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Issues: (i) Whether profits from offshore sales of CKD kits, raw materials, spare parts and CBU cars to the Indian affiliate or customers were taxable in India through a business connection; (ii) Whether the Indian affiliate constituted a fixed place or agency permanent establishment of the German enterprise under the India-Germany Double Taxation Avoidance Agreement; (iii) Whether any profits from the relevant sales were attributable to activities in India.
Issue (i): Whether profits from offshore sales of CKD kits, raw materials, spare parts and CBU cars to the Indian affiliate or customers were taxable in India through a business connection.
Analysis: Under Section 9(1)(i) of the Income-tax Act, 1961, only income attributable to operations carried out in India may be brought to tax. The sales were concluded outside India on a principal-to-principal basis, with title and risk passing outside India. The Indian affiliate conducted its own business, including assembly and subsequent sale, while the non-resident undertook no manufacturing, sale or distribution operations in India in respect of those supplies. No distinguishing facts or legal change from the earlier years was shown.
Conclusion: The Indian affiliate did not constitute a business connection, and the profits from the relevant sales were not taxable in India. This issue is in favour of the assessee.
Issue (ii): Whether the Indian affiliate constituted a fixed place or agency permanent establishment of the German enterprise under the India-Germany Double Taxation Avoidance Agreement.
Analysis: Article 5 requires that the foreign enterprise carry on its business through a fixed place at its disposal, or through a qualifying dependent agent. The Indian affiliate's premises were not at the disposal of the assessee; it had no authority to negotiate or conclude contracts for the assessee, did not habitually secure orders or maintain the assessee's stock for delivery, and merely facilitated communications in direct CBU sales. Its activities were independent and preparatory or auxiliary to such direct sales.
Conclusion: The Indian affiliate was neither a fixed place permanent establishment nor an agency permanent establishment of the assessee in India. This issue is in favour of the assessee.
Issue (iii): Whether any profits from the relevant sales were attributable to activities in India.
Analysis: Article 7 permits taxation only of profits attributable to a permanent establishment. Since no business connection or permanent establishment existed and no operations of the assessee relating to the sales were undertaken in India, the basis for attributing business profits to India failed.
Conclusion: No profits from the sales of CKD kits, raw materials, spare parts or CBU cars were attributable to India. This issue is in favour of the assessee.
Final Conclusion: The deletion of the addition for profits allegedly attributable to Indian activities was sustained for both assessment years.
Ratio Decidendi: Offshore sales by a non-resident are not taxable in India where the Indian affiliate neither performs operations giving rise to the sales income nor satisfies the conditions for a fixed place or agency permanent establishment.
Offshore sales remain outside Indian taxation where no Indian business connection, permanent establishment, or profit-generating operations exist.
Offshore sales by a non-resident to an Indian affiliate or customers are not taxable in India where contracts are concluded and title and risk pass outside India, and no sales-related operations are undertaken in India. Under the business-connection rule, only income attributable to Indian operations may be taxed. An Indian affiliate does not create a fixed-place permanent establishment unless its premises are at the foreign enterprise's disposal, and does not create an agency permanent establishment without authority to conclude contracts, habitually secure orders, or maintain stock for delivery. In the absence of a business connection or permanent establishment, no business profits are attributable to India under the treaty.
Income taxable in India - Business Connection under Section 9(1)(i) - profits from offshore sales of CKD kits, raw materials, spare parts and CBU cars to the Indian affiliate or customers - fixed place or agency permanent establishment of the German enterprise under the India-Germany DTAA - Principal-to-Principal Sales - Agency Permanent Establishment - Independent Agent Status - Attribution of Profits to Permanent Establishment - Rule of Judicial Consistency Business Connection under Section 9(1)(i) - Sale on Principal-to-Principal Basis - liability to tax under section 9 of the Act in respect of sale of CKD kits/raw materials/spare parts to the Indian group entity and sale of CBU cars to the Indian distributor - HELD THAT: - The Tribunal noted that the issue was recurring and had been consistently decided in the assessee's favour by co-ordinate Benches from earlier assessment years [2019 (3) TMI 2112 - ITAT MUMBAI], holding that such sales were concluded outside India on a principal-to-principal basis, with no further activity carried out by the assessee in India after transfer of goods, so that no income accrued or arose to it from such transactions. The Revenue's representative admitted that the issue stood covered by the earlier decisions and did not point out any distinguishing facts. [Paras 8] Following the consistent view taken in the assessee's own case for earlier years, it was held that no business connection was established under section 9(1)(i) and the income from such sales was not taxable in India Fixed Place Permanent Establishment - Article 5(1) and 5(2) of the India-Germany DTAA - existence of a fixed place permanent establishment of the assessee in India through the Indian group entity in respect of sale of parts/CKD units - HELD THAT: - Relying on the settled precedent in the assessee's own case [2019 (3) TMI 2112 - ITAT MUMBAI], the Tribunal reiterated that mere existence of a subsidiary does not by itself constitute a permanent establishment of the parent, that the assessee did not carry out any manufacturing, sale, or other operations in India, and that it had no right to use the Indian entity's premises nor any place of management therein, since key decisions were taken by the Board in Germany. [Paras 8] It was held that the assessee did not carry out any operations in India in respect of the sale of parts/CKD units and therefore could not be said to have a permanent establishment under Article 5(1) and 5(2) of the Treaty Agency Permanent Establishment under Article 5(5) - Dependent Agent - Independent Agent Status - whether the Indian group entity acting as communication conduit for direct sale of CBU cars to Indian customers constituted a dependent agent creating an agency permanent establishment - HELD THAT: - Indian entity had no authority to conclude contracts on behalf of the assessee, did not habitually secure orders, and merely acted as a channel of communication in an auxiliary or preparatory capacity, receiving commission for such limited role while pricing and negotiation remained with the assessee. It was found that the entity was not economically or legally dependent on the assessee so as to constitute a dependent agent. [Paras 8] It was held that the Indian entity did not constitute a dependent agent, and consequently no agency permanent establishment existed under Article 5(5) of the Treaty Attribution of Profits to Permanent Establishment - Article 7 of the India-Germany DTAA - attribution of profit on sale of CBU cars directly to Indian customers to any permanent establishment of the assessee in India - HELD THAT: - Since no permanent establishment, fixed place or agency, was found to exist, the Tribunal held that the question of attribution of profits under Article 7 of the Treaty did not survive, following the consistent view taken in the assessee's own case that once the existence of a permanent establishment fails, the percentage of profit estimated as attributable becomes academic. [Paras 8] It was held that no part of the profit arising to the assessee from sale of CBU cars directly to Indian customers was attributable to, or taxable in India in the hands of, any permanent establishment, and the addition made on this account was rightly deleted Final Conclusion: Following the consistent view taken by co-ordinate Benches in the assessee's own case for successive earlier assessment years, and in the absence of any distinguishing facts brought by the Revenue, the Tribunal upheld the order of the CIT(A) holding that no business connection or permanent establishment (fixed place or agency) existed in India and that no profit was attributable to India, thereby dismissing both appeals of the Revenue.