TaxTMI 
TaxTMI 
2020 (3) TMI 633
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....39;), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - I, (hereinafter referred to as the '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 has: 1. erred in holding that Volkswagen Group Sales India Pvt. Ltd (VGSIPL') constitutes a Permanent Establishment ('PE') of the Appellant in India and assessing the total income at INR 3,14,18,368. Fixed Place PE in India 2. erred in holding that VGSIPL constitutes a fixed place PE of the Appellant in India under Article 5(1) of the India - Germany treaty ('Tax treaty'); The learned AO/ DRIP failed to appreciate that - 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 India under Article 5(1) of the Tax treaty; - VGSIPL should not constitute PE of the Appellant merely due to the fact that it is a group company of the Appellant. Agency PE in India 3. erred in holding that VGSI....
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....erred in attributing profits to the PE without recording the reason for the same or bring any evidence on record to justify the same. Deduction for warranty, marketing, advertising and promotional expenses reimbursed by the Appellant (Without prejudice to all above objections) 9. without prejudice to the above, the learned AO/ DRP has erred in not allowing deduction of warranty, advertising, marketing and promotional expenses of INR 135,44,03,769 incurred by VGSIPL and reimbursed by the Appellant relating to brand building campaigns/ warranty expenses while computing income from sale of cars as income taxable in India. 10. without prejudice to the above, erred in not considering the alternative computation mechanism of attribution of profits to FE for allowing deduction of India specific expenditure of INR 135,44,03,769. Taxability of sole distribution fees in India 11. erred in considering sole distribution fees of INR 13,31,250 taxable in India, in the absence of PE and business connection in India. Levy of interest under section 234B of the Act 12. erred in levying interest under Section 234B of the Act amounting to ....
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....92,35,26,391 i.e Rs. 32,32,34,237/- is computed as total income of the assessee attributable to the India PE. Further, a deduction of Rs. 135,44,03,769/- pertaining to sales promotion/warranty expenditure is claimed by the assessee, however, a deduction for same is not allowed, since, while arriving at 35% revenue attribution, all expenses are deemed to have been allowed and hence, no further, expenses can be allowed. The DRP has also upheld that no deductions are allowable to be assessee. 10. As per the global audited accounts of the assessee, it has a shown profit margin of 9.72%. The same is considered to arrive at the taxable income of the assessee in India from its PE in India. 11. Therefore, in view of the facts as discussed above, the total income of the assessee is determined @ 9.72% of Rs. 32,32,34,237/- i.e at Rs. 3,14,18,368/-/- from its PE in India. 12. The total income of the assessee is as follows: Particulars Amount Income as per return of income [which does not include income from PE in India] 4,72,29,092 Income determined as income from PE in India in this order 3,14,18,368 Total income 7,86,47,460 4. A....
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....een handed over to the first or main carrier, so that the risk transfer to buyer upon handling goods over to without carrying at the place of shipment in the country of export. 7. The ld. AR of the assessee submits that similar ground of appeal was considered by Mumbai Tribunal in DCIT vs. Safgate International AB (ITA No. 1509/Mum/2015) dated 14.11.2017 wherein it was held that, where sales of goods is completed outside India and where the title/delivery is made outside India could income be attributed as sale has accrued in India. The ld. AR of the assessee also relied upon the decision of Hon'ble Apex Court in case of Ishikawajma Harima Heavy Industries [288 ITR 408 (SC)] wherein the Hon'ble Apex Court held what is to be taxed is the profit of the enterprises in India, but only so much of them as is directly or indirectly attributable to that permanent establishment. All income arising out of the turnkey project would not therefore, be assessable in India, only because the assessee has a permanent establishment. The ld. AR of the assessee further submits that the activities of manufacturing and sales of Car is completed by Audi AG outside India and constitute a separate....
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....ssessing Officer has clearly brought the material on record that VW Group Sales is the exclusive distributor of Audi Products in India whose only source of income is from Audi business. The business activities of VW Group Sales are devoted wholly on behalf of the assessee. The activities of assessee and VW Group Sales complement each other and VW Group Sales is functioning as an extended arm and replacement of the assessee in India. The sales targets are jointly established by the assessee and VW Group Sales. The activities of storage, marketing, advertisement, promotion of products of the assessee, soliciting clients and potential customers, after-sales services and support, supply of spare parts and accessories, taking part in Auto Expos etc were done by VW Group Sales on behalf of the assessee and were carried out from its fixed place of business maintained in India. 10. The ld. DR further submits that the assessee cannot get business of sale of Audi cars in India without the role being played by VW Group Sales having business at a fixed place in India. Accordingly, considering the business arrangement, the assessee has its subsidiary, it is clear that the premise of VW....
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....its AE. The assessee is tax resident of Germany and India had entered in tax treaty with Germany. And as per the provisions of section 90(2) the assessee is entitled to invoke the provision of Income Act or the India Germany DTAA, which is more beneficial to them. A non-resident entity will be liable to tax in India if the activities under taken by them constitute its business connection which constitute permanent establishment. The question is whether the non-resident has business connection in India from or through which income profit or gain can be said to be accrue or arise to them within the meaning of section 9 or Article 5 of India Germany tax treaty, has to be determined on the facts of each case. 14.During the assessment, the assessing officer on going through the Importer agreement (IA) in para 11 of the draft assessment order observed that: • VGSIPL is the exclusive distributors of Audi Product in India whose only source of income is from Audi sales, • Business activities of VGSIPL are devoted wholly on behalf of the assessee, • Activities of the assessee and VGSIPL complement each other and VW Group sales is functioning as....
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....ee has pointed out that similar facts were considered by Mumbai Tribunal in case of Daimler AG (supra). In Daimler AG (supra) it has been held that the subsidiary of that company cannot be regarded as PE and with respect to carrying or business in India as a parts and completely knocked down (CKD) sales are made by the assessee to Daimler Chrysler India Ltd (DCIL) on principle to principle basis and on sale such parts /CKD become property of DCIL, which does not constitute sales outlet or warehouse of the assessee has, that assessee does not carry out any operation in India in respect of sales of part of CKD to DCIL and therefore cannot qualify to have a PE in India accordance with Article 5(1) and 5(2) of Indo German tax treaty. The learned AR of the assessee while arguing his case submitted before us the transaction between VW group sales and assessee is on principle to principle basis and the transaction is completed outside India and the title/delivery is made outside India. Therefore, profit on sales does not accrue or arise to assessee in India. For completeness of this order the relevant part of the order is extracted below: 6. --------- the Tribunal had examined th....
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....ation 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 a perusal of the General Agency Agreement between the assessee and MBIL it was clear that delivery of goods took place outside India and the payment was also being made for purchase of goods outside India. Therefore, there was no business activity carried out by the assessee regarding sale of CBU Cars directly to the customers in India. Thus the assessee does not have a business connection and that MBIL does not constitute a business connection with the assessee in India under section 9 of the Act, therefore, income in respect of sale of CBU Cars are not taxable in India. 8. We agree with the order of the CIT(A) on this aspect. On the issue whether MBIL constitute a PE of the assessee in India within the meaning of Article-5 (2) of the India - Germany DTAA the Tribunal in A.Y 2001-02 the CIT(A)held as follows: "30. Now the activity of DCIL are twofold. (1) manufacture of cars using CKD packs and other components. (2) Act as communication exchange in respect of direct sale of CBUs by the Assessee directly to the clients in India.....
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.... 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 Apex Court has observed that since the assessee did not conclude any contracts on behalf of Morgan Stanley & Co. Inc (MSCo), it did not have an agency PE in India. Similar view has also been taken by the Special Bench of Delhi Tribunal in case of Motorola Inc & Others v. DIT (2005) 95 ITD 269 (refer page nos. 580, 589 & 591 of Paper Book Volume II) and the Authority for Advance Rulings in case of TVVM Ltd. v. CIT (1999) 237 ITR 230 (Refer page 600 & 618 of Paper Book Volume II). The Hon'ble Delhi Tribunal has in the case of Western Union Financial Services Inc ( 104 ITD 34) (Refer Pg 522 & 547 of Paper Book Volume II) observed that there is no evidence to show that the extent of their activities for the assessee, compared to oil their activities, is so large that it can be said that they are dependent on the assessee for their earnings or revenues. Accordingly, the agents are not economically dependent upon the assessee. Further, there is no authority with the agents to conclude contracts. The agents are merel....
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....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 percentage of profits, estimated by the CIT(A), as attributable to the activities of PE in India. Hence Ground No.3 raised by the assessee is not decided as being infructuous." 9. As can be seen from the order of the Tribunal on identical facts, MBIL does not constitute PE of the assessee in India. Respectfully following the decision of the Tribunal referred to above we hold that income on sale of CBU Cars by the assessee in India does not give rise to a business connection in India and income on such sale is not taxable in India. We also hold that the MBIL does not constitute a PE of the assessee in India under Article 5(2) of the India- Germany DTAA. For the reasons given above both the grounds of appeal raised by the revenue are dismissed. 10. In the result, appeal by the revenue is dismissed." 18. The learned AR for the assessee also vehemently relied upon the decision of Hon'ble Supreme Court in case of Ishikawajima-Harima (supra), wherein it has been held that where....
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.... 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 overall agreement is promoted by purely commercial considerations as India Cellular Operator would be desirous of having a single entity that could liaise with. Thus, it was concluded that the place of negotiation, the place of signing of agreement or formula acceptance thereof or overall responsibility of the assessee are relevant circumstances. Since the transaction is relating to the sale of goods, the relevant factor and determinative factor would be as to where the property in good passes and in the present case, the finding is that the property has passed on high seas. In the present case, the goods were manufactured outside India and even the sale has taken place outside India and once this fact is established even in those cases where there is a one composite contract supply has to be segregated from installation and only then would question of apportionment arise having regard to expressed language of Sect....
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....f 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 Chrysler AG Facts in case of Audi AG (assessee) Transaction with India entity Sales of raw material and parts and completely knocked down kit (parts/CKD to DCIL Direct sales to CBU cars to India Customers, for which DCIL rendered certain services. Fee for technical services from DCIL Interest on delayed payments Export of CBU cars to VW group sales Export of parts and accessories for assembling of Audi Brands cars to skoda India. Export of sales promotional material to VW group sales. Fee for technical services. Interest on delayed payment Whether any place in India No officer or place of business in India No officer or place of business in India Terms of delivery for sale of parts/CKD/FBU Delivery of parts CKD/CBU is outside India. Sale is Concluded outside India. The risk of damage and loss is borne by DCIL Import duty is paid by DCIL. Cu....
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....or 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 part of one transaction which cannot be independently performed. Thus, the decision cited by the ld. DR for the revenue is on different set of facts. 25. However, in the case of present assessee the care is manufactured by the Audi AG outside India and constitutes a separate and independent activity. As noted earlier the car is sold to VW Group for further sale in India and VW Group sale is not acting on behalf of Audi AG nor is Audi AG selling cars through VW Group sales. Moreover, the cars are sold on principle to principal basis. Hence, we are of the view that Assessing Officer was not justified in invoking section 9 of the Act and the Article 5 of Indo-Germany Tax Treaty for taking view that assessee has PE in India. In the result, Ground No.1 to 3 of appeal is allowed. 26. Ground No....