{"id":571,"date":"2011-09-09T09:26:08","date_gmt":"2011-09-09T09:26:08","guid":{"rendered":"http:\/\/www.itatonline.org\/blog\/?p=571"},"modified":"2011-09-09T10:55:16","modified_gmt":"2011-09-09T10:55:16","slug":"the-rolls-royce-case-spare-a-thought-for-the-much-maligned-ao","status":"publish","type":"post","link":"https:\/\/itatonline.org\/blog\/the-rolls-royce-case-spare-a-thought-for-the-much-maligned-ao\/","title":{"rendered":"The Rolls Royce Case: Spare A Thought For the Much-Maligned AO!"},"content":{"rendered":"<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.itatonline.org\/blog\/wp-content\/uploads\/2011\/04\/CA_Vellalapatti_Swaminathan.jpg\" alt=\"\" title=\"\" width=\"100\" height=\"100\" class=\"alignleft size-full wp-image-437\" \/><\/p>\n<p><strong>The author goes ballistic over the <a href=\"https:\/\/www.itatonline.org\/dlmonitor\/download.php?t=f&#038;i=236\"><strong>Rolls Royce Plc vs. DDIT<\/strong><\/a> case and claims that Rolls Royce&#8217;s \u201c<em>timid surrender<\/em>\u201d against the damning findings of the AO proves that even marquee companies like Rolls Royce are not averse to pinching a few dollars from the exchequer of third world countries if they think nobody&#8217;s looking. Rolls-Royce must be prosecuted for tax fraud demands the author<\/strong>\n<\/p>\n<p>The recent report in the <a href=\"https:\/\/articles.economictimes.indiatimes.com\/2011-09-01\/news\/29953667_1_transfer-pricing-rules-transfer-pricing-foreign-parent\">Economic Times<\/a> about how multinational companies were using their subsidiaries and affiliates to avoid taxes in India made for shocking reading even as a lot of readers reacted with disbelief and a sense that the author was exaggerating the issue.\n<\/p>\n<p>However, the case of <strong><a href=\"https:\/\/www.itatonline.org\/dlmonitor\/download.php?t=f&#038;i=236\">Rolls Royce Plc, UK vs. DDIT<\/a><\/strong> which ended in a whimper in the Delhi High Court, exposes the myth that marquee companies like Rolls Royce, with supposedly high governance standards, are supposed to above board when it comes to compliance with the laws of the foreign countries that they do business in.\n<\/p>\n<p><!--more--><\/p>\n<div align=\"center\">\n<div class=\"\"><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-6440093791992877\";\n\/* judgements_adsense *\/\ngoogle_ad_slot = \"0133843924\";\ngoogle_ad_width = 728;\ngoogle_ad_height = 90;\n\/\/-->\n<\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"https:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/div>\n<\/div>\n<div class=\"articlequote\">\n<p>Before the High Court, Rolls-Royce, perhaps not surprisingly, lost the stomach to carry on the fight. The point on the validity on the reopening, which had been contested with great gusto before the Tribunal, was meekly conceded before the High Court. On the point of whether there was a \u201cpermanent establishment\u201d and whether the activities were merely \u201cpreparatory and auxiliary\u201d, the High Court noted that \u201cthere was no serious contest\u201d.<\/p>\n<\/div>\n<p>Rolls Royce did a lot of business in India, selling aero-engines and spare parts to big-ticket Indian Customers like Hindustan Aeronautics Limited (HAL), Indian Navy and Indian Air force. These were not simple off-shore sales that you can just ship on a FOB basis and claim you had nothing to do with India. Instead, these were multi-million dollar defense deals for supply of sophisticated products requiring protracted negotiations spread over several months, if not years. Also, these were not products that you can just supply on an off-the-shelf basis and wash your hands off. Instead, it required prolonged hand-holding, training, warranty, supply of spare parts etc. Rolls-Royce had in fact up a subsidiary in UK known as Rolls Royce India Limited which had offices in India and marketed and sold Rolls Royce&#8217;s products in India.\n<\/p>\n<p>Given the substantial income that Rolls-Royce earned from India from its substantial presence in India, one would have expected Rolls Royce to lead by example and file a return of income even if it argued there that not all of the income was chargeable to tax in India. Instead, shockingly, Rolls-Royce did not file any return of India probably hoping that nobody would notice and it could sneak out unnoticed.\n<\/p>\n<p>Here, the AO must be complimented for the dogged perseverance that he showed in exposing Rolls-Royce&#8217;s dealings in India. The AO dug deep and flushed out a lot of evidence to show that Rolls-Royce&#8217;s argument that its transactions were \u201c<em>mere off-shore sales<\/em>\u201d was false.  