Audi AG v. ADIT Range-1(1), Mumbai
[Citation -2019-LL-0903-110]

Citation 2019-LL-0903-110
Appellant Name Audi AG
Respondent Name ADIT Range-1(1), Mumbai
Court ITAT-Mumbai
Relevant Act Income-tax
Date of Order 03/09/2019
Assessment Year 2009-10
Judgment View Judgment
Keyword Tags income accruing or arising in india • business connection in india • fees for technical services • interest on delayed payment • tax deducted at source • after sales services • commission received • business activities • non-resident entity • composite contract • services rendered • operating profit • foreign currency • levy of interest • offshore supply • commission paid • sales promotion • supply contract • turnkey project • interest income • profit margin • pe in india • dtaa
Bot Summary: Failed to appreciate the fact that all the related activities for sale of cars, sale of fixed assets and sale of promotional items are carried out outside India and hence, no portion of the income of the Appellant from sale of cars, fixed assets and sale promotional items to VGSIPL in India are taxable in India. The assessee sales part and accessories to Skoda India, pursuant to which Skoda India Manufactures/assembled Audi Brand Cars in India in its manufacturing unit at Aurangabad. The Volkswagon Group Sales is engaged in wholesale trading of Audi and Volkswagon brand car. AR of the assessee submits that similar ground of appeal was considered by Mumbai Tribunal in DCIT vs. Safgate International AB dated 14.11.2017 wherein it was held that, where sales of goods is completed outside India and where the 9 ITA No. 7335 Mum 2012 1781 Mum 2014-Audi AG title/delivery is made outside India could income be attributed as sale has accrued in India. 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 Auto Expo are done by VGSIPL on behalf of the assessee and are carried out from fixed place of business maintained in India, thus, the assessee has business connection in India and has a PE in India within the meaning of Article 5(5) of India Germany tax Treaty. 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. From DCIL Interest on delayed payment Interest on delayed payments Whether any No officer or place of No officer or place of business in place in India business in India India Term of Delivery of parts CKD/CBU Delivery of parts/ CBU is delivery for sale is outside India. In the said case Aramex entered in to the contract with the customer outside India for delivery of parcel, where the delivery of the parcel located in India, further Aramex had an agreement with Aramex India for the delivery of the parcel to the location in India.


IN INCOME-TAX APPELLATE TRIBUNAL I BENCH MUMBAI BEFORE SHRI G.S. PANNU, VICE-PRESIDENT AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No. 7335/Mum/2012 (Assessment Year 2009-10) Audi AG ADIT Range-1(1), C/o S R B C & Associates, Aayakar Bhavan, M.K. Road, 14th Floor, Ruby, 29 Mumbai-400020. Senapati Bapat Marg, Vs. Dadar (West), Mumbai-400028. PAN AAHCA3173A Appellant Respondent ITA No. 1781/Mum/2014 (Assessment Year 2010-11) Audi AG ADIT Range-1(1), C/o S R B C & Associates, Aayakar Bhavan, M.K. Road, 14th Floor, Ruby, 29 Mumbai-400020. Senapati Bapat Marg, Vs. Dadar (West), Mumbai-400028. PAN: AAHCA3173A Appellant Respondent Appellant by Shri Rajan Vora/Nimesh Vora/Sajan Choksi (AR) Respondent by Shri V. Sreekar (CIT-DR) with Nishant Samaiya (DR) Date of Hearing 26.08.2019 Date of Pronouncement 03.09.2019 ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER 1. These two appeal by assessee are directed against assessment order passed under section 143(3) read with section 144(C)(13) in pursuance of direction of Dispute Resolution Panel-I under section 144(C)(5) dated 1 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG 29.10.2014 & 2201.2014 for Assessment Year 2009-10 & 2010-11. assessee has raised certain common grounds of appeal for both Assessment Years. Therefore, both appeals were clubbed, heard and are decided by common order for sake of convenience and brevity. For appreciation of fact, appeal for Assessment Year 2009-10 was treated as lead case. assessee has raised following grounds of appeal: Based on facts and circumstances of case, AUDI AG (hereinafter referred to as 'Appellant') craves leave to prefer appeal against order passed by Additional Director of Income-tax, Range - 1 (1), Mumbai [hereinafter referred to as 'learned AO'] under section 143(3) read with section 144C(13) of Income-tax Act, 1961 (hereinafter referred to as 'Act'), in pursuance of directions issued by Hon'ble Dispute Resolution Panel-I, (hereinafter referred to as 'Hon'ble DRP') on following grounds, each of which are without prejudice to one another: On facts and circumstances of case and in law, learned AO based on directions of 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 PE of Appellant in India under Article 5 (1) and 5 (5) of India -Germany treaty (Treaty'). 1.2. 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 Treaty. 1.3. Failed to appreciate that transaction between Appellant and VGSIPL are on principal to principal basis and there is no agency relationship. 2. Independent Agent 2 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG 2.1. Failed to appreciate that VGSIPL is independent agent and hence does not lead to dependent agent PE of Appellant in India. 2.2. Without prejudice to contention that VGSIPL is agent of independent status, failed to appreciate that VGSIPL does not: = exercise authority to conclude contracts on behalf of Appellant in India; = maintain any stock of merchandise of Appellant, from which it makes regular deliveries on behalf of Appellant = secure orders wholly or almost wholly for Appellant in India. 