M/S. NAGASE & COMPANY LTD.,MUMBAI vs. ADIT (I.T) - RG.-3(2), MUMBAI

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. ings indicated that LO was being used to carry out sales and marketing activities in a big way, that the employees were contacting potential customers and were giving quotations about the rates,that they were passing on the requirements of those customers to the HO Japan,that they were forwarding the quarries of the customers to Japan,that they were pursuing shipment of the goods to be delivered to Indian customers and were following the payments,that the HO was only despatching the goods once the order was raised by the assessee,that in case of a LO the employees would just forward and receive the queries and would not go all out in the field fulfilling the sales targets,that the impounded material showed that employees of the LO were given specific sales target both as individual and as a group,that the targets were constantly reviewed by the appraisers,that they were supposed to increase/expand business and to develop new contacts,that the raising of final bills by the HO would not mean that assessee could claim that no profits were attributable to it,that the entire activity of the business except for the file of dispatch and raising the bills were carried out by the assessee in India,that the assessee had arranged its work in such a fashion that final invoices were raised outside and the goods were directly sent to the Indian clients,that it also made arrangements so that the Indian parties made payment to the NCJ.He referred to the Treaty (point number 6) and held that profit accruing on the sales being made from the assesse’s operations in India were to be taxed under the head business income for the year under consideration.

2.1.As per the AO,the assessee did not submit the sales turnover made by it during last six years, including the year under appeal.He directed it to submit a copy of its global accounts to assess the profitability at the global level and to determine the profit of the Indian branch.As per the AO the assessee did not furnish any documents/details in that regard.Invoking the provisions of Rule 10 of the Rules,he estimated the income at the rate of 10% of the total turnover from India. He held that assessee was mainly supplying chemicals that were in great demand and some of the items were near monopoly items,that the estimate was quite reasonable considering the nature of the business of the assessee. Analysing the available data, the AO held that on an average the annual turnover raised from Rs.100 Crores(approximately)in the AY. 1999-2000 to Rs.250 Crores (appx.) in the AY. 2002-03,that sales had increased by almost 20% every year, that the turnover figures were not available for the remaining years, that same had to be estimated at 20% more or less than the succeeding/preceding year.For the AY.1998-99 he estimated at 20% less than the sales for the subsequent AY. and so on.As stated earlier,he determined the income of the assessee at Rs.7,97,69,800/-

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd.

3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).It was argued that reasonable opportunity was not given by the AO to produce the evidence.The assessee furnished certain documents before the FAA for the first time.He called for a remand report from the AO with regard to the additional evidences produced before. Before the FAA,the assessee contended that it was a tax resident of Japan, that the provisions of Indo Japan Treaty would be applicable, that as per Article 7 of the Treaty the profits would be taxable in India only if it had a PE,that it was carrying out preparatory and auxiliary activities through its LO,that the said LO would not constitute a PE of the assessee in India [Article 5(6)of the Treaty], that sales would take place directly from Japan and the HO would deliver the goods directly to the customers, the customer would open a letter of credit in favour of the HO for making the payment, that sales were carried out through the independent agents,that approximately 80 to 85% of the assessee’s export of goods to Indian customer was conducted through the independent agents, that the agents were unrelated to the assessee and would provide similar services to other parties,that the agents were paid commission for their services,that as per the permission of the RBI the assessee had set up a LO in India to represent the parent company to promote export from and import into India to act as a commu -nication link between the assessee and its customers in India, that the LO was specifically prohibited from carrying out any commercial/income generating activities in India, that the LO did not carry out any activity which was prohibited by the RBI,that LO was involved only in liaisoning work, that it carried out support activities and not non-core activities for the assessee, that the employees of the LO would carry out support functions to enable the HO to carry out the sales in as well as purchases from India,that the employees of LO were not authorised to negotiate the pricing for the contractual terms with the potential customers /suppliers, that they would act to facilitate the sale by the HO, that the performance review reports were primarily grouped into various subdivisions at the HO level, that those divisions included dyestuff, colour and additives,minerals etc.,that the HO at its level had classified the employees as part of one of those divisions,that the HO had a policy to review the performan -ce of the employees based on the targets achieved by a division/group to which the respective employee belonged,that the performance of the employee was measured according to the assistance provided by him through the support functions rendered, that prompt commu -nication both ways would help the HO in ensuring satisfied and loyal customers and maximise sales,that the HO sales and purchases targets were relevant for measuring performa -nce or for evaluating the efficiency/performance of the LO staff, that the AO had placed

