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2019 (11) TMI 1580 - AAR - Income TaxAdvance ruling u/s 245(Q) (1) - Income accrued in India - non-resident applicant was carrying on its own business through a fixed place of business in India or not - holding - subsidiary Company relation - India-Japan DTAA - amount received/receivable by the Applicant i.e. Honda Motor Co., Ltd. from HSCI as a consideration for offshore supply of raw material/components/capital goods and CR-V cars - whether the Applicant i.e. Honda Motor Co., Ltd. would be considered to have a permanent establishment ('PE') in India by reason of its business transaction and related activities with Honda Siel Cars India Limited ('HSCI'), under the provisions of India-Japan DTAA? - Whether whether HSCI would be liable to withhold taxes under section 195 of the Act on the payments to be made by HSCI towards the offshore supplies made by the Applicant ? - HELD THAT - Whether PE? - DTAA between India and Japan does not provide for any service PE. Further, this is also not found to be a case of Service PE as per India Japan DTAA in respect of the transactions as raised in this application. Moreover, the contention of the revenue also was that this is not a case of a service PE but only a fixed place PE, which we have already negated earlier. Further, Article 5(9) of India-Japan DTAA stipulates that the mere presence of the subsidiary of a foreign entity in India shall not by itself constitute such subsidiary as a PE of a foreign entity. The fact that the subsidiary has its own corporate personality and is a separate legal entity cannot be overlooked. Even if the holding company exercises acts of control over its subsidiary by getting periodical reports, having review meetings, discussion about achievement of targets etc. does not dilute the separate legal identity of the subsidiary. It is unrealistic to expect that a subsidiary will keep off the clutches of the holding company and conduct its business independent of any control and assistance by the parent company. As already discussed earlier we have no evidence of the subsidiary having undertaken any activities for and on behalf of the parent company. Offshore supply of raw material/components/capital goods and CR-V cars - Title to the Parts supplied by the applicant would be transferred outside the territory of India upon loading of the Parts on to the mode of transport to be used to convey the same from the country of origin and upon endorsement of despatch document in favour of the purchaser. These facts clearly establish that the supply of Parts would be made outside India and thus the transfer of title to the Parts will also take place while the goods were outside the territory of India. The payment for the offshore supply of Parts is to be made outside the country in foreign currency as per the terms of contract. The fulfilment of these conditions is, however, subject to verification with reference to the invoice, Bill of Lading, the Bill of Entry etc. of each consignment. In the instant case the seller did not retain control over the goods as per the terms of the Memorandum. Therefore, the title to and property in the Parts shipped by the applicant at the foreign port would get transferred at the port of shipment itself. As this event takes place outside the territory of India, the income arising out of such sale transaction cannot be said to be accruing or arising in India. The applicant does not reserve the right of disposal of goods during transit or otherwise. In view of the clause (a) of Explanation 1 to Section 9(1)(i) and respectfully following the decision of the Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. 2007 (1) TMI 91 - SUPREME COURT , we are clear that no income arising in the hands of the applicant from the off-shore supply of Parts can be held to be chargeable to tax in India, under the Income-tax Act 1961, as the sale would be completed outside India and there would be no accrual or deemed accrual in India. Liability to withhold tax u/s 195 - payments to be made by HSCI towards offshore supplies of Parts - As already held earlier that no income arising in the hands of the applicant from the off-shore supply of Parts can be held to be chargeable to tax in India, under the Income tax Act 1961, as the sale would be completed outside India and there would be no accrual or deemed accrual in India. In view of this finding no withholding tax is required to be made on the payment to be made by HSCI towards the offshore supplies of Parts made by the Applicant. Ruling - 1. The Applicant, Honda Motor Co., Ltd. would not be considered to have a permanent establishment ('PE') in India by reason of its business transaction and related activities with Honda Siel Cars India Limited ('HSCI'), under the provisions of India-Japan DTAA. 2. The amounts received/receivable by the Applicant from HSCI as a consideration for offshore supply of raw material/components/capital goods and CR-V cars would not be liable to tax in India under the provisions of the Act and India-Japan DTAA subject to verifications as mentioned in para-37 of the ruling. 3.Because of our answer to question No. 1 and 2, the payment to be made by HSCI towards the offshore supplies of Parts made by the Applicant will not be subjected to withholding of tax under section 195 of the Act.
Issues Involved:
1. Whether the applicant, Honda Motor Co., Ltd., has a permanent establishment (PE) in India by reason of its business transactions and related activities with Honda Siel Cars India Limited (HSCI) under the provisions of the India-Japan DTAA. 2. Whether the amounts received/receivable by the applicant from HSCI as consideration for offshore supply of raw materials/components/capital goods and CR-V cars are liable to tax in India under the provisions of the Act and India-Japan DTAA. 3. Whether HSCI is liable to withhold taxes under section 195 of the Act on the payments to be made by HSCI towards the offshore supplies made by the applicant. Detailed Analysis: 1. Permanent Establishment (PE) in India: - Applicant's Argument: The applicant argued that it does not have a PE in India as it does not have a fixed place of business in India through which its business activities are carried out. The Indian subsidiary, HSCI, operates independently and the transactions between the applicant and HSCI are on a principal-to-principal basis at arm's length price. The expatriate employees deputed to HSCI work under the control and supervision of HSCI and not the applicant. - Revenue's Argument: The revenue contended that HSCI and the applicant were working as part of the same business, and the expatriate employees of HSCI were acting on behalf of the applicant, thereby constituting a fixed place of business. The revenue highlighted that the expatriate employees were paid by the applicant and retained their lien over their employment with the applicant. - Findings: The Authority concluded that the applicant does not have a PE in India. The expatriate employees were working for HSCI and not carrying out the business of the applicant. The reporting to the regional headquarters or the head office in Japan was found to be in the nature of a subsidiary reporting to the holding company about its periodical performance. The Authority found no evidence that the subsidiary HSCI was acting as an agent of the parent or that the parent had taken all the decisions on behalf of the subsidiary. 2. Taxability of Offshore Supply: - Applicant's Argument: The applicant argued that the offshore supply of parts was made outside India, and the title and ownership of the parts were transferred at the port of shipment outside India. Therefore, the income arising from such transactions cannot be taxed in India. - Revenue's Argument: The revenue did not provide a specific counter-argument on this issue but relied on the overall control and supervision by the applicant over HSCI to argue for taxability. - Findings: The Authority held that the offshore supply of parts was completed outside India, and the title to and ownership of the parts were transferred at the port of shipment. Therefore, the income arising from such transactions cannot be taxed in India. The Authority relied on the principles laid down by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT. 3. Withholding Tax Liability: - Applicant's Argument: The applicant argued that since the income from offshore supplies is not chargeable to tax in India, there is no liability to withhold tax under section 195 of the Act. - Revenue's Argument: The revenue's argument on withholding tax liability was contingent on the determination of taxability of the offshore supplies. - Findings: The Authority held that since the income from offshore supplies is not chargeable to tax in India, HSCI is not liable to withhold tax under section 195 of the Act on the payments made towards such supplies. Conclusion: 1. The Applicant, Honda Motor Co., Ltd., does not have a permanent establishment (PE) in India by reason of its business transactions and related activities with Honda Siel Cars India Limited (HSCI) under the provisions of the India-Japan DTAA. 2. The amounts received/receivable by the Applicant from HSCI as consideration for offshore supply of raw materials/components/capital goods and CR-V cars are not liable to tax in India under the provisions of the Act and India-Japan DTAA. 3. HSCI is not liable to withhold taxes under section 195 of the Act on the payments to be made towards the offshore supplies made by the Applicant.
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