3. Business connection in India 3.1. Erred in holding that VGSIPL constitutes business connection of Appellant in India under Section 9 of Act. 3.2. Without prejudice to contention that Appellant does not have business connection in India, erred in holding that income from sale of cars, sale of Fixed assets (Demo Car), sale of sales promotional items to VGSIPL, and sole distribution fees received from VGSIPL in India, accrues or arises to Appellant through business connection in India. 3.3. Failed to appreciate fact that all related activities for sale of cars, sale of fixed assets and sale of promotional items are carried out outside India and hence, no portion of income of Appellant from sale of cars, fixed assets and sale promotional items to VGSIPL in India are taxable in India. 3.4. Without prejudice to above, failed to appreciate that as per section 90(2) of Act, Appellant opted for application of treaty provisions being more favorable to it and hence issue of business connection in India is academic, 4. Attribution of 35% of income in India and adopting operating profit ratio @ 6.39% Erred in estimating worldwide profitability rate of AUDI AG at 6.39 percent and attributing 35 percent of profits from sale of cars, sale of fixed assets, sale of sales promotional items, etc in India as attributable to activities carried out by PE in India without assigning any reasons for arriving at such attribution. 5. Taxability of sole distribution fees in India 3 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG Failed to appreciate that in 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 Appellant (Without prejudice to all above objections) Without prejudice to above, erred in not allowing deduction of marketing and promotional expenses incurred by VGSIPL and reimbursed by 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 Act respectively, though Appellant is non-resident assessee and its entire income is subject to deduction of tax at source. 2. Brief facts of case are that assessee is one of world leading Car manufacturers. assessee is part of Volkswagen Group Sales India private Limited ( VGSIPL ). assessee is tax resident of Germany. assessee filed its return of income for Assessment Year 2009-10 declaring total income of Rs. 2,48,48,753/-. return of income was selected for scrutiny. In return of income assessee offered income in nature of fee for technical services and interest income received from its group entity in India to tax @10% as per India Germany Double Taxation Avoidance Agreement (India Germany tax treaty/ DTAA). During relevant Financial Year, assessee has sold fully built-up Cars and accessories to its Associated Entities (AE) in India. assessee is engaged in business activities vis- -vis India which includes export of cars, export of parts and accessories, export of 4 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG tools and machinery and export of sales promotion material. assessee also provided service to its India Group Companies for grant of right to use information technology system, provision of training outside India and consultancy/management and other support services. assessee has appointed Volkswagon Group Sales (VW group sales) as sole distributor of Audi brand cars in India. assessee sales part and accessories to Skoda India (AE), pursuant to which Skoda India Manufactures/assembled Audi Brand Cars in India in its manufacturing unit at Aurangabad. Volkswagon Group Sales (AE) is engaged in wholesale trading of Audi and Volkswagon brand car. 3. Volkswagon Group Sales, purchases fully built-up cars from assessee, Volkswagon Group (AG) and Skoda India and sales same to dealers/distributor. Volkswagon International Finance (NV) owns 99.99% shares and Volkswagon (AG) 0.01% shares of Volkswagon Group Sales. In return of income, assessee offered fees for technical services and interest income for taxation. Assessing Officer after giving due opportunity of hearing to assessee passed draft assessment order under section 143(3) r.w.s. 144(C)(1) by taking views that Volkswagon Group Sales is exclusive distributor whose only source of income is from Audi business. business activities of Volkswagon Group Sales are devoted wholly on behalf of assessee. Activities of assessee and Volkswagon Group Sales completed each 5 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG other and Volkswagon Group Sales is functioning as extended arm and replacement of assessee in India. As per clause-(1) of Importer agreement, assessee and Volkswagon Group Sales are jointly established sales targets. Most of senior officials working that Volkswagon Group Sales have all comes from Audi group abroad. On above observation, Assessing Officer held that assessee has business connection in India and has permanent establishment in India in 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. assessee has shown following income from Volkswagon Sales India Pvt. Ltd. during Financial Year 2008-09, 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 2,48,48,758 Income Sole Distributorship Fees 3,73,52,011 Total 139,25,13,651 4. 