2019 (10) TMI 121 - AT - Income Tax

Permanent Establishment, independent agent and business connection in India - fixed place of business maintained in India - Assessee is tax resident of Germany and India had entered in tax treaty with Germany - Indo-Germany DTAA - Whether the non-resident has business connection in India from or through which income profit or gain can be said to be accrue or arise to them within the meaning of section 9 or Article 5 of India Germany tax treaty? - HELD THAT - There is no dispute that the activities of manufacturing of Car is completed by assessee (Audi AG) outside India and constitute a separate and independent activity. The assessee claimed that Cars are sold to Volkswagen Group Sales for further sales in India and Volkswagon Group sales is not acting on behalf of Audi AG nor Audi AG is selling Car through Volkswagon Group Sales. The assessee also claimed that Cars are sold to Volkswagon Group Sales principle to principle basis and thereafter, Volkswagon Group Sales it on a principle to principle basis to the dealers. The sales of goods/Car are completed outside India than income arising from sales by no stretch of imagination can be said to be taxed in India. The assessing officer has not brought any material to counter the stand of the assessee that Cars are not sold to Volkswagon Group Sales on principle to principle basis and thereafter, Volkswagon Group Sales it on a principle to principle basis to the dealers. As in case of Daimler AG 2012 (6) TMI 479 - ITAT MUMBAI despite the fact that the AE was performing more activities as narrated in the chart above, it was held that the associated entity not created either fixed place PE nor dependent agent. Further, the income arising on the sales of Car by Volkswagen Group Sales to dealers in India is income accruing or arising in India and is taxed separately in the hands of Volkswagen Group Sales. In our view merely acting for non-resident principal would itself render an agent to be considered PE for the porpose of allocating profit. The assessee is not undertaking any definite activity to which profit can be attributed. We are of the 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. Car 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. - Decided in favour of assessee. Levy of interest u/s 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. Fixed Place and Dependent Agent Permanent Establishment (PE) in India.
2. Independent Agent.
3. Business Connection in India.
4. Attribution of Income and Profit Ratio.
5. Taxability of Sole Distribution Fees.
6. Deduction for Marketing and Promotional Expenses.
7. Levy of Interest under sections 234B and 234C.

Detailed Analysis:

1. Fixed Place and Dependent Agent Permanent Establishment (PE) in India:
The assessee argued that Volkswagen Group Sales India Pvt. Ltd (VGSIPL) does not constitute a PE in India under Articles 5(1) and 5(5) of the India-Germany tax treaty. The assessee contended that it does not have any premises for carrying out business in India and that transactions with VGSIPL are on a principal-to-principal basis with no agency relationship. The tribunal noted that similar facts were considered in the case of Daimler Chrysler AG, where it was held that the subsidiary did not constitute a PE. The tribunal concluded that VGSIPL is an independent entity engaged in selling fully built-up cars imported from the assessee and others, and thus cannot be regarded as a PE of the assessee in India.

2. Independent Agent:
The tribunal examined whether VGSIPL acts as an independent agent. The assessee argued that VGSIPL does not exercise authority to conclude contracts, maintain stock for the assessee, or secure orders wholly for the assessee. The tribunal found that VGSIPL operates on a principal-to-principal basis and does not have the authority to conclude contracts on behalf of the assessee. Thus, VGSIPL does not lead to a dependent agent PE of the assessee in India.

3. Business Connection in India:
The tribunal considered whether VGSIPL constitutes a business connection of the assessee in India under Section 9 of the Income Tax Act. The assessee argued that all related activities for the sale of cars and other items are carried out outside India, and thus no portion of the income from these sales is taxable in India. The tribunal agreed with the assessee, noting that the sales are completed outside India and the income arising from these sales cannot be taxed in India.

4. Attribution of Income and Profit Ratio:
The assessee challenged the attribution of 35% of its income in India and the adoption of an operating profit ratio of 6.39%. The tribunal, having allowed the grounds related to PE and business connection, found that the discussion on attribution of income and profit ratio became academic and did not require further adjudication.

5. Taxability of Sole Distribution Fees:
The tribunal noted that, in the absence of a PE and business connection in India, the sole distribution fees received by the assessee cannot be taxed in India.

6. Deduction for Marketing and Promotional Expenses:
The assessee argued for the deduction of marketing and promotional expenses reimbursed by it to VGSIPL. The tribunal, having held that the assessee does not have a PE in India and the income is not taxable, found that the adjudication of this ground became academic.

7. Levy of Interest under sections 234B and 234C:
The tribunal directed the Assessing Officer to recompute the tax/interest, noting that the assessee, being a foreign company and tax resident of Germany, is subject to tax deducted at source under section 195 and has no liability to pay advance tax. The tribunal referred to the jurisdictional High Court decision in NGC Network Asia LLC.

Conclusion:
The tribunal allowed the appeals for both assessment years, holding that VGSIPL does not constitute a PE or business connection in India for the assessee. Consequently, the income from the sale of cars and other items is not taxable in India, and the grounds related to attribution of income, marketing expenses, and interest levy became academic.

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