AI Drafter 
TaxTMI 
TaxTMI 
2019 (10) TMI 121
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....llowing grounds of appeal: Based on the facts 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 busines....
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....ny reasons for arriving at such attribution. 5. Taxability of sole distribution fees in India Failed to appreciate that in the absence of PE and business connection in 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 resid....
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....ntly established sales targets. Most of the senior officials working that Volkswagon Group Sales have all comes from Audi group abroad. On the above observation, the Assessing Officer held that assessee has business connection 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....
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.... parties. 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 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. ....
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....oup 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 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 bu....
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....idiary 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 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 th....
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....le 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 Rs. 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 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 ....
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.... 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) 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....
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....e 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 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. ....
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....ome 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 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 resul....
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....t 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 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 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 Expor....
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....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 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 agre....
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....n 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, the income arising on the sales of Car by Volkswagen Group Sales to dealers in India is income accruing or arising in India and is taxed separately in the hands of Volkswagen Group Sales. In our view merely acting for non-resident principal would itself render an agent to be considered PE for the porpose 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 th....