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, audited 6 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG account of assessee, assessee has shown operating margin of 6.39%. Therefore, same was considered to arrive at taxable income of assessee in India. Accordingly, Assessing Officer computed total taxable income at Rs. 3,11,43,567/- in draft assessment order passed under section 144(C)(1) read with section 143(3) dated 30.12.2011. draft assessment order dated 30.12.2011 was served upon assessee. assessee exercised its option to file objection before Dispute Resolution Penal-II (DRP). ld. DRP passed its direction dated 06.09.2012 after considering submission of assessee, ld. DRP observed that activities of storage, marketing, advertisement, promotion of products of assessee, sale sizing clients and potential customers after sales services and support supply of spare parts and accessories, taking part in Auto Expo etc. are undertaken/done by Volkswagon Group Sales on behalf of assessee and were carried out from its fixed place of business maintained in India. Volkswagon Group Sales has no independent authority to act its own Volkswagon Group is bound by terms and conditions of assessee. Sales target are jointly establishes and assessee and Volkswagon Group Sales. ld. DRP relied upon decision of authority at advance ruling in case of Aramax International Logistic Pvt. Ltd. (348 ITR 159) and held that facts of assessee s case is similar to case of Aramax International Logistic Pvt. Ltd. and accordingly, held that assessee has Permanent establishment in India. It 7 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG was also held tax treaty with Singapore and Germany are similar and thereby upheld action of Assessing Officer and rejected submission of assessee. In pursuance of direction of DRP, Assessing Officer passed final assessment order under section 143(3) rws 144C(13) dated 29.10.2012. Aggrieved by order of final assessment order, assessee has filed present appeal before this Tribunal. 5. We have heard submission of Sh Rajan Vohra ld. Authorized Representative (AR) of assessee and Sh. V. Sreekar ld CIT-DR/ ld. Department Representative (DR) for revenue and gone through orders of authorities below carefully. We have also perused importer agreement (IA) between assessee and with VW Sales Group. We have also deliberated on various case law relied by lower authorities and by representative of parties. 6. Ground No.1 to 3 relates to Permanent Establishment, independent agent and business connection in India. ld. AR of assessee submits that offshore sale is not taxable in India. ld. AR of assessee submits that Assessing Officer has not appreciated different nature of activities that have been performed by assessee and Volkswagon Group Sales. assessee performs activities of manufacturing, quality control, Research & Development in Germany whereas activities of import, warehousing, marketing etc. have been done by Volkswagen Group Sales (VW Group). sales are made by assessee 8 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG to AE on principle to principle basis. ld. AR of assessee explained that term of sales made by assessee to Volkswagon Group Sales in following manner: (i) Invoices are raised by Audi AG for export of Car on Volkswagon Group Sales. (ii) Shipping documents are issued in name of Volkswagon Group Sales. (iii) 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 sales invoice. (iv) All associated cost of exports like preservation; packaging, freight, insurance etc. are charged separately by Audit AG to Volkswagon Group Sales. (v) Thus, transaction between Volkswagon Group Sales and Audi AG is on FOB basis. Bill of lading confirms that transaction is on FOB basis. (vi) goods are cleared by Volkswagon Group Sales and custom duties also paid by Volkswagon Group Sales in case of CPT/CIP, goods are considered to be delivered when goods have been handed over to first or main carrier, so that risk transfer to buyer upon handling goods over to without carrying at place of shipment in country of export. 7. ld. AR of 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 9 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG title/delivery is made outside India could income be attributed as sale has accrued in India. ld. AR of assessee also relied upon decision of Hon ble Apex Court in case of Ishikawajma Harima Heavy Industries [288 ITR 408 (SC)] wherein Hon ble Apex Court held what is to be taxed is profit of enterprises in India, but only so much of them as is directly or indirectly attributable to that permanent establishment. All income arising out of turnkey project would not therefore, be assessable in India, only because assessee has permanent establishment. ld. AR of assessee further submits that activities of manufacturing and sales of Car is completed by Audi AG outside India and constitute 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. Cars are sold to Volkswagon Group Sales principle to principle basis and thereafter, Volkswagon Group Sales it on principle to principle basis to dealers. 