Director Of Income Tax v. Mitsui & Co. Ltd

$~R5,57 *IN THE HIGH COURT OF DELHI AT NEW DELHI R5 +ITA 13/2005 DIRECTOR OF INCOME TAX ..... AppellantThrough:Mr.RahulChaudhary,SeniorStandingCounsel.versus..... RespondentThrough:Mr.MayankNagi,Mr.TarunSingh,Advocates. MITSUI & CO. LTD. R57+ITA 334/2005 DIRECTOR OF INCOME TAX..... AppellantThrough:Mr.RahulChaudhary,SeniorStandingCounsel.versus MITSUI & CO. LTD. ..... RespondentThrough:Mr.MayankNagi,Mr.TarunSingh,Advocates. CORAM:JUSTICE S.MURALIDHARJUSTICE PRATHIBA M. SINGH O R D E R%27.07.2017 ITA Nos. 13 and 334 of 2005 Dr. S. Muralidhar, J.: 1. Common questions of law arise for determination in these two appealsfiled by the Revenue under Section 260A of the Income Tax Act, 1961(‘Act’). Questions of law 2. ITA 13 of 2005 is directed against an order dated 31st March, 2004passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No.5836/Del/1998 for the Assessment Year (AY) 1995-96. While admitting thisappeal on 3[rd]February 2005, this Court framed the following questions oflaw for consideration: “1. Whether the Tribunal was right in holding that theIndian branches/offices of the assessee company andtheir activities cannot be regarded as permanentestablishment of the assessee in India and incomedirectlyorindirectlyattributabletothesebranches/offices is not taxable in India? 2. Whether the Tribunal was right in law in holdingthattheassesseecompanydoesnothaveanypermanent establishment in India and its income frombusiness turnover/imports in India was exempt in viewof Agreement for Avoidance for Double Taxationbetween Indian and Japan?” 3. ITA 334 of 2005 is directed against an order dated 12[th]October, 2004passed by the ITAT in ITA No. 4095/Del/1998 for AY 1994-95. Whileadmitting this appeal on 10[th]May 2005, this Court framed the followingquestion of law for consideration: “Whether the Income Tax Appellate Tribunal wascorrect in holding that the assessee company is not ITA Nos. 13 and 334 of 2005 having permanent establishment in India and thereforeexempt under the provisions of the agreement forAvoidance of Double Taxation between India andJapan?” Facts relevant to AY 1994-95 4. The facts relevant to AY 1994-95 are that the Respondent/Assessee is anon-resident company having its headquarters in Japan. The Assessee hadtwo projects in India viz., the Anpara Thermal Power Project of the UPSEB(‘Anpara Power Project’) and the New Delhi Cable Project of DESU(‘DESU Power Project’). In its return filed for the AY in question on 30[th]November, 1994 the Assessee declared a total income of Rs. 10,68,10,369.The Assessee disclosed an income of Rs. 6,57,28,814 from the AnparaPower Project and a loss of Rs. 1,28,57,065 from the DESU Power project.Subsequently, a revised return was filed by the Assessee on 25[th]May, 1995declaring an income of Rs. 8,69,34,500. The AO's order for AY 1994-95 5. The return was picked up for scrutiny and an assessment was framed at atotal taxable income of Rs. 10,69,55,975 by the Assessing Officer (AO)order dated 25[th]March, 1997 under Section 143 (3) of the Act. The said totaltaxable income was arrived at by making an addition of Rs. 28,52,899 afterconcluding that the Assessee had a Permanent Establishment (PE) in Indiawithin the meaning of the Indo-Japanese Double Taxation AvoidanceAgreement (‘DTAA’). 6. During the assessment proceedings, a questionnaire was issued to the Assessee. An Authorized Representative (AR) of the Assessee appearedbefore the AO to provide the necessary details. The AO noted that theAssessee had a Liaison Office (‘LO’) in India which, according to the AO,helped the Assessee in finding new purchasers and sellers of goods andmerchandise. The Assessee had contended before the AO that the conditionsimposed upon it by the Reserve Bank of India (‘RBI’) permitting it to havean LO in India i.e. to not carry on any trading, commercial or industrialactivity from such LO, was fully complied by it. 6. During the assessment proceedings, a questionnaire was issued to the Assessee. An Authorized Representative (AR) of the Assessee appearedbefore the AO to provide the necessary details. The AO noted that theAssessee had a Liaison Office (‘LO’) in India which, according to the AO,helped the Assessee in finding new purchasers and sellers of goods andmerchandise. The Assessee had contended before the AO that the conditionsimposed upon it by the Reserve Bank of India (‘RBI’) permitting it to havean LO in India i.e. to not carry on any trading, commercial or industrialactivity from such LO, was fully complied by it. 7. The Assessee maintained before the AO that the said LOs merelyprovided information to the overseas offices and, therefore, the Assessee haddeclared Nil income in respect of its liaison activity in India. The Assesseealso contended that in AYs 1980-81 and 1981-82, the issue concerning thetaxability of a liaison activity had been decided in favour of the Assessee bythe ITAT holding that the LO could not be treated as PE in India within themeaning of the DTAA. 8. The AO noted that during the assessment proceedings, a Survey wasundertaken on 14[th]May, 1997 on the Assessee’s premises under Section 133A of the Act. In the assessment proceedings, one Mr. M.P. Adhikari,Manager (Accounts) appeared and pointed out that each of the projects atthe DESU and Anpara Power Projects had separate Project Offices (POs).The PO of the DESU Power Project was closed upon completion of theproject. Mr Adhikari stated that the books of accounts of the DESU PowerProject would be in the warehouse somewhere but the person concerned,viz., Mr. David would be able to give the details about them. He claimed ITA Nos. 13 and 334 of 2005 Page 4 of 24 that he had no knowledge regarding the whereabouts of the books and statedthat he would have to check with the concerned department of the HeadOffice that was in Tokyo. The books of accounts were, subsequently,produced by the Chartered Accountant (CA) appearing on behalf of theAssessee. 9. The Chief Representative of the Assessee in India, Mr. T. Ishibashi had aresidential accommodation at 28A, Prithviraj Road, New Delhi. The AOnoted that he looked after the entire operation of the LO at Le Meridien aswell as the POs as and when the projects came up. Another factor whichweighed with the AO to arrive at this conclusion was that the details of thetelephone expenses of the DESU Power Project showed that some partthereof pertained to the LO. The AO concluded: "Therefore, it is verydifficult to say that the liaison office is totally separated from the projectoperations, the imports and exports done by Mitsui & Co. etc.” 10. As regards the decision of the ITAT for the earlier AYs, the AO notedthat they did not involve income from the projects. The AO also noted thatthe Assessee had offered its income from the Anpara Power Project to taxunder Section 44BBB of the Act by taking the profit at 10% of the entirevalue of the contract. However, the income of the DESU Cable Project hadnot been offered to tax on a similar basis. The explanation offered by theAssessee in this regard was not accepted by the AO. Interestingly, theAssessee contended that Article 7 of the DTAA would prevail over Section44BBB of the Act. This was negated by the AO while recording that theAssessee should follow one method of taxing the income. Consequently, the ITA Nos. 13 and 334 of 2005 Page 5 of 24 income from the DESU Power Project was also held to be taxable by the AOunder Section 44BBB of the Act by taking the profit at 10% of the totalturnover. Accordingly, Rs. 43, 11,511 was added to the Assessee's incomeand the loss of the DESU Power Project claimed as Rs. 1,28,57,065 wasdisallowed. The CIT (A)'s order for 1994-95 11. The Assessee's appeal was partly allowed by the Commissioner ofIncome Tax (Appeal) [‘CIT(A)’] by an order dated 29[th]May 1998. On thequestion of the LO being a PE, the CIT (A) held that: ITA Nos. 13 and 334 of 2005 Page 5 of 24 income from the DESU Power Project was also held to be taxable by the AOunder Section 44BBB of the Act by taking the profit at 10% of the totalturnover. Accordingly, Rs. 43, 11,511 was added to the Assessee's incomeand the loss of the DESU Power Project claimed as Rs. 1,28,57,065 wasdisallowed. The CIT (A)'s order for 1994-95 11. The Assessee's appeal was partly allowed by the Commissioner ofIncome Tax (Appeal) [‘CIT(A)’] by an order dated 29[th]May 1998. On thequestion of the LO being a PE, the CIT (A) held that: (i) The Assessee had been acting in strict compliance with the conditionsstipulated by RBI under Section 29 of the Foreign Exchange Regulation Act,1973 (FERA). In AY 1981-82, this aspect had been examined in detail and aSpecial Bench of the ITAT had held in favour of the Assessee in its decisionin Inspecting Assistant Commissioner v. Mitsui & Co. Ltd. [1991] 39 ITD59 (Del) (SB). The Special Bench held that the LOs/Branches of theAssessee were merely concerned with liaison work. Therefore, theprovisions of Section 9 (1) of the Act, as it then stood, would not apply tothe Assessee and no part of its income from such LOs/Branches wasassessable in India. This order was upheld by the CIT (A)for AY 1993-94. (ii) In the survey under Section 133 A of the Act in the LO, no books ofaccounts relating to the projects of the company were found in the saidpremises. Further, although, Mr. Adhikari, Manager (Accounts) hasmentioned that the books of accounts might be in the warehouse, the ITA Nos. 13 and 334 of 2005Page 6 of 24 maintenance of such a warehouse by the Assessee could not be proved bythe AO. The fact that Mr. Ishibashi was looking after the LO as well as thePO did not in any way alter the position with regard to the maintenance ofthe LOs by the Assessee. “There was no rule in the Income Tax Law thatone person could not supervise the LO work as well as the work of the PO” (iii) No facts were marshalled by the AO in support of his conclusion thatthe LO was not totally separated from the POs. Considering that separateoffices were maintained by the Assessee with regard to the project work andin view of the Article 5 (ii) of the DTAA, the AO had not been able to provethat the Assessee maintained either a place of management, branch office,factory, warehouse etc. Further, since the Assessee was showing the incomefrom the project work separately, the question of treating the income fromthe project as that of the LO was not proper. 12. It should be noted here that the reference sought by the Revenue againstthe aforementioned decision of the Special Bench of the ITAT was returnedunanswered by this Court by order dated 31[st]August, 2007 in ITR 326-327of 1992 on the ground that the Revenue failed to file paper-books despite alapse of 15 years. Likewise, as regards the orders for AY 1982-83, 1985-86,the reference was returned unanswered by this Court by order dated 10[th]March, 2007. 13. As regards the other issue regarding bringing to tax the profits of theDESU Power Project in terms of Section 44BBB of the Act, the CIT (A)observed: 12. It should be noted here that the reference sought by the Revenue againstthe aforementioned decision of the Special Bench of the ITAT was returnedunanswered by this Court by order dated 31[st]August, 2007 in ITR 326-327of 1992 on the ground that the Revenue failed to file paper-books despite alapse of 15 years. Likewise, as regards the orders for AY 1982-83, 1985-86,the reference was returned unanswered by this Court by order dated 10[th]March, 2007. 13. As regards the other issue regarding bringing to tax the profits of theDESU Power Project in terms of Section 44BBB of the Act, the CIT (A)observed: “On going through the assessment record I find that asper the letter dated 24.5.94 of DESU it was confirmedthat the supply and erection of 220 KV XPLE Cableand accessories between I.P. Extension and Park StreetSub-Stns. was turn- key project. Subsequently thoughthe DESU had issued another letter in this connection,the fact remains that the original letter did mention andthe content of the project explaining this position thatthis project is a turn-key project. Moreover, thecontention of the AR that the Exim Bank was fundingthe main Mitsui Company and was not directly fundingdoes not make much difference in the situation becausethe appellant company is a part of the main company,whichwas receiving aidfrom theExim Bank.Therefore, I agree with the AO, that the project wasfinanced under an international aid programme. Evenas the AR contended before me that the project was notapproved as a 'Project' by the Department of Power,Ministry of Energy, Government of India; the factremainsthattheprojectwasapprovedbytheGovernment of India; Ministry of Energy (Departmentof Power) on 25th March, 1991. So, all the conditionsthat are laid down u/s 44BBB are satisfied by theappellant company with regard to this project. So, theAO is perfectly justified in taxing the income from thepower project u/s 44BBB and no interference is calledfor on this account.” The ITAT's order 14. Aggrieved by the above order, the Revenue went in appeal before theITAT. By the impugned order dated 12[th]October, 2004, the ITAT dismissedthe said appeal. The ITAT noted that only two grounds were raised by theRevenue, before it, which were that the CIT (A) erred in holding that: “1. That the Assessee company is not having a ITA Nos. 13 and 334 of 2005 permanent establishment in India and was, therefore,exemptundertheprovisionsofagreementforavoidance of double taxation between India & Japanand 2. That the Assessee Company is not liable to tax u/s9(1)(vi)(1) of the Income Tax Act, 1961 because it isnot having any business connection in India.” 15. By the impugned order dated 12th October 2004 ITAT held that bothissues stood answered against the Revenue by its earlier order dated 4[th]June,2002 in ITA 2939/Del/97 which pertained to AY 1993-94 and the orderpassed by the Special Bench reported in 53 lTD 59. A perusal of theimpugned order reveals that the DR did not controvert the above positionbut supported the order of the AO. Grounds in ITA 334 of 2005 16. In the appeal filed before this Court by the Revenue for the AY 1994-95i.e. ITA 334/2005, the grounds that have been highlighted by Mr RahulChaudhary, learned Senior Standing counsel for the Revenue are: “II. Because the Assessee had permanent establishmentin India. III. Because the Assessee is carrying on businessthrough its branch offices. IV. Because the provision of FERA and letter of RBIcannot be used as proof and evidence to determine anddecidewhethertheAssesseehadpermanentestablishment in India or not. V. Because the term “permanent establishment’ has been given broad and wide definition in DTAAbetween India and Japan. It includes an office or abranch or a premises used for receiving or solicitingorders. VI. Because the Assessee had admitted having businessturnover, importing goods and selling them in India.This Income was taxable in India as Assessee hadpermanent establishment in India. “II. Because the Assessee had permanent establishmentin India. III. Because the Assessee is carrying on businessthrough its branch offices. IV. Because the provision of FERA and letter of RBIcannot be used as proof and evidence to determine anddecidewhethertheAssesseehadpermanentestablishment in India or not. V. Because the term “permanent establishment’ has been given broad and wide definition in DTAAbetween India and Japan. It includes an office or abranch or a premises used for receiving or solicitingorders. VI. Because the Assessee had admitted having businessturnover, importing goods and selling them in India.This Income was taxable in India as Assessee hadpermanent establishment in India. VII. Because the Ld. ITAT for the AYs 1978-79 and1979-1980 has held that the Assessee had permanentestablishment in India. VIII. Because the Assessee had been functioning andcarrying on business through its branch offices. It wasincurring huge establishment expenses and carrying ontrading activities. IX. Because the Assessee had carried on businessthrough a permanent establishment in India and profitsdirectly or indirectly attributable to the permanentestablishment were taxable in India. XIX. Because the ITAT failed to appreciate thesignificance and importance of Article 5(4) of theDTAA that had been applied by the AO in the presentcase.” 