M/s Sagem Defence Securite SA, Gurgaon V. DDIT, New Delhi

ITA 5914/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3467 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 21-07-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 24-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: S D KAPILA
• Keywords: Business income; Double taxation relief; Principle of natural justice; Additional evidence; Permanent establishment

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G, NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA, HONBLE VICE PRESI DENT & SHRI I.P. BANSAL, JUDICIAL MEMBER ITA NO. 5914/DEL/2010 ASSESSMENT YEAR: 2007-08 M/S SAGEM DEFENCE SECURITE SA, VS. DDIT, INDIA LIAISON OFFICE, INTERNATIONAL TAXATION, BMR & ASSOCIATES, 22 ND FLOOR, CIRCLE 2(2), BUILDING NO. 5, TOWER A, NEW DELHI. DLF CYBER CITY, DLF PHASE III, GURGAON 122 002. AAAJS2051K (APPELLANT) (RESPONDENT) APPELLANT BY : SH. S.D. KAPILA, ADV. RESPONDENT BY : SH. N.K. CHAND, SR. DR ORDER PER I.P. BANSAL, J.M. THIS IS AN APPEAL FILED BY THE ASSESSEE. IT IS DI RECTED AGAINST ORDER PASSED BY ASSESSING OFFICER DATED 15.10.2010 U/S 144C(1)/143(3) OF THE INCOME TAX ACT, 1961 (ACT). 2. GROUNDS OF APPEAL READ AS UNDER: - 1.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN HOLDING THAT THE ASSESSEE COMPANY HAS A PERMANENT ESTABLISHMENT (PE) IN INDIA UNDER THE PROVISIONS OF THE AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION BETWEEN INDIA AND FRANCE (INDIA-FRANCE DTAA). ITA NO. 5914/D/2010 2 1.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN HOLDING THAT THE ACTIVITIES CARRIED OUT IN INDIA BY THE LIAISON OFFICE (LO) OF THE ASSESSEE COMPANY ARE NOT IN THE NATURE OF PREPARATORY AND AUXILIARY ACTIVITIES. 1.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN NOT APPRECIATING THAT THE ACTIVITIES CARRIED OUT IN INDIA BY THE LO ARE MERELY PREPARATORY AND AUXILIARY IN CHARACTER, AND ARE HENCE EXCLUDED FROM THE DEFINITION OF PE AS ENVISAGED UNDER ARTICLE 5(4) OF THE INDIA-FRANCE DTAA. 1.4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN HOLDING THAT LO IS DOING MUCH MORE THAN WHAT IS AUTHORIZED UNDER THE RESERVE BANK OF INDIA (RBI) REGULATIONS. 1.5 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS FAILED TO APPRECIATE THE FACT THAT AS PER THE STATUTORY APPROVAL GRANTED BY THE RBI, THE ACTIVITIES OF THE LO WERE RESTRICTED AND IT COULD NOT LEGALLY SECURE ORDERS OR CONCLUDE SALE CONTRACT WITH CUSTOMERS IN INDIA. 1.6 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN HOLDING THAT THE LO IN INDIA IS ENGAGED IN CONCLUDING COMMERCIAL TRANSACTIONS IN INDIA AND IS THEREFORE, PERFORMING ESSENTIAL/SIGNIFICANT PART OF ACTIVITIES IN INDIA. 