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. income arising on sales of Car by Volkswagon Group Sales to dealers in India is income accruing or arising in India and is taxed separately in hands of Volkswagon Group Sales. Further, Volkswagon Group Sales, being on independent company is 10 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG filing its own tax return and has considered 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. ld. AR of assessee further relied upon 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 ground of fixed place PE, ld. AR submits that to constitute fixed place PE, 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, place should be at disposal of foreign entity and assessing officer has to bring out fact in assessment order. To strengthen his submissions ld. AR for assessee also relied on decisions of Ishikawajima- Harima Heavy Industries [288 ITR 408 (SC)]. ld AR for assessee explained business model of assessee in following manner: Remaining part of Page left blank intentionally ------------- ------------- 11 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG Abbreviation Full form CBU Completely built unit P2P Principal to principal SKODA India Skoda Auto India Private Ltd VW Group Sales Volkswagen Group Sales Private Limited 9. On other hand, ld. DR for revenue supported order of lower authority. ld. DR further submits that assessee has PE in India. To establish this fact, Assessing Officer has clearly brought material on record that VW Group Sales is exclusive distributor of Audi Products in India whose only source of income is from Audi business. business activities of VW Group Sales are devoted wholly on behalf of assessee. activities of assessee and VW Group 12 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG Sales complement each other and VW Group Sales is functioning as extended arm and replacement of assessee in India. sales targets are jointly established by assessee and VW Group Sales. activities of storage, marketing, advertisement, promotion of products of 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 assessee and were carried out from its fixed place of business maintained in India. 10. ld. DR further submits that assessee cannot get business of sale of Audi cars in India without role being played by VW Group Sales having business at fixed place in India. Accordingly, considering business arrangement, assessee has its subsidiary, it is clear that premise of VW Group sales is fixed place PE of assessee within meaning of Article 5(1) and (2). premise of VW Group sales are used by assessee and personnel of AUDI AG are following necessary guidelines/recommendations fixed by AUDI AG at premised of VW Group sales. 11. ld. DR further submits that VW Group sales also constitutes agency PE in as much as 100% of business relating to trading of Audi AG Group brand cars on behalf of assessee in India. subsidiary 13 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG can also be regarded as PE of Parent company. Ld. DR referred to extracts by renowned jurist, Klaus Vogel: "On basis of special parent / subsidiary relationship - other than one of control under law - subsidiary may however individual cases be agent and consequently for that reason permanent establishment of its parent company Like any other unrelated company subsidiary even if independent agent can very well constitute permanent establishment of its parent company under conditions laid down in Art 5(6). subsidiary may for instance act as agent of its parent company and conclude such contracts for latter on basis of corresponding authority as to go beyond limits of ordinary course of its business" 12. ld. DR further submits that one has to look at various clauses mentioned in importer agreement (IA) and different agreements between appellant and VW Group sales and also should keep in mind nature of services rendered by assessee and nature of business of assessee. Accordingly, corporate veil needs to be lifted and real nature of transaction required to be looked at. In support of his submission, ld. DR for revenue relied upon decision of AAR ruling in case of Aramex International Logistic Pvt Ltd (supra) and would submit that business model of assessee constitutes PE in India. 13. We have considered rival submission of parties and have gone through orders of authorities below. We have also gone through other material consisting of various paper books and various case laws relied by learned representative of parties. We have also gone through contents of Importer agreement between assessee 14 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG and its AE. assessee is tax resident of Germany and India had entered in tax treaty with Germany. And as per provisions of section 90(2) assessee is entitled to invoke provision of Income Act or India Germany DTAA, which is more beneficial to them. non-resident entity will be liable to tax in India if activities under taken by them constitute its business connection which constitute permanent establishment. question is whether 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 meaning of section 9 or Article 5 of India Germany tax treaty, has to be determined on facts of each case. 14. During assessment, assessing officer on going through Importer agreement (IA) in para 11 of draft assessment order observed that: VGSIPL is 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 assessee, Activities of assessee and VGSIPL complement each other and VW Group sales is functioning as extended arm and replacement of assessee in India, 15 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG As per clause 1 of Importer agreement, assessee and VW group sales are jointly establishing sales targets, Most of senior officials working with VW group sales have all come from Audi Group abroad. 