2012 (6) TMI 479 - AT - Income Tax

Tribunal dismisses revenue's appeals, upholds non-taxability of income from CKD units

The Tribunal dismissed the revenue's appeals, except for the issue of the addition of income related to the SAP system, which was remanded for fresh ... Income from sale of Completely Knocked Down (CKD) Units – whether the provisions of Sec. 9(1)(i) are applicable or not – Held that:- The Assessee merely sells the raw materials/CKD units to DCIL who in turn 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 this connection, as this transaction ends with the Appellant selling the raw materials/CKD, no income from such sale accrues or arises to the Assessee in India - 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 – against revenue. Permanent establishment - Article 5(2) of the DTAA between India and Germany with regard to sale of CKD Units – Held that:- Merely acting for a non- resident principal would 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, 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 – against revenue Deletion of income in respect of rights of SAP system – assessee submitted that there is no basis for the estimate made by the AO regarding royalties/ FTS income in respect of rights for software to be an ad-hoc amount of EURO 1,00,000 - Held that:- As the confirmation filed by the assessee that no payment by DCIPL in connection with right to use any software licensed by the assessee during the financial year was made before the CIT(A) was not confronted to the AO he should be afforded opportunity for examining the claim made by DCIPL before the CIT(A ) - set aside the order of the CIT(A) and remand the issue to the AO for fresh consideration in the light of the additional evidence filed – in favour of revenue for statistical purpose. Applicability of levy of Interest u/s 234B - duty is cast on the payer to pay tax at source – Held that:- As decided in DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) Versus NGC NETWORK ASIA LLC 2009 (1) TMI 174 (HC) when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the payee-assessee - once the Income is subjected to TDS provision, then that Is outside the provisions of the advance tax as per the mandate of Section 209 – against revenue. Penalty u/s 271(1)(c) – Held that:- As addition made by the AO treating income from sale of CBU Cars as income chargeable to tax in India and that the assessee had a PE in India was deleted by Tribunal, the very basis of imposing penalty on the assessee no longer survives – against revenue. Issues Involved:1. Applicability of Section 9(1)(i) of the Income Tax Act to the sale of Completely Knocked Down (CKD) Units.2. Determination of whether M/s. Daimler Chrysler India Ltd. (DCIL) constitutes a Permanent Establishment (PE) under Article 5(2) of the DTAA between India and Germany.3. Addition of income on account of rights of SAP system.4. Imposition of interest under Section 234B for non-deduction of tax at source under Section 195.5. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.Issue-wise Detailed Analysis:1. Applicability of Section 9(1)(i) to the Sale of CKD Units:The revenue's appeal contended that the CIT(A) erred in holding that provisions of Section 9(1)(i) were not applicable to the sale of CKD Units by the assessee. The Tribunal noted that the issue had already been considered in the assessee's favor in the earlier assessment year (2001-02). It was held that no income from the sale of CKD units accrued or arose to the assessee in India as the transaction ended with the sale of raw materials/CKD units, and no further activities were carried out by the assessee in India. The Tribunal concurred with the CIT(A) that the income from the sale of CKD units was not taxable in India under the Act.2. Determination of PE under Article 5(2) of DTAA:The revenue also contended that DCIL constituted a PE of the assessee in India under Article 5(2) of the DTAA. The Tribunal referred to its earlier decision, which established that DCIL's activities were limited to acting as a communication exchange and did not involve negotiating or concluding contracts on behalf of the assessee. The Tribunal found that DCIL's role was preparatory or auxiliary in nature and did not constitute a dependent agent. Hence, DCIL was not considered a PE of the assessee, and no profits could be attributed to DCIL's activities in India.3. Addition of Income on Account of Rights of SAP System:The revenue challenged the CIT(A)'s direction to delete the addition of EURO 1,00,000 made by the AO on account of income in respect of rights of the SAP system. The CIT(A) found that there was no payment by DCIPL to the assessee for the right to use any software during the relevant financial year. The Tribunal noted that the confirmation from DCIPL was not confronted to the AO and remanded the issue back to the AO for fresh consideration, allowing the assessee to present additional evidence.4. Imposition of Interest under Section 234B:The revenue contended that the CIT(A) erred in holding that no interest under Section 234B could be imposed on the payee assessee when the duty to deduct tax at source was on the payer. The Tribunal referred to the Bombay High Court's decision in the case of DIT (IT) v. NGC Network Asia LLC, which held that no liability to pay advance tax arises if the income is subject to TDS under Section 195. The Tribunal upheld the CIT(A)'s order, confirming that interest under Section 234B was not applicable.5. Imposition of Penalty under Section 271(1)(c):The revenue appealed against the CIT(A)'s order canceling the penalty imposed under Section 271(1)(c) for the addition made on the income from the sale of CBU Cars. The CIT(A) noted that the Tribunal had already deleted the addition in the quantum appeal. The Tribunal agreed with the CIT(A) that the basis for imposing the penalty no longer existed and upheld the cancellation of the penalty.Conclusion:The appeals by the revenue were dismissed except for the issue regarding the addition of income on account of rights of the SAP system, which was remanded to the AO for fresh consideration. The Tribunal consistently followed its earlier decisions and upheld the CIT(A)'s findings on the non-applicability of Section 9(1)(i), the non-existence of a PE under the DTAA, and the non-imposition of interest under Section 234B. The penalty under Section 271(1)(c) was also rightly canceled.