17. Interestingly, although in Ground II and elsewhere in the appeal, areference is made to the “Branch Offices” of the Assessee, it was nobody’scase, and definitely not for the AY in consideration, that the Assessee hadany “Branch office” which was a PE. The appeal concerning AY 1995-96 ITA Nos. 13 and 334 of 2005 18. ITA 13 of 2005 is concerned with AY 1995-96. The basic facts are notdifferent in this appeal. The Assessee filed its return of income for AY1995-96 on 30[th]November, 1995 declaring a total income of Rs.33,88,97,808. The Assessee had shown an income of Rs. 9,14,38,792 fromthe Anpara Power Project and a loss of Rs. 3,74,94,374 in respect of theDESU Power Project. 19. By the assessment order dated 23[rd]March, 1998 the AO held that theAssessee's LO constituted a PE in India and, accordingly, on proportionatebasis, an income of Rs.54,57,627 was added to its taxable income in India.The AO basically followed the same approach as in the assessment order forAY 1994-95. The loss claimed for the DESU power project was disallowedand 10% of the turnover therefrom was added as income by invokingSection 44 BBB of the Act. 20. The CIT(A) by order dated 25[th]September, 1998 partly allowed theappeal filed by the Assessee following the order passed by the CIT(A) on29[th]May, 1998 for AY 1994-95. The corresponding order dated 31st March2004 of the ITAT upheld the order of the CIT (A). One question of law, asextracted hereinbefore, was framed by the Court for consideration. Submissions of counsel for the Revenue 21. Mr. Rahul Chaudhary, learned Senior Standing counsel for the Revenue,took the Court through the provisions of the first DTAA between India andJapan which was entered into on 5[th]January, 1960 and pointed out thedistinction in the definition of PE contained therein when compared to ITA Nos. 13 and 334 of 2005 Page 11 of 24 subsequent DTAA entered into between the two countries on 1[st]March,1990 and as amended from time to time. 22. Mr. Chaudhary advanced two lines of argument. The first was that theLO of the Assessee constituted a PE. He attempted an alternate submissionthat even assuming that the LO was not a PE, then the POs of the Assesseeshould be treated as PE themselves and, therefore the income of theAssessee was taxable under Section 9 of the Act. 21. Mr. Rahul Chaudhary, learned Senior Standing counsel for the Revenue,took the Court through the provisions of the first DTAA between India andJapan which was entered into on 5[th]January, 1960 and pointed out thedistinction in the definition of PE contained therein when compared to ITA Nos. 13 and 334 of 2005 Page 11 of 24 subsequent DTAA entered into between the two countries on 1[st]March,1990 and as amended from time to time. 22. Mr. Chaudhary advanced two lines of argument. The first was that theLO of the Assessee constituted a PE. He attempted an alternate submissionthat even assuming that the LO was not a PE, then the POs of the Assesseeshould be treated as PE themselves and, therefore the income of theAssessee was taxable under Section 9 of the Act. 23. Mr. Chaudhary reiterated the reasons that weighed with the AO inholding that the LO should be considered to bePE. First, the books ofaccounts of the POs were found in the warehouse of the Assessee. Secondly,Mr. Ishibashi was managing both the LO as well as the POs and thirdly, ananalysis of the telephone expenses of the POs showed that some part thereofpertained to the LO. Mr Chaudhary also laid emphasis on the fact that underArticle 5(6) (e), it is only where the maintenance of such LO is solely for thepurposes of an activity of preparatory or auxiliary character, it wouldexempt it from being considered as PE. According to him, since theAssessee has been carrying on business in India for several years, and hasexecuted several projects, no longer can the LO be considered to be only aplace where the activity of preparatory or auxiliary character is carried out.He submitted that once, it was clear that there was a PE in India then thereshould be no difficulty in attributing the profits of the POs as well apercentage of the global income to such PE in terms of the Article 7 ofDTAA, particularly, when Article 7 (1) permitted attribution of profits both‘directly’ or ‘indirectly’ to the PE. This according to him was different from ITA Nos. 13 and 334 of 2005 Page 12 of 24 Submissions of learned counsel for the Assessee 24. Mr. Mayank Nagi, learned counsel for the Assessee, on the other handplaced reliance on the earlier decision of the Special Bench of the ITAT forthe earlier AYs where these very issues were examined with reference to thespecific clauses of the DTAA. He points out that order of the Special Benchhas attained finality since the reference sought by the Revenue was returnedunanswered by this Court. He also placed reliance on the decision of thisCourt in National Petroleum Company Construction v. Director of IncomeTax (International Taxation) 2016 (383) ITR 648 (Del) where a similarclause in the DTAA between India and UAE was interpreted by this Court.Emphasis was placed on a collective reading of Articles 5 (1) and 5 (2) ofthe DTAA. Reliance was also placed by the order passed by the ITAT inD.C.I.T v. M/s Sofema SA (order dated 5[th]May, 2006 in ITA No.3900/D/2002) which was affirmed by this Court by its order dated 18[th]December, 2006 in ITA No. 1764/2006. This was further affirmed by theSupreme Court by an order dated 26[th]August, 2008 in Civil Appeal5260/2008 (Director of Income Tax, New Delhi XVII v. Sofema SA, NewDelhi). 25. Mr. Nagi submitted that the factual foundation for determining that theLO of the Assessee was a PE was not laid by the Revenue in the presentcase. According to him the conclusion drawn by the AO was based purelyon surmises and conjectures. He placed reliance on the decision inMinakshiammal v. Chandrasekaran (2005) 1 SCC 280 which cited with ITA Nos. 13 and 334 of 2005Page 13 of 24 approval the observations in R. v. Hodge 168 ER 1136. He submitted that inview of the mandate of the RBI, there was no question of on any business ortrade being carried on in the LO. 25. Mr. Nagi submitted that the factual foundation for determining that theLO of the Assessee was a PE was not laid by the Revenue in the presentcase. According to him the conclusion drawn by the AO was based purelyon surmises and conjectures. He placed reliance on the decision inMinakshiammal v. Chandrasekaran (2005) 1 SCC 280 which cited with ITA Nos. 13 and 334 of 2005Page 13 of 24 approval the observations in R. v. Hodge 168 ER 1136. He submitted that inview of the mandate of the RBI, there was no question of on any business ortrade being carried on in the LO. 26. Mr Nagi submitted that the onus of showing existence of PE lay on theRevenue. Inter alia, reliance was placed on a decision Northern Network v.DIT 386 ITR 353 Del. He pointed out that during 30 years of the Assessee'sfunctioning, the RBI has not found the LO to have violated any of theconditions on which, the Assessee was permitted to run such LO. Mr Nagipointed out that the Survey conducted by the Revenue was not relevant toAYs 1994-95 and 1995-96. Lastly, he pointed out that no ground that theimpugned order of the CIT(A) or the ITAT suffered from perversity wasurged by the Revenue in either appeal. Alternative ground not permitted 27. As regards the alternative ground urged by the Revenue viz., that evenassuming that the LO was not a PE, then the POs of the Assessee should betreated as PE themselves ,the Court finds not a single ground anywhere inthe two appeals that reflect the above alternative argument. It does notappear to have been urged by the Revenue before the AO, or the CIT(A) oreven before the ITAT. The Court declines to permit the Revenue at the stageof final arguments in these appeals to urge such a ground for the first time. Provisions of the DTAA 28. Before beginning to discuss the central issue viz., whether the LO of theAssessee was during the AYs in question a PE, the provisions of the DTAA ITA Nos. 13 and 334 of 2005Page 14 of 24 require to be examined. Article 5 of the DTAA reads as under: “1. For the purposes of this Convention, the term‘permanent establishment’ means a fixed place ofbusiness through which the business of an enterprise iswholly or partly carried on. 2.Theterm‘permanentestablishment’includesespecially: (a)a place of management; (b)a branch;(c)an office;(d)a factory;(e)a workshop;(c)an office;(d)a factory;(e)a workshop; (f)a mine, an oil or gas well, a quarry or anyother place of extraction of natural resources;other place of extraction of natural resources; (g)a warehouse in relation to a person providingstorage facilities for other;storage facilities for other; (h)a farm, plantation or other place whereagriculture, forestry, plantation or relatedactivities are carried on;agriculture, forestry, plantation or relatedactivities are carried on; (i)a store or other sales outlet; and (j)an installation or structure used for theexploration of natural resources, but only if soused for a period of more than six months.exploration of natural resources, but only if soused for a period of more than six months. 3. A building site or construction, installation orassembly project constitutes a permanent establishmentonly if it lasts for more than six months. 4. An enterprise shall be deemed to have a permanentestablishment in a Contracting State and to carry onbusiness through that permanent establishment if itcarries on supervisory activities in that ContractingState for more than six months in connection with abuilding site or construction, installation or assemblyproject which is being undertaken in that Contractingstate. 5. Notwithstanding the provisions of paragraphs 3 and4 an enterprise shall be deemed to have a permanentestablishment in a Contracting State and to carry onbusiness through that permanent establishment if itprovides services or facilities in that contracting Statefor more than six months in connection with theexploration, exploitation or extraction of mineral oils inthat Contracting State. 4. An enterprise shall be deemed to have a permanentestablishment in a Contracting State and to carry onbusiness through that permanent establishment if itcarries on supervisory activities in that ContractingState for more than six months in connection with abuilding site or construction, installation or assemblyproject which is being undertaken in that Contractingstate. 