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. reliance on incorrect documents,that the turnover computed by the AO included the sales made by the assessee through its independent agents,that the agents would collect and provide information about the Indian market to the HO,that they would identify and meet new customers and would provide information about price to them, that as per the provisions of Article 5 (8) of the Treaty and independent status of the agents,acting in ordinary course of its business,would not constitute a PE of the principal in India,that no employee of the assessee held the position of management,that neither the agents not the assessee had any shareholding in each other’s business,that the decision-making power in respect to activities of the agents did not rest with the assessee,that they were paid a commission @ 2 to 5%(appr- oximately)of the sales amount,that all the costs relating to conducting their agency business was born by the agents,that the agents would independently frame their business policies, that the only instruction the agents would receive from the assessee was regarding the overall term of identifying the new customer and the price to be charged to them,that such instruct - tions were normal in any agency relationship,that the agents would carry out similar activities for a number of principles,that each of the agents would conduct its business as independent entrepreneur according to his own views experties and methods,that the agents were not dependent upon the assessee for their economic viability,that the agents were unrelated entities and the remuneration paid to them was at arm’s length basis.The assessee filed documents with regard to its key agents.The documents included the data available on the website of Musk and Fragrance (M&F) and on the website of associated agencies,list of customers agents wise and product wise.It was further argued that direct sales/sales through independent agents were not taxable in India, that the business of the assessee was structured in such a manner that a major part of its sales in India was affected through its independent agents that the agents had considerable knowledge and experience of the market, that the AO himself had acknowledged the fact, that majority (approximately 85%) of the business of the assessee was carried on through the independent agents, that there was a clear demarcation of products which were supplied through direct sales and agents sales, that agents sales were based on certified exhibits, that the AO was not justified in stating that the assessee had attempted to reclassify transaction in the nature of direct sales,that the AO had erred in stating that role of the independent agents was not different from the customers of the assessee to whom direct sales were made,that the assessee had submitted several sample documents evidencing the fact that agents were independent and would directly deal with the HO, that the documents also proved that the assessee had made direct remittances of the commission amount to the bank accounts of the agents, that the LO had only provided a support service to 1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. the HO, that the AO had himself acknowledged the fact that agents were working for the others also,that the assessee had filed a copy of its consolidated profit and loss accounts reflecting financial results of NCJ as well as its subsidiaries on a consolidated basis, that a certified statement reflecting the summary of financial data in respect of the years ended March 1996 to March 2002 was also furnished, that it submitted the statements reflecting the breakup of cost of sales and selling expenses,that it had also submitted a revised statement explaining the reason for revising the same,that it had furnished specific reconsiliation statement in response to the issue raised by the AO with regard to discrepancy in the amount of sales made by M&F,as independent agents for the AY.1998-99, that the AO had not commented on para 5A and 5B of the first remand report as well as the submissions made by the assessee on 30/06/2005 in his second remand report.The assessee further argued that turnover computed by the AO was erroneous,that the figures reflected in the achievement column of the PRR of the employees included the sales made by the assessee through its independent agents,that the figures also included the amount of purchases, that the LO essentially acted as, negation channel between the HO and the Indian parties and only played a supportive role in respect of assessee’s import business, that the LO is not engaged in making purchases for the assessee in India, that as per the provisions of Article 7 (5) of the Treaty no profit would be attributable to the PE on account of purchases made by such PE in India, that purchases made by the assessee from India should be excluded while computing its total taxable income,that the AO had assumed that there was a 20% increase in the sales in the subsequent years,that the increase/decrease of 20% in the sales figure for the subsequent/ prior years could not be taken on an ad hoc basis, that the AO had attributed the entire 10% profits to the LO in India,that even if the LO was considered as a PE of the assessee the entire profit on sales could not be attributed to LO in India ,that the amount of purchases and sales made through the agent should be reduced from the figures reflected in the achievement columns of the performance review reports.It relied upon the case of Annamalais Timber Trust and Company (41 ITR 781)and argued that even if the LO was regarded as a PE the scope of activities of the LO could not in any event be higher than that of an independent agent,that the average rate of commission paid to the agent should therefore be considered for computing revenue attributable to the LO operations in respect of direct sales,that from such revenues the expenses pertaining to the LO should be directed to arrive at the net profits,that based on the above the income attributable to the PE should be computed as per the average rate of commission on by the independent agents,that the agents acted in the ordinary course of their business and had legal and economic independence,that even if any of its agents was 1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. held to be a PE of the assessee that taxable income should be calculated as per Article 7 of the Treaty.The assessee also refer to the circular number 23, dated 23/07/1969 and Article 7 of the Treaty and stated that no income would arise in the hands of the assessee, that there was no requirement to place reliance on the global profitability figures that, provisions of Article 5(8)would be applicable in the case under consideration.The assessee also filed details of the discrepancy pointed out by the AO in the first remand report and the submissions made by it before the AO.

