TaxTMI 
TaxTMI 
2019 (11) TMI 1580
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....da Siel Cars India Limited (HSCI), which was incorporated in December 1995 to manufacture and sale Honda's model cars in the Indian market. The applicant had entered into a technical collaboration agreement dated 21/05/1996 with its Indian subsidiary, the term of which had expired. It has entered into a fresh agreement with Indian subsidiary on 01/04/2010 whereunder HSCI is permitted to use the intellectual property rights and technical information belonging to the applicant to manufacture and sale Honda's automobile products in India. The consideration payable under this agreement was Model fee of JPY 800,000,000 in consideration for furnishing of technical information in relation to each new model or full model change as well as royalty @ 5 % of domestic and export sales for license granted to use the IPR. It was clarified by the applicant in the course of hearing that so far as this agreement is concerned there is no dispute and the fees/royalty as per this agreement are offered to tax in India. 2. The applicant has entered into another Agreement on Dispatching of Experts and Accepting of Trainees with HSCI dated 21st May, 1996 to provide guidance to HSCI as to the appl....
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....d to HSCI at the port of delivery i.e. in Japan. The import of CR-V cars as well as the capital goods from the applicant was also on similar terms and conditions. It was explained that HSCI had to import certain components/parts which are sophisticated or IPR protected components and are not available from vendors in the local Indian market. The decision regarding import and localisation of the products and components is taken by HSCI. The applicant, however, specifies quality requirements and HSCI consults the applicant regarding the local vendor's appointment to ensure adherence to standard quality of Honda's rendered products. The transactions between the applicant and HSCI are undertaken on principal to principal basis at arm's length price. The exercise of control/supervision of the applicant is limited in its capacity of a shareholder and there is no control and supervision in the day to day operation/decision making of HSCI. The applicant as a shareholder and technical collaborator retains the right to inspect the quality of products manufactured and obtains periodic reports to ensure that HSCI adheres to the standard quality of Honda's brand products. 5. It....
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....ent legal entity. c. The fact that the trade or business carried on by that subsidiary company is controlled by the parent company does not constitute the subsidiary company to be a permanent establishment of the parent company. d. Any place or premises belonging to the subsidiary that is at the disposal of the parent company (i.e. parent company has a right to use that place) which constitutes a fixed place of business through which the parent carries its own business can only constitute a permanent establishment of the parent. e. A parent will be deemed to have a permanent establishment in the State of the Subsidiary only in respect of any activities that its subsidiary undertakes for and on behalf of the parent. f. It is thus essential that the business of a foreign entity must be carried out in India and mere control by the foreign entity over the subsidiary as a shareholder in other country would not create PE of the foreign entity in the other country. g. The fact that the subsidiary's own activities at a given location may provide an indirect economic benefit to the business of the parent does not mean that the latter company carries on its business through tha....
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....pendent corporate entity and that the business functions of the parent company in Japan were carried out in India through their employees. HSCI served as a fixed place of business through which the business of Honda, Japan was being carried out. The entity HSCIL was acting more like a branch of Honda than being a separate legal and operational entity. 10. It was submitted that the parent company, Honda Japan, follows a model where the overseas business operations are divided into Regional Headquarters and each regional headquarter controls and supervises the business functions in its region. The Indian operation falls under the control of Regional Headquarters in Bangkok, Thailand. In a structure of this kind, the business functions are carried out as a group where no entity enjoys a separate and independent status. The Indian Company was headed by an employee of the Parent company who also happened to be a Director of the parent company, Honda Japan and President of a subsidiary in Pakistan. All the major departments of the Indian company were headed by an employee of Honda, Japan. The Indian company was left to employ only subordinate, supervisory or technical staff or low-paid ....
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....ey. It was submitted that the employees of the Parent company were not in India as a mere deputationists working for the Indian Company, but they were representing the Parent Company in India and doing functions on their behalf. According to revenue, while the Parent Company was fully justified to supervise or control the affairs of the subsidiary through the Board of Directors of the subsidiary, but if the Parent company directly controlled the functioning of the subsidiary by sending its own employees for heading all departments of the subsidiary, directly paying them salary without charging it from the subsidiary, getting reports from them and giving instructions through the regional offices then it would lead to an inevitable conclusion that the Parent company had decided not to recognise the independent corporate structure of the subsidiary and had thus, torn the corporate veil which separated the subsidiary from the parent. It was contended that the applicant had gone much beyond the shareholders function and the argument that there was nothing wrong or illegal in the functioning of the regional offices or getting reports etc. which were only advisory in nature; ignored the v....