1.7 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN HOLDING THAT THE ACTIVITIES UNDERTAKEN BY THE LO IN INDIA RE ITA NO. 5914/D/2010 3 MORE OR LESS SIMILAR ACTIVITIES AS THAT THE HEAD OFFICE. GROUND 2: ATTRIBUTION OF INCOME TO THE PERMANENT ESTABLISHMENT 1.8 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, AND WITHOUT PREJUDICE TO THE ABOVE GROUND OF APPEAL, THE AO HAS ERRED IN SEEKING TO ATTRIBUTE 50% OF THE NET OPERATING PROFITS (LOSS) TO THE PE IN AN ARBITRARY MANNER, AND WITHOUT APPRECIATING THE FUNCTIONS, ASSETS AND RISKS RESIDING IN INDIA IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, AND THE INDIA-FRANCE DTAA. 1.9 THAT WITHOUT PREJUDICE TO OTHER GROUNDS OF APPEAL, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN ASSUMING AN ARBITRARY METHODOLOGY AND A RELATIVELY VERY HIGH RATE OF ATTRIBUTION OF NET OPERATING PROFITS (LOSS) FOR ATTRIBUTING INCOME (LOSS) TO THE PE IN INDIA. GROUND 3: LOSS ASSESSMENT 1.10 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, AND WITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPEAL, THE AO HAS ERRED IN NOT ATTRIBUTING A NET TAXABLE LOSS [TO THE EXTENT OF INR 122,079,085 (I.E. INR 1,366,615,567*17.8659%*50%) ] IN THE FINAL ASSESSMENT ORDER. 1.11 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, WITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPEAL, THE AO HAS ERRED IN NOT PROVIDING FOR CARRY-FORWARD AND SET-OFF OF THE LOSS ATTRIBUTABLE TO THE PE IN THE ASSESSMENT ITA NO. 5914/D/2010 4 YEAR UNDER CONSIDERATION AGAINST THE PROFITS OF THE FUTURE YEARS, IF ANY. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VARY FROM THE ABOVE GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HEARING. 3. THE ASSESSEE HAS ALSO FILED AN APPLICATION FOR A DMISSION OF ADDITIONAL GROUND OF APPEAL ON 25.02.2011 WHICH REA D AS UNDER: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. DISPUTE RESOLUTION PANEL REFUSED TO ADMIT THE ADDITIONAL EVIDENCE FILED WITH IT IN BREACH OF SUB RULE 9 OF THE INCOME TAX (DISPUTE RESOLUTION PANEL) RULE, 2009 AND PRINCIPLES OF NATURAL JUSTICE. 4. LATER ON ANOTHER APPLICATION WAS FILED IN WHICH THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT ADDITIONAL GROUND RAISE D IS TO BE REVISED AS UNDER: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. DISPUTE RESOLUTION PANEL ERRED IN REFUSING TO A DMIT THE ADDITIONAL EVIDENCE FILED WITH IT IN BREACH OF SUB RULE 9 OF THE INCOME TAX (DISPUTE RESOLUTION PANEL) RULE , 2009 AND PRINCIPLES OF NATURAL JUSTICE. 