DDIT (IT)-4(1), MUMBAI V. M/S. M. FABRICANT & SONS INC., MUMBAI

ITA 3055/MUM/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7713 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 14-03-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 05-05-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJIV DUTT
• Keywords: Deemed to accrue or arise in india; Permanent establishment

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L, MUMBAI. BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ITA NOS.3055 & 3056/MUM/2008 (ASSESSMENT YEARS : 2004-05 & 2005-06) DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 4(1), MUMBAI. VS. M/S. M. FABRICANT & SONS INC., 603, DHEERAJ VIHAR, N N ROAD NO.1, W E HIGHWAY, JOGESHWARI EAST, MUMBAI-400 060 PAN NO.AADCM7925N (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SANJIV DUTT RESPONDENT BY : SHRI ARVIND SONDE PER V. DURGA RAO : THESE APPEALS FILED BY THE REVENUE ARE DIRECTED A GAINST THE ORDERS OF THE LEARNED COMMISSIONER OF INCOME TAX (A PPEALS)-XXXIII, MUMBAI DT.29.2.2008. 2. THE GROUNDS OF APPEAL RAISED IN THESE APPEALS A RE AS UNDER : ITA NO.3055/MUM/2008 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASSESSEES LIAISON OFFICE CANNOT BE CONSIDERED AS A PERMANENT ESTABLISHMENT IN INDIA AND NO PROFITS CAN BE ATTRIB UTED TO THE PERMANENT ESTABLISHMENT AS NO PROFIT ACCRUED OR ARI SES IN INDIA. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSIN G OFFICER TO DELETE THE ENTIRE ADDITION OF RS.1,64,94,79,200. THE APPELLANT PRAYS THAT THE ORDER OF THE LEARNED CIT(A), MUMBAI ON THE ABOVE GROUNDS BE SET ASIDE AND THE OR DER OF THE ASSESSING OFFICER BE RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GR OUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA NO.3056/MUM/2008 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASSES SEES LIAISON ITA 3055 & 3056/MUM/2008 M/S M. FABRICANT & SONS INC. 2 OFFICE CANNOT BE CONSIDERED AS A PERMANENT ESTABLIS HMENT IN INDIA AND NO PROFITS CAN BE ATTRIBUTED TO THE PERMA NENT ESTABLISHMENT AS NO PROFIT ACCRUED OR ARISES IN IND IA. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSIN G OFFICER TO DELETE THE ENTIRE ADDITION OF RS.6,53,36,379. THE APPELLANT PRAYS THAT THE ORDER OF THE LEARNED CIT(A), MUMBAI ON THE ABOVE GROUNDS BE SET ASIDE AND THE OR DER OF THE ASSESSING OFFICER BE RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GR OUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 2. SINCE COMMON ISSUES ARE INVOLVED IN BOTH THESE A PPEALS, WE FIND IT CONVENIENT TO DISPOSE OF THESE APPEALS BY THIS COMM ON ORDER. 3. THE ISSUE INVOLVED IN THESE APPEALS IS WHETHER T HE ASSESSEES LIAISON OFFICE TO BE CONSIDERED AS A PERMANENT ESTA BLISHMENT IN INDIA OR NOT. 4. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ISSUE INVOLVED IN THESE APPEALS IS SQUARELY COVERED BY THE DECISION OF THE ITAT, MUMBAI BENCH IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEARS 1999-2000 TO 2002-03 AND 2003-04 I N ITA NOS.4657 TO 4660 AND 3342/MUM/2007 VIDE ORDER DT.28.01.2011, A COPY OF WHICH HAS BEEN FILED BEFORE US. 5. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE HAS NOT OBJECTED THE SUBMISSIONS MADE BY THE ASSESSEE. HOWEVER, HE SUPPORTED THE ORDERS OF THE ASSESSING OFFICER. 6. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE REC ORDS. THE ISSUE INVOLVED IN THIS APPEAL IS DISCUSSED BY THE TRIBUNA L IN DETAIL IN ASSESSEES ITA 3055 & 3056/MUM/2008 M/S M. FABRICANT & SONS INC. 3 OWN CASE FOR THE ASSESSMENT YEARS 1999-2000 TO 2002 -03 AND 2003-04 (SUPRA).THE RELEVANT PORTION OF THE TRIBUNAL ORDER IS EXTRACTED HEREUNDER : WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RELEVANT RECORD. UNDISPUTEDLY, THE LO OF THE ASSE SSEE WAS PERFORMING THE ACTIVITIES OF ASSORTING OF DIAMONDS, CHECKING OF THE RIGHT QUALITY OF DIAMONDS AND PRICE NEGOTIAT ION AS PER THE INSTRUCTIONS AND SPECIFICATION OF THE ASSESSEE. THESE ACTIVITIES OF THE LO IS ONLY PART OF THE PURCHASING PROCESS OF THE DIAMONDS AND DID NOT BRING ANY PHYSICAL OR QUAL ITATIVE CHANGE IN THE GOODS PURCHASED. EVEN OTHERWISE, TH E FUNCTION OF THE LO AS MENTIONED ABOVE ARE PRIOR TO PURCHASE OF THE DIAMONDS AND NOT SUBSEQUENT TO THE PURCHASES. THEREFORE, NO QUALITY CHANGE IS BROUGHT BY THE LO WHILE DOING THE OPERATION OF PURCHASING IN INDIA FOR EXPORT PURPOSES. IT IS A CASE OF PURCHASE OF GOO DS THROUGH LO AND ALL THE ACTIVITIES CARRIED OUT BY T HE LO ARE BASIC AND PRELIMINARY REQUIREMENT OF THE PURCHASIN G PROCESS/OPERATION. SELECTION OF RIGHT GOODS AND NEG OTIATION OF PRICE AS PER THE INSTRUCTIONS OF THE ASSESSEE AR E ESSENTIAL PART OF THE PURCHASING ACTIVITY. THUS, THE CASE IS FULLY COVERED BY THE CLAUSE (B) OF EXPLANATION (1) TO SEXTON 9(1)(I) OF THE ACT. FURTHER IN VIEW OF THE CIRCUL AR NOS. 23 AND 163, THE BOARD HAS CLARIFIED AS UNDER : CIRCULAR NO.23 (5) NON-RESIDENT PERSON PURCHASING GOODS IN INDIA - A NON-RESIDENT WILL NOT BE LIABLE TO TAX IN INDIA ON ANY INCOME ATTRIBUTABLE TO OPERATIONS CONFINED TO P URCHASE OF GOODS IN INDIA FOR EXPORT, EVEN THOUGH THE NON-R ESIDENT HAS AN OFFICE OR AN AGENCY IN INDIA FOR THIS PURPOS E. WHERE A RESIDENT PERSON ACTS IN THE ORDINARY COURSE OF HI S BUSINESS IN MAKING PURCHASES FOR A NON-RESIDENT PAR TY, HE WOULD NOT NORMALLY BE REGARDED AS AN AGENT OF THE N ON- RESIDENT UNDER SECTION 163. BUT, WHERE THE RESIDEN T PERSON IS CLOSELY CONNECTED WITH THE NON-RESIDENT PURCHASE R AND THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE RESIDENT PERSON GETS NO PROFITS OR LESS THAN TH E ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN THAT BU SINESS, THE INCOME-TAX OFFICER IS EMPOWERED TO DETERMINE TH E AMOUNT OF PROFITS WHICH MAY REASONABLY BE DEEMED TO HAVE BEEN DERIVED BY THE RESIDENT PERSON FROM THAT BUSIN ESS AND INCLUDE SUCH AMOUNT IN THE TOTAL INCOME OF THE RESI DENT PERSON. (6) .. (7) EXTENT OF THE PROFIT ASSESSABLE UNDER SECTION 9 - SECTION 9 DOES NOT SEEK TO BRING INTO T HE TAX NET THE PROFITS OF A NON-RESIDENT WHICH CANNOT REAS ONABLY BE ATTRIBUTED TO OPERATIONS CARRIED OUT IN INDIA. EVE N IF THERE ITA 3055 & 3056/MUM/2008 M/S M. FABRICANT & SONS INC. 4 BE A BUSINESS CONNECTION IN INDIA, THE WHOLE OF THE PROFIT ACCRUING OR ARISING FROM THE BUSINESS CONNECTION IS NOT DEEMED TO ACCRUE OR ARISE IN INDIA. IT IS ONLY THA T PORTION OF THE PROFIT WHICH CAN REASONABLY BE ATTRIBUTED TO TH E OPERATIONS OF THE BUSINESS CARRIED