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TMI Blog2019 (10) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and circumstances of the case, AUDI AG (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the Additional Director of Income-tax, Range - 1 (1), Mumbai [hereinafter referred to as the 'learned AO'] under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel-I, (hereinafter referred to as the 'Hon'ble DRP') on the following grounds, each of which are without prejudice to one another: On the facts and circumstances of the case and in law, the learned AO based on the directions of the Hon'ble DRP: Fixed Place and Dependent Agent Permanent Establishment ('PE') in India 1.1. Erred in holding that Volkswagen Group Sales India Pvt. Ltd ('VGSIPL') constitutes a PE of the Appellant in India under Article 5 (1) and 5 (5) of the India -Germany treaty (Treaty'). 1.2. Failed to appreciate that the Appellant does not have any premises for carrying any business at its disposal in India and hence it does not have any fixed place PE in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India, sole distribution fees cannot be taxed in India. 6. Deduction for marketing and promotional expenses reimbursed by the Appellant (Without prejudice to all above objections) Without prejudice to the above, erred in not allowing deduction of marketing and promotional expenses incurred by VGSIPL and reimbursed by the appellant relating to brand building campaigns of 'AUDI' brand in India amounting to Rs. 44.82 Crores while computing income from sale of cars as income taxable in India. 7. Levy of Interest under section 2348 and 234C Erred in levying interest of Rs. 31,05,901 and Rs. 2,30,516 under Section 234B and 234C of the Act respectively, though Appellant is non-resident assessee and its entire income is subject to deduction of tax at source. 2. Brief facts of the case are that the assessee is one of the world leading Car manufacturers. The assessee is a part of Volkswagen Group Sales India private Limited ('VGSIPL'). The assessee is a tax resident of Germany. The assessee filed its return of income for Assessment Year 2009-10 declaring total income of Rs. 2,48,48,753/-. The return of income was selected for scrutiny. In the return of income the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection in India and has a permanent establishment in India in the form of Volkswagon Group Sales as per Article-5(1) and 5(5) of India-Germany Tax Treaty (Indo-Germany DTAA). Accordingly, it was held that income attributable to permanent establishment is taxable in India. The assessee has shown the following income from Volkswagon Sales India Pvt. Ltd. during Financial Year 2008-09, the following income: Nature of Income Amount (Rs.) Sale of Cars 127,78,57,032 Sale of Fixed Assets (Demo Car) 5,03,96,392 Sale of sales promotional items 20,59,548 Fees for Technical Services and Interest Income 2,48,48,758 Sole Distributorship Fees 3,73,52,011 Total 139,25,13,651 4. The Assessing Officer accordingly attributed 35% of total income of assessee in India. Hence, 35% of 139.25 Crore, i.e. at Rs. 48,73,79,778/- was computed as total income of assessee attributed to permanent establishment in India. As per global audit, the audited account of assessee, the assessee has shown operating margin of 6.39%. Therefore, the same was considered to arrive at taxable income of assessee in India. Accordingly, the Assessing Officer computed total taxable income at Rs. 3,11,43,567 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer has not appreciated the different nature of activities that have been performed by assessee and Volkswagon Group Sales. The assessee performs the activities of manufacturing, quality control, Research & Development in Germany whereas the activities of import, warehousing, marketing etc. have been done by Volkswagen Group Sales (VW Group). The sales are made by assessee to AE on principle to principle basis. The ld. AR of the assessee explained that term of sales made by assessee to Volkswagon Group Sales in the following manner: (i) Invoices are raised by Audi AG for export of Car on Volkswagon Group Sales. (ii) Shipping documents are issued in the name of Volkswagon Group Sales. (iii) The exports are done by Audi AG on CIT (carriage Insurance paid to), based and accordingly carried charges and insurance charges recovered from Volkswagon Group Sales by separately charging in the sales invoice. (iv) All associated cost of exports like preservation; packaging, freight, insurance etc. are charged separately by Audit AG to Volkswagon Group Sales. (v) Thus, the transaction between Volkswagon Group Sales and Audi AG is on FOB basis. Bill of lading confirms that the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable in India. Therefore, any income which can be further said to be attributed in India. The ld. AR of the assessee further relied upon the decision of Hyundai Heavy Industries Ltd. [291 ITR 482 (SC)], Linde AG [W.P. No. 3914/2012 (Del. High Court), decision of Mumbai Tribunal in Daimler Chrysler AG (52 SOT 93). 