IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘A
‘A’ : NEW DELHI

BEFORE SHRI G.D.AGRAWAL,

G.D.AGRAWAL, VICE PRESIDENT AND
SHRI I.C. SUDHIR,
SUDHIR, JUDICIAL MEMBER

ITA Nos
Nos.2015/Del/2008, 2435/Del/2010 & 5026/Del/2011
Assessment Years
Years : 2003-
2003-04, 2004-
2004-05 & 2005-
2005-06

M/s Brown
Brown & Sharpe INC, Vs. Assistant /Deputy Commissioner of
A-5, Sector-
Sector-4, Income Tax,
Noida, Gautam Budh Nagar, Circle, Noida.
U.P. – 201 301.
PAN : AACCB2482G.
(Appellant) (Respondent)

Appellant by : Shri Salil Agarwal, Advocate.

Respondent by : Shri Sanjeev Sharma, CIT-DR.

ORDER
PER G.D.AGRAWAL,
G.D.AGRAWAL, VP :

These appeals by the assessee are directed against separate

orders of learned CIT(A), Ghaziabad dated 05.02.2007, 16.03.2010 and
16.08.2011 for the AY 2003-04 to 2005-06 respectively.

2. In all these appeals, common grounds have been raised.

Therefore, we shall discuss in detail the grounds as well as facts for AY
2003-04.

3. In this year, the assessee has raised as many as 20 grounds.

However, they are all against the determination of income at
`24,86,703/- as against the declared loss of `38,86,254/-.

4. At the time of hearing before us, it is stated by the learned

counsel that the assessee i.e. M/s Brown & Sharpe INC is incorporated

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in USA and it is 100% subsidiary of Hexagon AB (Publ), Sweden. That

during the accounting year, the assessee started a liaison office in
India for which permission of the RBI was taken. That the liaison office
was established only as a communication channel between the
assessee and its customers or prospective customers in India. That as
per the condition put forth by the RBI while permitting the assessee to
establish a liaison office in India, the liaison office was debarred from
rendering any consultancy or any other services directly or indirectly.
That the RBI had never alleged that the assessee has violated the
conditions put forth by RBI while granting permission to establish a
liaison office in India. He stated that the liaison office never rendered
any services for procurement of order or sale of the product of the
assessee company. Therefore, there was no income earned in India.
He further stated that the liaison office is only receiving the
reimbursement of expenses incurred from the head office. He,
therefore, submitted that merely because the assessee company has
opened the liaison office in India, it is not liable to be taxed. In this
regard, he relied upon the following decisions:-

(i) Angel Garment Ltd. – [2006] 287 ITR 341 (AAR).

(ii) U.A.E. Exchange Centre Ltd. Vs. UOI & Another – [2009]
313 ITR 94 (Delhi).
(iii) K.T. Corporation – [2009] 181 Taxman 94 (AAR-New Delhi).
(iv) Sojitz Corporation Vs. Assistant Director of Income Tax
(International Taxation) – [2008] 117 TTJ (Kol) 792.
(v) Mondial Orient Ltd. Vs. ACIT (International Taxation) –
[2010] 129 TTJ (Bang) 560.

5. The learned counsel further submitted that the reimbursement of

expenses cannot be said to be income of the assessee. In support of
this contention, he relied upon the decision of Hon'ble Jurisdictional

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High Court in the case of CIT Vs. Industrial Engineering Projects Pvt.
Ltd. – [1993] 202 ITR 1014.

