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TMI Blog2010 (3) TMI 869X X X X Extracts X X X X X X X X Extracts X X X X ..... he main condition for constitution of PE is carrying on of business in India, and as regards sale of parts/CKD no operations in respect of the manufacture and sale of parts is carried out by the assessee in India. Further the assessee does not have a right to use of DCILs premises. Further DCIL does not constitute a place of management of the assessee in India as the management of the assessee s business is by the Board of Directors at Germany. DCIL is a sales outlet or warehouse - As regards sale of parts/CKD such sales are made by the assessee to DCKIL on principal-to-principal basis and on sale such parts/CKD become the property of DCIL. Hence, We are of the opinion that the assessee does not carry out any operations in India in respect of sale of parts/CKD to DCIL and therefore cannot qualify to have a PE in this respect under Article 5(1) and 5(2) of the Treaty. Therefore we confirm the order of the Ld. CIT(A) and dismiss ground Nos. ( i ) ( ii ) raised by the revenue. In the result, the revenue s appeal is dismissed. Sale of CBU cars - profit accruing - percentage of profits - HELD THAT:- DCIL themselves are manufacturing and selling the cars and procurement of ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant filed its return on 30th October, 2001 offering to tax an income of Rs. 3,33,85,351. This included royalty income of Rs. 3,25,13,272 and fees for technical services of Rs. 6,49,837 earned from Daimler Chrysler India Private Limited (DCIL). The same was offered to tax on a gross basis at 10 per cent under Article 12 of the India-Germany Double Taxation Avoidance Agreement (DTAA or Treaty). The Appellant also earned interest of Rs. 1,61,554 from DCIL on delayed payment for supplies and interest of Rs. 60,688 on Income-tax refund, which was offered to tax on gross basis at 10 per cent under Article 11 of the treaty. DCIL was set-up as a joint venture with TELCO for the manufacture/assembly and sale of cars in India. At the time of formation of the joint venture, the Appellant held 51 per cent of the shareholding in DCIL and the balance 49 per cent stake was held by TELCO. The stake of the Appellant in DCIL subsequently increased and as at the end of the previous year relevant to the subject assessment year, the Appellant held 86 per cent of the equity stake in DCIL and the balance stake was held by TELCO. The Appellant made sales of raw materials and parts and completely knocke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts/CKD kits by the appellant to DCIL was governed by the General Supply Agreement entered into between the Appellant and DCIL. The main points in the General Supply Agreement are as under : -The General Supply Agreement was signed by the Appellant in Germany. -Delivery of parts/CKD is made "FOB North Sea Port" if the parts/CKD are to be transported by sea and "Free Carrier Stuttgart" if the parts/CKD are to be transported by air (INCOTERMS 1990). -The risk of damage and loss is borne by DCIL from the point the parts/CKD have been handed over to the carrier. -All associated costs of import like preservation, packing, freight, insurance, etc., are charged separately by the Appellant to DCIL. -The import of the parts/CKD into India is done by DCIL and the assessed import duty on them is paid by DCIL. This is evidenced by the sample bill of entry for import of parts/CKD evidencing DCIL as the importer of the parts/CKD. -The payments for the parts/CKD are received by the Appellant in its bank account outside India. -The General Supply Agreement provides that the contract for sale of the contractual goods, i.e., parts/CKD is concluded once the Appellant has accepted in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate terms of the sale or conclude contracts on behalf of the Appellant. On confirmation of the order and receipt of payment directly from the Indian customer, the Appellant sends the vehicle in the name of Indian customers. The sale of the CBU cars is made outside India. All the customs formalities in relation to the import of the cars are completed by the customers. The payment for the CBU cars is made directly by the customer in foreign currency to the Appellant s bank account outside India. DCIL does not stock the CBU cars in respect of the direct sales by the Appellant to the customers. In the background of the above, the Assessing Officer had concluded that the Appellant had business connection in India, accordingly is taxable in India. As the Appellant has conferred exclusive rights to DCIL for distribution of all vehicles the Appellant has income which accrues/arises from India and the DCIL constitutes business connection of the Appellant in India. The Appellant submitted ( a ) the Assessing Officer did not discuss the question of business connection between the Appellant and the DCIL and hence the Appellant was not given sufficient opportunity to rebut the same; ( b ) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India of assembly, manufacture and sale of cars. After purchasing the parts/CKDs required for assembly of the cars from the assessee, DCIL procures the remaining parts locally and assembles the cars in its own facility in India. DCIL also has its own marketing network for sale of the cars in India. The income earned by DCIL from the sale of the cars is reported by it in its return of income. The above indicates that the assessee is not selling its cars through DCIL in India, but that the assessee merely supplies certain parts required for manufacture of the cars to DCIL. The cars are then manufactured and sold by DCIL on its own account, after paying the necessary local duties. The assessee has submitted the General Supply Agreement and the import documents for the parts/CKDs to evidence the facts outlined above. The assessee has relied on the principles outlined in the case of CIT v. Gulf Oil (Great Britain) Ltd. [1977] 108 ITR 874 (Bom.) and other judicial precedents and has also complied with the relevant provisions of Circular 23 in this regard. 