Income Tax Appellate Tribunal - Delhi
Daikin Industries Ltd., Gurgaon vs Assessee
ITA NO. 3005/Del/2011
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "B", NEW DELHI
BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 3005/Del/2011
A.Y. : 2006-07
Daikin Industries Limited, vs. Assistant Director of Income Tax,
C/o BMR Associates, Circle 1(1), International Taxation,
22nd floor, Building No. 5, Drum Shape Building, IP Estate,
Tower-A, DLF Cyber City, New Delhi
DLF Phase-III,
Gurgaon - 122 002
Haryana
(PAN/GIR NO. : AACCD2498N)
(Appellant ) (Respondent )
Assessee by : Sh. Mukesh Butani, Adv.,
Sh. Anurag Jain, Parul Jain, Mohit
Aggarwal, Anuj Aggarwal, CA
Department by : Sh. D.K. Gupta, CIT(D.R.)
ORDER
PER SHAMIM YAHYA: AM This appeal by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-XI, New Delhi dated 07.3.2011 pertaining to assessment year 2006-07.
2. The grounds raised read as under:-
1. GENERAL 1.1 That the order dated March 7, 2011 passed by the, Commissioner of Income-tax (Appeals) - XI, New Delhi 1 ITA NO. 3005/Del/2011 [hereinafter referred to as "the CIT(A)"] under section 253 of the Income tax Act 1961 ("Act") is illegal, bad in law and void ab initio.
1.2 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the Assistant Director of Income-tax, Circle 1(1), International Tax, New Delhi, (hereinafter referred to as "the AO") assessing the income of the appellant for the relevant assessment year at Rs. 79,353,253, as against the returned income of Rs.
19,718,810.
2. CREATION OF PERMANENT ESTABLISHMENT ("PE") 2.1 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO concluding that the appellant had a PE in India as per the provisions of paragraph 7 of Article 5 of the Double Taxation Avoidance Agreement between Indian and Japan ("the treaty").
3. ATTRIBUTION OF PROFITS 3.1 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO attributing profits of Rs. 59,634,440 to the alleged PE of the appellant in India without any cogent basis and without considering the provisions of the Act.
3.2 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO attributing profits of Rs 59,634,440 to the alleged PE and 2 ITA NO. 3005/Del/2011 not appreciating that an arm's length commission had been paid to the alleged dependent agent, Daikin Air-conditioning India Private Limited, which should effectively extinguish any attribution to the alleged PE.
3.3 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO and in not allowing deduction on account of actual commission payable to DAIPL at Rs. 106,439,135 while computing taxable profits attributable to the alleged PE in India.
3.4 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the attribution as made by the AO, erroneously observing that the appellant has not put forth any facts to substantiate a lower attribution of profits, ignoring the details of its global profitability for the relevant year placed on record by the appellant.
4. Levy of interest 4.1 That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the AO levying interest under section 234B of the Act.
The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal."
3. The assessee is engaged in the development, manufacture, assembly and sale of air conditioning and refrigeration equipments. It was incorporated in Japan. In India, the assessee is having a wholly owned subsidiary by the name of Daikin Air-conditioning India Pvt. Ltd.
3ITA NO. 3005/Del/2011 (DAIPL/ Indian Company). Earlier the Indian company was joint a venture of the assessee company of the assessee and Shriram Group. In financial year 2004-05, the joint venture was terminated and the assessee acquired all the shares in the joint venture company. Regarding the fact whether the assessee has a Permanent Establishment (PE) in India, the observation of the AO are summarized below:-
5.1 The contention of the assessee that DAIPL acted as a communication channel between the prospective customers and the assessee and facilitate the flow of information and documents like enquiries, proposals, quotation, purchase orders, invoices etc between the assessee and the customers. As against this, the commission agreement dated 22/12/05 states the roles and responsibility of DAIPL as below:-
i) To forward the customer's request for procuring products from DIL to DIL.
ii) To forward DIL's quotation and contractual proposals to the customers, The assessee did not submit any document to prove that enquiries, proposals from the customers were received by it, it clearly indicates that no such enquiries or proposals were received from the customers by the assessee and these functions were performed by DAIPL and for these functions DAIPL is not being remunerated. Without prejudice to the above and without accepting, even if the assessee was 4 ITA NO. 3005/Del/2011 receiving enquiries/proposals from customers forwarded by DAIPL for these functions also DAIPL is not being remunerated.
5.2 The reason for direct import by the customers are certainly on account of exemptions from customs duty.
5.3 The assessee has contended that the sales made to various customers were not less than Rs.1 lakh, but more than that. Even if this being so, the same does not change the fact that, assessee, did not submit any objective documents to support its contention that, with these parties it has negotiated the prices.