The AO found that the activities undertaken by Rolls Royce India Ltd on behalf of the assessee were much more than what were agreed to in the agreement. The activities of RRIL included marketing services, liaison services, market analysis, technical support, customer relationship\/interface, strategic planning etc. on behalf of the assessee. The AO grilled Rolls-Royce&#8217;s top brass Tim Jones and discovered that (a) Rolls-Royce PLC&#8217;s personnel frequently and continuously came to India, (b) Tim Jones&#8217; salary was paid by Rolls Royce Plc, (c) Rolls Royce (India) Ltd&#8217;s operations were confined to India, (d) Rolls-Royce had employees in India etc. The AO also found documents titled &#8216;Rolls Royce and Indian Air Force relationship&#8217; and &#8216;RR-IAF relationship &#8211; key players&#8217; which exposed facts on the actions to be undertaken by the assessee through Rolls-Royce India Ltd and the names of the personnel designated for this purpose.\n<\/p>\n<p>Despite the damning evidence against it, Rolls-Royce argued with all fire and brimstone before the Tribunal that it had no &#8220;<em>business connection<\/em>&#8221; in India and that Rolls-Royce India&#8217;s Indian offices were not a \u201c<em>permanent establishment<\/em>\u201d because the said office was \u201c<em>merely engaged in preparatory and auxiliary<\/em>\u201d activities.\n<\/p>\n<p>Well, there is a limit to how much one can argue in theoretical terms by disregarding the facts on record. The Tribunal (<strong><a href=\"https:\/\/www.itatonline.org\/downloads\/download.php?f=rolls_royce_pe.pdf\">Rolls Royce Plc vs. DDIT<\/a><\/strong> 113 TTJ (Del) 446) made short shrift of the arguments by extensively referring to the correspondence which had been brought on record by the AO and observing:\n<\/p>\n<blockquote><p>\u201c<em>The material existed for all the time to come and <strong>it is unfortunate that the assessee never disclosed its true relationship vis-a-vis RRI<\/strong>L. Only after the survey was conducted, the <strong>true face has come out<\/strong>. Prima facie these papers itself show the extent of work being handled by RRIL for appellant in India. RRIL is not only 100% subsidiary of the appellant but also maintains a permanent office in India to undertake all such activities. Thus, it can be concluded that the appellant has a business connection in India within the meaning of Section 9(1)(i) of the Act and under the Income-tax act, its income is chargeable to tax in India arising out of such business connections<\/em>\u201d.<\/p><\/blockquote>\n<p> The Tribunal also found the argument that the Indian office was only engaged in \u201c<em>preparatory and auxiliary<\/em>\u201d activities to be not acceptable by meticulously examining the evidence on record and held that:\n<\/p>\n<blockquote><p>\u201c<em>This negates the contention that the activities of RRIL are solely of a preparatory or auxiliary character or like a conduit or postman<\/em>\u201d and \u201c<em>All such activities cannot be merely held as solely of preparatory or auxiliary character but are in the form of marketing the product manufactured by appellant in India. Therefore, the exclusion granted under Article 5(3) is not available to the appellant<\/em>\u201d.<\/p><\/blockquote>\n<div align=\"center\">\n<div class=\"\"><script type=\"text\/javascript\"><!--\ngoogle_ad_client = \"pub-6440093791992877\";\n\/* judgements_adsense *\/\ngoogle_ad_slot = \"0133843924\";\ngoogle_ad_width = 728;\ngoogle_ad_height = 90;\n\/\/-->\n<\/script><br \/>\n<script type=\"text\/javascript\"\nsrc=\"https:\/\/pagead2.googlesyndication.com\/pagead\/show_ads.js\">\n<\/script><\/div>\n<\/div>\n<div class=\"articlequoteleft\">\n<p>what is it that makes marquee companies like Rolls Royce, which are supposed to be the torch-bearers of \u201c<em>good governance<\/em>\u201d for the Industry, behave like petty tax thieves? Drafting agreements that don\u2019t show the reality? Trying to camouflage the facts? Is it only because India is a third-world country? Would they have dared to do this in a first-world country where its top brass could stand the risk of being prosecuted for tax-fraud and sent to Jail?<\/p>\n<\/div>\n<p>The Tribunal also found that Rolls-Royce Plc had a \u201c<em>dependent agent<\/em>\u201d in India in the form of Rolls-Royce India Ltd. It recorded that \u201c<em>The fact that RRIL is totally dependent upon the appellant is not denied<\/em>\u201d and went on to hold that Rolls-Royce India \u201c<em>habitually secured orders in India<\/em>\u201d for the assessee and that \u201c<em>It is a set practice that no customers in India are directly to send orders to the appellant in UK. Such orders are required to be routed only through RRIL<\/em>\u201d.