3.1.The FAA, after considering the submissions of the assessee and the remand reports,held that the AO had provided a table listing out of 21 instances of documentation (forming part of the impounded documents)to support the argument that it’s LO was engaged in full-fledged business activities,that the documents indicated strong evidence to the point that LO had undertaken marketing activities, including negotiations and had been dealing with customers, that the documents indicated that the role of the LO in Indian was critical to the main trading business of the assessee in India,that the activities could not be categorised as preparatory and auxiliary activities,that they did not qualify for exclusion from the definition of the term PE under Article 5 of the Treaty,that the LO constituted a PE of the assessee in India, that the assessee had claimed that approximately 80-85% of the export business of the assessee had been conducted through independent agents and that they were unrelated to it, that although all the customers whether attended directly or through agents made payments to the HO at Japan but the business negotiations were carried out with them by the LO, that there was no basic difference in the dealing by the assessee with the customers directly or through agents, that the role of the independent agents was not different from the customers who negotiated directly,that during the survey operations details regarding the sales claimed to have been made by so-called independent agents were found to be reflected in the total sales figure of Mumbai office for the AY. 1999-2000 and 2000-2001,that the LO had played a role in sales made by the agents,that LO was involved in the agents’ sales transaction, that the figures of the PRR,impounded during the survey operation,should be considered to be the turnover for those years, that the reconciliation submitted by the assessee with regard to the figure as per the exhibits vis a vis the PRR did not substantiate the claim that it also included purchases, that nowhere it had been certified by the assessee that reports also included agents’ sales,that it had not filed details of purchases,that in respect of remaining AY.s the figures as per the certified exhibits should be considered as there was no justification for 20% ad hoc increase/ decrease to the sales figure of the those AY.s,that sales figure had been taken on the estimate

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. basis for the AY.s 1996-97 to 1998-99 and AY.2001-02 for which no reference to impounded documents had been made by the AO,that even the sales figures for the AY.2002-03 had been estimated on the basis of the sales figures for the earlier AY.for which no impounded documents had been referred to,that the AO had determined the sales for the AY.s.1996-97 and 1997-98 by adopting rate of 20% decrease,that the sales shown by the assessee for the those AY.s were more than the sales figures adapted on estimate basis by the AO.He directed the AO to adopt the sales figure for all the above AY.s (except AY. 1999-00 and 2000-01) as per the certified exhibits submitted by the assessee.The FAA further held that the PE in India was an extension of the assessee,that from the verification of the accounts,submmitted it by the assessee,it was not possible to draw any reasonable conclusion,that in the absence of various details like itemised details of sales/ purchases and expenses claim of the assessee remained unsubstantiated,that the accounts filed by the assessee were merely extracts of its annual accounts,that the certified statements reflecting the summary of the financial data did not give a complete state of affairs, that the AO did not have any option but had to estimate the profits attributable to PE under Rule 10 of the Rules,that the assessee had submitted that GP from its global operation was approximately 7%,that its activities involved trading/ marketing which would yield high profits.Finally,he applied the GP rate of 8%,as against 10% applied by the AO.

4.Before us, the Authorised Representative (AR) argued that facts available for later year i.e. AY.1999-00 could not form basis for assuming facts for the years prior to such year,that income for earlier years had to be assessed on the basis of material subsisting for those years, that the AO had majorly relied on the documents impounded during the survey proceedings for the period 1995 to 2003 to hold that LO of the assessee constituted a PE in India for the year under consideration,that only documents from 1995 till March 1998 could be considered for understanding the state of affairs for the impugned year under appeal, that the AO/FAA had based their conclusions on the PRR.s of the staff of the LO,that the PRR.s.were not for the year under appeal,that the members of the staff were being evaluated on the basis of their support role given to the actual/customers and hence the figures mentioned were in respect of support given by the staff and did not relate to sales achieved by such employees in India, that the PRR.s were relevant for the subsequent AY.s.,that no adverse conclusion should be drawn from such documents not pertaining to the year to hold that assessee had a LO in India, that LO carried out the RBI permitted activities only and acted as a communication channel gathering market information,that the analysis of the documents for the year under appeal

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. proved that LO was engaged in activities within the RBI permitted guidelines i.e. preparatory and auxiliary services, that Article 5 of the DTAA defined the concept of PE, that as per the DTAA preparatory and auxiliary services would not constitute PE, that no decision-making was done at the LO but was done at HO of the assessee i.e.at Japan,that the agents were pointed by the HO and the LO only acted as an information/commutation channel,that the LO’s role assumed significance on account of the language barrier between the countries, that the staff of the LO was responsible for collecting the market information and relaying the same to the HO,that the documents impounded by the Department clearly indicated that activities carried out by the staff of the LO were merely that of communication channel, that the AO had mentioned that RBI was being separately informed about the violation by the LO of carrying out activity beyond what was permitted,that the RBI had not taken any action against the LO till date in spite of the entire operation of the LO being disclosed to the regulator on an annual basis, that activities carried out through independent agents could not be said to be constituting a PE of the assessee in India,that the assessee would sell its commo -dities to Indian customers directly as well as through independent agents in India, that the full details of the sales made by the assessee to clients in India through agents/directly were submitted to the AO, that while determining the issue of PE in India he did not consider the material filed before him and held that entire sales of the assessee in India were attributable to PE of the assessee in India,that the agents were independent agents and were carrying out the activities in the normal and ordinary course of business, that as per Article 5 (7) and 5 (8) of the treaty activities carried out by an independent agent in his ordinary course of business would not constitute a PE,that the agents were not legally or economically dependent on the assessee,that they would deal with various other customers/principles that none of the documents impounded for the year establish that agents were customers of the LO,that the document at page 567 of the paper book did not indicate that agents were customers of LO, that the said paper supported the view that the agents were independent and the LO was only acting as facilitator, that page 559 of paper book indicated and supported the view that agents were actually involved in developing market and not the LO-employees, that the LO- employees had passed information to HO,that such passing of information could not be the basis to assume that agents were working at the behest of the LO, that agents would coordinate with the local office,that declaration from the major agents of the assessee to the effect that they were independent agents was filed,that the simple print of the websites of the agents clearly showed that they were dealing with the others beside the assessee,that the sales made through the agents in India should be excluded from the profits attributable to the PE of 1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. the assessee in India. He made a reference to pages 75 -78 and 81-85 of the PB.It was further argued that the profits attributable in respect of the direct sales of the assessee in India should be computed on the average rate of commission of the independent agents that even if the LO was considered as a PE of the assessee in India the scope of activities could not be in any event be wider than the activities of independent agents,that profits attributable to the PE of the assessee in India in relation to the direct sales in India should be computed on the basis of the average rate of commission paid by the assessee to such agents.Alternatively,it was argued that the profits attributable to the PE of the assessee in India in relation to the direct sales in India should be computed on the basis of the allocating the gross margin/net margins of the global operations of the assessee to the activities carried out by the PE in India, that in case the gross margins were apportioned to the PE the expenditure incurred by the LO should be allowed as a deduction while computing the profit attributable to a PE of the assessee in India,that the AO had arbitrarily estimated the profit at the rate of 10% on ad hoc basis which was reduced to 8% by the FAA, that the assessee is a trading company and was operating on extremely thin margins.He relied upon the cases of Mitsui and Company Ltd.(39ITD59) and Tokyo Marine and Fire insurance Company Limited (ITA/4696/Del/2005).

4.1.The Departmental Representative (DR)contended that two of the employees of the LO working with the assessee during the year under consideration,that the details of travelling expenses and the establishment expenses for the assessment year 1998-99 proved that GS and Balgi were on the payroll of the assessee,that they were engaged in the sales and business promotion of the assessee for the year under appeal, that the assessee had a PE in India, that the impounded material showed that the assessee had not restricted its activities to liasoning only,that it indulged into other activities,that the LO was involved in day-to-day business and aggressive sales activities with the help of the employees, that performance of the employees was analysed on the basis of sales target,that the employees were involved in expansion of the business and development of future business,that the LO had undertaken marketing activities including negotiations and it was dealing with customers,that the role of LO in India was critical to the main trading business of the assessee, that the activities could not be categorised as preparatory or auxiliary activities,that the activities carried out by the LO did not qualify for the exclusion from the definition of the term PE under Article 5 of the Treaty, that AO had noticed that all customers made payments to the HO at Japan and that assessee would raise invoices in the name of each serves customers, that there was no basic difference in assessee’s dealing with customer either directly or through agents,that the role of indepen -

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. dent agents was not different from the customers who were negotiated directly,that sales claim to have been made by independent agents were found to be reflected in the total sales figure of Mumbai office, that LO was directly involved in all the sales transaction pertaining to Indian operations,that the estimation of profit the rate of 10% on ad hoc basis was in accordance to Rule 10 of the Rules,that the AO had asked the assessee to submit details of its global accounts for last six years,that the assessee had not produced any documents/details, that the AO was left with no other option but to estimate the profit, that the assessee changed stands constantly by filing the revised certified copies of the accounts and documents every now and then.

5.We have heard the rival submissions and perused the material available on record including the impounded documents and the remand reports filed by the AO.We find that an action u/s. 133A of the Act was carried out at the business premises of the assessee,that certain documen -ts were impounded during the survey proceedings,that the AO held that the LO of the assessee was carrying out business activities and thus was its PE in India,that the business through the agents was procured through the LO,that that the LO had played a role in the sales made by the agents,that the figures of the PRR should constitute the part of the turnover for those years.The AO estimated sales adopting a particular formula( i.e.20% increase or decrease in the sales figures for the subsequent or earlier years),the FAA held that the LO was the PE of the assessee in India,that the AO was not justified in estimating the sales,that he should accept the sales figures submitted by the assessee except for two AY.s,that the AO had rightly invoked the provisions of Rule 10 of the Rules.He directed the AO to adopt GP rate of 8% as against the 10%,as adopted by the AO.

5.1.It is said that for income tax proceedings,each AY.is a separate assessment unit and liability to pay tax depends upon the fact as to whether any income had arisen or accrued to an assessee in that particular year or not.Events of earlier or subsequent years can be useful in that regard,but same should lead to establish the basic fact in a particular year the assessee had received certain income or income had accrued to it.In the case under consideration,the AO/FAA referred to certain impounded documents to establish that the LO was,in fact, functioning as PE of the assessee for the year under appeal and hence its income should be taxed in India.Therefore,we are of the opinion that issue of existence of PE should be decided first. For that purpose it would be essential to refer to the impounded material.One of the document -ts relied upon by the AO is PRR of one of the employees.We find that it talks of the perform 11

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd.

-ance of one of the employees for the FY.1998-99 i.e.for the AY.1999-2000.In our opinion, the report has no relevance for deciding anything for the year under consideration. Now,we would like to analyse the other documents that are relevant for the instant AY.Agreement dtd.13.09.1996,entered in to between LG Chemicals Ltd. Korea and Nagase & Co.(pg.517- 22)take of granting non transferable rights to distribute certain chemicals.The agreement was valid up to December,1996.No other document was referred to by the AO/FAA to prove that the agreement was renewed was acted upon during the year under appeal.Pg. 523 of the PB is a letter from one of the employees of the assessee to its Shanghai office.In that letter the employee has advised the Shanghai office as to how to deal with Indian customers.But,it does not prove that the assessee was indulging in sales activities.A fax message from GS on 15.07.2000 to the HO(Pg.537-39)clearly show that till July,2000 LO was supposed to find out the ‘business possibilities’ in the various parts of India.It also talks that intention of the Bombay office was not to do ‘independent business’.Letter from one of the employees to HO (Pg.546)pertains to some information about purchases to be made as per the ‘comments/ order’ of the HO.Pg.559of the PB is a letter from Musk and Fragrance (M&F) to LO.We have not come across any evidence that can prove that LO had directly dealt with the agent. The assessee had claimed that information received from M&F had been forwarded to HO. The AO had not commented upon the assertion made by the assessee.The next document (Pg.567) talks about meeting of members of the LO with agent and one of the manufacturer.It does not prove that the LO was carrying out business activities.

5.2.There is a very thin line between liasoning/providing auxiliary services and doing business. In the first instance support is given by LO to its HO who looks after the business. But,if the LO starts taking independent business decisions,including dealing with the customers,same could not be treated preparatory/auxiliary services.Providing/collecting information and acting as per the instructions of the HO will not definitely fall in the category of doing business independently.So,until and unless some reliable evidence is not brought on record it cannot be held that an assessee was not liasoning or was doing business.What has to be seen is that with whom the decision making power lies.If the LO has to follow the directions/command of the HO then the reins of the business would not be in its hands and it cannot be treated an independent entity.But,if it informs the HO,after entering in to business transaction on its own,about the results of its business activities then the HO cannot claim that the HO was assisting it.In the matter of UAE Exchange Centre (313 ITR 94),the Hon’ble Delhi High Court has held as under:

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd.

“The plain meaning of the word " auxiliary" is found in the Black' s Law Dictionary 7th Edition at page 130 which reads as " aiding or supporting, subsidiary" …..Once an activity is construed as being subsidiary or in aid or support of the main activity it would, according to us, fall within the exclusionary clause. To say that a particular activity was necessary for completion of the contract is, in a sense saying the obvious as every other activity which an enterprise undertakes in earning profits is with the ultimate view of giving effect to the obligations undertaken by an enterprise vis-a-vis its customer. If looked at from that point of view, then, no activity could be construed as preparatory or of an " auxiliary" character.” From the above discussion it is clear that any activity being subsidiary or in aid or support of main activity has to be treated auxiliary or preparatory activity.Perusal of the impounded documents,relevant for the year under appeal,have not led us to the conclusion that the LO was offering services that were not auxiliary.

5.3.We have not come across any statement of any of the employees or the officials / executives of the LO,recorded during the survey proceedings or after the action u/s. 133A of the Act was over.Generally,during the such operations statements are recorded and questions are asked about relevant and important impounded documents.There is no doubt that two of the employees GS and Vinod Balgi were employer of the LO for the year under considera - tion.But, that does not lead to any final conclusion.No question was ever asked to them about the duties assigned to them or about the responsibilities shared by them.There appointment letters would have given some clues about their job profile.Nothing is on record that can prove that the LO was functioning as an independent profit center for the year under consideration. We want to make it clear that our observation are for the AY.1998-99 and they are in no way binding for any other AY.We have analysed the papers that are relevant for the year under consideration only and our decision is also based solely on those documents.

5.4.Here,we want to mention that we have taken note of a portion of order of the AO,wherein he has mentioned that he would inform the RBI about the violations made by the LO in conducting its activities.We are not aware as to what was the outcome of that exercise. The FAA or the DR has not mentioned anything about the correspondence entered into with the RBI.We are aware that decision of RBI may not be very relevant for determining the tax liability of an assessee.But,if the RBI has,after receiving a communication from the AO,not initiated any proceedings against the assessee for violating the terms and conditions of the permission letter issued to it by the Bank for operating the LO,then it will strengthen the case of the assessee.By not taking any action against the assessee,the RBI has accepted the plea that the LO was performing the activities that were allowed by the Bank.

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd.

Considering the above,we are of the opinion that there is no evidence that the LO was functioning as PE of the assessee in India for the year under appeal.First effective ground is decided in favour of the assessee. As all the other grounds,raised by the assessee,are alternative grounds,so,we allow them for statistical purposes.

ITA/1800/Mum/2007-AY.1998-99(Appeal by the assessee): 6.While giving effect to the order of the FAA, the AO disallowed expenses under the heads Agents’ Commission (Rs.1,56,26,851/-)and expenditure incurred towards packing and trans - portation of personal and household effects and air travels of the employees (Rs.2,98,750/-). The assessee challenged the order of the AO before the FAA,who dismissed the appeal filed by it.

7.Before us,the AR argued that the issue will have to be decided only if it was held that assessee had PE in India, that assessee would be paying commission to independent agents, that after rejecting the financials of the assessee for considering the turnover the AO was not justified in Iran upon the same statement for holding that GP rate of 8% was inclusive of commission paid to the agents, that all expenses in connection with the determination of correct PE profits should be considered for computing the taxable income, that the assessee was required to incur expenditure for relocation of personal and household effects of the employees,that the expenditure was incurred in connection with the relocation of the employees in the normal course of business, that the expenditure was an allowable deduction. The DR supported the order of the AO and the FAA.

8.While deciding the earlier appeal,we have held that assessee was not having PE in India. The issues raised by the assessee are academic in nature in the background of our order. So, we allow the appeal filed by the assessee for statistical purposes.

ITA/369/Mum/2006-AY. 1998-99(Appeal by the AO): 9.First ground of appeal is about estimation of sale figures.During the assessment proceed – ings,the AO found that there was an error in the statement filed by the assessee with regard to turnover figures.The assessee,vide its letter dated 13/05/2005 (Page 257 of the PB) filed explanation in that regard.Later on, it also produced revise certified statement along with appended verification by the certified Public accountant accepting the mistake along with the reconciliation of the amounts. However, the AO was not satisfied with the explanation filed 14

1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. by the assessee.He stated that there were mistakes in the average commission paid to the agents,that the accounts of the assessee were not reliable. He estimated the turnover figure on the basis of the PRR of the employees applying plus/minus to the figures appearing in the reports. He also estimated the gross profit for the year under consideration at the rate of 10%, as stated in the earlier part of our order.

9.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA and made elaborate submissions. He called for remand reports from the AO. After considering the submission of the assessee and the reports he held that turnover figures had to be considered as per the certified statements filed on record, that in a particular year the estimated turnover was less than the certified turnover, that there was no justification for rejecting the certified statements.

9.2.During the course of hearing before us, the DR stated that the assessee itself had admitted that there were mistakes in the statement filed with regard to average commission paid to the agents,that the assessee filed the revised statements only after detection by the AO, that AO was left with no option but to estimate the turnover. The AR supported the order of the FAA.

9.3.We have heard the rival submissions and perused the material before us. We find that the AO had noted that there was discrepancy in the certificate dealing with average commission paid to the agents, that the assessee produced revise certificate along with the reconciliation before the AO,that the revised certificate was certified by authorised person, that out of the various certified statements filed by the assessee the discrepancy was only in case of one certificate.We find that while sending the remand reports the AO did not comment upon the reconciliation filed by the assessee with regard to commission paid to the agents.Pg.309-316, 327-340 and 427 of the PB are about the reconciliation of the figures. After going through these documents we are of the opinion that the FAA were justified in rejecting the method adopted by the AO i.e. estimating the turnover instead of accepting the turnover is certified by the professionals.We have taken note of the fact that assessee is a public company in Japan and the statements drawn were from its public accounts.Because of a genuine mistake in one of the certificates (not all the certified documents),the AO should not have estimated the turnover.In our opinion, before taking such a drastic step in case of a public limited company he should have commented upon the reconciliation statement filed by the assessee. Considering the above,we are of the opinion that the order of the FAA does not need any 1800/M/07&115/M/06369/M/06, M/s. Nagase & Co.Ltd. interference from our side.So, confirming his order, we decide the first ground of appeal against the AO.

10.Next ground of appeal is about reducing the GP to 8% by the FAA,as against 10% estimated by the AO. Following our order for the first ground of appeal, we dismiss second ground.

11.Last ground of appeal is about levy of interest under section 234B of the Act.While completing the assessment,the AO had levied interest under the said section.During the appellate proceedings,the FAA deleted the interest.

11.1.We find that the issue is decided against the AO and in favour of the assessee by the order of the Hon’ble jurisdictional High Court delivered in the case of NGC Network Asia LLC (313 ITR 187).We would like to reproduce the relevant portion of the judgment of the Hon’ble court and it reads as under- “Under the provisions of the present Act, the issue had come for consideration in the case of CIT v. Sedco Forex International Drilling Co. Ltd. reported in [2003] 264 ITR 320 (Uttaranchal). One of the questions was, as to whether interest could be levied on the assessee under section 234B of the Act in respect of tax which was not liable to be deducted at source. A learned Bench of the Uttaranchal High Court, after considering the provisions, held as under (page 328) : "Secondly, although section 191 of the Act is not overridden by sections 192, 208 and 209(1)(a)(d) of the Act, the scheme of sections 208 and 209 of the Act indicates that in order to compute advance tax the assessee has to, inter alia, estimate his current income and cal culate the tax on such income by applying the rates in force. That under section 209(1)(d) the Income-tax calculated is to be reduced by the amount of tax which would be deductible at source or collectible at source, which in this case has not been done by the employer com pany according to the law prevailing for which the assessee cannot be faulted."