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TMI Blog2020 (3) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... 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]. - ITA No. 6363/Mum/2017 - - - Dated:- 4-3-2020 - Shri Pramod Kumar, Vice President And Shri Amarjit Singh, Judicial Member For the Appellant : Shri Rajan Vora, A.R For the Respondent : Shri Sanjay Singh, D.R ORDER PER AMARJIT SINGH, JM The assessee has challenged the correctness of the DRP order dated 27.06.2017 in the matter of assessment under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aintain any stock of the merchandise of the Appellant, from which it makes regular deliveries on behalf of the Appellant nor it secures orders wholly or almost wholly for the Appellant in India. - Business connection in India 4. erred in holding that VGSIPL constitutes a business connection of the Appellant in India under Section 9 of the Act. 5. without prejudice to ground no 4, erred in holding that the income from sale of cars and accessories, sale of sales promotional items and sole distribution fees received from VGSIPL in India, accrues or arises to the Appellant through business connection in India. The learned AO/ DRIP failed to appreciate that all the related activities for sale of cars and accessories, sale of promotional items are carried out outside India and hence, no portion of the income of the Appellant from sale of cars, and sales promotional items to VGSIPL in India is taxable in India. Attribution of 35% of income in India and adopting operating profit ratio @ 9.72% 6. without prejudice to the above, erred in attributing income in India for activities of export of cars, accessories and promotional items to India, as operations in connection wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d selling them worldwide. The assessee is an associate enterprise in the form of Volkswagan Group Sales India Pvt. Ltd. (VGSIPL) in India. VGSIPL has been appointed as exclusive distributors of Audi AG in India. During the year under consideration, the assessee offered fee from technical services (information technology fees, market fees, conference and training fees and other professional fees consulting fees) and interest income in its return of income. During the year under consideration, the assessee was asked to show cause as to why the draft assessment order of the assessment year 2009-10 to 2013-14 that the 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. Accordingly, income attributed to the PE was proposed to tax in India in draft assessment order. The assessee filed its objection and following earlier order as DRP dismissed the objection and the income of the assessee was proposed as under: Nature of income Amount (Rs) IT fees 1,57,17,33 Income from services rendered (includes ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d circumstances the claim of the assessee is liable to be allowed. However, on the other hand, the ld. Representative of the department of the has refuted the said contention. Before going further, we deem it is necessary for us to go into the finding of the assesses own case: 6. Ground No.1 to 3 relates to Permanent Establishment, independent agent and business connection in India. The ld. AR of the assessee submits that offshore sale is not taxable in India. The ld. AR of the assessee submits that Assessing 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 ITA No. 7335 Mum 2012 1781 Mum 2014-Audi AG 9 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e India than income arising from sales by no stretch of imagination can be said to be taxed in India. The income arising on the sales of Car by Volkswagon Group Sales to dealers in India is income accruing or arising in India and is taxed separately in the hands of Volkswagon Group Sales. Further, Volkswagon Group Sales, being on independent company is filing its own tax return and has considered the receipt from sales of Car to dealers as income. Therefore, income in respect of sales of goods/car by assessee to Volkswagon Group Sales outside India cannot be held taxable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised of VW Group sales. 11. The ld. DR further submits that the VW Group sales also constitutes agency PE in as much as 100% of the business relating to trading of Audi AG Group brand cars on behalf of assessee in India. A subsidiary ITA No. 7335 Mum 2012 1781 Mum 2014-Audi AG 14 can also be regarded as PE of the Parent company. The Ld. DR referred to extracts by the renowned jurist, Klaus Vogel: On the basis of special parent / subsidiary relationship - other than one of control under law - a subsidiary may however individual cases be an agent and consequently for that reason a permanent establishment of its parent company Like any other unrelated company a subsidiary even if an independent agent can very well constitute permanent establishment of its parent company under 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 betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing officer took his view that activity of storage, marketing, 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, thus, the assessee has business connection in India and has a PE in India within the meaning of Article 5(5) of India Germany tax Treaty. Accordingly the assessing officer attributed 35% of the total income of the assessee in India as attributable to Indian PE. The assessing officer worked out the taxable income by applying operating profit margin of 6.39% as per global audited account and computed taxable income of ₹ 3,11,43,567/. The ld DRP conformed the action of the assessing officer it its direction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sides, we find force in assessee's arguments. The Assessee merely sells the raw materials/CKD units to DCIL. It is DCIL which carries out further activity of assembling the same and selling the finished cars. There are no further activities carried out by Appellant in India in India in this connection. This transaction ends with the Appellant selling the raw materials/CKD. No income from such sale accrues or arises to the Assessee in India. In other words no part of such profits accrue from or can be attributed to any activities of the assessee or his agent in India. The Apex Court in the case of CIT v. Hyundai Industries Ltd. (29 1 ITR 482) has held that in the case of an agreement with a South Korean Company for fabrication and installation of Oil exploration platform, the PE attributable to installation and commissioning came into existence only after the supply of the equipment. Therefore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L or their agents evidencing to buy CBUs from the Appellant DCIL passes on communication both sides. Negotiations of price, specifications etc were concluded by the Appellant. The sale to the customer was on principle to principle basis. The risk of diminishing in value or damages to the cars is to the account of customer's right from the port of shipment at the manufacturing end. The cars were cleared through customs in India for and on behalf of the ultimate customers. Thus, DCIL had no role to play from the sale or in any activity in promoting the sale to the Assessee directly to the customers in India. They are only collection of information and activities of preparatory or auxiliary in nature. The prices offered to the clients are as per the list price notified by the Assessee. DCIL has no authority to conclude any deal. Thus the mere acting as post office between the Assessee and the client will not render DCIL as a dependent agent. 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntain stock of goods/merchandise belonging to the foreign company and also carries on a variety of activities besides promoting examinations of the foreign company, the applicant enjoys an independent status. Accordingly, the applicant cannot be deemed to be a PE of the foreign company in India. Similarly, in case of Specialty Magazines P Ltd (274 ITR 310 ) (Refer Pg 633 644 of Paper Book Volume II), the AAR ruled that since 22% - 25% of the income of the applicant is derived from other clients, it cannot be said that its activities are carried out wholly or almost wholly for the foreign company. Thus the applicant, being an independent agent is not covered by the definition of PE in article 5 of the DTAA 32. From the above it can be seen that merely acting for a non resident principal wou1d not by itself render an agent to be considered as PE for the purpose of allocating profits taxable in the hands of the principal. There should be some 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the parties and also material placed on record. First of all, we find that the Hon'ble High Court in the context of LO has held that there is no material or evidence on the basis of which it can be said that LO can offer a business connection to assessee in India and it does not constitute PE of the assessee in India. The same reason ostensibly applies to NIPL also, as the terms and conditions of supply contract continues as spelled out in para 17 of the judgment remains the same. Further, the Hon'ble High Court in paragraph 13 has noted that income which has been earned by the assessee is a result of supply of software and hardware license under the supply agreement and if supply agreement is taken on standalone basis then such supplies under this agreement were made ITA No. 7335 Mum 2012 1781 Mum 2014-Audi AG 23 outside India. The properties and goods has passed on to the buyers under the supply contract outside India where the equipment was manufactured and for coming to this conclusion, 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 agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax under the Act and therefore, under the fact where there is off shore supply of equipments nothing can be held to be taxed in India in terms of Section 9(1). ----------- This judgment of Hon'ble Delhi High Court clearly clinches the issues in hand, both on the point of taxability u/s. 9(1)(i) and also in the context of PE. Thus, respectfully following the ratio laid down in aforesaid judgment of Hon'ble High Court in the case of assessee as well as in the case of Nortel, we hold that income of the assessee from off-shore supply of equipments in pursuance of supply contract cannot be brought to tax in India. 20. 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p sales Custom clearance by VW group sales. The payment is received in foreign currency in bank outside India Authority to conclude contra ct No authority to conclude contract No authority to conclude contract Activities carried out by DCIL/VW group sales DCIL imports raw material /CKD units and carries out ssembling and selling of finished cars. Providing liaising services in case of direct sales of CBU cars to India customers by DAG VW group sales imports and sells to dealers on a principal to principal basis. Term of sales On principal to principal basis On principal to principal basis Any commission paid Commission is paid to liaising services in case of direct sales No commission is paid 22. We have noted that in case of Daimler AG (supra), 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s raised these grounds of appeal in alternative. Considering the fact that we have allowed Ground No.1 to 3 of the appeal, therefore, the discussion on Ground No. 4 5 have become academic. 27. Ground No. 6 relates to deduction for marketing and promotional expenses. 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. 28. Ground No.7 relates to levy of interest under section 234B 234C. 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 ITA No. 7335 Mum 2012 1781 Mum 2014-Audi AG 29 Assessing Officer to recompute the tax/interest by following the decision of the jurisdictional High Court in case of NGC Network A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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