5. IT IS SUBMITTED IN THE APPLICATION THAT THE ADDI TIONAL GROUND SOUGHT TO BE RAISED BY THE LETTER DATED 25.02.2011 WAS SUF FERING FROM TYPOGRAPHICAL ERROR AS THE GRIEVANCE WAS NOT EXPLIC ITLY EXPRESSED. THE WHOLE DISPUTE IN THE PRESENT APPEAL REVOLVES AROUND THAT WHETHER OR NOT PE OF THE ASSESSEE EXISTED IN INDIA IN THE SHAPE OF ITS LIAISON OFFICE. THE ASSESSEE IS A TAX RESIDENT OF FRANCE AND IS ENGAGED IN THE BUSINESS OF ITA NO. 5914/D/2010 5 MANUFACTURING AND SALE OF HELICOPTER FLIGHT CONTROL S, MILITARY AIRCRAFT SYSTEMS, INERTIAL NAVIGATION SYSTEMS AND HAS A LIAI SON OFFICE IN INDIA. IT MADE TOTAL SALES IN INDIA OF EURO 2,37,75,497/- (EQ UIVALENT TO RS. 136,66,15,567/- FROM VARIOUS INDIAN CLIENTS LISTED IN THE ASSESSMENT ORDER). 6. THE AO IN ORDER TO EXAMINE THE NATURE OF ACTIVIT IES OF THE LIAISON OFFICE, SEND ENQUIRY LETTERS TO THE CLIENTS OF THE ASSESSEE. IN RESPONSE TO SUCH ENQUIRY ONE OF THE CLIENTS OF THE ASSESSEE NAM ELY INSTRUMENTS RESEARCH & DEVELOPMENT ESTABLISHMENT, MINISTRY OF D EFENCE, DEHRADUN VIDE LETTER DATED 22.12.2009 INFORMED THAT THE NAME AND DESIGNATION OF THE PERSON WITH WHOM IT NEGOTIATED THE SALE PRICE O F THE PRODUCTS OF THE ASSESSEE COMPANY WAS MR. BERNARD LACOSTE. THE AO D ID NOT RECEIVE ANY REPLY FROM ANY OTHER CLIENT OF THE ASSESSEE. T HE AO OBSERVED THAT SAID MR. BERNARD LACOSTE IS AN EMPLOYEE OF THE INDI AN LIAISON OFFICE OF THE ASSESSEE COMPANY AND DRAWING AN ANNUAL TAXABLE SALARY OF RS. 96,39,726/-. IN THE CIRCUMSTANCES, THE AO VIDE HIS LETTER DATED 24.12.2009 REQUIRED THE ASSESSEE TO EXPLAIN AS TO W HY THE ACTIVITIES OF THE LIAISON OFFICE MAY NOT BE TREATED AS BUSINESS A CTIVITY AND INCOME ATTRIBUTABLE TO INDIAN SALES MAY NOT BE TAXED ACCOR DINGLY. THE ASSESSEE WAS REQUIRED TO ARRANGE PERSONAL APPEARANCE OF MR. BERNARD LACOSTE FOR THE PURPOSE OF RECORDING THE STATEMENT. THE ASSESS EE WAS ALSO REQUIRED TO SUBMIT GLOBAL PROFIT AND LOSS ACCOUNT F OR THE YEAR ENDING DECEMBER, 2006 AND DECEMBER, 2007. IN RESPONSE TO SUCH LETTER OF THE AO THE AR OF THE ASSESSEE VIDE ORDER SHEET ENTRY DA TED 29.12.2009 ITA NO. 5914/D/2010 6 STATED THAT THE REQUISITE INFORMATION COULD NOT BE PROVIDED DUE TO CHRISTMAS & NEW YEARS HOLIDAYS. HOWEVER, THE AO T REATED THE LIAISON OFFICE OF THE ASSESSEE AS PE AND ASSESS THE ASSESSE E ACCORDINGLY. 7. IT IS THE MAIN GRIEVANCE OF THE ASSESSEE THAT IT S LIAISON OFFICE COULD NOT BE TREATED AS PE AND IT HAS NOT BEEN PROVIDED W ITH REASONABLE AND SUFFICIENT OPPORTUNITY TO REPRESENT ITS CASE, AS TH E TIME GIVEN BY AO WAS VERY SHORT AND INVOLVED HOLIDAYS ON ACCOUNT OF CHRI STMAS AND NEW YEAR. 8. AT THE OUTSET, IT WAS SUBMITTED BY LD. AR THAT I T WILL BE JUST AND PROPER, IF THE MATTER IS RESTORED BACK TO THE FILE OF AO WITH A DIRECTION TO CONSIDER THE MATERIAL PLACED BY THE ASSESSEE BEFORE DRP WHICH HAS BEEN REJECTED TO BE ADMITTED AS