5.4 The claim that the consultant/contractor/architect represents several price and are in contact with assessee generally for their requirements on a regular basis and the discussion about the prices take place generally between the consultants of the individual and the assessee. Even for such claim not a single documentary evidence is filed.
5.6 ..........Such explanation is not material for the fact that this office had requested the emails/correspondence with the direct customers in India with regard to the receipt of proposals, relating to price negotiation and other documents. These documents are not supposed to be in the possession of the person handling the tax matters. In absence of these documents, one is required to draw the 5 ITA NO. 3005/Del/2011 conclusion that the employees of DAIPL or the persons of the assessee, who are deputed with DAIPL only, are deciding the prices of the products and only those persons are securing the orders for the assessee.
5.7 The assessee's claim that the employees, who visited India, for which information was submitted vide letter dated 20/11/08, include people from sales and marketing, who have made frequent visits, such personnel were responsible for discussing proposals and to negotiate the terms and conditions and prices with the customers. This is not acceptable due to the fact that only very few employees had business meetings with customers. These business meetings will not be only for the purpose of direct sales by DIL but also for the sales made through DAIPL.
...... In view of the above and in absence of positive documentary evidence by the assessee, it is held that DAIPL secures orders in India for the assessee (which is controlling DAIPL) and DAIPL also negotiates and finalizes the prices with the customers of assessee in India, though such authority is not vested in them through any agreement, but in practice they are deciding the prices and such prices are later on being confirmed by the assessee through documents. Such prices decided by DAIPL have the 6 ITA NO. 3005/Del/2011 binding effect on the assessee, as the otherwise has not been proved.
In this regard, reference is invited to Para 32.1 of the Commentary on OECD Model Tax Convention reads as below:-
32.1 Also the phrase "authority to conclude contracts in the name of the enterprise" does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprises; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. Lack of active involvement by an enterprise in transactions may be indicative of a grant of authority to an agent. For example, an agent may be considered to possess actual authority to conclude contracts where he solicits and receives (but does not formally finalize) orders which are sent directly to a warehouse from which goods are delivered and where the foreign enterprise routinely approves the transactions."
(Emphasis supplied) In arriving at the prices with the customers, the assessee could not prove that it was actively involved in negotiating the prices, which lead to the contracts. Therefore it is held that the assessee has PE in India 7 ITA NO. 3005/Del/2011 considering the provisions of Paragraph 7(a) and 7(c) of the tax treaty between India and Japan."
4. Before the ld. CIT(A), assessee inter-alia submitted that the assessee company was incorporated in Japan and it has a wholly own subsidiary in the name and style Daikin Air-conditioning India Pvt. Ltd. The Indian company does trading in AC machine in as much it purchases the machine from the parent company and sells to Indian customers. The appellant, the parent company also directly sells its product to the resident customers. The Indian company provides after sale warranty services both for the parent company and for itself and marketing support for the parent company. The Ld AO while completing the asstt. has held that the Indian company negotiates and concludes contracts on behalf of the appellant and therefore the appellant has a PE in India under Art.5(7) of Indo Japan Treaty (Refer to Page 16 to 18, para 5.1 to 5.10 of the order dated 26/12/08).
It was further submitted that the approach of the Ld AO is wrong because of the following reasons:-
a) The agreement dated 22/12/05 entered upon between the appellant and the Indian company (DAIPL) reveals that the sole job of DAIPL is to act as a communication channel between the appellant and the Indian customers. The appellant has produced documents like copy of the agreement, quotations, purchase orders etc. during the course of asstt. proceedings but further requirements like details of correspondence through e-mails could not be filed as the· matter was about 4 years old and the details were not maintained either by the appellant or by DAIPL. The copies of purchase order as filed 8 ITA NO. 3005/Del/2011 before the Ld AO clearly indicates that the Indian customers placed order directly with the appellant company and there was no role in concluding contract by DAIPL in such transaction. The appellant receives queries from resident customers and forward the same to the appellant and the proposal is prepared and sent by the appellant to DAIPL which in turn forward the same to the resident customers. This action of the DAIPL by itself would not prove conclusion of the contract as alleged by the Ld. AO.
b) The Art.5(7)(a) stipulates the conditions for having PE in India and the DAIPL would not meet the conditions as laid down and hence the action of the Ld AO is wrong.