4. The Ld. CIT(A) held as follows : "I find force in the argument of the appellant that it is not liable to tax under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any business connection in India, shall be deemed to be income accruing or arising in India and, hence, where the person entitled to such income is a non-resident, it will be included in his total income. Further, Explanation ( a ) to section 9(1)( i ) of the Act provides that in case of a business of which all the operations are not carried out in India, the income deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India..... 9. The Ld. Counsel for the assessee reiterated the arguments before the Ld. CIT(A). He further relied on the following case laws : Gulf Oil (Great Britain) Ltd. ( supra ); Mahabir Commercial Co. Ltd. v. CIT [1972] 86 ITR 417 (SC); CIT v. Mewar Textile Mills Ltd. [1973] 91 ITR 542 (SC); Addl. CIT v. Skoda Export Prabha [1988] 172 ITR 358 (AP). 10. The Ld. Counsel further submitted as follows : "The assessee further submits that provisions of Circular No. 23/1969, dated July 23 1969 ( Circular 23 ) issued by the Central Board of Direct Taxes ( CBDT ) would be applicable to the case of the assessee (Refer Pg Nos. 551 to 553 of the Paper Book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. We, therefore, concur with the decision of the CIT(A) on this issue and dismiss the ground No. 1( i ) of the revenue s appeal. 12. The next issue is that the assessee has challenged the contention of the Assessing Officer that the assessee has a PE in India under Article 5(2)( a ), ( b ), ( c ) and ( g ) of the Treaty. 13. The Assessing Officer s arguments in this respect are as under : "DCIL derives its entire business on account of the appellant and during the subject year, out of its total income of Rs. 17,36,10,000, Rs. 2,47,05,000 was by way of commission income received from the assessee. The engine is the most vital component of the automobile and DCIL is not in a position to carry out its contracts on its own in the absence of supply of equipment and technology by the assessee. The Managing Director (MD) and Executive Director (ED) of DCIL are expatriate employees deputed by the appellant to DCIL and through these employees, the appellant effectively controls all the employees of DCIL. Further, DCIL executes the business generated by the appellant and its day-to-day affairs are being controlled by the appellant. Further, the Assessing Officer has s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Berhad (222 ITR 551) to argue that the deputation of the MD and ED do not constitute a PE for the appellant in India. Sales outlet/warehouse of the appellant - The goods stored in the warehouses of DCIL and sold at the sales outlets of DCIL are those which belong to DCIL. As regards sale of parts/CKD, such sales are made by the appellant to DCIL on a principal-to-principal basis and on sale, such parts/CKD become the property of DCIL. As far as CBU sales are concerned, DCIL does not maintain a stock of such cars and does not display them in its sales outlets. Accordingly, DCIL does not constitute a sales outlet warehouse of the appellant. The Assessing Officer has erroneously compared the gross commission income of DCIL of Rs. 2,47,05,000 with its net profits of Rs. 17,36,10,000 to indicate that such commission forms a large proportion of DCIL s income. However, when compared to DCIL s gross revenues of Rs. 2,53,42,66,000, it is clear that the commission earned forms less than 1 per cent of the total gross revenues earned by DCIL during the year." 14. The Ld. CIT(A) held as under : "I have carefully considered the submissions of the appellant as well as the observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ismissed. ITA No. 6718/Mum./2006 - assessment year 2002-03 - revenue s appeal 19. As the facts of the case are identical in revenue s appeal in ITA No. 9211/Mum./04 for the reasons stated in appeal for assessment year 2001-02 ( supra ), we hold DCIL does not constitute the assessee s business connection in India and thus, the assessee s income from sale of raw material/CKD units to DCIL would not be liable to tax in India under the provisions of the Act. Further, we hold that the assessee does not carry out any operations in India in respect of sale of parts/CKD to DCIL and, therefore, cannot qualify to have a PE in this respect under Article 5(1) and 5(2) of the Treaty. Therefore we confirm the order of the Ld. CIT(A) and dismiss the revenue s appeal. ITA No. 8520/Mum./2004 - assessment year 2001-02 - assessee s appeal 20. The grounds raised by the assessee are as follows : "1. The learned CIT(A) has erred in holding that Daimler Chrysler India Private Limited. (DCIL) is a dependent agent of the appellant in respect of sale of Completely Built-up (CBU) cars directly to customers in India and constitutes a permanent establishment in respect of such sales under Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er : "I have considered the submissions made by the appellant and the contentions raised by the Assessing Officer. The appellant has provided a copy of the submissions filed during the course of the assessment proceedings which indicate the FOB value of CBU cars of Euro 64,44,089 (Rs. 26,43,36,531) sold to Indian customers and the worldwide financials of the appellant. In my view, these should have been considered by the Assessing Officer in determining the appellant s tax liability in determining the taxable income from CBU sales to Indian customers. Accordingly, the Assessing Officer ought to have considered the actual CBU sales of Rs. 26,43,36,531 made by the appellant to Indian customers during the subject year in determining the appellant s tax liability in India on such sales rather than computing the CBU sales on a deemed basis. I accordingly, hold that the figure of Rs. 26,43,36,531, being the sales of CBU cars to Indian customers be considered as gross receipts in determining the appellant s tax liability in India on CBU sales. Further, in applying Rule 10 in determining the appellant s tax liability on the CBU sales, the Assessing Officer has applied a net profit per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pril 9, 1995 for distribution of CBU cars manufactured by the appellant, in the countries of India and Bhutan (Page Nos. 1-13 of the Paper Book filed on September 3, 2007). During the subject year, the appellant sold raw material and parts/CKD units to DCIL. The appellant also made direct sales of CBU cars to the Indian customers for which DCIL acted as a communication channel. The sequence of transactions in relation to the direct sales of CBU cars are briefly described as under : The Indian customer approaches any of the dealers within DCIL s network for purchase of car directly from the appellant. The dealer in turn approaches DCIL in respect of the prices/terms and conditions of the sale, which are pre-determined by the appellant. The dealer then provides the quotation for the car as per the standard price list provided by the appellant and a copy of standard terms and conditions provided by the appellant. If the customer is agreeable to the price and terms and conditions, he fills up the order form, which is dispatched/communicated to the appellant by the dealer through DCIL for acceptance and confirmation. Once the order is confirmed by the appellant, the same is comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in such sales. No inference can be made that DCIL assists the assessee in the sale of CBU cars in material manner which can be considered as DCIL acting as an Agent in concluding the sale of cars. DCIL cannot be considered to be controlled by the appellant in these transactions if DCIL to be considered as a depending agent. Further DCIL does not bear any risk in the transaction but merely acts as conduit of communication for which they are compensated. Hence, no part of the profits accruing to the assessee can be attributed to the activities of DCIL in India. 26. The Ld. DR submits that DCIL is a dependent agent of the assessee inasmuch as the entirety of the transactions of the assessee in India is through DCIL and DCIL undertakes an active part in concluding a deal for and on behalf of the assessee. 27. We heard both the parties. The issue to be decided is whether DCIL is acting as an agent dependent on and controlled by the assessee and if so, can DCIL be considered as a Permanent Establishment (agency PE) of the assessee in India. If that is so, the next issue to be considered is whether any profit be attributed to the activities of such a PE in India. Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or ( c )Habitually secures orders in the first mentioned State wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling controlled by, or subject to the same common control, as that enterprise." 29. First it has to be established that DCIL is a permanent establishment as contemplated in the DTAA between India and West Germany and if so, the profits attributable to the activities of such permanent establishment in the transactions under consideration will have to be determined which will be taxable in India. While arriving at the profits of the PE, the expenses incurred in earning the profits would also be deducted therefrom in arriving at the taxable profits of PE. 30. Now the activity of DCIL are twofold. (1) manufacture of cars using CKD packs and other components. (2) Act as communication exchange in respect of direct sale of CBUs by the assessee directly to the clients in India. Eventhough the commission received by DCIL for helping the sale of CBUs, it is obvious that their main activity is that of manufacture of cars. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , wherein the Hon ble Apex Court has observed, that since the assessee did not conclude any contracts on behalf of Morgan Stanley Co. Inc. (MSCo), it did not have an agency PE in India. Similar view has also been taken by the Special Bench of Delhi Tribunal in case of Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (refer page Nos. 580, 589 591 of Paper Book Volume II) and the Authority for Advance Rulings in case of TVM Ltd. v CIT [1999] 237 ITR 230 (Refer page Nos. 600 618 of Paper Book Volume II). The Hon ble Delhi Tribunal has in the case of Western Union Financial Services Inc. (104 ITD 34) (Refer Page Nos. 522 547 of Paper Book Volume II), observed that there is no evidence to show that the extent of their activities for the assessee, compared to all their activities, is so large that it can be said that they are dependent on the assessee for their earnings or revenues. Accordingly, the agents are not economically dependent upon the assessee. Further, there is no authority with the agents to conclude contracts. The agents are merely performing their duties and not exercising any authority. Based on the above, the Hon ble Tribunal concluded that there is no agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of DCIL, we are not deciding upon the correctness or otherwise of the percentage of profits, estimated by the CIT(A), as attributable to the activities of PE in India. Hence Ground No. 3 raised by the assessee is not decided as being infructuous. 34. In the result the appeal of the assessee is allowed. ITA No. 6574/Mum./2006 : assessment year 2002-03 35. The only issue in the assessee s appeal is against the decision of the CIT(A) holding that 2.5 per cent of the sale price of CBUs sold by the assessee directly to the Indian customers constitutes net profit of the assessee from sale of CBUs and 30 per cent of the same accrues and is taxable in India. 36. As the facts of the case are identical with the assessee s appeal in ITA No. 8520/Mum./04 for assessment year 2001-02, for the reasons stated in the appeal for assessment year 2001-02 ( supra ), we hold that no part of the profits accruing to the assessee from sale of CBUs directly to the Indian Clients is attributable to the activities of any PE of the assessee in India and hence no part of the profit arising to the assessee from sale of CBUs is taxable in India. 37. In the result, the appeal filed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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