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

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DELHI BEFORE G.S. PANNU, VICE-PRESIDENT AND SHRI SAKTIJIT DEY, VICE-PRESIDENT

ITA Nos. 643 to 645/Del/2005 & 3660/Del/2009 Assessment Years: 1999-2000 to 2002-03 Springer Verlag GmbH, Versus DCIT, Circle 2(2), (formerly known as Springer International Taxation, Verlage GmbH & Co. KG), New Delhi. 906-907, Akashdeep Building, Barakhamba Road, New Delhi. PAN: AAOCS4799R (Appellant) (Respondent) Assessee by : Sh. Sanjeev Chaudhary, AR Revenue by : Sh. Sanjay Kumar, Sr. DR

Date of hearing : 06.10.2023 Date of pronouncement: 04.01.2024 ORDER

Captioned appeals by the assessee arise out of two separate orders of learned Commissioner of Income-tax (Appeals)-XXIX, New Delhi pertaining to assessment years 1999-2000, 2000-01, 2001-02 and 2002-03.

2 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

identical and relate to the same parties, the appeals have been clubbed

together and disposed of in a common order, for the sake of

convenience.

appeals, we find that following issues arise for consideration :

(i). Validity of reopening of assessments under section 147 of the Income-tax Act, 1961; Validity of assessment orders due to non-service of notices purportedly issued under section 143(2) of the Act; (ii). Whether liaison office (LO) in India can be treated as permanent establishment (PE) of the assessee in terms of Article 5(2) of India-Germany Double Taxation Avoidance Agreement(DTAA); and (iii). Validity of attribution of income to the alleged PE by applying net profit rate of 10% on the total sales and further non-allowance of deduction of expenses in terms of section 44C of the Act.

under section 147 of the Act is concerned, briefly, the facts are, the

assessee is a non-resident corporate entity incorporated in Germany

and a tax resident of Germany. As stated, the assessee is a pioneer in

3 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

publishing scientific, technical, medical books and journals. The

assessee got an approval from Reserve Bank of India (RBI) on

08.12.1997, to open a Liaison Office (LO) in India. As per the assessee,

the LO was opened to carry out solely liaisoning activity or to act as a

communication channel between the Head Office and clients in India.

For the assessment years 1999-2000 to 2001-02, the assessee did not

file any return of income under section 139(1) of the Act. A survey

under section 133A of the Act was conducted at the premises of the LO

on 23.10.2002. In course of survey, certain documents were

impounded, which included loose papers and compact discs (CDs)

containing records of emails and other correspondences from LO to

Head Office and others. Summons under section 131 of the Act were

also issued to the assessee on the date of survey and statements were

recorded from certain officers/persons working in the LO. Based on the

information gathered in course of survey operation, the Assessing

Officer recorded reason to believe that income chargeable to tax has

escaped assessment in assessment years 1999-2000 to 2001-02.

Therefore, he reopened the assessments under section 147 of the Act

by issuance of notices under section 148 of the Act.

4 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

assessee furnished returns of income declaring nil income. It was the

case of the assessee that the income earned by the assessee from sale

of books/journals in India cannot be made taxable in India, as such

income is in the nature of business income and in absence of

Permanent Establishment (PE), not taxable in India. It was the case of

the assessee that the LO cannot be treated as PE, as it had not carried

on any commercial activity in India. Assessing Officer, however, was

not convinced with the submissions of the assessee. He held that the

LO is involved in activities, which are something more than mere

preparatory and auxiliary services. Thus, he held that LO constitutes a

PE of the assessee in India. Having held so, the Assessing Officer

attributed 15% of the total sales as income of the LO. Against

assessment order so passed, the assessee preferred appeals before

learned first appellate authority, inter alia, challenging the validity of

proceedings under section 147 of the Act.