5. Considering the above, Ld. CIT(A) held as under:-
"Examined the rival submissions. The short question of law to be adjudicated here as to whether the appellant has PE in India within the meaning of para 7(a) and para 7(c) of Article 5 of Indo Japan treaty (DTAA). Either side has given its argument which has been placed above in verbatim. The fact remains in the instant case that the appellant did not supply any document before the Revenue to prove that enquiries, proposals from the customers were received by it. Whether such act of appellant would ipso facto indicate that no such enquiries or proposals were performed is also to be decided but there is no shred of doubt that the appellant has grossly failed to discharge its onus which has been placed on it by the 9 ITA NO. 3005/Del/2011 statute itself. The Ld AO has brought on record that regarding the claim of the appellant that the consultant /contractor represent several price and are in contact with the appellant could not be verified as not a single documentary evidence in this respect was filed before the Revenue in spite of specific requisition. The AO has also come to the conclusion from the material evidence that business meeting will not be only for the purpose of direct sales by the appellant but also through the DAIPL. In absence of any such document the Revenue was constrained to conclude that DAIPL secured orders in India for the appellant, the appellant is the controlling authority for DAIPL and DAIPL also negotiates and finalizes the prices with the customers of the appellant in India. The authority for such act although not vested in them through any agreement but in all practical purposes they were deciding the prices and such prices later on confirmed by the appellant through document at a routine manner. It has been decisively held by a five member bench of Supreme Court in the case of Mc Donald v. CIT 154 ITR 148 (5C) that any colourable device to evade the tax would not exonerate the assessee from the ambit of taxation statute. Although no agreement was signed between the appellant and DAIPL in this regard but in reality the prices decided by DAIPL have been confirmed by the appellant and the Ld. AO has 10 ITA NO. 3005/Del/2011 rightly pierced through the veil to find the actual fact and such fact cannot be faulted.
Although no agreement was entered upon between the appellant and DAIPL, the latter company acted as its agent for soliciting order. The AO has made a detailed study which he has placed in the face of the asstt. order. The appellant could not produce any documents as asked for by the Revenue. This leads to an inescapable conclusion that there is a direct nexus between the appellant and DAIPL. Non-production of the document at the asstt. Stage would prove the hollowness of the argument of the appellant. The appellant has chosen both before the Ld. AO and also before me to explain the situation not with facts but only with the case laws. The Court decisions, under no stretch of imagination can be substitute for facts and there is conspicuous absence of the same in the present case. The appellant has failed to explain the facts to the satisfaction of the AO and the observation of the AO is on facts and he has critically examined all the submissions of the appellant for the period under consideration (0607). Considering the material facts, I confirm the approach taken by the Ld. AO in holding that the appellant has PE in India within the meaning of para 7(a) and para 7(c) of Article 5 of Indo Japan Tax Treaty. With this the question relating to the fact that whether the appellant has PE in India is answered 11 ITA NO. 3005/Del/2011 in favour of Revenue and against the appellant and the ground of the appellant fails."
6. Against the above assessee is in appeal before us.
7. We have heard the rival contentions in light of the material produced and precedents relied upon.
8. In this regard assessee's submission as regard Permanent Establishment are as under:-
Authority to conclude contracts Article 5(7) of the India-Japan tax treaty reads as follows:
"..... 7. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 8 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if
(a) he has and habitually exercises in" that Contracting State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph ... "
The phrase "authority to conclude contracts" implies that an agent of a non resident can be construed to constitute a PE 12 ITA NO. 3005/Del/2011 of the non-resident, if the agent can act independently on its own in the matter of concluding contracts on behalf of its principal. If the agent cannot conclude or enter into a contract on its own or without the final confirmation / approval from its principal, it negates the said power to conclude contracts.
The commission agreement between the appellant and DAIPL (page 48 to 57 of paper book) makes it clear that DAIPL did not have this freedom and the role of DAIPL is limited to act as a communication channel between the appellant and customers.
Reliance in this regard is placed on the following:
• Paragraph 32 of OECD commentary on Article 5 of the OECD Model Tax Convention On Income and Capital- July 2010 edition If a non-resident principal is also involved in negotiations / conclusion of contracts solely or jointly with the agent or if the agent has to obtain permission / confirmation for the same from its principal, the agent cannot be said to have the authority to conclude contracts on its behalf and, therefore, cannot be said to constitute a PE of the non- resident. Thus, the authority to conclude contracts must be exercised habitually by the Dependent Agent PE independently.
