2020 (3) TMI 633 - AT - Income Tax

Income accrued in India - income attributed to the PE - Agency PE in India - Whether assessee is a permanent establishment in India within the meaning of Article 5(1) and Article 5(5) of the DTAA through its dependant agent VGSIPL - HELD THAT - 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. In the result, Ground No.1 to 3 of appeal is allowed. Deduction for marketing and promotional expenses - HELD THAT - We have noted that this ground of appeal is also directly connected with the Ground No. 1 to 3 of the appeal, which we have allowed holding that the assessee has no PE in India and accordingly, the income earned by assessee is not taxable in India. Therefore, the adjudication of this ground of appeal is also become academic. 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 .

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 in India under Section 9 of the Income Tax Act
5. Attribution of Income to PE in India
6. Deduction for Warranty, Marketing, Advertising, and Promotional Expenses
7. Taxability of Sole Distribution Fees
8. Levy of Interest under Section 234B of the Income Tax Act

Detailed Analysis:

1. Permanent Establishment (PE) in India:
The assessee, a German company, was assessed for having a Permanent Establishment (PE) in India through its associate enterprise, Volkswagen Group Sales India Pvt. Ltd. (VGSIPL). The AO held that VGSIPL constituted a PE of the assessee in India under Article 5(1) and 5(5) of the India-Germany Tax Treaty. The assessee argued that it did not have any premises in India for carrying out business, and VGSIPL should not be considered a PE merely because it is a group company.

2. Fixed Place PE under Article 5(1) of the India-Germany Tax Treaty:
The AO and DRP concluded that VGSIPL constituted a fixed place PE of the assessee in India. The assessee contended that it did not have any fixed place of business in India and that VGSIPL's activities were independent and not at the disposal of the assessee. The Tribunal referred to the Supreme Court's decision in ACIT Vs E-Funds IT Solution Inc, which held that a fixed place PE requires the place to be at the disposal of the foreign entity.

3. Agency PE under Article 5(5) of the India-Germany Tax Treaty:
The AO determined that VGSIPL acted as an Agency PE of the assessee in India. The assessee argued that transactions between it and VGSIPL were on a principal-to-principal basis and that VGSIPL did not have the authority to conclude contracts on its behalf. The Tribunal referred to the decision in Daimler Chrysler AG, which held that a subsidiary acting on a principal-to-principal basis does not constitute an Agency PE.

4. Business Connection in India under Section 9 of the Income Tax Act:
The AO held that VGSIPL constituted a business connection of the assessee in India under Section 9 of the Income Tax Act. The assessee argued that all activities related to the sale of cars and accessories were carried out outside India, and thus, no portion of the income was taxable in India. The Tribunal found that the sales were completed outside India, and the income could not be attributed to activities in India.

5. Attribution of Income to PE in India:
The AO attributed 35% of the total income of the assessee from India to the PE and applied a profit margin of 9.72% based on global audited accounts. The assessee contested this attribution, arguing that the income from sales was not taxable in India. The Tribunal held that since the assessee did not have a PE in India, the attribution of income was not justified.

6. Deduction for Warranty, Marketing, Advertising, and Promotional Expenses:
The AO denied the deduction of expenses related to warranty, advertising, marketing, and promotional activities incurred by VGSIPL and reimbursed by the assessee. The Tribunal found that since the assessee did not have a PE in India, the question of allowing or disallowing these deductions did not arise.

7. Taxability of Sole Distribution Fees:
The AO considered the sole distribution fees taxable in India. The assessee argued that in the absence of a PE or business connection in India, these fees should not be taxed. The Tribunal agreed with the assessee, holding that the fees were not taxable in India.

8. Levy of Interest under Section 234B of the Income Tax Act:
The AO levied interest under Section 234B of the Act. The Tribunal directed the AO to recompute the tax and interest, considering that the assessee's income was not taxable in India.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that VGSIPL did not constitute a PE of the assessee in India under the India-Germany Tax Treaty. Consequently, the income from sales and related activities was not taxable in India, and the attribution of income and denial of deductions were not justified. The levy of interest under Section 234B was also directed to be recomputed.

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