legal ground raised by the assessee relating to validity of reopening of

assessments. Even on merits also, learned first appellate authority

5 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

upheld the decision of the Assessing Officer in treating the LO as the

PE of the assessee in India. However, he granted partial relief with

regard to attribution of profit to the LO. (In assessment year 1999-2000,

he applied net profit rate of 10% on the gross revenue and out of that

he attributed 15% in respect of sale of journals and books to the PE in

India. In assessment years 2000-01 and 2001-02, learned first

appellate authority applied net profit rate of 15% and made attribution of

15% of sale of journals and books printed abroad and 80% for sale of

books for EPZ of PE. In assessment year 2002-03, for journals and

books printed abroad, he directed the Assessing Officer to compute

income as per Rule 10 and thereafter to attribute 15% of the net profit

to PE. For sale of books published in EPZ, he directed the Assessing

Officer to determine the profits on net income basis and thereafter

attribute 80% to the PE.) Accordingly, he decided the appeals.

attention to the reasons recorded for reopening of assessments placed

in the paper book and submitted that in the reasons recorded, the

Assessing Officer has simply referred to the statements recorded from

P.N. Venkatraman and Shri Sanjeev Goswami, working in LO and

6 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

concluded that commercial activities were carried on by the LO. He

submitted, the business activities carried on by the assessee in India

are the following :

(a). Journals subscription (b). Direct import of books in India (c). Sale of books printed at export processing zone (EPZ) in India.

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

7 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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.

He submitted, there must be some direct nexus and live link between

the material and the formation of belief that there is escapement of

income in a particular assessment year. He submitted, in the facts of

the present appeal, that live link and direct nexus is missing. Thus, he

submitted, in absence of such nexus between the information available

and formation of belief, reopening of assessments under section 147 of

the Act is invalid. In support of such contention, learned counsel relied

upon following decisions :

(i). CIT v. Kelvinator India Ltd. (2010) 187 Taxman 312 (SC). (ii). ACIT vs. Sur Buildcon (P) Ltd. (2021) 90 ITR(T) 300. (iii). Calcutta Discount Company Ltd. v. ITO (1961) 41 ITR 191 (SC) (iv). Sheo Nath Singh v. AAC (1971) 82 ITR 147 (SC) (v). Lakhmani Mewal Das (1976) 103 ITR 437 (SC) (vi). Gangasaran & Sons (P) Ltd. vs. ITO (1981) 130 ITR 1 (SC)

8 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

(vii). CIT v. Lucas TVS Ltd (2001) 117 Taxman 366 (SC) (viii) United Electricals Company (P) Ltd. vs. CIT (2002) 178 CTR 192(Delhi HC).

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.

9 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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

10 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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.

What is required at the stage of recording of reasons is whether there

are tangible materials available on record to form a belief that income

has escaped assessment. Having examined the facts on record, we

are firmly of the view that the Assessing Officer, at the time of forming

the belief regarding escapement of income, had tangible material

available with him. Thus, in our view, there is a direct nexus/live link

between the material available on record and the formation of belief for

reopening the assessments under section 147 of the Act. Therefore, we

11 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

do not find merit in the submissions made by the assessee that

reopening of assessments under section 147 of the Act is invalid.

on careful examination, we have found them to be factually

distinguishable, hence, not applicable to assessee’s cases.

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 :

(i). Except the liaison work, the representative will not undertake any other activity of a trading, commercial or industrial nature nor shall he enter into any business contracts without our prior permission. (ii). No commission/fees will be charged or any other remuneration received/income earned by the representative for the liaison activities/services rendered by the representative or otherwise in India. (iii). The entire expenses of the representative office will be met exclusively out of the funds received from abroad through normal banking channels. (iv). The representative shall not borrow or lend any money from/to any person in India without our prior permission. (v). The representative shall not acquire, hold, (otherwise than by way of lease for a period not exceeding five years), transfer or dispose of any immovable property in India without obtaining prior

12 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

permission of the Reserve Bank of India under section 31 of the Foreign Exchange Regulation Act, 1973. (vi). The representative office in India will furnish to the General Manager, Exchange Control Department, Reserve Bank of India, New Delhi (on a yearly basis): a). a certificate from the auditors to the effect that during the year no income was earned by/or accrued to the office in India; b). Details of remittance received from abroad duly supported by Inward Remittance Certificates; c). Certified copy of the audited final accounts of the office in India; and d). Annual report of the work done by the representative in India, stating therein the details of actual export or import, if any, effected during period in respect of which the representative had rendered liaison services; e). The number of staff engaged/appointed and duties assigned to each staff. (vii). The representative office will not render any consultancy or any other services, directly/indirectly, with or without any consideration. (viii). The representative will not have signing/commitment powers except than those which are required for normal functioning of representative office on behalf of the Head Office.”