Reliance in this regard is placed on the following:13
ITA NO. 3005/Del/2011 Ruling of the Authority for Advance Rulings ("AAR") in TVM Ltd, In Re [1999] 237 ITR 230 (AAR) In this case, the AAR has held that:
" ... A person will be deemed to be a PE only if he has, and exercises, the authority to conclude contracts in the name of the enterprise The conclusion seems inevitable that even a non independent agent can be deemed to be a PE only if he can act independently in the matter of concluding contracts on behalf of the principal, on his own, freely and without control from the latter ... "
Paragraph 33 of the OECD Model Tax Convention On Income and Capital - July 2010 edition Further, it is respectfully submitted that the allegation of the AO is that DAIPL is engaged in the activity of negotiation with the customers and such activity results in the creation of PE for the appellant in India. However, it may be noted that Article 5(7) of the India- Japan tax treaty, as reproduced above, envisages the creation of a PE only when the agent has an authority to conclude contracts on behalf of the enterprise, and such authority is habitually exercised. The stress in the India-Japan tax treaty is on conclusion of contract and not on negotiation. It is amply clear from the plain reading of the commission agreement that DAIPL did not have any authority to even negotiate contracts 14 ITA NO. 3005/Del/2011 much less conclude contracts on behalf of the appellant. Further, it is respectfully submitted that DAIPL is not a dependent agent, per se, as it is also undertaking its own business of trading in air- conditioners and therefore, it should be considered as an independent agent of the appellant, if at all it is held to be an agent.
The Department representative ("DR"), during the course of the hearing, has stated that the appellant, inter alia, has a PE in India under Article 5(7)(c) of the India-Japan tax treaty, which reads as follows:
" ... (c) he habitually secures orders in the first- mentioned Contracting State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the 'same common control as that enterprise ... "
There is no guidance in the India-Japan tax treaty on what constitutes 'securing orders'. Attention is, however, drawn to the Protocol to the India- USA tax treaty which explains the term 'securing orders' as follows:
" ... a person shall be considered to habitually secure orders in a Contracting State, wholly or almost for an enterprise, only if:15
ITA NO. 3005/Del/2011
1. such person frequently accepts orders for goods or merchandise on behalf of the enterprise;
2. substantially all of such person's sales related activities in the Contracting State consist of activities for the enterprise;
3. such person habitually represents to persons offering to buy goods or merchandise that acceptance of an order by such person constitutes the agreement of the enterprise to supply goods or merchandise under the terms and conditions specified in the order; and
4. The enterprise takes actions that give purchasers the basis for a reasonable belief that such person has authority to bind the enterprise ... "
It is respectfully submitted that while the DR has argued that DAIPL secure orders for the appellant in India, he has not been able to substantiate as to how, considering the above mentioned explanation of the term 'securing orders', DAIPL could be said to have secured orders for the appellant in India. The onus, in this regard, is on the Revenue to substantiate that DAIPL secures orders for the appellant in India and such onus has not been discharged at all.
16ITA NO. 3005/Del/2011 Further, the DR has placed reliance on the ruling of the AAR in the case of Aramex International Logistics Pvt Ltd to argue that DAIPL, being a subsidiary of the appellant, would constitute a PE in India. In this regard, it is respectfully submitted that the facts in the case in hand are completely different from the facts in the case of Aramex. In this case, the appellant was engaged in the business of delivering door to door shipments by air and performing related transport services. The Indian company was responsible for movement of packages within India. On these facts, the AAR has held that the business of the appellant could not have been carried out without the Indian company and the office of the Indian company was being used by the non-resident assessee and, therefore, it had a fixed place PE in India. It is respectfully submitted that the facts in the instant case are substantially different as the issue is regarding constitution of dependent agent PE ("DAPE") and the role of DAIPL is only to act as a communication channel between the appellant and the customer, therefore, the same could not be applied.
Commission agreement rejected - conclusion drawn on conjecture and surmise It is respectfully submitted that, the Income-tax Act, 1961 ("Act") does not clothe the taxing authorities 17 ITA NO. 3005/Del/2011 with any power or jurisdiction to re-write the terms of the agreement entered into, particularly in view of the fact that there is no cogent evidence on records to suggest that the parties were not undertaking their respective duties.
Reliance in this regard is placed on the decision of the Delhi High Court in the case of D. S. Bist & Sons vs. CIT Delhi (Central) [1984]149 ITR 276 (Del).
The appellant and DAIPL had entered into a commission agreement for direct sales to customers (refer page 48 to 57 of paper book). As per the agreement, DAIPL was
- To forward the customer's request for procuring products from DIL to DIL
- To forward DIL's quotation and contractual proposal to the customer From the above, it is clear that DAIPL was only responsible for acting as a medium through which appellant' used to communicate with customers in India. DAIPL acted as a communication channel between customers and DIL to facilitate flow of information and documents like enquiries, proposals, quotations, purchase orders, invoices, etc DAIPL did not have any authority to carry out negotiations with customers in India, which was exercisable only by the appellant.
