2019 (12) TMI 1283 - AT - Income Tax

Income accrued in India - PE in India - Indo-Germany Tax Treaty - Whether VGSIPL should not be the Appellant's PE merely due to the fact that it is the Appellant's group company? - as pr assessee Transaction between the Appellant and VGSIPL are on principal to principal basis and there is no agency relationship - HELD THAT - V W Group sales is an independent and separate entity, which is engaged in selling of fully built up cars imported from the assessee, Volkswagen AG and Skoda India to dealers and distributors. Thus, VW Group cannot be regarded as a PE of assessee in India. In the case of present assessee the care is manufactured by the Audi AG outside India and constitutes a separate and independent activity. As noted earlier the car is sold to VW Group for further sale in India and VW Group sale is not acting on behalf of Audi AG nor is Audi AG selling cars through VW Group sales. Moreover, the cars are sold on principle to principal basis. Hence, we are of the view that Assessing Officer was not justified in invoking section 9 of the Act and the Article 5 of Indo-Germany Tax Treaty for taking view that assessee has PE in India. Levy of interest under section 234B 234C - HELD THAT - Considering the fact that the assessee is a foreign company and tax resident of Germany. The entire income of the Audi AG is subject to tax deducted at source under section 195 of the Act. The assessee has no liability to pay advance tax and the fact that we have already hold that income earned by assessee is not taxable in India, we direct the Assessing Officer to recompute the tax/interest by following the decision of the jurisdictional High Court in case of NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT

Summary

Issues Involved:
1. Permanent Establishment (PE) in India
2. Fixed Place PE under Article 5(1) of the India-Germany Tax Treaty
3. Agency PE under Article 5(5) of the India-Germany Tax Treaty
4. Business connection under Section 9 of the Income Tax Act
5. Attribution of income and operating profit ratio
6. Deduction for warranty, marketing, advertising, and promotional expenses
7. Taxability of sole distribution fees
8. Levy of interest under Section 234B and 234D of the Income Tax Act
9. Non-receipt of refund

Detailed Analysis:

1. Permanent Establishment (PE) in India:
The appellant challenged the decision that Volkswagen Group Sales India Pvt. Ltd. (VGSIPL) constitutes a PE in India and the assessment of total income at ?8,03,67,812. The Tribunal examined the Importer Agreement and concluded that VGSIPL does not constitute a PE of the appellant in India. The Tribunal observed that the activities of VGSIPL, such as storage, marketing, and after-sales services, are carried out independently and not on behalf of the appellant.

2. Fixed Place PE under Article 5(1) of the India-Germany Tax Treaty:
The Tribunal found that the appellant does not have any premises at its disposal in India, and hence, it does not have a Fixed Place PE under Article 5(1) of the Treaty. The Tribunal relied on the decision in Daimler AG, where it was held that a subsidiary cannot be regarded as a PE if the sales are made on a principal-to-principal basis and the transactions are completed outside India.

3. Agency PE under Article 5(5) of the India-Germany Tax Treaty:
The Tribunal held that VGSIPL does not constitute an Agency PE under Article 5(5) of the Treaty. The transactions between the appellant and VGSIPL are on a principal-to-principal basis, and VGSIPL does not have the authority to conclude contracts on behalf of the appellant. The Tribunal also noted that VGSIPL is an independent agent and does not lead to a Dependent Agent PE.

4. Business Connection under Section 9 of the Income Tax Act:
The Tribunal disagreed with the Assessing Officer's view that VGSIPL constitutes a business connection of the appellant in India. The Tribunal emphasized that the activities related to the sale of cars and accessories are carried out outside India, and therefore, no portion of the income from these sales is taxable in India.

5. Attribution of Income and Operating Profit Ratio:
The Tribunal found that the Assessing Officer erred in attributing 35% of the income to activities carried out by the PE in India and adopting an operating profit ratio of 10.30%. The Tribunal noted that the sales of cars are completed outside India, and the income from these sales cannot be attributed to any operations in India.

6. Deduction for Warranty, Marketing, Advertising, and Promotional Expenses:
The Tribunal held that the Assessing Officer erred in not allowing the deduction of ?28,05,40,999 for warranty, advertising, marketing, and promotional expenses incurred by VGSIPL and reimbursed by the appellant. Since the Tribunal concluded that the appellant does not have a PE in India, the discussion on this ground became academic.

7. Taxability of Sole Distribution Fees:
The Tribunal found that the sole distribution fees of ?5,01,86,605 are not taxable in India in the absence of a PE and business connection in India.

8. Levy of Interest under Section 234B and 234D of the Income Tax Act:
The Tribunal directed the Assessing Officer to recompute the tax/interest, noting that the appellant is a foreign company and its income is subject to tax deduction at source under Section 195. The Tribunal held that no interest under Section 234B can be levied as the appellant has no liability to pay advance tax. Similarly, the interest levied under Section 234D was also directed to be recomputed.

9. Non-receipt of Refund:
The Tribunal addressed the issue of non-receipt of a refund of ?55,01,130 and directed the Assessing Officer to adjust the amount accordingly while computing the tax demand.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that VGSIPL does not constitute a PE of the appellant in India. The Tribunal directed the Assessing Officer to give relief as prayed for by the appellant, following the decision in the appellant's own cases for the assessment years 2009-10 and 2010-11. The Tribunal's observations in those years were applied mutatis mutandis for the assessment year 2011-12.