\n<\/p>\n<p>Before the High Court, Rolls-Royce, perhaps not surprisingly, lost the stomach to carry on the fight. The point on the validity on the reopening, which had been contested with great gusto before the Tribunal, was meekly conceded before the High Court. On the point of whether there was a \u201c<em>permanent establishment<\/em>\u201d and whether the activities were merely \u201c<em>preparatory and auxiliary<\/em>\u201d, the High Court noted that \u201c<em>there was no serious contest<\/em>\u201d. Even the point on whether the Tribunal could differ from the view of a co-ordinate Bench, which was raised by way of an additional ground, was conceded without any ceremony. Instead, probably, as a face-saving measure, Rolls-Royce argued that the matter should be remanded to the Tribunal on the ground that certain objections that had been raised pursuant to a remand report of the AO had not been \u201c<em>properly considered<\/em>\u201d by the Tribunal.\n<\/p>\n<p>Well, one has to only read the judgement of the Tribunal to realize that Rolls-Royce\u2019s submission was frivolous. The High Court said as much when it thundered:\n<\/p>\n<blockquote><p> \u201c<em>We are thus convinced that there is a detailed discussion after taking into consideration all the relevant aspects while holding that RRIL constituted PE of the assessee in India. While undertaking critical analysis of the material on record, the Tribunal kept in mind the objections filed by the assessee as well as the documents on which it wanted to rely upon. Those objections were duly met and answered. We thus, do not find any need to remand the case back to the Tribunal for this purpose which was the plea raised by the learned Counsel for the appellant\/assessee<\/em>\u201d.\n<\/p><\/blockquote>\n<p>Hopefully, this will bring an end to Rolls-Royce&#8217;s futile litigation in India and it will own up to its mistakes.\n<\/p>\n<p>Now, I have three questions. First, when the AO behaves in an irresponsible manner and makes all sorts of unwarranted additions, people (rightly) bay for his blood and want him to pay the price for harassing the assessee. When the AO behaves in a diligent manner and exposes deep secrets that multi-national corporations hide under the carpet, is he going to be rewarded or will it be brushed aside by saying \u201c<em>Oh, but he was just doing his duty<\/em>\u201d.\n<\/p>\n<p>Second, what is it that makes marquee companies like Rolls Royce, which are supposed to be the torch-bearers of \u201c<em>good governance<\/em>\u201d for the Industry, behave like petty tax thieves? Drafting agreements that don\u2019t show the reality? Trying to camouflage the facts? Is it only because India is a third-world country? Would they have dared to do this in a first-world country where its top brass could stand the risk of being prosecuted for tax-fraud and sent to Jail?\n<\/p>\n<p>Third, what is the price that Rolls-Royce will pay for trying to evade taxes? Will Rolls-Royce be asked to pay penalty? Can Rolls-Royce still maintain that it had an \u201c<em>arguable<\/em>\u201d and \u201c<em>reasonable<\/em>\u201d case for not paying up due taxes even when it conceded and surrendered before the High Court. What about prosecution for failure to file tax returns? Are we going to make an example out of Rolls-Royce so other multi-nationals can be wary? After all, lets not forget that the Tribunal did record the finding of fact (which has now become final) that it was &#8220;<em>unfortunate that the assessee never disclosed its true relationship vis-a-vis RRI<\/em>&#8221; and that the &#8220;<em>true face<\/em>&#8221; emerged only after the survey.\n<\/p>\n<p>These are questions which bother me for which I would like to hear from my brethren.\n<\/p>\n<p>CA Vellalapatti Swaminathan Iyer<br \/>\nHyderabad<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The author goes ballistic over the <a href=\"http:\/\/www.itatonline.org\/dlmonitor\/download.php?t=f&#038;i=236\"><strong>Rolls Royce Plc vs. DDIT<\/strong><\/a> case and claims that Rolls Royce&#8217;s \u201c<em>timid surrender<\/em>\u201d against the damning findings of the AO proves that even marquee companies like Rolls Royce are not averse to pinching a few dollars from the exchequer of third world countries if they think nobody&#8217;s looking. Rolls-Royce must be prosecuted for tax fraud demands the author<\/p>\n<div class=\"read-more\"><a href=\"https:\/\/itatonline.org\/blog\/the-rolls-royce-case-spare-a-thought-for-the-much-maligned-ao\/\">Read more &#8250;<\/a><\/div>\n<p><!-- end of .read-more --><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[3],"tags":[],"class_list":["post-571","post","type-post","status-publish","format-standard","hentry","category-judiciary"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/posts\/571","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/comments?post=571"}],"version-history":[{"count":0,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/posts\/571\/revisions"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/media?parent=571"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/categories?post=571"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/blog\/wp-json\/wp\/v2\/tags?post=571"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}