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.

13 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

The Assessing Officer observed that the LO is involved in various

activities, which has not only helped in expanding the growth of

business of the assessee in India , but has also revealed active

participation of LO in obtaining business for the assessee. He

observed, earlier, the activities undertaken by a joint venture of the

assessee with an Indian company has completely been taken over by

the LO for all purposes. Referring to a report of an official of the

assessee namely Conny Schindewolf, the Assessing Officer observed

that the LO has contributed enormously to achieve the growth rate of

190% and 80% in books segment and 20% in journal segment. He

further observed that in March, 2002, the assessee has set up a

subsidiary company in India, namely Springer (India) Pvt. Ltd., which is

being compensated @ 11% of gross revenue earned by the assessee

from India from distribution of original titles and trading profits in respect

of titles printed in India. Whereas, for similar activities carried out by the

LO, no revenue is shared. He observed that even in appointment of

distributors in India, the LO plays a very important role, as it ascertains

the creditworthiness of distributors situated in India. Thus, based on the

aforesaid reasoning, the Assessing Officer ultimately concluded that the

14 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

LO constitutes a PE of the assessee in India. Having held so, he

proceeded to attribute profit @ 15% of the gross revenue to the LO.

Against the aforesaid decision of the Assessing Officer, the assessee

preferred appeals before learned first appellate authority. While

deciding the appeals, learned first appellate authority modified the

assessment orders only to the extent of attribution of profit to the PE.

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 :

(i). PCIT v. Meeta Gutgutia [2017] 395 ITR 526 (Delhi HC) (ii). Paul Mathews & Sons v.CIT [2003]129 Taxman 416 (Kerala HC) (iii). CIT v. S. Khader Khan Son [2008] 300 ITR 157 (Madras HC) approved by Hon'ble Apex

15 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

(iv). Court in CIT v. S. Khader Khan Son [2012] 210 Taxman 248 (SC) (v). CIT v. Dhingra Metal Works [2011] 196 Taxman 488 (Delhi HC) (vi). DCIT v. Bansal Credits Ltd. [2016] 74 taxmann.com 224 (Delhi - Trib.)

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.

16 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

The employees of LO only communicate to them that the assessee is

engaged in publishing of journals and refer them to the assessee or

educate them about the website.

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

17 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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 ,

18 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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.

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

19 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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.

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

20 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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 :

S. Appellant’s submission Ld. AO/Hon’ble CIT(A)’s No. contention 1 Employees of the LO visit Employees of the LO who visited the universities various institutes, libraries, and 'etc., were not specialist in their respective lines. In individuals to discuss and other words, no employee of the LO was in a promote the publication of the position to influence the requirement of any assessee and to ascertain their potential customer exact requirements 2 These requirements are then There was no discussion about the profitability with consolidated and discussed the distributor. It is basically to understand the price with a distributor about the at which the titles can be sold. As stated earlier, the profitability and the willingness discounts are agreed with the distributor by the of the distributor to undertake Appellant only and discounts are standard for all the sales distributors 3 The LO had a mere Post Office function. Final quotations, which were always addressed to the Appellant were merely received from the printer appointed by the Appellant and the same were forwarded to the Appellant. The quotations were for various quantities like 500 copies, 600 copies, 750 copies, 1000 copies, 2000 Quotations are obtained from copies, etc. which clearly shows that the Appellant the printers for printing rates was provided various scenarios of production costs with respect to exact number of to enable them to make a decision. The LO has copies done calculation which is more a clerical work.