8. On the ground of fixed place PE, the ld. AR submits that to constitute the fixed place PE, the law has been settled by Hon'ble Supreme Court in ACIT Vs E-Funds IT Solution Inc [(2017) 100 CCH 0048 I SCC], wherein it is held that in order to constitute PE, the place should be at the disposal of the foreign entity and the assessing officer has to bring out the fact in the assessment order. To strengthen his submissions the ld. AR for the assessee also relied on the decisions of Ishikawajima- Harima Heavy Industries [288 ITR 408 (SC)]. The ld AR for the assessee explained the business model of the assessee in the following manner: "Remaining part of Page left blank intentionally" ------------- ------------- Abbreviation Full form CBU Completely built unit P2P Principal to principal SKODA India Skoda Auto India Private Ltd VW Group Sales Volkswagen G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conditions laid down in Art 5(6). A subsidiary may for instance act as an agent of its parent company and conclude such contracts for the latter on the basis of a corresponding authority as to go beyond the limits of the ordinary course of its business" 12. The ld. DR further submits that one has to look at the various clauses mentioned in the importer agreement (IA) and different agreements between the appellant and VW Group sales and also should keep in mind the nature of services rendered by the assessee and nature of business of the assessee. Accordingly, the corporate veil needs to be lifted and the real nature of the transaction required to be looked at. In support of his submission, the ld. DR for the revenue relied upon the decision of AAR ruling in case of Aramex International Logistic Pvt Ltd (supra) and would submit that the business model of the assessee constitutes PE in India. 13. We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also gone through the other material consisting of various paper books and the various case laws relied by learned representative of the parties. We have also gone thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on dated 06.09.212 holding that that activity of storage, marketing, advertisement, promotion of product of the assessee, soliciting with clients and potential customers, after sales services and support services, supply of spare parts and accessories, taking part in Auto Expo are done by VGSIPL on behalf of the assessee and are carried out from fixed place of business maintained in India. Sales targets are meet jointly established by the assessee and VW group. VW Group sales has no independent authority to act on his own, but is bound by the terms and conditions of the assessee. The ld DRP also relied on the decision of Aramex International Logistic Pvt Ltd.(supra). 16. The foremost and primary controversy before us, whether VW group sales constitute assessee's PE in India or not. The assessee is tax resident of Germany. Article 5 of India Germany text treaty defined fixed place of PE. As per article 5 of Indo Germany text treaty, a fixed place arises when the foreign entity has a fixed place in India through which its business is wholly or partly carried on. 17. During the submission the learned AR of the assessee has pointed out that similar facts were considered by Mumbai Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, profits from supply of the platform did not accrue in India. Similarly in the case of Ishikawajima Harima Heavy Ind. Ltd v. DIT ( 288 ITR 408), the Apex court held that profit will not accrue in India in respect of offshore supply of equipment. (The subsequent amendment to sec 9(1)(i) will not affect the decision on profit arising from sale of equipment offshore.) Mere sale of raw materials/ components will not result in business connection and even if it does as per the terms and conditions of the contract between the Assessee and DCIL no income accrues to the Assessee on the basis of any activities carried out, on behalf of the Assessee in India. Therefore in our opinion 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. 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." 7. The above observation in the context of sale of raw materials/CKD Units sale equally apply to sale of CBU Cars also. The finding of the CIT(A) is that on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIL cannot be considered as habitually procuring orders for the Assessee. In fact DCIL themselves are manufacturing and selling the cars aid procurement of orders for direct shipment of cars by the assessee would in fact he contrary to and against the interest of the DCIL in its manufacturing activity. DCIL by passing on communication from Assessee to the client and vice versa, are merely rendering a very insignificant auxiliary/preparatory service in the sale of CBUs by the Assessee to Indian clients. Therefore DCIL does not constitute a dependent agent of the Assessee. The prices offered to the Indian clients arc as per list price notified and so whether DCIL is involved or not the price charged to the customer would be the same. No profits can be attributed to the services of DCTL in India. In fact by engaging the services of DCIL, the profit of the Assessee is reduced to the extent of he commission paid to DCIL. 31. The following decisions cited by the assessee can be extracted for this purpose. "The decision of the Hon'ble supreme Court in case of DIT v. Morgan Stanley & Co Inc 292 ITR 416 (refer page 555, 556 & 565 of Paper Book Volume II), wherein the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome definite activity of the PE to which profits can he attributed. Unless it is so established, merely calling a person as agent acting on behalf of foreign non-resident would not by itself render him to be considered as an agency PE and pro tanto part of the profits of the non-resident is liable to be taxed in India. We find that the Revenue has not established that DCIL had carried out any activity to which any profit can he attributed. DCIL was merely carrying out the work of a post office transferring communication from one to another. Therefore, we are not. convinced that the department had established that the activity of DCIL, even if it is to be considered as PE has resulted in any profits to the Assessee and in view of the specific provisions of the Article 7 of the Double Taxation Avoidance Agreement between Indian and Germany no part of the profit of the non-resident. Assessee can be attributed to the activity with DCIL and hence is not taxable in India. 33. As we have held that no profit accruing to the Assessee on sale of CBU cars directly to Indian customers can be attributed to the activities of OCIL, we are not deciding upon the correctness or otherwise of the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, the Hon'ble High Court has referred and relied upon the judgment of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) that such agreement would not be taxable in India and no profit arising from supply of equipment outside India would be chargeable to tax in India. In paragraph 15, the Hon'ble Court has further observed that no doubt the contract in question was signed in India but it may not be a relevant circumstance to determine the taxability of such an income and for this proposition they have referred the judgment of Hon'ble Andhra Pradesh High Court in the case of Skoda Export v. Addl. CIT [1983] 143 ITR 452/[1984] 17 Taxman 256. Finally in paragraph 17 as incorporated above, Hon'ble High Court has categorically said that the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test is not the determinative of this factor and further referring to the judgment of Hon'ble Supreme Court in the case of Mahabir Commercial Co. Ltd. v. CIT [1972] 86 ITR 417 (SC), held that overall agreement does not result the income accruing in India and the execution of an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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. 21. We are also in agreement with the submissions of the ld. AR for the assessee that the facts of the decision in Daimler Chrysler AG (supra) are similar to some extent with the assessee in the present case. In the said case the assessee the assessee is also in the business of manufacturing and selling of premium vehicles worldwide (Mercedes) and tax resident of Germany. The assessee (Audi AG) is also tax resident of Germany. The comparative chart of the case in hand and that of Daimler Chrysler AG relied by ld AR for the assessee is refereed below: Particulars Facts in case of Daimler Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of allocating profit. The assessee is not undertaking any definite activity to which profit can be attributed. 23. In view of the aforesaid discussions, 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. 24. The case law relied by ld. DR for the revenue in Aramex Logistic Private Limited (supra) is not helpful to the revenue as the said case is based on the different set of facts. In the said case Aramex entered in to the contract with the customer outside India for delivery of parcel, where the delivery of the parcel located in India, further Aramex had an agreement with Aramex India for the delivery of the parcel to the location in India. The privity of contract was between Aramex and customer outside India. The completion of the contract for the delivery of the parcel will only be complete once the parcel is delivered to the location in India. Accordingly, the activity performed in India by Aramex India, viz; delivery of the parcel to the location in India is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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