5. Notwithstanding the provisions of paragraphs 3 and4 an enterprise shall be deemed to have a permanentestablishment in a Contracting State and to carry onbusiness through that permanent establishment if itprovides services or facilities in that contracting Statefor more than six months in connection with theexploration, exploitation or extraction of mineral oils inthat Contracting State. 6. Notwithstanding the provisions of the precedingparagraphsofthisarticle,theterm‘permanentestablishment’ shall be deemed not to include: (a) the use of facilities solely for the purpose of storageor display of goods or merchandise belonging to theenterprise; (b) the maintenance of a stock of goods or merchandisebelonging to the enterprise solely for the purpose ofstorage or display; (c) the maintenance of a stock of goods or merchandisebelonging to the enterprise solely for the purpose ofprocessing by another enterprise; (d) the maintenance of a fixed place of business solelyfor the purpose of purchasing goods or merchandise orof collecting information, for the enterprise; (e) the maintenance of a fixed place of business solelyfor the purpose of carrying on, for the enterprise, anyother activity of a preparatory or auxiliary character.” 29. Article 7 (1) which relates to attribution of the profits reads as under: “7 (1) The profits of an enterprise of a ContractingState shall be taxable only in that Contracting Stateunless the enterprise carries on business in the otherContracting State through a permanent establishment ITA Nos. 13 and 334 of 2005 situated therein. If the enterprise carries on business asaforesaid, the profits of the enterprise may be taxed inthat other Contracting State but only so much of themas is directly or indirectly attributable to that permanentestablishment.” 30. There have been protocols developed in relation to DTAA and one suchprotocol which seems to explain Article 7(1) reads as under: “6. With reference to paragraph 1 of article 7 of theConvention, it is understood that by using the term‘directly or indirectly attributable to the permanentestablishment’, profits arising from transactions inwhich the permanent establishment has been involvedshall be regarded as attributable to the permanentestablishment to the extent appropriate to the partplayed by the permanent establishment in thosetransactions. It is also understood that profits shall beregarded as attributable to the permanent establishmentto the above-mentioned extent, even when the contractor order relating to the sale or provision of goods orservices in question is made or placed directly with theoverseas head office of the enterprise rather than withthe permanent establishment.” The decision in National Petroleum 31.1 The Court next proceeds to examine the legal position as regards a PEand in that context discusses in some detail decision of this Court inNational Petroleum Company Construction v. DIT (supra) where anidentical Article 5 of the DTAA between India and UAE was interpreted bythe Court. It may be noticed here that Articles 5 (1) and 5 (2) of the saidDTAA is identical to Articles 5 (1) and 5 (2) of the DTAA between Indiaand Japan. 31.2 Paras 15, 16, 17 and 20 of the said decision in National PetroleumCompany Construction (supra) are relevant in the present appeals and readas under: The decision in National Petroleum 31.1 The Court next proceeds to examine the legal position as regards a PEand in that context discusses in some detail decision of this Court inNational Petroleum Company Construction v. DIT (supra) where anidentical Article 5 of the DTAA between India and UAE was interpreted bythe Court. It may be noticed here that Articles 5 (1) and 5 (2) of the saidDTAA is identical to Articles 5 (1) and 5 (2) of the DTAA between Indiaand Japan. 31.2 Paras 15, 16, 17 and 20 of the said decision in National PetroleumCompany Construction (supra) are relevant in the present appeals and readas under: "15. In order to determine whether an enterprise hasa permanent establishment within the meaning ofarticle5oftheDoubleTaxationAvoidanceAgreement, it would be necessary to consider thescheme of article 5. Paragraph (1) of article 5provides an over arching general definition of theexpression“permanentestablishment”(PE).Itdefines a permanent establishment to mean a fixedplace of business through which the business of anenterprise is wholly or partially carried on. It isclearfromtheaforesaiddefinitionthattheexpression “permanent establishment” entails (a) afixed place of business; and (b) business of theenterprise being carried on wholly or partiallythrough the said fixed place of business. These twoconditions must necessarily be satisfied for theexistence of a permanent establishment. In addition,theword permanent inthe term “permanentestablishment” indicates that there should be somedegree of permanency attached to the fixed place ofbusiness before the same can be construed as apermanent establishment of an enterprise. The wordpermanent does not imply for all times to come butmerely indicates a place which is not temporary,interim, short-lived or transitory. In Re.P.No. 24 of1996 [1999] 237 ITR 798 (AAR), the Authority