21 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

appointed by the Appellant and the same were forwarded to the Appellant. The quotations were for various quantities like 500 copies, 600 copies, 750 copies, 1000 copies, 2000 copies, etc. which clearly shows that the Appellant was provided various scenarios of production costs to enable them to make a decision. The LO has done calculation which is more a clerical work. 4 Upon receiving quotations from The quotations received by LO on behalf of the printers, LO obtains other cost Appellant, as explained above, were for various component of publishing to be quantities with different production costs. The incurred e.g. royalty, etc. on the Appellant asked the LO to compute the cost basis of all cost components it components for realizable revenue so that the same works out the cost with regard clerical calculations were not required to be done by to each title the Appellant. The Appellant analyzed the various cost components and asked the LO to get final quotes from the printer. The LO after receiving the final quotes informed the Appellant and made suggestions based on statistical analysis 5 Thereafter, the LO asks the It is improper to draw this conclusion that the Appellant to issue the purchase Appellant approval was a matter of pure formality. order directly to the printers, Rather, it was an indication of the fact that standard which Appellant invariably does process set by the Appellant were being followed by in accordance with the terms the LO in most of the cases for the cost and conditions agreed to computation. A definite process was put in place by between printer and the LO the Appellant to scrutinize each and every proposition sent by the LO and Appellant did not take any decision unless the proposition sent by the LO was passed though the scrutinizing process. This is evidenced by the fact that at least 10% of the quotes sent by LO for Appellant’s acceptance were rejected for not conforming to Appellant stipulations 6 In the purchase order issued by Appellant gave delivery instructions and asked the the Appellant, printer is asked LO to convey to the Printer, as address of delivery to take instructions from Sanjiv place was to be confirmed from the distributor in Goswami India. In many cases the Appellant also gave direct delivery instructions

22 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

7 Printer raises the invoice of The printer raises invoice based on the Purchase Springer Germany on the Order raised by the Appellant and the LO is not agreement reached with LO involved in the process. The payment is made by Appellant directly to printers in foreign exchange through normal banking channels. The distributors are invoiced directly as per import regulations and payments are made directly by distributors for the imports to the Appellant company through normal banking channels

misstatement of facts both by the Assessing Officer and first appellate

authority as under :

Correct fact Page no. in paper book s. No. 1 Appellant never had any person by the name of Peter Seibold ever in the employment - whether in AffAffidavit by Margita Sperling, Germany or in the Indian LO. Executive Vice President Finance and Gregor Karolus, Executive Vice President Human Resources on pages 266 - 270 2 LO reported to Amoud de Kemp, the Deputy Affidavit on pages 266 - 270 Member of the Board of the International Sales Answer to Q. No. 4 of statement and Marketing department recorded by Sanjiv Goswami on page 237

23 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

3 Conny’s report was a private study done for her Affidavit on pages 266 - 270 MBA course pursued from Milton Keynes Open Email correspondence with University, UK. The management of Springer Milton Keynes University on never asked for the report from her. Accordingly, it pages 271 - 274 was wrong on the part of the Ld. AO to place reliance on this report 4 Conny’s report states as under: Relevant portion of Conny’s • Management has set highest growth rate report on page 242 of 40% for the emerging South Asian market Certificate of incorporation of which is supposed to be taken care of by the LO SBIPL dated 29 September 1980 • From 1973 up till 1997, India was on page 275 exclusively handled by a joint venture company Annual return of SBIPL for AGM that was owned by Springer with 49% stake held on 27 September 1993, The aforesaid statements are absolutely false and annual return for AGM held on 23 without any basis for the following reasons: September 1996 and annual • Springer's only exposure to India in the return for AGM held on 27 period pre 1998 was in the form of a September 2000 on page 275 - distributorship for Springer's books given to a 301 private limited company called Springer Books India P. Ltd. (‘SBIPL’). • Appellant had no shareholding in SBIPL. This is evidenced by copies of annual returns filed by SBIPL with the Registrar of Companies (‘ROC’) as required under the Companies Act, 1956. The said company was the distributor for Springer titles and the relationship was that of a principal-to- principal basis. 5 The report states that there was a massive growth Illustrative list of new distributors in book segment and journal segment between appointed on page 302 1997 and 1998, and the same was attributed to LO. Imperative to note that the aforesaid increase in business was not because of the establishment of LO but because of the inclusion and expansion of a bigger distribution network by Springer, Germany. When Springer was being supported in India by SBIPL, no other distributor had the right to import Springer books but subsequently with the inclusion of more direct importers and the expansion of the distribution network, sales showed a significant growth. The LO had nothing to do with the improvement in performance of the Appellant in India.