18ITA NO. 3005/Del/2011 The AO has, without adducing any evidence to the contrary, held that DAIPL negotiated the prices on behalf of appellant, merely because the appellant has not proved to the contrary. It is respectfully submitted that the explicit terms of a contract between two parties cannot be ignored without bringing on record any material which indicates anything to the contrary. An adverse conclusion cannot be drawn on conjectures and surmises.
Reliance in this regard is placed on the following decisions, where it has been held that irrelevant material! lack of material cannot be the basis for arriving at a conclusion adverse to the assessee merely on conjectures and surmises:
• Dhirajlal Girdharilal vs CIT [1954]26ITR 736 (SC) In this case, the assessee had filed a special leave petition before the Supreme Court ("SC") which allowed the appeal of the assessee and observed as follows:
" ...if the court of fact whose decision on a question of fact is final arrives at a decision by considering material which is irrelevant to the query or by considering material just partly relevant or partly irrelevant or basis its decision partly on conjectures, surmises or Suspicions, and partly on evidence, then in such a situation, it is impossible to say to what extent the mind of 19 ITA NO. 3005/Del/2011 the Court was affected by the irrelevant material used by it in arriving at its findings and such a finding is vitiated because of use of in-admissible material ... "
• Narayan Chandra Baidya vs CIT [1951] 20 ITR 287 (Cal) In this case, the High Court ("HC") held in favour of the assessee and observed as follows:
" ... even after an Income-tax officer rejects the evidence adduced by the assessee, he must indicate in his order on what material he ultimately basis his conclusion it is not clear from the record that the Income-
tax Officer proceeded on any definite material and the Tribunal had not found that he did. The definite material need not necessarily be in the form of legal evidence but there must be something which at the first stage should be brought to the notice of the assessee and if the Income-tax Officer in default of any response from the assessee adds something more the additional material also should appear in the order ... "
Onus not discharged by the Revenue 20 ITA NO. 3005/Del/2011 The onus was on the AO to bring on record evidence to demonstrate the action on part of DAIPL of negotiating and concluding contracts. Merely stating that the appellant has failed to prove the contrary cannot be adequate to hold that such acts were actually performed by DAIPL and a PE came into existence. The onus to show that a PE exists is on the Revenue.
In this regard, kind attention is invited to the decision of the Delhi Bench of Income Tax Appellate Tribunal in the case of DCIT vs. Mis Sofema SA bearing ITA No. 3900/Del/2002 order dated May 5,2006. The ITAT inter alia held as under:
" ... We are further of the considered view that in the absence of any evidence on record with regard to commercial activity having been done by the assessee company in India., its liaison office cannot be considered to be permanent establishment in India, as provided for in DTAA between India and Government of France...."
The order passed by the IT AT in Sofema's case has since been upheld by the Jurisdictional Delhi High Court in ITA No. 1764/2006 vide order dated December 18, 2006. The SLP filed by Revenue has been dismissed by the Supreme Court (Civil Appeal No. 5260 of 2008 vide order dated 26th August 2008), wherein the Apex court has observed as follows:
21ITA NO. 3005/Del/2011 " ... In the present case, there a concurrent finding that Sofema SA, respondent herein, is not a PE under the DTAA. However, we find that this finding has been given on the basis that there is no evidence or justification forthcoming from the side of the Department to show that the respondent is a PE. On that account alone, we do not wish to interfere in this matter.
Reliance in this regard is further placed on the recent decision of the Delhi bench of the ITAT in Metal One Corporation vs DDIT ITA No 5377/DEL-20111 [2012] 22 taxmann.com 77 (Delhi). In this case, the Hon'ble Bench of the Delhi Tribunal placed reliance on the SC decision in the case of Sofema (supra) and held as under:
5.15 In the case of DCIT vs. Sofema SA, I.T.A. NO.
3900/Del/2002 for assessment year 97-98 dated 05/05/2006, a copy of which has been placed before us, the facts are that the assessee has an office in India and it is a trader in defence equipments. It supplies goods to various companies and Government departments in India. The assessee maintains office at Delhi and Bangalore in which huge amounts have been spent. The finding of the Tribunal is that in absence of any evidence on record in respect of commercial activity having been undertaken by the assessee in India, its LO cannot be treated as a PE. In 22 ITA NO. 3005/Del/2011 this connection reliance has been placed in the decision in the case of lAC vs. Mitsui & Co. Ltd. 39 ITD 59 =(2003-TII-94-ITATDELSB-INTL). This decision has been confirmed by Hon'ble Delhi High Court on 18/12/2006 with the remark that no substantial question of law arises. The Civil Appeal filed by the Revenue has also been dismissed by the Hon'ble Supreme Court. It has been mentioned that the finding has been given on the basis that there is no evidence or justification forthcoming from the Revenue to show that the assessee has a PE. On this account alone, the court does not wish to interfere in the matter"
Documents submitted by the appellant not considered Further, the appellant had filed details of visits of its employees to India at various times during the subject assessment year (refer page 46 of the paper book). A perusal of the details will clearly indicate that the employees include people from sales and marketing who had made frequent visits to India. Such personnel were responsible for discussing proposals and to negotiate the terms and conditions and prices with the Indian customers.