6. Learned DR, on the other hand, relied upon the order of the
Assessing Officer as well as learned CIT(A) and by referring to pages 2
to 4 of the assessment order, he pointed out that the Assessing Officer
had examined in detail whether the liaison office has rendered any
services for effecting the sales of the assessee’s product or not and on
examination of the service agreement of the employees, he found that
the employees were offered the sales incentive plan by setting the
performance target for which they were allowed to receive up to 25%
of the annual remuneration as incentive. He also stated that the
liaison office had employed not only the Chief Representative Officer
but also the Technical Support Manager. The Assessing Officer had
examined the Chief Representative Officer i.e. Shri Anoop Prasad
Verma and his statement was recorded. From his statement, it was
evidently clear that the liaison office was promoting the brand
products of the assessee and the performance of the employees was
being judged by the number of orders that the company received. He,
therefore, submitted that the liaison office was not simply a
communication channel and as claimed by the assessee but it was
rendering the services for promotion and sales of the products of the
assessee company. That apart from getting permission from RBI for
opening the liaison office, the assessee company is registered with the
Registrar of Companies for establishment of place of business in India.
He referred to the certificate issued by the Registrar of Companies,
NCT of Delhi and Haryana in this regard. He also stated that the
assessee itself had filed the return of income not only for this year but
also for all subsequent years claiming the loss under the head ‘income
from business or profession’.

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7. We have carefully considered the submissions of both the sides

and perused the material placed before us. The learned counsel for
the assessee has argued at length to buttress his point that the liaison
office of the assessee did not render any services in India so as to
saddle with the liability of income tax in India and in support of which
he relied upon the various decisions. Therefore, before adverting to
the facts of the assessee’s case, it would be important to see the ratio
laid down in the various decisions relied upon by the learned counsel.

8. In the case of U.A.E. Exchange Centre Ltd. (supra), Hon'ble

Jurisdictional High Court held as under:-

“Under article 5(2)(c), amongst others, permanent

establishment includes an office. However, article 5(3)
which opens with a non obstante clause, is illustrative of
instances where under the DTAA various activities have
been deemed as ones which would not fall within the ambit
of the expression “permanent establishment”. One such
exclusionary clause is found in article 5(3)(e) which is :
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. The only
activity of the petitioner’s liaison offices in India was to
download information which was contained in the main
servers located in the UAE based on which cheques were
drawn on banks in India whereupon the cheques were
couriered or dispatched to the beneficiaries in India,
keeping in mind the instructions of the NRI remitter. Such
an activity could not be anything but auxiliary in character.
The instant activity was in “aid” or “support” of the main
activity. It fell within the exclusionary clause.”

9. In the case of Angel Garment Ltd. (supra), the Authority for

Advance Rulings held as under:-

“The applicant, a non-resident company incorporated in

Hong Kong, proposed to set up a liaison office in India for
collecting information and samples of garments and

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textiles from manufacturers, traders and exporters and

passing on the information to the head office in Hong Kong
and co-ordinating and acting as the channel of
communication between the applicant and Indian
exporters and follow up with Indian exporters for timely
export of goods. The entire expenses of the proposed
liaison office were to be met through remittances from the
applicant’s head office in Hong Kong. On these facts the
applicant applied to the Authority for an advance ruling on
the question whether the applicant could be said to have
received income taxable in India. On the facts stated the
Authority ruled that a plain reading of Explanation 1(b) to
section 9(1)(i) of the Income-tax Act, 1961, indicating that
no income would be deemed to accrue or arise to a non-
resident through or from operations confined to the
purchase of goods in India for the purpose of export. The
proposed activities of the liaison office of the applicant in
India were to be confined to purchase of goods for export.
It was immaterial whether the export of goods was to Hong
Kong or to any other country. The applicant company
could not, therefore, be said to earn income from the
proposed activities under the provisions of the Income-tax
Act.”

10. In the case of K.T. Corporation (supra), the Authority for Advance
Rulings held as under:-

“The applicant, a Korean company, is telecommunication

carrier/reseller. It has opened a Liaison Office (‘LO’) in India
with the permission of the Reserve Bank of India (RBI) to
act as a communication channel between the head office
of the applicant and the Indian companies within the
parameters listed out by the RBI. Pursuant to the opening
of the LO, the applicant entered into an agreement with
Vodafone Essar South Ltd. (VESL), an Indian company
which is also a telecommunication carrier/reseller, to
provide certain services to each other. In the above
backdrop, the applicant has sought advance ruling on
question as to whether its LO in India constitutes a
permanent establishment in terms of the aforesaid
agreement. It contends that LO in India only carries out
preparatory or auxiliary activities, such as: (i) holding of
seminars, conferences; (ii) receiving trade enquiries from
the customers; (iii) advertising about the technology being

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used by the applicant in providing the wired/wireless

services and to answer the queries of the customers; (iv)
collecting feedback from the prospective
customers/consumers, trade organizations, etc., and it has
neither played any role in pre-bid survey, etc., before
entering into the agreement with VESL nor has involved
itself in the technical analysis of any project, and,
therefore, it cannot be considered to be a PE in terms of
clauses (d), (e) and (f ) of Para 4 of article 5 of the Treaty
between India and Korea.”

