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2010 (3) TMI 869 - AT - Income TaxIncome - Deemed to accrue or arise in India - DTAA - HELD THAT - Mere sale of raw materials/components will not result in business connection and even if it does as per the terms and conditions of the contract between the assessee and DCIL no income accrues to the assessee on the basis of any activities carried out on behalf of the assessee in India. Therefore in our opinion DCIL does not constitute the assessee s business connection in India and thus, the assessee s income from sale of raw material/CKD units to DCIL would not be liable to tax in India under the provisions of the Act. We, therefore, concur with the decision of the CIT(A) on this issue and dismiss the ground No. 1( i ) of the revenue s appeal. PE carrying on of business in India - HELD THAT - In our opinion mere existence of subsidiary does not by itself constitute the subsidiary company a PE of the parent. The main condition for constitution of PE is carrying on of business in India, and as regards sale of parts/CKD no operations in respect of the manufacture and sale of parts is carried out by the assessee in India. Further the assessee does not have a right to use of DCILs premises. Further DCIL does not constitute a place of management of the assessee in India as the management of the assessee s business is by the Board of Directors at Germany. DCIL is a sales outlet or warehouse - As regards sale of parts/CKD such sales are made by the assessee to DCKIL on principal-to-principal basis and on sale such parts/CKD become the property of DCIL. Hence, We are of the opinion that the assessee does not carry out any operations in India in respect of sale of parts/CKD to DCIL and therefore cannot qualify to have a PE in this respect under Article 5(1) and 5(2) of the Treaty. Therefore we confirm the order of the Ld. CIT(A) and dismiss ground Nos. ( i ) ( ii ) raised by the revenue. In the result, the revenue s appeal is dismissed. Sale of CBU cars - profit accruing - percentage of profits - HELD THAT - DCIL themselves are manufacturing and selling the cars and procurement of orders for direct shipment of cars by the assessee would in fact be contrary to and against the interest of the DCIL in its manufacturing activity. DCIL by passing on communication from assessee to the client and vice versa, are merely rendering a very insignificant auxiliary/preparatory service in the sale of CBUs by the assessee to Indian clients. Therefore DCIL does not constitute a dependent agent of the assessee. The prices offered to the Indian clients are as per list price notified and so whether DCIL is involved or not the price charged to the customer would be the same. No profits can be attributed to the services of DCIL in India. In fact by engaging the services of DCIL, the profit of the assessee is reduced to the extent of the commission paid to DCIL. As we have held that no profit accruing to the assessee on sale of CBU cars directly to Indian customers can be attributed to the activities of DCIL, we are not deciding upon the correctness or otherwise of the percentage of profits, estimated by the CIT(A), as attributable to the activities of PE in India. Hence Ground No. 3 raised by the assessee is not decided as being infructuous. In the result the appeal of the assessee is allowed. sale price of CBUs - We hold that no part of the profits accruing to the assessee from sale of CBUs directly to the Indian Clients is attributable to the activities of any PE of the assessee in India and hence no part of the profit arising to the assessee from sale of CBUs is taxable in India. In the result, the appeal filed by the assessee stands allowed.
Issues Involved:
1. Taxability of income from sale of parts/CKD units to DCIL. 2. Existence of Permanent Establishment (PE) in India under Article 5 of the India-Germany DTAA. 3. Attribution of profits from direct sales of CBU cars to Indian customers. 4. Interest under section 234B of the Income-tax Act. Detailed Analysis: 1. Taxability of Income from Sale of Parts/CKD Units to DCIL: The Appellant, a German company, sold parts/CKD units to DCIL in India. The Assessing Officer contended that DCIL constituted a business connection in India, making the income from these sales taxable in India. However, the Appellant argued that the sales were made on a principal-to-principal basis, with ownership and risk passing outside India, and payments received outside India. The CIT(A) agreed with the Appellant, holding that the sales were concluded outside India and that the Appellant was not liable to tax under section 9 of the Income-tax Act for these sales. The Tribunal upheld this view, noting that the transaction between the Appellant and DCIL was on a principal-to-principal basis and that no income accrued or arose in India from these sales. 2. Existence of Permanent Establishment (PE) in India under Article 5 of the India-Germany DTAA: The Assessing Officer argued that DCIL constituted a PE of the Appellant in India under Article 5 of the DTAA. The Appellant countered that it had no fixed place of business in India and that DCIL operated independently. The CIT(A) found that the Appellant did not carry out any operations in India and that DCIL did not constitute a PE. The Tribunal concurred, stating that the mere existence of a subsidiary does not constitute a PE and that the Appellant did not have a right to use DCIL's premises. The Tribunal emphasized that significant business decisions were made in Germany, not India, and that DCIL did not act as a sales outlet or warehouse for the Appellant. 3. Attribution of Profits from Direct Sales of CBU Cars to Indian Customers: The CIT(A) held that DCIL acted as a dependent agent for the Appellant in the sale of CBU cars, thus constituting a PE. The CIT(A) attributed 30% of the net profit from these sales to the PE in India. The Appellant argued that DCIL merely acted as a communication channel and did not conclude sales or bear any risk. The Tribunal agreed with the Appellant, noting that DCIL's role was limited to communication and auxiliary services. Citing various judicial precedents, the Tribunal held that DCIL did not constitute a dependent agent PE and that no profits from the direct sales of CBU cars could be attributed to activities in India. 4. Interest under Section 234B of the Income-tax Act: The CIT(A) deleted the interest charged under section 234B, which was contested by the revenue. The Tribunal upheld the CIT(A)'s decision, noting that the Appellant's income from sales of parts/CKD units and CBU cars was not taxable in India, and thus, the interest under section 234B was not applicable. Conclusion: The Tribunal dismissed the revenue's appeals and allowed the assessee's appeals, concluding that: - The Appellant's income from the sale of parts/CKD units to DCIL was not taxable in India. - DCIL did not constitute a PE of the Appellant in India under the DTAA. - No profits from the direct sales of CBU cars to Indian customers could be attributed to activities in India. - Interest under section 234B was not applicable as the income was not taxable in India.
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