SPRINGER VERLAG GMBH vs. DDIT, CIRCLE-2(2),,

He submitted, at no stage, the Assessing Officer has recorded the reasons why such activities should be constituted as commercial activity of the LO. He submitted, in the reasons recorded, the Assessing Officer has not referred to any document found in course of survey, which indicates that the LO is involved in commercial activities of sale, appointment of dealers, securing dealers, signing of contracts, negotiation of price etc. He submitted, the departmental authorities except making general observations, have not given any substantive finding as to how the statements recorded or the information/documents collected can lead to an inference that income has escaped assessment. Drawing our attention to the sequence of events starting from application made to RBI for opening of LO in India and ending with the survey action carried out on 23.10.2002, learned counsel submitted, for exercising power under section 147 of the Act, the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment. He submitted, the expression ‘reason to believe’ and ‘escapement of income’ would mean that the reason for formation of belief must have rational connection with the information received.

Strongly relying upon the observations of learned first appellate authority, learned Departmental Representative submitted, admittedly, the assessee had not filed any return of income for all these assessment years. He submitted, only because of survey action, certain documents were impounded, which indicated that the LO is involved in commercial activities of procuring orders for the head office. He submitted, even in the statements recorded from the employees working at LO, it is revealed that the LO is involved in commercial activities. He submitted, had the survey action not taken place, all these facts would not have come to notice. Thus, he submitted, while recording the reasons for reopening of assessments under section 147 of the Act, the Assessing Officer had tangible material in his possession, which reflected escapement of income. Thus, he submitted, reopening o assessment under section 147 of the Act is valid.

We have considered rival submissions in the light of decisions relied upon and perused materials on record. It is a fact on record that in the assessment years under dispute, the assessee had not filed any return of income voluntarily under section 139(1) of the Act. It is also a fact that a survey action under section 133A of the Act was carried out at the premises of the LO, in course of which, certain documents/CDs were impounded, which contained communication between the LO and head office. On the date of survey itself, statements under section 131 of the Act were recorded from the Country Head and Manager, Promotion and Publicity, who were working at the LO. In the statements recorded, the extent of work/activities performed by the LO with regard to promotion and sales of books, journals etc. produced and printed by the HO could be ascertained. Undisputedly, the HO has earned substantial amount of income from sale/subscription of its books/journals in India. The information contained in the impounded documents found at the time of survey operation coupled with revelation made regarding activities of the LO from the statements recorded from two of the officers working at the LO, certainly gave an insight not only with regard to the business activities carried on by the HO in India but the extent of involvement of the LO in such business activities of the HO. Thus, in our view, the information gathered at the time of survey operation, either from the documents impounded or from the statements recorded from the officers working at LO certainly constitute tangible material to hold a prima facie view that the income chargeable to tax has escaped assessment. Whether the information contained in the documents and the statements recorded would ultimately result in assessment of escaped income, is a factor which need not be gone into at the time of recording reasons for forming the belief that the income chargeable to tax has escaped assessment.

So far as the decisions cited by learned counsel are concerned, on careful examination, we have found them to be factually distinguishable, hence, not applicable to assessee’s cases.

The next issue, which arises for consideration is whether the assessee had a PE in India in the relevant assessment years. As discussed earlier, in December, 1997, the assessee opened the LO in India with prior approval of RBI. As per letter dated 08.12.1997, RBI granted permission for opening the LO with the following conditions :

In course of assessment proceedings, based on certain documents/materials impounded at the time of survey action and statements recorded from Officers working at the LO, the Assessing Officer concluded that the LO constitutes a PE in terms of Article 5(1) read with Article 5(2) of India-Germany DTAA. According to the Assessing Officer, the activities/work performed by the LO is much more than carrying out any activity of preparatory or auxiliary character.

Before us, learned counsel appearing for the assessee submitted that the Assessing Officer has concluded existence of PE purely relying upon the statements recorded from certain employees working at LO, in course of survey proceedings. He submitted, section 133A(3)(iii) of the Act does not authorise the Income-tax Authority to record any sworn statement. He submitted, for this reason unlike statements recorded under section 132(4), the statements recorded in course of survey cannot be used as evidence. In support of such contention, he relied upon the following decisions :

Without prejudice, he submitted that the statements relied upon by the departmental authorities only discuss about role of LO in printing the books in EPZ. Therefore, the statements cannot be relied upon to draw any inference about the role played in sale of journals and books printed outside India. Proceeding further, he submitted, the journals sold by the assessee are highly technical and scientific in nature, as they deal with high end research topics in subject areas like medicine, life sciences, mathematics, computer science, etc. Hence, these journals are sold directly and dispatched to the subscriber by the assessee from outside India. Therefore, the sale is concluded outside India. He submitted, these journals are being imported to India for more than 40 years. Since, the subscribers to journals are scientists and other highly specialist researchers, the employees of LO are not capable of communicating the contents of these journals to subscribers.

