TaxTMI 
TaxTMI 
2019 (11) TMI 1580
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....97.4 % shares in its Indian subsidiary, Honda 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, 19....
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....ance basis (C&I), wherein the title and risk in the goods got transferred 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 HS....
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.... b. For the purpose of taxation, such a subsidiary company would constitute an independent 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 in....
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....urvey operations carried out on 24-6-2010 and 19-12-2012 had brought on record material to show that HSCI did not function as an independent 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 hea....
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....ters or the Head Office in Japan. In this respect reliance was placed on the statements of the various employees recorded during the survey. 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 noth....
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....as Heads of various divisions of the Indian company, these employees represented both the entities involved in the transaction. The contract for import by one and 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....
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.... merely on the statement was bad in law as held by Hon'ble Supreme Court in the case of CIT Vs. S. Kader Khan Sons (210 Taxmann 248). Our attention was drawn to statement of some of 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.....
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.... objective of the expatriate employees was to increase localisation and reduce imports from the applicant which substantiates that they were working for the interest of HCIL and not the applicant 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 ....
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....vity of a preparatory or auxiliary character. 7. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 8 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment 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 ....
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....s case is primarily based on status of the expatriate employees working with HSCI, who were seconded by the applicant and the nature of functions performed by them. For proper appreciation of the rival contentions, the relevant portion of the statement given by those employees, at the time of survey operation, are extracted hereunder: Statement of Sh. Raman Kumar Sharma, V.P. & Director (General 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 (a....
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.... in India, have you visited Japan and Thailand for official purpose? Ans. For new models, technologies, transfer and knowhow. Q. Whom did you meet and when do you go for official visit? Ans. Thailand and Japan both there is a overseas department and meet the window person there. I visited Thailand four times and Japan three times. Q. Do you do price negotiation. How do you place the order? Ans. There is a computerized ordering system 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. ....
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....marketing department is shared with the regional office. More than sending the report it is discussion with Mr. Ike and we hear advice from him in some areas." Qn. Where were you working before coming to India and how you are related to HM, Japan? Ans. I was working as Executive Vice President in Asian Honda Motor, Bangkok and I am operating officer of Honda Motor Co. Japan and still hold the position of Honda Motor Co. Japan in India. Qn. Can you explain your responsibility 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 answ....
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....explain the functions/operation/results/future plans to him on quarterly basis. Q.10 Do you have report to any person in India? Ans. No. Q. But why should they pay you? Ans. I was appointed by Honda Motors Co. Ltd. Japan and belonged to HM Japan. Honda Motors as a shareholder of HCIL, has appointed me as President and CEO of HCIL. Therefore, I am salary in Japan from HM Co. Japan also." Statement of Sh. Jiro Morisawa- Director Business Management (Finance, Accounting, Taxation and Business Planning) "Q5. For how long have you been asked 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....
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....apacity, the applicant had a secured right to use his office for the purpose of business. Similarly, the other expatriate employees also had a secured right to use their office space provided by HSCI. In this sense the applicant had a fixed place of business. Thus, the first requirement of PE that there should be fixed place of business was fulfilled in this case in the form of office space of the expatriate employees. However, this fixed place of business will result into PE only if it was used for carrying on the business of the parent enterprise either wholly or partly. 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 ....
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....rket survey will be conducted by the subsidiary as it had exclusive right for the Indian market. When asked about launch of models by HSCI, Mr. Takashi Nagai, President & CEO of HSCI had categorically stated in the course of his statement that "We have not launched any model which is not an existing model of Honda Motor Co. Limited, Japan. For existing models like JAZZ and Accord, we conduct surveys whether customers will buy these models or not and we share this information with Honda Motor Company Limited, Japan." It is thus found that the market surveys were conducted by HSCI in order to launch the models in Indian 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 manufactu....
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....nt and subsidiary was possible only when the decision making authority of both the entities rests with the single person. The applicant has explained that the imported CR-V cars were sold to the customers by HSCI and not by the applicant. All the import of CR-V cars and spares was made by HSCI and, therefore, the warranty claims were in favour of HSCI only. As explained the warranty claims in respect of the defective parts were settled by HSCI and then got reimbursed from the applicant. In case certain warranty claim made by HSCI was not reimbursed by the applicant, it does not mean that HSCI was carrying on the business 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 subsidia....
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....by the revenue is also not applicable in the present case. 35. In the case of Morgan Stanley & Co. (supra) the Hon'ble Supreme Court has held that in the case of deputationist, the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs and in such case a service PE can emerge. In the present case also the expatriate employees were on the payroll of the applicant and they continued to have their lien on their jobs with Honda. Therefore, this may result into service PE. However, the DTAA between India and Japan does not provide for any service PE. Further, this 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 sep....
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....on and recovered from the buyer. 37. It is thus apparent from the above facts that the title to the Parts supplied by the applicant would be transferred outside the territory of India upon loading of the Parts on to the mode of transport to be used to convey the same from the country of origin and upon endorsement of despatch document in favour of the purchaser. These facts clearly establish that the supply of Parts would be made outside India and thus the transfer of title to the Parts will also take place while the goods were outside the territory of India. The payment for the offshore supply of Parts is to be made outside the country 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 ....
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.... as the sale would be completed outside India and there would be no accrual or deemed accrual in India. The essence of this decision of the Hon'ble Supreme Court, has also been followed in the case of Hyosung Corp. (supra) and other decisions as relied upon by the applicant. Liability to withhold tax 40. The next question raised by the applicant is about liability to withhold tax u/s 195 of the Act on the payments to be made by HSCI towards offshore supplies of Parts. The provision of section 195 of the Act stipulates withholding of tax "on any other sum chargeable under the provisions of this Act." Hence, tax is required to be deducted u/s 195 of the Act only if the 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 ....