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.... export by the other was both getting finalised by persons who were representing the two entities who were supposed to be distinct and independent in their decision making. (iv) Looking after every aspect of foreign operations of the Parent company in India. (v) Undertaking post sale functions in respect of CRV cars on behalf of HM, Japan. The revenue has relied upon the testimony of the employees during survey about the actual functioning and the state of affairs as they existed at the time of making the application. It was submitted that the launching of a product was completely under the domain of Honda, Japan who carried out market survey through their employees in India and then took necessary decision for launch of the product. These employees heading various divisions carried out after sale functions in respect of CRV cars and the warranty claims were accepted by them on behalf of Honda, Japan. As stated by them, these claims were not always paid/reimbursed by Honda, Japan. This kind of business arrangement between the Parent and the Subsidiary was possible only when the decision-making authority for both the entities rested with one single person. 14. It was pointed o....
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....f the expatriate employees recorded during survey who had stated that they were working for the Indian company. 16. As regarding allegation that HCIL was an extension of the applicant and working as its branch it was submitted that HCIL was a legally independent corporate entity, an independent manufacturing entity and was entering into contracts with customers in its own name in the ordinary course of business. HCIL was bearing the entire business, financial and economic risk with respect to its business. The activities of HCIL with the applicant were undertaken at arm's length. HCIL was manufacturing cars in its own two factories and selling them to dealers on its own account and it was not an extension or branch of the applicant. It had substantial income, expenditure, employees and business to lend substance to itself and to be regarded as a separate independent entity. HCIL was operating since F.Y. 1995-96 and was assessed in respect of the income earned by it in its own name and capacity. The commercial activities of HCIL were only subject to policies and strategies as formed by its Board of Directors. 17. The Ld. Counsel for the applicant submitted that the allegation ....
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....ant company. Findings: 20. We have carefully considered the facts of the case, the details, documents and the statements brought on record, the submissions of the revenue and the clarification of the applicant. The first question to be decided is whether the applicant i.e. Honda Motor Co., Ltd. has a permanent establishment ('PE') in India under the provisions of India-Japan DTAA, by reason of its business transaction and related activities with Honda Siel Cars India Limited ('HSCI'). Article-5 of DTAA between India and Japan lays down as to what would constitute a PE. It reads as under: ARTICLE 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially : (a) a place of management ; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop ; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, plantation or o....
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....ishment in the first-mentioned Contracting State, if (a) he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph ; (b) he has no such authority, but habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise ; or (c) he habitually secures orders in the first-mentioned Contracting State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise. 8. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that Contracting State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of....
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....eral Affairs) of HCIL-30-6-2010 Q6. Are you responsible for appointment, promotion and other HR related matter of Japanese employees including Directors? Ans. No, Mr. Sato is a Japanese working as an advisor in India and he informed HR Department about the appointment of Japanese employees. He informs about the salaries is to be paid to the Japanese employees in India. Subsequent to this, an appointment letter is issued by the HR department. We also send invitation letters to them to enable them to get work permit to work in India. We are not involved in the recruitment and negotiation process of Japanese employees. Statement of Sh. Tatsuye Natsume, Director Marketing- 30-6-2010 Qn. Details of salary drawn in India and abroad? Ans. The salary in India is Rs. 7 lacs per annum (approx.) and salary in Japan Rs. 40 lacs (approx.). The salary in Japan is paid by Honda Motors Co. Ltd. Japan. "Qn. Whom do you report to and whether you send reports to Honda Motor Co. Ltd. Japan and to your regional headquarter in Thailand? Ans. I am reporting to Mr. Nagai, President HSCIL. I do not send any report to Honda Motor Co. Ltd. Japan. I report to Managing Director and send certain routine ....