He submitted, such communication between the LO and the subscribers in India is also very rare, as mostly, there is direct communication between the subscribers and the assessee. Orders are directly placed on the assessee and not on LO. In this context, learned counsel drew our attention to a sample copy of proforma invoice placed in the paper book. He submitted, in some cases, orders are also placed on subscription agent, who in turn handles the communication with the assessee. Even the payment is directly made to the assessee and the LO has no role to play. In this context, learned counsel drew our attention to a communication between the assessee and Tata Institute of Fundamental Research and Informatics (India) Ltd. Thus, he submitted, the LO did not maintain stock of journals, from which the journals are regularly delivered to the subscribers on behalf of the assessee. Thus, he submitted, in so far as the sale of journals is concerned, the LO has no role to play. In so far as import of books printed and published outside India is concerned, learned counsel submitted, these books are highly technical, scientific and pertain to subject areas like medicine, mathematics, engineering, computers, life sciences etc. He submitted, these books are being sold from Germany to the dealers/distributors of the assessee in India for more than 40 years. He submitted that LO has no authority to appoint dealers/distributors. The credit applications are sent to the assessee by the distributors. Only after undertaking a scrutiny process, if credit application is accepted, then the assessee sends a letter of appointment to the concerned distributor. He submitted, the acceptance of credit application is also signed by the assessee and the LO has no authority, whatsoever. The role of LO is that of a communication channel in terms of forwarding distributors’ credit applications to Germany. Even the discounts are standard discounts, which are agreed by the dealers at the time of signing the agreement and the LO has no role to play. The orders for books are directly placed upon the assessee and not on the LO. The sale of books happens outside India. In terms of the agreement with dealers, consignment is delivered by the assessee to the distributor’s nominated freight forwarder outside India. In rare cases, if LO receives any orders, it forwards the same to the assessee , as it has no access to the database of stock of books at Germany, which is sold all over the world. In this context, learned counsel drew our attention to sample copies of letters sent to dealers. He submitted, the LO is in no position to confirm the orders placed by the dealers/distributors because there are more than 20,000 titles sold by the assessee. Thus, he submitted, the LO has no role to play in respect of imported books printed and published outside India.

In so far as the sale of books printed at EPZ in India, learned counsel submitted, as per EPZ scheme, the assessee places printing orders of selected titles on Indian printing houses located in EPZ and books printed therein are supplied to Indian distributors, who then sell them to the final customers. He submitted, in this process, the final customers get the books at a much cheaper price than the price they had to pay while importing. He submitted, the titles to be published at low price edition are selected based on the expert opinion/recommendations by professors, authors, syllabus committee, universities etc. He submitted, once, the assessee communicated to LO that the titles can be printed in EPZ after referring to the agreement with authors of such prints, the LO used to get the details of costing of such printing in India. Final decision whether to print at such cost or not was always taken by the assessee and the LO has no role to play. He submitted, in case the assessee is of the view that low-priced edition can be published, then the assessee instructs the LO to obtain the printer quotes and forward to the assessee for approval. Further, the purchase orders are directly issued to the printers with printing instructions and the LO has no role to play. The contract with printers, printing instructions, payment to printers and instructions for delivery of printed books to dealers were done by the assessee only and the LO had no role to play in it except for communicating to printers to make delivery to the dealers based on communication from the assessee. He submitted, the printers raised the bills on the assessee and remittance is made directly by the assessee to the printers. Of course, at times, instructions are communicated through LO.