24 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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

25 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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.

counsel submitted that the LO is not fixed place of business of the

26 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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.

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.

Further, he submitted, the approval granted by RBI clearly mandated

that the assessee should not undertake any commercial activity. He

submitted, there is no allegation by the RBI regarding violation of the

conditions of approval. Therefore, the department cannot allege

27 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

undertaking of any commercial activity by the LO. In support, he relied

upon following decisions :

(i). Union of India v. U.A.E. Exchange Centre Ltd. [2020] 273 Taxman 122 (SC) (ii). IAC v. Mitsui & Co. Ltd. [1991] 39 ITD 59 (Delhi) (SB) (iii). DIT v. Mitsui & Co. [2018] 407 ITR 294 (Delhi) [SLP Dismissed/Rejected in [2019] 111 taxmann.com 215 (SC)] (iv). DIT (Intl. Taxation) v. Morgan Stanley & Co. Inc. |2007] 292 ITR 416 (SC) (v). Sojitz Corporation v. ADIT [2008] 117 TTJ 792 (Kolkata) (vi). Metal One Corpn. v. DD1T [2012] 52 SOT 304 (Delhi) (vii). S.R. Technics Switzerland Limited v. ACIT (2022) ITA No. 6616/Mum/2018.

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.

He submitted, while coming to such conclusion, the first appellate

authority has relied upon incorrect facts while observing that the

assessee is engaged in several activities like printing, publishing and

sales of foreign titles independently and on a regular basis. Whereas, in

reality, the activity of printing and sales are carried out by third party

printers and distributors. The LO does not have any role to play in these

28 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

activities. Thus, learned counsel submitted that the LO cannot

constitute a PE of the assessee in India.

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.

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

29 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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. 2. 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. 3. 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. 4. Notwithstanding the preceding provisions of this article, the term establishment" shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

30 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed p lace of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 5. 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. 6. 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. 7. 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.”

31 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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.

Paragraph No. 2 of Article 5 sets out what comes within the ambit of

PE, such as place of management, branch, an office, a factory, a

workshop, a warehouse or sales outlet, a building site or construction,

installation or assembly project or supervisory activities in connection

therewith etc. etc. Paragraph No. 3 of Artilce-5, since, is not applicable

to the facts of assessee’s case, there is no need to go into that.

Paragraph 4 of Article-5 carves out certain exceptions to the definition

of PE by providing that the PE, inter alia, shall not include the

maintenance of a fixed place of business solely for the purpose of

carrying on, for the enterprise, any other activity of a preparatory or

auxiliary character. Paragraphs No. 5, 6 and 7 of Article-5 are not

applicable to assessee’s case, hence, there is no need to discuss them.

32 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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 :

a. The employees of the liaison office visits various institutes, libraries and individuals to discuss and promote the publications of the assessee and to ascertain their exact requirements. b. These all requirements are consolidated and discussed the distributor about the profitability and willingness of the distributor to undertake the sales. c. The quotations are obtained from the printers asking for printing of exact no. of copies. d. Upon receiving the quotations from printers, the L.O. obtains cost component of publishing to be incurred outside viz royalty etc. On the basis of all the cost component received, it works out the profitability with regard to each title. Normally the gross profitability in all cases are worked out at more than 50%.