Moreover, documents like proforma invoice, invoice, quotation from appellant to customer, acceptance of the quotation, packing List, bill of lading, insurance documents, certificate of fumigation were submitted 23 ITA NO. 3005/Del/2011 before the AO in relation to sales made to some parties (refer page 103 to 167 of the paper book).
It is pertinent to ·note that all documents are between the appellant and customers. The quotations were raised by the appellant on the customer and in turn the customer has given the acceptance to the appellant only. DAIPL was, thus, only responsible for forwarding the documents between the appellant and the customer.
The AO/CIT(A) have, however, brushed aside all the documents and held that no evidence was produced by the appellant. If the AO was to reject such evidence then some positive evidence should have been brought on record to prove otherwise."
9. The submissions of the Ld. Departmental Representative are as under:-
(A) Permanent establishment:
The Department's stand is that Daikin Airconditioning India (P) ltd. (DAIPL) who is a 99.99% subsidiary of the assessee viz. Daikin Industries Ltd.{ DIL) is a PE of the assessee within the meaning of paragraph 7{a) and
(c) of article 5 of Indo- Japan Treaty (PB 222). This is for the following reasons:-
1. The assessee was repeatedly asked by the A.O. to furnish documentary evidence in support of the claim that prices were negotiated and contracts were 24 ITA NO. 3005/Del/2011 entered by the assessee directly with the end customers in India and the Indian entity had no role to play in this regard (page 4 para ii; page 10 para 3 and page 11 para 3.1 of the AO's order).
2. The assessee in its reply dated 22-12-2008 (page 13, last para of the AO's order) expressed its inability to produce relevant documents/details except the documents furnished earlier. The AO has discussed this reply of the assessee on page 17 para 5.5. and 5.6 of the order.
3. The assessee had submitted certain documents vide reply dated 12-122008 in support of its claim (PB 101 to 167). The AO has discussed the assessee's reply on page 18 para 5.8 and held that the same was and satisfactory as it did not prove that the assessee arid the end customers directly decided the prices and the terms and conditions. Further, mere acceptance letter given by the purchaser is not a sufficient evidence as (i) when the quotation was issued by the assessee the acceptance, as a natural corollary, had to be in the name of the assessee and (ii) DAIPL with whom end customers were dealing was, in any case, in a position to take acceptance letter in the name of the assessee.
4. The other evidence submitted by the assessee was that its employees visited India for price negotiations (details of such employees are at PB 47). The AO has 25 ITA NO. 3005/Del/2011 discussed this issue on page 17 para 5.7 of his order.
He has rightly held that merely on this basis it cannot be said that employees had visited India for negotiating with end customers.
5. Except the above documents no other evidence whatsoever was submitted by the assessee in the form of emails or other communications to show that the end customers directly negotiated the price and other terms and conditions with the assessee (page 16 para - 5.1 to 5.4 of the AD's order).
6. It is difficult to believe that the end customers in India, who were large in number ( PB 11 to 23 ), would directly contact and negotiate the price with the assessee at their own cost in Japan having different times zone and different language (particularly when the assessee's representative in the form of DAIPL with whom they had discussed the purchase proposals etc was available in India). This is more so when there are large number of competitors selling air conditioners in India. It is also difficult to believe that in not single case the quoted price was not accepted by the end customer and the price had to be re negotiated. In view of the aforesaid it was imperative on the part of the assessee to produce clinching evidence in support of its claim. Failure to _do so clearly proves that it is the Indian entity (DAIPL) which 26 ITA NO. 3005/Del/2011 in effect concluded the price and other terms and conditions.
7. The commission agreement (PB 48 to 57) has been entered into and signed on 22-12-2005 (PB 49 and 56). The 'effective date' has been defined as date of execution of the agreement (PB 50 clause 1.1.3) and the terms and conditions clearly state that agreement would be deemed to come into force from the effective date(PB 53 clause 6.1).No independent person without any agreement in place would undertake the marketing activities. The fact that the Indian entity undertook the marketing activities for the period prior to the agreement viz. 1-4-2005 to 21-12- 2005 clearly shows that i) both the parties acted beyond the terms of agreement and ii) the Indian entity viz. DAIPL was not a person of independent status and was in complete control of the assessee.