Thus, learned counsel submitted, the LO is merely a communication channel between the HO and clients in India. Better flow of information through the LO helped HO in Germany to provide information and services to clients in India. He submitted, the LO only receives information brochures on assessee’s products and some sample copies of books published by the HO, which have promotional use only. He submitted, the Assessing Officer has used certain statements of the employees working at LO selectively according to his convenience. In this context, learned counsel furnished his rebuttal to the findings of the Assessing Officer and learned Commissioner (Appeals) in a tabular format as under :

Learned counsel further submitted that there are various misstatement of facts both by the Assessing Officer and first appellate authority as under :

He submitted, though, the Assessing Officer has relied upon the appointment letter of the country head, Shri Sanjiv Goswami, however, that cannot lead to the conclusion that LO is more than a communication channel. Further, he submitted, the appointment letter of Shri Sanjiv Goswami was signed on 21.10.1997 prior to approval of RBI. Hence, it will not be correct to relate RBI’s letter with the documents signed earlier. Without prejudice, he submitted, the terms ‘ marketing’ and ‘sales’ mentioned in the appointment letter are not to be interpreted in their strict legal sense. He submitted, since, the LO has no permission to do business activities in India, Shri Sanjiv Goswami could not have undertaken such activities. He submitted, the responsibility of Shri Sanjiv Goswami was only focussed on planning and communication building between the assessee and potential customers in India. He submitted, the reliance placed by the Assessing Officer on an inter-office email written by Shri Rajiv Salwan, Area Manager, South India is of no relevance, as the LO employees cannot identify a title which may be taken up for reprinting and mass circulation. They can at best make a market survey of what are the titles in demand. He submitted, employees during their promotion work at the institutions generally get suggestions from academicians and researchers regarding titles that they are interested in or require for inclusion in their syllabi. Similar suggestions during book fairs, conferences and seminars are gathered. However, employees of the LO neither have authority/capacity nor the occasion to decide as to which title has to be taken up for reprinting and mass circulation. Thus, this email is a mere opinion on viability based on cost consciousness and cannot be interpreted as a decision, as the assessee is nowhere involved in the entire communication. He submitted, the LO had no role to play once it forwarded the cost computation inputs to Germany. He submitted, occasional and stray involvement of the LO in forwarding a printing instruction or a delivery instruction to the printer or communication with the distributor, based on the instructions of the assessee, cannot be considered as involvement of the LO in the entire business process. If at all, such involvement of the LO is only as a conduit for transmission of information and cannot lead to a PE situation.

Drawing our attention to Article 5 of India-Germany treaty, learned counsel submitted that the LO is not fixed place of business of the assessee, as it does not satisfy the basic conditions for constituting a PE under Article 5(1) of India-Germany treaty. He submitted, Article 5(2) cannot override the basic conditions of Article 5(1) that a PE has to be a place of business. Whereas, LO is merely a representative office in India, through which, no part of the business of the assessee is carried out. Therefore, even if LO can be considered as an office, it cannot be treated as PE, as it is not a place of business.

Without prejudice, he submitted, in respect of books and journals directly imported from outside India, the LO had no role to play. Even in respect of the books printed in India, the LO did not conclude contracts on behalf of the HO, neither had stock of books for delivery to customers nor did it secure orders for assessee. Therefore, in terms of Article 5(5), there is no PE of the assessee in India. He submitted, assessee’s case falls purely under the exceptions provided in Article 5(4) of the treaty, as the nature of activities is preparatory and auxiliary.

Without prejudice, he submitted, in assessment year 2002-03, the first appellate authority in addition to his finding that the LO constitutes a PE, has also held that the assessee had business connection in India.

Per contra, learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned first appellate authority. Drawing our attention to the statements recorded from two employees of LO and certain other documents, he submitted that the LO was carrying out wholesome commercial activities, which resulted in phenomenal increase in the business of the assessee in India. He submitted, the activities carried out by the LO is akin to the activities undertaken by Indian subsidiary of the assessee, which came into existence in the year 2002. He submitted, though, for carrying out similar activities, the Indian subsidiary was remunerated by 11% of the gross revenue, however, the LO was not paid anything. Thus, he submitted, the decision of learned first appellate authority should be upheld.

We have considered rival submissions in the light of decisions relied upon and perused materials on record. We have also painstakingly perused all facts and materials on record including the documents submitted in the factual paper books. The precise issue arising for consideration is whether the LO of the assessee in India can be treated as PE in terms of Article-5 of India-Germany DTAA. Before we delve into the issue, it is necessary to look into the definition of PE as per Article 5 of India-Germany DTAA, which reads as – Article 5 : Permanent establishment 1. For the purposes of this agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, including an installation pr structure used for the exploration or exploitation; (g) a warehouse or sales outlet; (h) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; and (i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months.

An enterprise shall be deemed to have a permanent establishment in a contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery or hire used for or to be used in the prospecting for or extraction or exploitation of mineral oils in that State.

Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 6 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 State, if this person. (a) has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprises; (b) has no such authority, but habitually maintains in the first mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) habitually secures orders in the first mentioned 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.