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....tem of Honda Japan which is online valid for all Honda company this is called GLO. Statement of Sh. Takashi Nagai, President & CEO of HCIL "Qn. Where you were working before coming to India and how you were related to Honda Motor Co. Ltd. Japan? Ans. I was working as Executive Vice President in Asian Honda Bangkok/Thailand and I am operating officer of Honda Motor Co. Ltd. Japan and still hold this position of Operating Officer of Honda Motor Co. Ltd. Japan. Qn. Can you explain your responsibility as Operating Officer of Honda Motor Co. Ltd. Japan? Ans. As an operating officer of Honda Motor Co. Ltd. Japan, I am given the responsibility to be the President of the HSCIL and HMIL. Qn. What is the structure of Honda Motor Co. Ltd. Japan and what is your position in that structure? Ans. Honda Motor Co. Ltd. Japan follows matrix organisational structure. Vertically we have regional HQ and horizontally we have functional HQs. We have six regions and we may have 8 functional heads. Vertically I fall under Asian Oceania Region and I am a member of Regional Operational Committee. Qn. What is the function of the Regional Operational Committee? Ans. It is overall responsible for mana....
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....as operating officer of Honda Motor Co. Japan? Ans. As an operating Officer of Honda Motor Co. Japan, I am given the responsibility to be the President of HSCIL and HMIL. Qn. You are promoting the brand of HM, Japan in India and promoting their sales in India then what is the reason for not charging any amount from them. Also elaborate whether you take approval of advertisement material from HM, Japan because their brand is promoted in India. Ans. We are doing it in our budget and therefore do not take money from them. There are certain guidelines of HM, Japan and we are aware of this and our advertisers are also aware of this. Qn. Who changes the design mentioned by you in the earlier answer? Ans. Honda R&D. Statement of Sh. Katsuhiro Harada, Director Purchase "Q. At present how much salary getting in India and Japan? Ans. I am getting approximately 60000 in India and getting a salary of Japanese yen 5 to 6 lacs Japanese Yen approx. from Honda Motor Co. Ltd. Japan. Statement of Sh. Hiroaki Konno Q.3 Please explain in detail how you were appointed in HCIL? Ans. My previous boss Mr. Suganuma in Honda Motor Co. Ltd. Japan told me to go and join HCIL in India. Statement of....
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....ked to stay in India? Ans. I am not sure how long I will stay in India. Mr. Kanayama the President in HCIL will decide. Q6. To whom you will report for duties if you are relieved by Mr. Kanayama? Ans. If Mr. Kanayama decides to relieve me from this company than the Accounts & Finance Division of Honda Motor Co. Ltd. Japan will decide the next place of posting." "Q.21 How many visits you generally make to Japan and other countries and for what purpose? Ans. I visit atleast 4 times a year to Thailand to report to our business plan to Mr. Kobayashi who is MD of Honda Motor and takes care of Asia Oceania region and sometimes I visit Japan to explain business plans of this Company to General Manager accounting & finance in Honda Motor Co. Japan. Mr. Takeushi is the GM, Accounting & operating officer of Honda Motor Co. Japan. This is just reporting not approval. In addition to that there is a computer system and the information relating to finance budget and financial reports is regularly (quarterly) is sent on the system to the accounting and finance division. That computer system is two way communication and we also receive reminders or communication regarding clarification." Sh.....
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.... 25. The revenue has contended that the expatriate employees were reporting to regional headquarters or the head office in Japan and that they were doing functions on behalf of the parent company and not the subsidiary. However, no evidence has been brought on record in this regard except for selectively relying on the statements. A mere reporting to the regional headquarters or the head office in Japan does not establish that the expatriate employees were doing functions on behalf of the parent company. The applicant has clarified that administratively the expatriate employees were reporting to their Division heads of HSCI and they were only sending certain periodical reports to the regional/head office. Sh. Tatsuye Natsume, Director Marketing, had categorically stated that he was reporting to Mr. Nagai, President, HSCIL and was not sending any report to Honda except certain routine reports such as sales and inventory reports and report published by SIAM, India. Mr. Nagai, President, HSCIL had also confirmed that sales report and monthly reports generated by the marketing department was shared with the regional office. Similarly Sh Morisawa, Director Business Management had state....