THE SAID ADDITIONAL EVIDENCE WILL GO TO THE ROUTE OF THE MATTER VIDE WHICH THE ASSESSEE CAN PROVE THAT ITS LIAISON OFFICE IN INDIA COULD NOT BE TREATED AS PERMANENT ESTABLISHMENT OF THE ASSESSEE. TO SUBSTANTIATE HIS ARGUMENT REGARDING NO N-GRANT OF REASONABLE OPPORTUNITY LD. AR HAS PLACED BEFORE US THE COPY OF CALENDAR FROM THE HAND BOOK ISSUED BY DIRECTORATE (R&SP) INC OME TAX DEPARTMENT FOR THE YEAR 2009. ACCORDING TO THE SAI D CALENDAR 25/12 IS A FRIDAY WHICH IS HOLIDAY ON ACCOUNT OF CHRISTMAS AND 26 & 27/12 ARE SATURDAY AND SUNDAY WHICH ARE CLOSE DAYS. 28/12 WH ICH IS MONDAY IS ALSO HOLIDAY ON ACCOUNT OF MOHARRUM FALLING ON THAT DAY AND THEREAFTER ONLY 29 TH IS THE WORKING DAY WHICH IS TUESDAY. REFERRING TO THE OBSERVATIONS OF AO FROM THE ASSESSMENT ORDER IT WAS POINTED OUT THAT THE AO ISSUED LETTER ASKING THE ASSESSEE TO EXPLAIN ON 24.12.2009 AND ITA NO. 5914/D/2010 7 THEREAFTER, UP TILL 29.12.2009 NO WORKING DAY WAS I NVOLVED AND ON 29/12 ITSELF THE AO PASSED DRAFT ORDER AND THUS, IT IS TH E CASE OF LD. AR THAT VIRTUALLY NO OPPORTUNITY HAS BEEN PROVIDED TO THE A SSESSEE BY THE AO AND IN THE CIRCUMSTANCES, IT WAS REQUIRED BY THE DR P TO ADMIT THE EVIDENCE AND TO ACCEPT THE SUBMISSION OF THE ASSESS EE THAT ASSESSEE WAS NOT GRANTED WITH PROPER OPPORTUNITY BEFORE AO P ASSED THE DRAFT ASSESSMENT ORDER. THEREFORE, LD. AR PLEADED THAT D RP HAS COMMITTED AN ERROR IN NOT ACCEPTING AND CONSIDERING THE ADDIT IONAL EVIDENCE PLACED BY THE ASSESSEE BEFORE IT WHICH WAS NECESSARY IN TH E INTEREST OF JUSTICE. HE PLEADED THAT AS THE RULES OF NATURAL JUSTICE HAV E NOT BEEN COMPLIED WITH, THE ADDITIONAL GROUND TAKEN BY THE ASSESSEE S HOULD BE ADMITTED. 9. ON THE OTHER HAND, RELYING UPON THE ORDER PASSED BY DRP IT WAS SUBMITTED BY LD. DR THAT IN VIEW OF THE OPPORTUNITI ES GIVEN BY THE AO TO THE ASSESSEE, THE ADDITIONAL EVIDENCE SOUGHT TO BE SUBMIT BY THE ASSESSEE BEFORE DRP HAS RIGHTLY BEEN REJECTED, THER EFORE, ADDITIONAL GROUND SHOULD NOT BE ADMITTED. 10. AFTER HEARING BOTH THE PARTIES AND AFTER CONSID ERING THE FACTS PLACED BEFORE US, WE ARE OF THE OPINION THAT TO APP LY THE PRINCIPLES OF NATURAL JUSTICE, IT IS NECESSARY TO ADMIT THE ADDIT IONAL GROUND RAISED BY THE ASSESSEE. ALL THE FACTS REQUIRED FOR ADMISSION OF SUCH GROUND ARE AVAILABLE ON RECORD. THEREFORE, WE ADMIT THE ADDIT IONAL GROUND AND PROCEED TO DECIDE THE PRESENT APPEAL. ITA NO. 5914/D/2010 8 11. AFTER NARRATING THE FACTS, IT WAS SUBMITTED BY LD. AR THAT IT WILL MEET THE END OF JUSTICE, IF THE MATTER IS RESTORED BACK TO THE FILE OF AO WITH A DIRECTION TO GIVE THE ASSESSEE A REASONABLE OPPORTUNITY OF HEARING AND ALSO TO PLACE ALL THE MATERIAL ON THE RECORD OF AO TO SUPPORT ITS CASE. 12. ON THE OTHER HAND, LD. DR RELYING UPON THE ASSE SSMENT ORDER AND THE ORDER PASSED BY DRP PLEADED THAT ASSESSEE WAS G IVEN REASONABLE OPPORTUNITY OF HEARING. HOWEVER, LD. DR COULD NOT CONTROVERT THE FACTUAL ASPECT AND CONTENTION OF THE ASSESSEE THAT VIRTUALL Y NO TIME WAS PROVIDED TO THE ASSESSEE AFTER THE AO ISSUED SHOW C AUSE NOTICE TO THE ASSESSEE ON 24.12.2009. 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS IN THE LIGHT OF MATERIAL PLACED BEFORE US. IT HAS BEEN DEMONSTRATE D BY THE LD. AR OF THE ASSESSEE THAT ASSESSEE WAS NOT PROVIDED WITH THE RE ASONABLE OPPORTUNITY BY THE AO AS THE SHOW-CAUSE NOTICE WAS ISSUED BY THE AO ONLY ON 24.12.2009 IT WAS SUBMITTED BY LD. AR OF TH E ASSESSEE THAT RELEVANT DETAILS COULD NOT BE OBTAINED DUE TO CHRIS TMAS HOLIDAYS AND NEW YEAR HOLIDAYS. SUCH CONTENTIONS OF THE LD. AR HAVE NOT BEEN FOUND TO BE INCORRECT. THEREFORE, IT CAN BE HELD THAT AS SESSEE WAS NOT PROVIDED WITH THE REASONABLE OPPORTUNITY TO PRESENT ITS CASE. IN ANY CASE, ASSESSMENT GOING TO BE TIME BARRED WAS TO BE FRAMED BY THE AO AND ACCORDINGLY DRAFT ORDER WAS PREPARED ON 29.12.2 009. WHEN ALL THESE FACTS WERE SUBMITTED TO DRP WITH A REQUEST TO ADMIT THE EVIDENCE ITA NO. 5914/D/2010 9 WHICH COULD NOT BE PRODUCED BY THE ASSESSEE FOR WAN T OF LACK OF OPPORTUNITY, LD. DRP SHOULD HAVE ADMITTED THOSE EVI DENCES WHICH IS NOT DONE. THEREFORE, WE FIND FORCE IN THE CONTENTION O F LD. AR THAT IT IS A FIT CASE WHERE ADDITIONAL EVIDENCE FILED BY THE ASSESSE E IS REQUIRED TO BE ADMITTED AND ASSESSEE HAS TO BE PROVIDED WITH A REA SONABLE OPPORTUNITY OF HEARING AND PLACING ALL THE MATERIAL ON RECORD O F THE AO. TO GRANT SUCH OPPORTUNITY, WE RESTORE THIS APPEAL TO THE FIL E OF AO WITH A DIRECTION TO ALLOW THE ASSESSEE A REASONABLE OPPORTUNITY OF H EARING AND ALSO TO PLACE ALL THE MATERIAL ON RECORD TO REPRESENT THE C ASE OF THE ASSESSEE. AFTER PLACING ALL THESE MATERIALS ON RECORD AND AFT ER GIVING REASONABLE OPPORTUNITY OF HEARING, THE AO WILL FRAME THE ASSES SMENT DENOVO AS PER PROVISIONS OF LAW. WE DIRECT ACCORDINGLY. 14. AS WE ARE RESTORING THIS APPEAL TO THE FILE OF AO FOR DENOVO ASSESSMENT AS PER DIRECTIONS GIVEN HEREINABOVE, WE DO NOT EXPRESS ANY OPINION ON THE MERITS AS THE SAME HAS TO BE RE-ADJU DICATE IN THE LIGHT OF AFOREMENTIONED DIRECTIONS GIVEN TO THE AO. 15. IN THE RESULT, FOR STATISTICAL PURPOSES, THE AP PEAL FILED BY THE ASSESSEE IS ALLOWED IN THE MANNER AFORESAID. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JULY, 2011. SD/- SD/- (G.E. VEERABHADRAPPA) (I.P. BANSAL ) VICE PRESIDENT JUDICIAL MEMBER DATED: 29.7.11 *KAVITA ITA NO. 5914/D/2010 10 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR