Facts
The taxpayer is a Hong Kong based company and a wholly owned subsidiary of St. Jude Medical Inc. (SJMI), a US based company. The taxpayer had set up a Liaison Office (LO) in India with the permission of the Reserve Bank of India (RBI). Subsequently, the taxpayer decided to close the LO and set up a branch office with the permission of RBI. Accordingly, LO was closed on 31st December, 1999 and the branch office started functioning on
1st January, 2000.
The taxpayer declared nil taxable income on the ground that its operations in India were restricted to act as a LO which has not earned any income in India.
Later, a survey was conducted on the taxpayer, and on the basis of documents impounded in the course of survey, the Assessing Officer (AO) held that the taxpayer was involved in the business activity and had a 'business connection' in India.
Accordingly, the AO treated the taxpayer's Liaison Office in India as PE of SJMI and estimated the profits on the sales made by SJMI as well as the taxpayer and determined the tax and interest thereon in one assessment order.
The Commissioner of Income Tax (Appeals) held that the taxpayer has business connection and there exists a PE in India. Further, he affirmed the profits estimation on sale of both SJMI and the taxpayer. However, the CIT(A) held that income of US company cannot be estimated in taxpayer's hands.
Issues
Whether the income attributable to the PE of the US company in India can be taxed in the hands of a Hong Kong company on account of the Hong Kong company's Liaison Office in India?
Held
The procedure adopted by the AO, to attribute the income of SJMI in the hands of the taxpayer, was not correct since there should be separate proceedings for two separate companies established in different countries. Further, this aspect was considered by the CIT(A) in later years and accepted the taxpayer's contentions in later years.
It is legally not possible to consider the profits attributable to SJMI in the hands of the taxpayer and therefore, the profit of SJMI was excluded from the income of the taxpayer.
The entire basis for arriving at the findings of the tax department that the taxpayer had done business activities in the guise of LO was based on the statement recorded during the survey when the LO was already closed and the branch office was functioning for more than a year. Consequently, the documents collected after the survey cannot be relied for the prior period.
The documents submitted by the tax department do not indicate that the taxpayer was involved in direct sales activity except co-ordinating and liaisoning with various distributors and doctors who are to use the products. Further, these documents do not establish that the taxpayer was involved in business activity before it became a branch office.
There was a clear distinction between the liaison activities and the branch activity and the taxpayer was not involved in business activity when they were only permitted to do liaison activity by the RBI.
The taxpayer was involved in liaison activities up to 31st March, 1999 and not in sales activity. The attribution of income and estimation of gross profits in relation to A.Y. 1999-2000 cannot be done since the taxpayer did not have any business connection or business activity though its LO.
In relation to the A.Y. 2000-01, there is business activity for a period of three months in the year after the taxpayer established the branch. Therefore, the profits attributable to the branch office for the sales made in the three month period from January 2000 to March 2000 are to be confirmed. Accordingly, the AO was directed to examine the sales made and the expenditure incurred during that period to arrive at the taxable profits.
Accordingly, the addition of business profits of SJMI as income of the taxpayer was deleted in total for both the years. Also, the profit attributable to the liaison period was deleted.
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