M/s. Thales Electron Devices SA, New Delhi V. Addl. DIT (International Taxation), New Delhi

ITA 6041/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 9011 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-01-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2009-2010
• Appeal Filed On: 25-11-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SATPAL GULATI
• Keywords: Principle of natural justice; Permanent establishment; Set aside
• Section: 142(1); 143(2)

Judgement Text

1 ITA NO. 6041/DEL/2016 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D NEW DELHI BEFORE MS SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER I.T.A. NO. 6041/DEL/2016 (A.Y 2009-10) M/S. THALES ELECTRON DEVICES SA, 703, A&B KONNECTUS BUILDING, 7 TH FLOOR, TOWER-C, BHAVBHUTI MARG, CANNAUGHT PLACE, NEW DELHI 110 001. (PAN : AACCT 0524 H) (APPELLANT) VS ADDITIONAL DIRECTOR OF INCOME TAX, RANGE 2, INTL. TAXATION NEW DELHI. ( RESPONDENT) APPELLANT BY SHRI V. K. AGGARWAL, A.R. SMT. SWETA BANSAL, C.A. RESPONDENT BY SHRI SATPAL GULATI, CIT-D.R. ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX [APPEALS]-43, NEW DELHI DATED 22.09.2016 FOR ASSESSMENT YEAR 2009-10. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN CONFIRMING THE ORDER OF THE LD AO WITHOUT APPRECIATING THE FACTS IN PROPER PERSPECTIVE. 2. THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN CONFIRMING THE ADDITION OF RS 27,34,302/- MADE BY THE LD. AO BY HOLDING THAT THE LIAISON OFFICE IS PE OF TED, FRANCE. 3. THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN CONSIDERING THE FACTS OF A. Y. 2007-08 WHEREIN TWO INDIAN CLIENTS STATED THAT SH. D. S. DUGGAL, THE COUNTRY DIRECTOR, WAS INVOLVED IN THE NEGOTIATION AND COMPLETELY IGNORING THE FACT THAT NOT EVEN A DATE OF HEARING 02.01.2020 DATE OF PRONOUNCEMENT 14.01.2020 2 ITA NO. 6041/DEL/2016 SINGLE CLIENT HAS SAID SO DURING THIS YEAR. 4. THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN HOLDING THAT ARRANGING VISITS OF VISITING TECHNICAL PERSONNEL FROM HEAD OFFICE AND ACCOMPANYING THEM AMOUNTS TO COMMERCIAL NEGOTIATION WITH THE CUSTOMERS. 5. THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN HOLDING THAT THE LIAISON OFFICE WAS NOT INVOLVED MERELY IN LIAISON OFFICE ACTIVITIES. 6. THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN HOLDING THAT THE SUPPLIES WERE RECEIVED BY THE INDIAN CLIENTS THROUGH SH. D S. DUGGAL WITHOUT ANY SUCH EVIDENCE. 7. THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN HOLDING THAT RBI APPROVAL FOR EXTENSION OF THE LIAISON OFFICE DOES NOT MEAN THAT THE LIAISON OFFICE HAS NOT CARRIED OUT NON PERMITTED ACTIVITIES. 8. THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN HOLDING THAT THE FACTS OF THE APPELLANTS CASE ARE DIFFERENT THAN THOSE OF CASE LAWS, WITHOUT EVEN POINTING OUT ANY SUCH FACTS. 9. WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN CONFIRMING THE ATTRIBUTION OF PROFITS TO LIAISON OFFICE @ 20% OF THE EXPENSES. 