11. In the case of Sojitz Corporation (supra), Kolkata Bench of ITAT

held as under:-

“Liaison offices of the assessee in India whose activities

are restricted to collecting and sending of information from
India to Japan fall within the exclusionary cl. (e) of art. 5 of
the DTAA between India and Japan and, therefore, the said
liaison offices cannot be treated as PE of the assessee in
India, and therefore the action of authorities below in
estimating the income of the assessee on the basis of
having PE was not sustainable.”

12. Let us now see the facts of the assessee’s case so as to arrive at
the conclusion whether any of the above decisions would be applicable
to the case of the assessee. In the assessment order, at page 2, the
Assessing Officer has recorded that the liaison office of the assessee
has employed Chief Representative Officer Shri Anoop Prasad Verma
and Technical Support Manager Shri Rajeev K. Datar. The employees,
besides fixed remuneration, were offered sales incentive plan by fixing
the performance target for which they were allowed to receive up to
25% of the annual remuneration as sales incentive. Though during the
assessment proceedings Shri Anoop Prasad Verma i.e. Chief
Representative officer of the liaison office had stated that sales
incentive plan was not actually acted upon but, nevertheless, it is not
in dispute that in the employment contract between the assessee and
the employees, there was a sales incentive plan and employees were

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to be provided with the remuneration based upon the achievement of

the target for the sales of the goods of the assessee company in India.
The statement of Shri Anoop Prasad Verma was also recorded by the
Assessing Officer and, in reply to question 14, he stated “The
employee of the liaison office was assigned the task to promote Brown
& Sharpe Brand’s products and to understand the Indian market. The
performance judged by number of direct orders that the company
received as well as extend the awareness of the Brown & Sharpe
Company in India.” The above factual finding recorded by the
Assessing Officer could not be controverted by the assessee either
before the CIT(A) or before us. Further, the assessee company
registered itself with the Registrar of Companies for carrying on the
business in India and the certificate issued by the Registrar of
Companies reads as under:-

“I hereby certify that Form No.44 dated 13.9.2002 filed U/s

592 of the Companies Act, 1956 notifying establishment of
place of business in India with effect from 31.7.2002 by M/s
Brown & Sharpe INC. Company originally incorporated in
U.S.A. has been registered.

Given under my hand at New Delhi this day of 14th Nov.

Two Thousand Two.”

13. The assessee itself filed the return of income on 28.11.2003

declaring net loss of `38,86,255/-. The computation of income is at
page 26 of the paper book from which it is evident that the loss is
computed under the head ‘profits & gains of business & profession”. In
the computation, the assessee added back the depreciation which was
debited to the books of account as per Companies Act and claimed the
depreciation as per the Income-tax Act. Thus, the assessee itself took
a stand that it derives income from business or profession in India. On
these facts, none of the decisions relied upon by the learned counsel

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would be applicable because in the case of U.A.E. Exchange Centre