An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business and in their commercial and financial relations to the enterprise no conditions are agreed or imposed which differ from those agreed between independent persons.

The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.”

As can be seen, paragraph No. 1 of Article 5 defines PE to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. Thus, paragraph 1 of Article-5 of the treaty sets out two conditions. Firstly, the PE must be a fixed place of business and secondly, through such fixed place of business, the business of an enterprise is either wholly or partly carried on.

Thus, it requires examination, whether the assessee has a fixed place of business in India, through which it carries out its business either wholly or partly or even if there is fixed place of business, it is only for the purpose of carrying out activities of preparatory or auxiliary character. It is the consistent stand of the assessee from the assessment stage that the LO in India has been established only for activities of preparatory or auxiliary character. However, in course of survey conducted at the premises of the LO, certain documents were impounded and statements were recorded from two employees of the assessee working at the LO, where from, it was found that the LO effectively was involved in various activities. In the assessment order, the Assessing Officer has described the nature of activities undertaken by the LO as under :

Further, the Assessing Officer has also referred to statements recorded on oath from Shri Venkatraman, working as Manager, Promotion and Publicity, in the LO and Shri Sanjeev Goswamy, the country Head working at the LO. In the statement recorded, on a query raised with reference to the printing activities carried on in India in EPZ, Shri Venkatraman has specifically stated that employees working at LO identify a title which may be taken up for reprinting and mass circulation. He admitted that once, the identification of the title is done, the distributors are contacted by the LO to determine their readiness to purchase the said titles. He has stated that once the distributor shows the readiness to procure the identified titles, the LO obtains the price, on which they are willing to buy the titles and number of prints they want. After completion of this exercise, the LO contacts the HO to find out the cost component in terms of royalty payable and e-file costs.

In the statement recorded from Shri Sanjeev Goswami, country head, working at LO, he has stated that the LO has visited 200 to 250 institutions during the year and met the scientists and academicians to inform them about the existing new products of the company to enable them to procure the required products through companies distributors in India. He has further stated that the LO provides market research information and market feedback to HO for pricing of the products.

So far as contention of learned counsel for the assessee that there is no allegation by RBI that the assessee has violated the conditions of their approval by indulging in commercial activities is concerned, we are of the view that such argument is without any substance, as what we are required to decide is whether the assessee had a PE in terms of Article 5 of India-Germany treaty. Though, the LO may not be involved in direct sale of products, however, the facts on record clearly reveal that the activities of the LO with regard to printing of books at EPZ is of much wider magnitude than mere preparatory and auxiliary character. At this stage, it will be pertinent to observe that while examining the issue relating to existence or otherwise of PE, learned first appellate authority has recorded a factual finding that the LO plays an active role with regard to printing of books in the EPZ, deciding their cost component and their sales. The assessee has not been able to rebut the concurrent factual finding of the departmental authorities in so far as it relates to activities of the LO in printing of books in EPZ. Therefore, in our view, the LO constitutes a PE in terms of Article 5(1) read with Article 5(2) of the treaty, at least, in relation to reprinting of books at EPZ. The exceptions provided under Article 5(4) would not be applicable, as, in our view, the activities undertaken by the LO is not merely limited to preparatory or auxiliary character of a communication channel between the clients in India and HO. In our view, the decision of the coordinate Bench in case of Nagase & Company Ltd. v DDIT(IT), (2018) 96 taxmann.com 504 would be of no help to the assessee, as in that case, the facts on record did not indicate that the role of LO is not limited to preparatory and auxiliary work. In aforesaid view of the matter, we hold that the LO constitutes PE of the assessee in India.

Having held so, now, it is necessary to deal with the issue relating to attribution of profit to the PE. As could be seen from the facts on record, learned first appellate authority has given a factual finding that the role of PE has been very limited in the sale of journals and books printed abroad. In fact, on perusal of materials on record, we are convinced that the PE had no role to play in sale of journals and books printed abroad, as, these are direct transactions between the assessee and subscribers/buyers in India without any intervention of the LO.

Before parting, we must observe, though the assessee has taken an argument that no profit is attributable to PE with regard to EPZ sales in terms of Article 7(5) of the treaty, however, on careful consideration, we are not convinced with the submissions of the assessee. We have discussed in detail the role of LO in procuring orders for EPZ sales. In that view of the mater, it cannot be said that no profit can be attributed to the PE. We order accordingly.

In the result, appeals are partly allowed.