10. WITHOUT PREJUDICE TO THE ABOVE, THE LD CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN CONFIRMING THE ALLOCATION OF PROFITS BY NOT FOLLOWING THE METHOD ADOPTED IN THE EARLIER YEARS WHERE GLOBAL ACCOUNTS WERE CONSIDERED. 11. THE LD. CIT(A) HAS GROSSLY ERRED ON FACTS AS WELL AS IN LAW IN HOLDING THAT NO ACCOUNTS WERE MADE AVAILABLE IGNORING THE FACT THAT GLOBAL ACCOUNTS WERE BEFORE THE LD. AO AS WELL AS BEFORE THE LD. C1T(A). 12. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, MODIFY AND WITHDRAW ANY GROUNDS BEFORE OR DURING THE COURSE OF APPELLATE PROCEEDINGS. 3. THE ASSESSEE-COMPANY IS A LEADING DEFENCE CONTRACTOR AND A MAJOR PLAYER IN CIVIL AND COMMERCIAL MARKETS AROUND THE WORLD. ITS BUSINESS ARE ORGANIZED BY MARKET SEGMENT - AEROSPACE & SPACE, DEFENCE AND SECURITY. APPLYING ITS DISTINCTIVE MODEL OF MULTI DOMESTIC DEVELOPMENT, THALES HAS EXPANDED FROM 3 ITA NO. 6041/DEL/2016 FRANCE INTO THE REST OF EUROPE, AMERICA AND ASIA-PACIFIC REGION, AND IS PURSUING ITS GROWTH STRATEGY IN PROMISING NEW MARKETS ALL OVER THE WORLD. THALES HAS ALWAYS BEEN A MAJOR EXPORTER, AND GENERATES CLOSE TO 80% OF ITS REVENUES OUTSIDE FRANCE. THALES ELECTRON DEVICES SA DEVELOPS AND PRODUCES TRAVELLING WAVE TUBES. THESE ARE USED PRIMARILY FOR SPACE-RELATED APPLICATIONS AND ALSO FOR A NUMBER OF MILITARY APPLICATIONS SUCH AS RADAR. IN INDIA, THALES ELECTRON DEVICES SA HAS SUPPLIED TRAVELLING WAVE TUBES AND OTHER XRI TUBES TO MEDICAL EQUIPMENT COMPANIES FOR X-RAY AND SIMILAR MACHINES. THE ASSESSEE BEING A LIAISON AND REPRESENTATIVE OFFICE OF A FOREIGN ENTITY DULY APPROVED BY THE RESERVE BANK OF INDIA, AS PER THE CONTENTIONS OF THE ASSESSEE NO MANUFACTURING, TRADING, COMMERCIAL OR INDUSTRIAL ACTIVITY WAS CARRIED OUT DURING THE RELEVANT PERIOD UNDER CONSIDERATION. THE ENTIRE EXPENSES OF THE ASSESSEE FOR ITS LIAISON ACTIVITIES IN INDIA WERE MET EXCLUSIVELY OUT OF THE FUNDS RECEIVED FROM ABROAD THROUGH ITS PARENT, I.E. THALES FRANCE. THE FOLLOWING REVENUE WERE SHOWN DURING THE PREVIOUS YEAR AS SALES DIRECTLY MADE BY THALES ELECTRON DEVICES SA TO ITS INDIAN CUSTOMERS; S. NO. PARTICULARS AMOUNT IN EURO 1. UNITHERM INDUCTOWELD 1,73,573 2. PHILIPS ELECTRONICS INDIA LTD. 1,83,850 3. BHARAT ELECTRONICS LTD. 3,18,000 4. ALLENGERS MEDICAL SYSTEMS LTD. 6,34,170 5. PHILIPS ELECTRONICS INDIA LTD. 8,13,371 6. BHARAT ELECTRONICS LTD. 11,59,035 7. BHARAT ELECTRONICS LTD. 18,75,174 8. OTHER MISCELLANEOUS PARTIES 21,06,259 TOTAL 72,63,432 THE ASSESSEE HAS NOT OFFERED THESE SALES FOR TAXATION. 4. THE ASSESSEE FILED ITS RETURN OF INCOME FOR A.Y. 2009-10 ON 30.09.2009, DECLARING TOTAL INCOME AT NIL. RETURN OF INCOME WAS PROCESSED U/S 143(1). NOTICE U/S 143(2) WAS ISSUED ON 21.09.2010 WHICH WAS DULY SERVED ON ASSESSEE. NOTICES U/S 142(1) AND THE DETAILED QUESTIONNAIRE WERE ISSUED AND SERVED. IN RESPONSE TO WHICH CA & AUTHORIZED REPRESENTATIVE OF THE ASSESSEE 4 ITA NO. 6041/DEL/2016 APPEARED FROM TIME TO TIME. THE ASSESSING OFFICER HELD THAT SINCE IN A.Y. 2007- 08, THE LO IS ACTIVELY ENGAGED IN COMMERCIAL ACTIVITIES AS PE IN INDIA, THE EXPENSES OF LO DOES