2010 (7) TMI 1077 - AT - Income Tax

Summary

Issues involved:
Cross appeals against the order of CIT(A)-XXXI, Mumbai for the assessment year 2003-04.

Issue 1 - Permanent Establishment (PE) in India for sale of Completely Built Up (CBU) cars:
The assessee, a German company, sells CBU cars in India through DaimlerChrysler India Pvt. Ltd. (DCIL). The dispute was whether DCIL constitutes a dependent agent of the appellant for such sales, leading to a PE in India. The ITAT, referring to previous decisions, held that DCIL's role was mainly that of manufacturing cars and acting as a communication conduit, not actively procuring orders. As DCIL did not actively engage in negotiating or concluding contracts, it was deemed not a dependent agent. Therefore, no profits could be attributed to DCIL's activities in India, and the income was not taxable in India.

Issue 2 - Business Connection under section 9 of the Income-tax Act, 1961:
The contention was whether DCIL constituted a business connection for the appellant in India regarding the sale of spare parts and raw materials. The ITAT, following precedent, ruled that DCIL's activities did not create a business connection for the appellant in India. The sale of raw materials to DCIL did not result in income accruing to the appellant in India, and thus, it was not taxable under Indian law.

Issue 3 - Attribution of profits to PE in India:
The dispute was over the attribution of 30 percent of the net profits earned by the appellant from direct sales of CBU cars to the PE in India. The ITAT, as no profits could be attributed to DCIL's activities in India, deemed this issue infructuous and dismissed it accordingly.

Issue 4 - Existence of Permanent Establishment (PE) in India u/s Article 5(2) of the DTAA:
The question was whether the appellant had a PE in India as per Article 5(2) of the Double Taxation Avoidance Agreement. Referring to previous decisions, the ITAT concluded that the appellant did not carry out operations in India regarding the sale of parts/CKD to DCIL on a principal to principal basis. As DCIL did not act as a sales outlet/warehouse for the appellant and the management was in Germany, the appellant did not have a PE in India.

Conclusion:
The ITAT upheld the decisions based on precedents for all issues, ruling in favor of the assessee and dismissing the revenue's appeals. Additionally, the interest u/s 234B was deemed not leviable for non-residents subject to tax deduction u/s 195.