8. The AO thus in para 5.10, page 18 of the order has rightly concluded that the assessee has dependent agent PE in terms of para 7(a) & para 7(c) of article 5 of the treaty.
9. Even if for the argument's sake it is accepted that there is no PE under article 5(7)(a), the appellant's case squarely falls under article 5(7)(c) (PB 222) as DAIPL is habitually securing orders for the assessee. Reference by the assessee to the letter exchanged between India and the USA is of no help as 27 ITA NO. 3005/Del/2011 the same has effect only between these two countries and could not be applied to other treaties. This is more so when not only strict rules of interpretation of statute applies to the interpretation of treaties but also the treaties are understanding between the two countries and hence cannot be applied for other treaties. This also clear from the letter referred to by the learned AR. In any case, the fact of the present case clearly shows that all the conditions mentioned all the letter are fulfilled.
The OEDC guidelines:
Paragraphs 31 to 33 ( including paragraph 32.1 reproduced by the AO in his order on page 18 ) of the DECO commentary on article 5 as submitted by the learned AR, clearly support the case of the department wherein it is clearly mentioned that persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the state concerned may be treated as an agent (para32). It also states that a person who is authorised to negotiate all elements and details of a contract in away binding on the enterprise can be said to exercise this authority "in that state" even if the contract is signed by another person in the state in which the enterprise is situated ,or ,if the first person has not formally been given the power of representation (para 33). As mentioned 28 ITA NO. 3005/Del/2011 above, para 32.1 re-produced by the AO in the order (page 18) clinches the issue the favour of the department.
The views of Klaus Vogel reproduced in the AAR's decision in the case of TVM Ltd. vs. ClT on page containing para 18 wherein it is mentioned that substance over form should be seen and after considering the actual behaviour of the parties a permanent establishment may be deemed to exist irrespective of what the formal arrangements were, further support the department's case.
Case Laws:
The department relies on the following case laws:-
i) Aramex International Logistics (P) Ltd.; AAR, 2012-
TII-29-ARA-INTL ( para 15 & 16 - page 9 )
ii) M/s. Rolls Royce PLC, ITAT, Delhi; 2007-TII-32-ITAT- DEL-INTL ( para 23 page 20/21)
iii) M/s. Rolls Royce PLC, Delhi High Court 2011-TII-35- HC-DEL-INTL (para 17 pag~ 7)
iv) M/s. Rolls Royce Singapore (P) Ltd.-2011-13 Taxmann.com 81 (Delhi) ( para 29 & 30).
During the hearing the learned AR referred to the AAR's decision in the case of TVM Ltd. This decision is not applicable as Indo- Mauritius Treaty ( 29 ITA NO. 3005/Del/2011 reproduced on page containing para 9 of TVM decision) does not contain clause (c) of article 5(7) of the Indo- Japanese Treaty ( PB 222) .
During the hearing it was argued by the learned AR that the AO has no power to go beyond the Commission agreement or to re-write the agreement. It is submitted that the AO has not re-written the agreement. While an agreement forms the starting' point for examining a transaction but the conduct of the parties has to be seen. If the conduct of the parties is not in accordance with the terms of agreement then the AO has power to travel beyond it. The jurisprudence on the concept of 'substance over form' is well developed and needs no elaboration. This concept is also recognized by the DECO. The same is 'also discussed in TVM's case (supra) (para 16 and page containing para 18).
In view of the above discussion the AO's action in treating DAIPL as PE of the appellant may kindly be upheld."
10. We have carefully considered the submissions and perused the records. We find that it is assessee's contention is that DAIPL acted as a communication channel between the prospective customers and assessee. DAIPL facilitated the flow of information and documents like enquiries, proposals, quotations, purchase orders, invoice etc. between the assessee and the customers.
30ITA NO. 3005/Del/2011 10.1 In this connection, assessee has relied upon the agreement dated 22.12.2005, which states the roles and responsibility of DAIPL as below:-
i) To forward the customer's request for procuring products from DIL to DIL.
ii) To forward DIL's quotation and contractual proposals to the customers.
10.2 Here we find that from 1st April, 2005 to 21.12.2005, there was no agreement between DAIPL and the assessee.
10.3 In this connection, Assessing Officer has observed that assessee did not submit any document to prove that enquiries, proposals received from the customers were received by it. From this it has been deduced that no such enquiries or proposals were received from the customers by the assessee and these functions were performed by DAIPL.