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....ndian market and that such market surveys were not conducted on behalf of the parent company. It is imperative that the result of the market survey will be shared with the parent company as the business of both parent and the subsidiary is inter-dependent. Mr. Nagai had further stated that the timing of launch of a particular model is decided only by HSCI and not the parent Honda. 28. As regards brand building exercise carried on by the HSCI, it is to be kept into consideration that HCIL itself is a manufacturing company and 95% of its sales are coming from own manufacturing. Therefore, maintenance, development and promotion of Honda brand is more in the interest of the subsidiary HSCI than the applicant. The promotion of Honda Brand in the Indian market will be for the purpose of supplementing the business opportunities of the subsidiary HSCI. In case HSCI has not at all shared its brand building expenses with the applicant that might be the case of transfer pricing adjustment. But it cannot be said that by promoting Honda brand in India, HSCI had carried on the business activity of the applicant. 29. With respect to negotiating and concluding the price at which the car and spar....
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....ss on behalf of the applicant. Similarly, regarding post sale functions of CR-V cars, as those cars were first imported by HSCI and then sold to the customers, it cannot be said that such functions were done on behalf of Honda Japan. 31. The revenue has also pointed out that the sample documents found during the survey have not been responded by the applicant. It is found that those documents were in respect of communication regarding increase in regular employees, reason for change of GA expense from the previous year, changes in the revised budget of the subsidiary and communication regarding periodical reports being sent to the principles in Japan. It is thus seen that these documents do not indicate that any business of the applicant was carried out through the subsidiary HSCI. 32. In the absence of any proof regarding any management activity of the applicant being conducted in India we cannot agree with the contentions of the revenue that the applicant was conducting the business in India through its expatriate employees. The activities of the expatriate employees related to the specificity of the products, market surveys, promotion of brands, market strategies etc. which we....
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....his is also not found to be a case of Service PE as per India Japan DTAA in respect of the transactions as raised in this application. Moreover, the contention of the revenue also was that this is not a case of a service PE but only a fixed place PE, which we have already negated earlier. Further, Article 5(9) of India-Japan DTAA stipulates that the mere presence of the subsidiary of a foreign entity in India shall not by itself constitute such subsidiary as a PE of a foreign entity. The fact that the subsidiary has its own corporate personality and is a separate legal entity cannot be overlooked. Even if the holding company exercises acts of control over its subsidiary by getting periodical reports, having review meetings, discussion about achievement of targets etc. does not dilute the separate legal identity of the subsidiary. It is unrealistic to expect that a subsidiary will keep off the clutches of the holding company and conduct its business independent of any control and assistance by the parent company. As already discussed earlier we have no evidence of the subsidiary having undertaken any activities for and on behalf of the parent company. Offshore supply of raw materia....
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....y in foreign currency as per the terms of contract. The fulfilment of these conditions is, however, subject to verification with reference to the invoice, Bill of Lading, the Bill of Entry etc. of each consignment. 38. In the case of Mahabir Commercial Company Limited (86 ITR 417) Hon'ble Supreme Court has enunciated the principle that under CIF contract, the property in the goods, passes once the documents are tendered by the seller to the buyer or the agent, as required under the contract. It was further held that where the seller retains control over the goods by either obtaining a bill of lading in his name or to his order, the property in the goods does not pass to the buyer until he endorses the bill to the buyer and delivers the document to him. As already mentioned earlier, in the instant case the seller did not retain control over the goods as per the terms of the Memorandum. Therefore, the title to and property in the Parts shipped by the applicant at the foreign port would get transferred at the port of shipment itself. As this event takes place outside the territory of India, the income arising out of such sale transaction cannot be said to be accruing or arising i....
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....payment to the non-resident is income chargeable to tax in India. The Hon'ble Supreme Court has held in the case of G.E. India Technology Centre Private Limited (327 ITR 456) as under: The most important expression in section 195(1) consists of the words "chargeable under the provisions of the Act". A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Income-tax Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the Income-tax Act. Further, in another the case of Transmission Corpn. of A.P. Ltd. v. CIT (239 ITR 587) the Hon'ble Supreme Court has also held that an assessee who makes payments to non-residents under contract entered into is under obligation to deduct tax at source under section 195 and the obligation is limited only to appropriate proportion of income chargeable under the Act. We have already held earlier that no income arising in ....