forAdvanceRulingreferredtoBaker’s“DoubleTaxation Conventions and International Tax Law,second edition”, wherein the author had cited thedecision in Henriksen (Inspector of Taxes) V.Grafton Hotel Ltd. [1943] 11 ITR (E.C) 10 (CA)and explained that the expression “permanent” isrelative and not synonymous with “everlasting” ;the Authority for Advance Rulings ruled that it was usedonlyin“contradistinctiontosomethingfleeting, transitory, temporary or casual”.16. Paragraph (2) of article 5 of the DoubleTaxation Avoidance Agreement provides for aninclusivedefinitionoftheterm“permanentestablishment” and specifically lists out places ofbusiness that fall within the meaning of thatexpression. The use of the word “especially”underscores the intention of the authors of thetreaty to remove any doubts that the places listed insub-paragraphs (a) to (i) fall within the definition ofthe term “permanent establishment”. Normally aninclusive definition is used to expand the width ofthe term sought to be defined, however, that doesnot appear to be the principal intent in draftingparagraph (2) of article 5 of the Double TaxationAvoidance Agreement. Read in the context of theother provisions of article 5, paragraph (2) clearlyindicates that it has been used as an explanatoryprovision to specifically include the species ofplacesofbusinessthatwouldconstituteapermanent establishment of an enterprise. In thisview, paragraph (1) and (2) of article 5 of theDoubleTaxationAvoidanceAgreementcomplementeachother.Thus,allclassesofpermanent establishments as specified in varioussub-paragraphs of paragraph (2) of article 5 of theDouble Taxation Avoidance Agreement would beconstrued as a permanent establishment subject tothe essential conditions of paragraph (1) of article 5being met. In so far as sub-paragraphs (h) and (i) ofparagraph (2) of article 5 are concerned, the test ofpermanence as required under paragraph (1) ofarticle 5 is substituted by a specified minimumperiod of nine months. Thus, places of business asspecified under subparagraphs (h) and (i) ofparagraph (2) of article 5, cannot be construed as apermanent establishment of an enterprise unless they exist for a period of at least nine months. 17. Paragraph (3) of article 5 is an exclusionaryclause and is intended to exclude certain places ofbusinessfromthescopeoftheexpression“permanent establishment” paragraph (3) beginswith a non obstante clause. “Notwithstanding thepreceding provisions of this article”. Thus, theexclusions provided under paragraph (3) wouldoverride the provisions of paragraphs (1) and(2)of article 5 of the Double Taxation AvoidanceAgreement. In other words, even if a place ofbusiness squarely falls within the definition ofparagraph (1) of article 5 and is specifically listedin paragraph (2) of the said article, the same would,none the less, not be construed as a permanentestablishment of an enterprise, if it falls within anyof the exclusionary clauses contained in sub-paragraphs (a) to (e) of paragraph (3) of article 5 ofthe Double Taxation Avoidance Agreement. 20. It is clear from the plain language of paragraph(1) of article 5 as well as article 5(3)(e) of theDouble Taxation Avoidance Agreement that thefunctions performed at an office maintained by anenterprise would be vital to determine whether theoffice could be construed to be the permanentestablishment of that enterprise for the purposes ofthe double taxation avoidance agreement. First ofall, the business of an enterprise must be carried on,wholly or partially through the office in question ;secondly, the business activity carried on must notbe that of a preparatory or auxiliary character . Thequestion, thus, arises is whether the activitiescarried out by the Assessee through its projectoffice at Mumbai are that of a preparatory orauxiliary character. This is the bone of contentionbetween the Revenue and the Assessee. Analysis and reasons 32. In the present case, the onus was on the Revenue to demonstrate that LOof the Assessee was a PE within the meaning of Articles 5 (1) and 5 (2) ofthe DTAA. In other words, it was not enough for the Revenue to show thatthe Assessee had an office, factory or a workshop etc. within the meaning ofArticle 5 (2) of DTAA. For the purpose of Article 5 (1), the Revenue wasrequired to show that such place was “a fixed place of business throughwhich the business of an enterprise is wholly or partly carried out.” 33. For the AYs in question, the LO of the Assessee was not in fact used forthe purpose of business. It is here that Article 5 (6) of the DTAA assumessignificance. The use of facility solely for the purpose of search or display orfor the maintenance of place for business solely for the purchases of goodsor collecting information or for any other activity “preparatory or auxiliaryin character” would take it outside the ambit of a PE. 34. Viewed in this context, the mere fact that the Manager of the Assesseestated that the books of accounts might be kept in a warehouse (which wasunable to be shown by the Revenue to exist) or that some portion of thetelephone expenses were attributable to the LO or that Mr. Ishibashi wasmanaging both the LO as well as the PO was hardly sufficient to concludethe LO was being used to carry on the business of the enterprises. The CIT(A) found that the POs were treated as separate taxable units. In