10.4 It has been claimed by the assessee that from plain reading of the commission agreement, it is clear that DAIPL does not have any authority to even negotiate contracts much less conclude contracts on behalf of the assessee. However, it is Assessing Officer's case that Assessing Officer had requested the emails/ correspondence with the direct customers in India, with regard to the receipt of proposals, relating to price negotiations and other the documents which were not produced. In this regard, the Assessing Officer has noted assessee's response that assessee was trying its best to procure the relevant documents/ details. However, substantial record for the year under question were not traceable with assessee. Assessing 31 ITA NO. 3005/Del/2011 Officer has further noted assessee's response that "inspite of the limitations the assessee had furnished whatever documentation relating to specified customers, it has been able to search out so far. It is also respectfully submitted that the person responsible for handling tax matters of the assessee has not been able to attend office for sometime on account of ill health, which has also added to the difficulty in procuring and furnishing the required documents." However, Assessing Officer has not accepted the above. He observed that required documents were not supposed to be in the possession of person handling the tax matters. Assessing Officer has held that in absence of these documents one is required to draw the conclusion that the employees of DAIPL or the persons of the assessee, who are deputed with DAIPL only, are deciding the prices of the products and only those persons are securing the orders for the assessee. Ld. Commissioner of Income Tax (A) has also observed that the assessee did not supply any document before the Revenue to prove that enquiries, proposals, from customers were received by it.
10.5 The assessee has further claimed before the Assessing Officer that consultant / contractor/architect represent several prices and are in contact with the assessee generally for their requirement, on a regular basis and the decisions about the prices take place generally between the consultant of the individual and the assessee. However, the submissions were not accepted by the Assessing Officer as he observed even for this claim not a single documentary evidence was filed.
10.6 Assessee has further claimed that its employees, who visited India include persons from sales and marketing, who have made 32 ITA NO. 3005/Del/2011 frequent visits, such personnel were responsible for discussing proposals and to negotiate the terms and conditions and prices with the customers. Assessing Officer has rejected the above claim by observing that very few employees had business meetings with customers. These business meetings will not be only for the purpose of direct sales by DIL but also for the sales made through DAIPL.
10.7 We further note that Assessing Officer has observed that reasons for direct import by customers are certainly on account of exemptions from customers from custom duty. In this regard, it was further been claimed by the revenue that it is difficult to believe that the end customers in India, who are large in number, would directly contact and negotiate the price with the assessee at their own cost in Japan having different time zones and different language.
10.8 From the above discussion, we note that Assessing Officer has not accepted assessee's explanation as required documentary evidences were not furnished. Assessee has claimed that documents like proforma invoice, invoice, quotations from assessee to customers acceptance of the quotation, packing list, bill of loading, insurance documents, certificate of fumigation were submitted before the Assessing Officer in relation to sales made to some parties.
10.9 We further note that with regard to attribution of profits to the PE assessee has inter-alia claimed that without prejudice to the claim of the assessee that a PE does not exist in India, the amount attributed by the Assessing Officer is unjustified keeping in mind the global profitability of the assessee. In this regard ld. Counsel of the assessee 33 ITA NO. 3005/Del/2011 admitted that this claim was not made before the Assessing Officer.
However, claim in this regard was made before the Ld. Commissioner of Income Tax (A), but the same was ignored by the Ld. Commissioner of Income Tax (A), and no finding in this regard has been given in his appellate order.
10.10 Further as regards levy of interest u/s. 234B by the Assessing Officer, assessee has contended before the Ld. Commissioner of Income Tax (A) that section 234B is not applicable where the income is liable to deduction of tax at source. If the Assessing Officer's allegation that assessee has a PE in India is to be accepted, then its income was subject to deduction of tax at source under section 195 of the Act. Ld. Commissioner of Income Tax (A) has not discussed this issue. He has held that charge of interest u/s. 234B is consequential and no appeal lies against such order.
11. From the above discussion we are of the opinion that there are conflicting claim by the Revenue and the assessee. The lower authorities have held that assessee has not provided the necessary evidence in support of its claim. On the other hand, assessee has pleaded that all the information to the extent possible were submitted. We have also noted that before the Assessing Officer assessee had pleaded that the person who was in charge of the requisite details had fallen ill. It has also been a claim of the assessee that its submission had not been appreciated properly. On some issues it is the claim of the assessee that proper adjudication has not been done.
34ITA NO. 3005/Del/2011
12. In the background of the aforesaid discussion, we are of the considered opinion, that interest of justice will be served, if the issues are remitted to the file of the Assessing Officer for de novo consideration. Accordingly, we remit the issues in this case to the file of the Assessing Officer for fresh adjudication. Needless to add that the assessee should be granted adequate opportunity of being heard.
13. In the result, the appeal filed by the Assessee is allowed for statistical purposes.
Order pronounced in the open court on 13/7/2012.
Sd/- Sd/-
[U.B.S. BEDI]
BEDI] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 13/7/2012
"SRBHATNAGAR"
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
35