OUT IN INDIA, WH ICH IS LIABLE TO INCOME-TAX. TO CONSTITUTE A BUSINESS CONNECTION, SOME CONTINUIT Y OF RELATIONSHIP, BETWEEN THE PERSON IN INDIA WHO HELPS TO MAKE THE PROFITS AND THE PERSON OUTSIDE INDIA WHO RECEIV ES OR REALISES THE PROFITS, IS NECESSARY. WHERE ALL WHAT HAS HAPPENED IS THAT A FEW TRANSACTIONS OF PURCHASES OF RAW MATERIALS HAVE TAKEN PLACE IN INDIA AND THE MANUFAC TURE AND SALE OF GOODS HAVE TAKEN PLACE OUTSIDE INDIA, T HE PROFITS ARISING FROM SUCH SALES CANNOT BE CONSIDERE D TO HAVE ARISEN OUT OF A BUSINESS CONNECTION IN INDIA. WHERE, HOWEVER, THERE IS A REGULAR AGENCY ESTABLISHED IN I NDIA FOR THE PURCHASE OF THE ENTIRE RAW MATERIALS REQUIRED F OR THE PURPOSE OF MANUFACTURE AND SALE ABROAD AND THE AGEN T IS CHOSEN BY REASON OF HIS SKILL, REPUTATION AND EXPER IENCE IN THE LINE OF TRADE, IT CAN BE SAID THAT THERE IS A B USINESS CONNECTION IN INDIA SO THAT A PORTION OF THE PROFIT S ATTRIBUTABLE TO THE PURCHASE OF RAW MATERIALS IN IN DIA CAN BE APPORTIONED UNDER EXPLANATION (A) TO SECTION 9(1)(I 1 ). [THE TAXABILITY OF SUCH PORTION OF THE PROFITS WILL, HOW EVER, BE SUBJECT TO THE EXEMPTION PROVIDED IN CLAUSE (B) OF THE EXPLANATION TO SECTION 9(1)(J).] CIRCULAR NO.163 2. THE ABOVE SENTENCE MAY CONVEY THE IMPRESSION TH AT A NON-RESIDENT IS LIABLE TO BE TAXED ON A PORTION OF THE PROFITS ATTRIBUTABLE TO THE PURCHASE OF RAW MATERIALS REQUI RED FOR THE PURPOSES OF MANUFACTURE AND SALE ABROAD, IF THE PURCHASES ARE MADE IN INDIA THROUGH A REGULAR AGENC Y ESTABLISHED IN INDIA FOR THIS PURPOSE. BY VIRTUE OF CLAUSE (B) OF THE EXPLANATION TO SECTION 9(1)(I), THE CORRECT LEGAL POSITION IS THAT IN THE CASE OF A NON-RESIDENT, NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA THROUGH OR FROM OPERATIONS WHICH ARE CONFINED TO PURCHASE OF GOODS IN INDIA FOR THE PURPOSE OF EXPORT. ACCORDINGLY, THE MERE EX ISTENCE OF AN AGENCY ESTABLISHED BY A NON-RESIDENT IN INDIA WILL NOT BE SUFFICIENT TO MAKE THE NON-RESIDENT LIABLE TO TA X, IF THE SOLE FUNCTION OF THE AGENCY IS TO PURCHASE GOODS FO R EXPORT. THIS LEGAL POSITION HAS ALSO BEEN EXPLAINED IN PARA 3(5) OF THE BOARDS PUBLIC CIRCULAR CITED ABOVE. 7. WE FIND THAT THE SINCE FACTS OF THE CASES UNDER CONSIDERATION ARE MATERIALLY IDENTICAL TO THAT OF EARLIER YEARS A ND NO MATERIAL HAS BEEN BROUGHT TO OUR NOTICE THAT THE SAID ORDER HAS BEEN MODIFIED OR REVERSED ITA 3055 & 3056/MUM/2008 M/S M. FABRICANT & SONS INC. 5 BY THE HONBLE HIGH COURT. FURTHER, THE LEARNED DE PARTMENTAL REPRESENTATIVE HAS NOT BROUGHT/POINTED OUT ANY CONT RARY DECISIONS. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF T HE CO-ORDINATE BENCH OF THE TRIBUNAL (SUPRA), WE UPHOLD THE ORDERS OF THE C IT(A) IN BOTH THE YEARS UNDER CONSIDERATION AND DISMISS THE GROUNDS RAISED BY THE REVENUE IN THIS REGARD. 8. IN THE RESULT, BOTH THE APPEALS OF REVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 31ST MARCH, 20 11. SD/- SD/- (P.M. JAGTAP) (V. DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT. 31 ST MARCH, 2011. *GPR COPIES OF THE ORDER FORWARDED TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT, MUMBAI (4) CIT(A), MUMBAI (5) DR, (6) GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES