AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (3) TMI 633
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....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 VGSIPL constitutes an Agency PE of the Appellant in India under Article 5(5) of the Tax treaty; The learned AO/ DRP failed to appreciate that - Tr....
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....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 INR 30,93.033. The Appellant craves leave to add, alter omit or substitute any or all of the above grounds of appeal, at any time before or at the time of the appeal." 2. Brief facts of the case are that the assessee filed its return of income on 28.11.2014 declaring a total income ....
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....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. Aggrieved, the assessee carried the matter in appeal before us. 5. At the very outset of the ld. Representative of the assessee has argued that the issue has duly been covered with the decision of the Hon'ble ITAT in the assesse's own case for the assessment year 2009-10 and 2010-11 bearing ITA No. 7335/Mum/2012 and 1781/Mum/2014 decided on 03.09.2019, therefore, in the sa....
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....ide 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 and independent activity. 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 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....
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.... 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 Group sales is a fixed place PE of the assessee within the meaning of Article 5(1) and (2). The premise of VW Group sales are used by the assessee and the personnel of AUDI AG are following the necessary guidelines/recommendations fixed by the AUDI AG at the premised 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 asses....
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....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 an extended arm and replacement of assessee in India, * As per clause 1 of Importer agreement, the assessee and VW group sales are jointly establishing the sales targets, * Most of the senior officials working with the VW group sales have all come from Audi Group abroad. 15. On the basis of his above observation, the 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 ....
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....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 the issue in assessee's own case in A.Y. 2001-02. Both the parties agreed that the issue raised by the revenue in this appeal have already been considered and decided by the Tribunal in A.Y. 2001-02. On the issue of accrual of income on sale of CBU Cars in India the Tribunal in assessment year 2001-02 in ITA No. 9211/M/04 held as follows: "11. After hearing both 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....
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....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. Even though the commission received by DCIL for helping the sale CBUs it is obvious that their main activity is that. of manufacture of cars. Acting as communication conduit is not their main business. Further the dept has not established that DCIL actively canvasses orders for CBUs of Assessee or is actively engaged in negotiating and concluding contracts. If and when clients approach DCIL 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 princ....
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.... 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 merely performing their duties and not exercising any authority. Based on the ITA above, the Hon'ble Tribunal concluded that there is no agency PE in India. In case of KnoWerX Education (India) P Ltd. ( 301 ITR 207 ) (Refer Pg 619 & 632 of Paper Book Volume II), the Authority for Advance rulings has observed that since the applicant does not conclude any contract on behalf of the foreign company, does not maintain 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 app....
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....ection 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 the entire transaction has been completed offshore the profit on sale should not /could not be taxable in India. 19. The learned AR also relied upon the decision of Special Bench in case of Nokia Networks (supra) and submitted that the ratio of the said decision it is squarely applicable on the facts of case of assessee. the relevant part of decision in Nokia Network (supra) is extracted below; 56. We have heard the rival contentions made 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 busi....
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.... 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 Section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arises in India. 58. ----------- Thus, the Hon'ble High Court in Nortel's case has clearly concluded that equipments supplied overseas cannot be taxed under the Act and as per clause (a) of Explanation 1 to Section 9(1)(i) which postulates the principle of apportionment, the only such income that can be reasonably attributed to assessee in India could be chargeable 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 clinche....
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....s 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. Custom clearance by DCIL The payment is received in foreign currency in bank outside India. Delivery of parts/CBU is outside India. Sale is concluded outside India. The risk of damage and loss is borne by VW group sales. Import duty is paid by VW group 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 ....
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.... 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. 4 & 5 relates to attribution of income and estimation of Gross Profit. The assessee has 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 com....