33 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

e. Thereafter the L.O. asks the H.O. to issue the purchase order directly to the printers, which the H.O. invariably do in accordance with the terms and conditions agreed between printer and L.O. f. In the purchase order issued by H.O. also, the printers are asked to take instructions from Mr. Sanjeev Goswami. g. After the books are printed, the Liaison office instructs the printer to supply the books to the specific publishers. h. The printer raises the invoice on Springer Germany on the basis of agreement reached with L.O. and receive payments from overseas. The distributors after making the sales make the remittance to Springer Germany.

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

34 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

out the cost component in terms of royalty payable and e-file costs.

Thereafter, the printing quotes are taken from the printer by the LO. He

stated that once, the LO procures the cost components, the number of

confirmed orders and the selling rates, the net price and gross margin

are determined by the LO and the quote is sent to the Head Office for

acceptance. After acceptance of the quote by the Head Office, printing

order is placed with the concerned EPZ. Shri Venkatraman has further

stated that in very rare instances, some queries are raised by the head

office, otherwise, in 90 to 95% of cases, the quotes sent by the LO are

accepted by the HO.

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.

From the aforesaid statements, particularly, the statement of Shri

Venkatraman, it becomes very much clear that in so far as the

35 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

reprinting of low priced editions at EPZ in India is concerned, the

activities of the LO is much more than mere preparatory and auxiliary

character. The LO not only procures orders, but also works out the cost

components and margin of the books to be reprinted in EPZ and sends

for acceptance of the HO. It is also evident, in majority of cases, almost

90 to 95%, the price and margin fixed by the LO in respect of specific

titles to be published/reprinted at the EPZ are accepted by the HO.

Thus, the aforesaid facts clearly reveal that the LO has a major say with

regard to not only the titles to be reprinted in India, but their pricing also.

It is also a fact on record that in a report submitted by Conny

Schindewolf, the achievement of the LO in increasing the sale of

products of the assessee has been appreciated. Though, learned

counsel for the assessee has submitted before us that much

importance cannot be attached to the said report, as it was for internal

consumption , however, we are not impressed. From various invoices

placed in the paper book, it is observed that Conny Schindewolf was in

an authoritative position of the company, hence, her report carries

much weight.

36 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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)

37 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

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.

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.

Therefore, in our view, no part of the income derived by the assessee

from sale of journals and books imported to India can be attributed to

38 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

the PE. The attribution of income to PE should only be with reference to

the books printed at EPZ and sold to distributors/customers. It is

observed, with regard to EPZ sales, learned Commissioner (Appeals)

has determined net profit rate at 15% of the total sales made in India

and out of that has attributed 80% to the PE. In our view, the attribution

of profit by learned Commissioner (Appeals) appears to be irrational

and not in consonance with the facts on record. From the assessment

order, it is evident that the assessee has incorporated a subsidiary in

India in the year 2002. The Assessing Officer has himself observed that

the subsidiary is remunerated with a mark up of 11% of the gross

receipts while rendering similar nature of services as rendered by the

LO. Thus, in our view, the profit rate, at which the Indian subsidiary was

remunerated, can be taken as an yardstick to determine the quantum of

profit attributable to PE. The Assessing Officer has attributed 15% of

the gross revenue as profit to the PE. Whereas, learned first appellate

authority has determined the net profit rate at 15% of the total sales and

attributed 80% out of that to the PE. In our view, it will be reasonable to

estimate the net profit at 11% of the total sales made in India and out of

that attribute 80% as income of the PE, as major role was played by the

39 ITA No. 643 to 645/Del/2005 & 3660/Del/2009

PE with regard to EPZ sales. Of course, while computing the income of

the PE, the Assessing Officer must consider assessee’s claim of

expenses incurred towards making sales in India and other deductions

such as depreciation, head office expenses, turnover discounts etc.

While undertaking such exercise, the Assessing Officer must provide

reasonable opportunity of being heard to the assessee.

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.

Order pronounced in the open court on 04/01/2024.

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) VICE-PRESIDENT VICE-PRESIDENT

Dated: 04.01.2024 *aks/-