Ltd. (supra), the liaison office of the assessee in India was only to
download information which was contained in the main server located
in UAE based upon which the cheques were drawn in India. On these
facts, Hon'ble Jurisdictional High Court held that such an activity was
only auxiliary in character. In the case of Angel Garment Ltd. (supra),
the liaison office was only collecting information and sample of
garments and textile from manufacturer and traders and passing on
the information to the head office in Hong Kong and coordinating as
channel of communication between the assessee and the customers.
On these facts, the Authority for Advance Rulings held that the
applicant company could not be said to have earned income from the
proposed activities under the provisions of the Income-tax Act. In the
case of K.T. Corporation (supra), the liaison office in India carried out
only preparatory or auxiliary activities such as holding seminars,
conferences, receiving trade enquiries, collecting feedbacks,
advertising about the technology being used by the assessee etc. On
these facts, the Authority for Advance Rulings held that the liaison
office cannot be termed as PE in terms of treaty between India and
Korea. In the case of Sojitz Corporation (supra), the liaison office of the
assessee in India was only collecting and sending the information from
India to Japan. On these facts, the ITAT Kolkata Bench held that the
authorities below were not justified in estimating the income of the
assessee on the ground that the assessee was having a PE in India.
But, the facts in the case of the assessee are altogether different. The
assessee company is registered with the Registrar of Companies in
India for carrying on the business. The liaison office, apart from having
Chief Representative Officer and other staff, is also having a Technical
Expert. The employees of the assessee company are promoting the
sales of the goods of the assessee company as per service conditions.
There is a sales incentive plan by which employees are provided the

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incentive for achieving the sales target and the performance of the
employees is being judged by the orders secured by the assessee
company. All these activities clearly establish that the liaison office of
the assessee was promoting the sales of the assessee company in
India and, therefore, the Assessing Officer was fully justified in holding
that the income attributable to liaison office is taxable in India.

14. Now, coming to the determination of income by the Assessing

Officer, the learned counsel for the assessee has vehemently
contended that the liaison office has only received the reimbursement
of the expenses and, under no circumstances, the reimbursement of
expenses can be termed as the income of the assessee. In support of
this contention, the learned counsel relied upon the decision of Hon'ble
Jurisdictional High Court in the case of Industrial Engineering Projects
Pvt. Ltd. (supra), wherein their Lordships held as under:-

“Held, (i) that reimbursement of expenses can, under no

circumstances, be regarded as a revenue receipt and in
the present case the Tribunal had found that the assessee
received no sums in excess of expenses incurred. The
Tribunal was, therefore, justified in deleting the
disallowance under section 37(2A) of the Income-tax Act,
1961, and rule 6D of the Income-tax Rules, 1962.”

(emphasis by underlining supplied by us)

15. There cannot be any dispute with the legal contention of the
learned counsel that the reimbursement of the expenses can never be
income. Hon'ble Jurisdictional High Court has also held that the
reimbursement of expenses can under no circumstances be regarded
as a revenue receipt. However, in this case, as a matter of fact, what
the Assessing Officer taxed is the amount received by the assessee
over and above the reimbursement of the expenses. In fact, from the

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amount received from the head office, the Assessing Officer had
deducted the expenses incurred by the assessee and it is only the
excess amount received by the assessee which has been treated as
income. That in the above mentioned case, Hon'ble Jurisdictional High
Court has upheld the order of the ITAT because in that case, the
amount received by the assessee from the foreign company was equal
to the expenses incurred. Thus, the actual expenditure incurred by the
assessee was reimbursement by the foreign company and no sum in
excess of the expenses incurred was reimbursed. But, the facts are
altogether different in the case of the assessee. In the case under
appeal before us, in all the three years, the liaison office received more
amount than the expenses actually incurred by the liaison office. The
Assessing Officer himself has not treated reimbursement of expenses
as income. The amount received by liaison office over and above the
expenses actually incurred, year after year, was treated as income. To
that extent, the above decision of Hon'ble Jurisdictional High Court
would in fact support the case of the Revenue rather than the
assessee.

16. In view of the above, we do not find any justification to interfere

with the orders of authorities below. The same are sustained.

17. In the result, all the appeals of the assessee are dismissed.
Decision pronounced in the open Court on 17th January, 2014.

Sd/- Sd/-
(I.C. SUDHIR)
SUDHIR) (G.D.AGRAWAL)
JUDICIAL MEMBER VICE PRESIDENT

Dated : 17.01.2014
VK.

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Copy forwarded to: -

1. Appellant : M/s Brown

Brown & Sharpe INC,
A-5, Sector-
Sector-4,
Noida, Gautam Budh Nagar,
U.P. – 201 301.

2. Respondent : Assistant /Deputy Commissioner of

Income Tax, Circle, Noida.
3. CIT
4. CIT(A)
5. DR, ITAT

Assistant Registrar

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