fact theprofits therefrom were brought to tax by invoking Section 44 BBB of theAct. After having treated the POs as separate taxable units and having ITA Nos. 13 and 334 of 2005 Page 21 of 24 offered the profits therefrom to tax under Section 44 BBB, the said POscannot also be treated as PEs for the purpose of the DTAA. 35. The Court finds merit in the contention of counsel for the Assessee thatthe factual findings of the CIT (A) which has been conferred by the ITAThave not shown to be perverse by the Revenue. There is a categoricalfinding of the CIT (A) that two POs in question were treated as separatelytaxable units. CIT (A) correctly concluded that the AO was unable to provethat the Assessee had maintained a PE answering the description on acollective reading of Articles 5 (1) and 5 (2) of the DTAA. ITA Nos. 13 and 334 of 2005 Page 21 of 24 offered the profits therefrom to tax under Section 44 BBB, the said POscannot also be treated as PEs for the purpose of the DTAA. 35. The Court finds merit in the contention of counsel for the Assessee thatthe factual findings of the CIT (A) which has been conferred by the ITAThave not shown to be perverse by the Revenue. There is a categoricalfinding of the CIT (A) that two POs in question were treated as separatelytaxable units. CIT (A) correctly concluded that the AO was unable to provethat the Assessee had maintained a PE answering the description on acollective reading of Articles 5 (1) and 5 (2) of the DTAA. 36. On the issue of activity of ‘preparatory or auxiliary character’ it wasnoted by this Court in its decision in National Petroleum CompanyConstruction v. DIT (supra) as under: “........Whereas a liaison office can act as a channelof communication between the principal place ofbusiness and the entities in India and cannotundertake any commercial trading or industrialactivity; a project office can play a much widerrole. Regulation (6)(ii) of the aforesaid regulationsmandates that a “project office” shall not undertakeor carry on any other activity other than the“activity relating and incidental to execution of theproject”. Thus, a project office can undertake allactivities that relate to the execution of the projectand its function is not limited only to act as achannel of communication.” 37. Indeed, the basic factual foundation for holding a LO of the Assessee asits PE has not been laid by the Revenue in the present case. The fact that the ITA Nos. 13 and 334 of 2005 Assessee was adhering to the conditions imposed by the RBI for running aLO, and the RBI had accepted the functioning of the Assessee’s LO for overthree decades, points out to the fact that the Assessee has complied to theconditions, one of which was that it could not carry on any business ortrading activity in the LO. While, it is a moot question whether this wouldbe binding on the Revenue, it certainly increases the burden of the Revenueto show that notwithstanding the RBI permission continuing during the AYsin question, the Assessee’s LO should be construed to be a PE in terms ofArticles 5 (1) and 5 (2) of the DTAA. 38. The Court has undertaken the exercise of again examining the factualposition since in the impugned order the ITAT has merely relied upon itsorder for an earlier AY. While the Court appreciates the contention put forthby the Revenue that the facts of each AY has to be separately considered,the Court finds that there is no ground made out to disturb the reasonedorder of the CIT (A) for both the AYs. Conclusion 39. The only question framed in ITA 334 of 2005 for AY 1994-95 by orderdated 10[th]May 2005 is answered in the affirmative i.e. in favour of theAssessee and against the Revenue. It is held that the ITAT was correct inholding that the Assessee did not have a PE in India and was thereforeexempt under the provisions of the DTAA between India and Japan. 40. The questions framed by the Court by order dated 3[rd]February 2005 inITA No. 13 of 2005 for AY 1995-96 are answered thus: ITA Nos. 13 and 334 of 2005Page 23 of 24 (i) Question (1) is answered in the affirmative i.e. in favour of the Assesseeand against the Revenue. It is held that the ITAT was right in holding thatthe offices of the Assessee and its activities during the AY in question couldnot be regarded as its PE in India and the income directly or indirectlyattributable to the said offices was not taxable in India. (ii) Question (2) is answered in the affirmative i.e. in favour of the Assesseeand against the Revenue. It is held that the ITAT was right in law in holdingthat the Assessee does not have any PE in India and its income frombusiness turnover/imports in India was exempt in view of DTAA betweenIndia and Japan. 41. The appeals are, accordingly, dismissed but in the circumstances, withno orders as to costs. S. MURALIDHAR, J. JULY 27, 2017j/srb PRATHIBA M. SINGH, J. (ii) Question (2) is answered in the affirmative i.e. in favour of the Assesseeand against the Revenue. It is held that the ITAT was right in law in holdingthat the Assessee does not have any PE in India and its income frombusiness turnover/imports in India was exempt in view of DTAA betweenIndia and Japan. 41. The appeals are, accordingly, dismissed but in the circumstances, withno orders as to costs. S. MURALIDHAR, J. JULY 27, 2017j/srb PRATHIBA M. SINGH, J. ITA Nos. 13 and 334 of 2005