NOT JUSTIFY THE ACTIVITIES CONTENDED TO BE UNDERTAKEN BY THE LO. THE SPECIFIC RESPONSE OF THE ASSESSEE WAS SOUGHT ON THE ACTIVITIES UNDERTAKEN BY THE LO DURING THE PREVIOUS YEAR UNDER CONSIDERATION. BUT THE ASSESSEE HAS NOT GIVEN ANY REPLY TO THAT EXTENT TO THE ASSESSING OFFICER AS REGARDS TO DETAILS, CORRESPONDENCES, EMAILS REGARDING TECHNICAL DISCUSSIONS WITH CUSTOMERS WHERE LO WAS INVOLVED AND THE PURPOSE OF VISIT OF CUSTOMERS FROM BARC & SAMEER TO FRANCE HEAD QUARTERS AND ALSO THE PURPOSE OF RADAR SYMPOSIUM AT BANGALORE. THE ASSESSING OFFICER GAVE A FINDING THAT THE PRESENCE OF EXPATS FOR AN INSIGNIFICANT PERIOD IN INDIA, BUSINESS MODEL AND POLICIES FOLLOWED BY THE HO AND FINDING RECORDED IN THE A.Y.2007-08, THE LO IS ACTIVELY INVOLVED IN THE BUSINESS / COMMERCIAL ACTIVITIES AND CONSTITUTE PE. THEREFORE, THE SALES MADE TO CLIENTS IN INDIA ARE EFFECTIVELY CONNECTED TO THE PERMANENT ESTABLISHMENT. AS REGARDS ATTRIBUTION OF PROFIT THE ASSESSING OFFICER HELD THAT THE ADDITION OF A MARKUP OF 20% ON THE TOTAL COST OF LO AT RS. 1,36,77,151/- SHOULD BE TREATED AS A BASE AND MARKUP OF 20% IS APPLICABLE ON IT AFTER ALLOWING CORRESPONDING EXPENSE DEDUCTION AND AN AMOUNT OF RS.27,34,302/- IS ADDED TO THE RETURN INCOME. 5. THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER AS WELL AS CIT(A) HAS CONFIRMED THE ADDITION ON THE BASIS OF THE FINDINGS GIVEN IN A.Y. 2007-08. THE LD. AR FURTHER SUBMITTED THAT THE TRIBUNAL IN A.Y. 2007-08 BEING ITA NO.5460/DEL/2010 VIDE ORDER DATED 07.11.2019 DELETED THE ADDITION ON THE ACCOUNT THAT NO AMOUNT OR INCOME HAS ACCRUED TO LO IN INDIA IN THAT PARTICULAR YEAR I.E. 2007-08 AND LO HAS NOT DEDUCTED IN TRADING OR BUSINESS ACTIVITIES INDEPENDENTLY. THEREFORE, AUTHORITIES BELOW WERE NOT JUSTIFIED IN HOLDING THAT ASSESSEE MAINTAINED PE IN INDIA. HENCE, 50% OF ITS INCOME WAS NOT PROPERLY TAXED IN INDIA AND THUS NO INCOME IS TAXABLE IN THE HANDS OF THE ASSESSEE AND THE SAME IS NOT CHARGEABLE TO TAX IN INDIA. THE LD. AR SUBMITTED 5 ITA NO. 6041/DEL/2016 THAT THE ISSUE BEFORE A.Y. 2009-10 IS ALSO SIMILAR AND THEREFORE THE ORDER OF THE CIT(A) SHOULD BE SET ASIDE. 6. THE LD. DR SUBMITTED THAT THE PARTICULAR TRANSACTIONS WHICH TOOK PLACE IN A.Y. 2009-10 HAS NOT BEEN DENIED BY THE ASSESSEE AT ANY POINT OF TIME. IN FACT, THE ASSESSEE IS ONLY RELYING THAT THE ISSUE IS IDENTICAL IN A.Y. 2007-08, THEREFORE THE APPEAL SHOULD HAVE BEEN ALLOWED BY THE CIT(A). BUT EACH ASSESSMENT YEAR HAS DIFFERENT SET OF FACTS. IN FACT, THE TRIBUNAL HAS GIVEN THE FINDING THAT THE LETTERS AND EVIDENCE WHICH WERE PRODUCED BEFORE THE REVENUE AUTHORITIES WERE NOT BELONGING TO A.Y. 2007-08. IN PRESENT ASSESSMENT YEAR THE ASSESSING OFFICER HAS GIVEN A CATEGORICAL FINDING THAT THE PARTICULAR LETTERS BELONGS TO A.Y. 2008-09. THE ASSESSEE DELIBERATELY KEPT SILENCE AND HAS NOT GONE INTO THE DETAILS AND DID NOT REPLY AT ALL BEFORE THE ASSESSING OFFICER AS WELL AS THE CIT(A). THE LD. DR RELIED UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF G.E. ENERGY PARTS INC. VS. CIT 2019-TII-01-HC-DEL-INTL. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIALS AVAILABLE ON RECORD. AS PER THE CONTENTIONS OF THE LD. AR, WE HAVE GONE THROUGH THE ORDER OF THE TRIBUNAL IN A.Y. 2007-08 IN ASSESSEES OWN CASE. FROM THE PERUSAL OF ORDER OF THE TRIBUNAL IN A.Y. 2007-08, IT IS SEEN THAT THE LETTERS REFERRED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER FOR A.Y. 2007-08 ISSUED BY SHRI D. S. DUGGAL DO NOT PERTAIN TO SAID ASSESSMENT YEARS. THIS FINDING IS GIVEN IN THE ORDER OF THE TRIBUNAL IN PARA 6.1 (PAGE 24). FURTHER IN A.Y. 2007-08, THE TRIBUNAL HAS GIVEN FINDING THAT NO AMOUNT OR INCOME HAS ACCRUED TO THE LIAISON OFFICE (LO) IN INDIA AND THE SAID OFFICE HAS NOT CONDUCTED ANY TRADING OR BUSINESS ACTIVITIES INDEPENDENTLY. IN THE PRESENT ASSESSMENT YEAR I.E. A.Y. 2008-09, THE ASSESSING OFFICER AS WELL AS THE CIT(A) HAVE PROCEEDED ON THE BASIS OF ASSESSMENT ORDER FOR A.Y. 2007-08. IN PRESENT ASSESSMENT YEAR THE ASSESSING OFFICER HAS GIVEN A CATEGORICAL FINDING THAT THE PARTICULAR LETTERS BELONGS TO A.Y. 2008-09. BUT THERE IS NO SEPARATE FINDINGS WERE GIVEN AS TO WHETHER THE INCOME OR AMOUNT ACCRUED TO THE LIASION OFFICE OR 6 ITA NO. 6041/DEL/2016 NOT IN THIS PARTICULAR YEAR AND WAS NOT INQUIRED BY THE ASSESSING OFFICER AS WELL. THUS, WE FIND THAT THE FACTS OF THE PRESENT ASSESSMENT YEAR ARE DISTINGUISHABLE TO THE FACTS OF A.Y. 2007-08. THE ASSESSEE HAS NOT ESTABLISHED THAT THE LETTERS WHICH WERE MENTIONED IN THE ASSESSMENT ORDER DO NOT BELONG TO A.Y. 2008-09. THE RELEVANCE OF THESE LETTERS HAS NOT BEEN ELABORATELY DISCUSSED BY THE ASSESSING OFFICER AS WELL TO ESTABLISH THAT THE INCOME ACCRUED TO THE LIASION OFFICE OR NOT. THEREFORE, IT WILL BE APPROPRIATE TO REMAND BACK THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR GIVING MORE APT FINDINGS IN RESPECT OF THE LETTERS WHICH BELONGS TO A.Y. 2008-09 AND GIVE A DETAILED REASONS ON THE BASIS OF THE DOCUMENTARY EVIDENCE WHETHER THE ACTIVITIES OF LO IN INDIA CONSTITUTE PE OR NOT. NEEDLESS TO SAY, THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING BY FOLLOWING PRINCIPLES OF NATURAL JUSTICE. THUS, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 8. IN RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH DAY OF JANUARY, 2020 . SD/- SD/- (PRASHANT MAHARISHI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 14/01/2020 PRITI YADAV, SR. PS * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 7 ITA NO. 6041/DEL/2016 DATE OF DICTATION 0 6 . 01 .20 20 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 0 7 .01.2020 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 1 4 .01.2020 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS 1 4 .01.2020 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 1 4 .01.2020 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 1 4 .01.2020 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 1 4 .01.2020 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 1 4 .01.2020 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK