagons, we do net see any merit in"i:hése 'aVpépé.a'§5{,'-..A___iA<f§§ordingiy, these appeais Me ﬂ:Sma:ﬁ$VE¥v §?'r§"-'

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Karnataka High Court

Jebon Corporation vs The Commissioner Of Income-Tax on 8 February, 2011

Bench: N.Kumar, Ravi Malimath