15. On basis of his above observation, 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 Auto Expo are done by VGSIPL on behalf of assessee and are carried out from fixed place of business maintained in India, thus, assessee has business connection in India and has PE in India within meaning of Article 5(5) of India Germany tax Treaty. Accordingly assessing officer attributed 35% of total income of assessee in India as attributable to Indian PE. assessing officer worked out 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/-. ld DRP conformed action of assessing officer it its direction dated 06.09.212 holding that that activity of storage, marketing, advertisement, promotion of product of 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 assessee and are carried out from fixed place 16 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG of business maintained in India. Sales targets are meet jointly established by assessee and VW group. VW Group sales has no independent authority to act on his own, but is bound by terms and conditions of assessee. ld DRP also relied on decision of Aramex International Logistic Pvt Ltd.(supra). 16. foremost and primary controversy before us, whether VW group sales constitute assessee s PE in India or not. assessee is tax resident of Germany. Article 5 of India Germany text treaty defined fixed place of PE. As per article 5 of Indo Germany text treaty, fixed place arises when foreign entity has fixed place in India through which its business is wholly or partly carried on. 17. During submission learned AR of assessee 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 subsidiary of that company cannot be regarded as PE and with respect to carrying or business in India as parts and completely knocked down (CKD) sales are made by 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 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 PE in India accordance with Article 17 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG 5(1) and 5(2) of Indo German tax treaty. learned AR of assessee while arguing his case submitted before us transaction between VW group sales and assessee is on principle to principle basis and transaction is completed outside India and title/delivery is made outside India. Therefore, profit on sales does not accrue or arise to assessee in India. For completeness of this order relevant part of order is extracted below: 6. --------- Tribunal had examined issue in assessee's own case in A.Y. 2001-02. Both parties agreed that issue raised by revenue in this appeal have already been considered and decided by Tribunal in A.Y. 2001-02. On issue of accrual of income on sale of CBU Cars in India Tribunal in assessment year 2001-02 in ITA No. 9211/M/04 held as follows: "11. After hearing both sides, we find force in assessee's arguments. Assessee merely sells raw materials/CKD units to DCIL. It is DCIL which carries out further activity of assembling same and selling finished cars. There are no further activities carried out by Appellant in India in India in this connection. This transaction ends with Appellant selling raw materials/CKD. No income from such sale accrues or arises to Assessee in India. In other words no part of such profits accrue from or can be attributed to any activities of assessee or his agent in India. Apex Court in case of CIT v. Hyundai Industries Ltd. (29 1 ITR 482) has held that in case of agreement with South Korean Company for fabrication and installation of Oil exploration platform, PE attributable to installation and commissioning came into existence only after supply of equipment. Therefore, profits from supply of platform did not accrue in India. Similarly in case of Ishikawajima Harima Heavy Ind. Ltd v. DIT ( 288 ITR 408), 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 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 terms and conditions 18 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG of contract between Assessee and DCIL no income accrues to Assessee on basis of any activities carried out, on behalf of Assessee in India. Therefore in our opinion DCIL does not constitute Assessee's business connection in India and thus Assessee's income from sale of raw material/CKD units to DCIL would not be liable to tax in India under provisions of Act. We therefore, concur with decision of CIT(A) on this issue and dismiss ground No. 1(i) of Revenue's appeal." 7. above observation in context of sale of raw materials/CKD Units sale equally apply to sale of CBU Cars also. finding of CIT(A) is that on perusal of General Agency Agreement between assessee and MBIL it was clear that delivery of goods took place outside India and payment was also being made for purchase of goods outside India. Therefore, there was no business activity carried out by assessee regarding sale of CBU Cars directly to customers in India. Thus assessee does not have business connection and that MBIL does not constitute business connection with assessee in India under section 9 of Act, therefore, income in respect of sale of CBU Cars are not taxable in India. 8. We agree with order of CIT(A) on this aspect. On issue whether MBIL constitute PE of assessee in India within meaning of Article-5 (2) of India - Germany DTAA Tribunal in A.Y 2001-02 CIT(A)held as follows: "30. Now 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 Assessee directly to clients in India. Even though commission received by DCIL for helping 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 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 Appellant DCIL passes on communication both sides. Negotiations of price, specifications etc were concluded by Appellant. sale to customer was on principle to principle basis. risk of diminishing in value or damages to cars is to account of customer's right from port of shipment at manufacturing end. cars were cleared through customs in India for and on behalf of ultimate 19 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG customers. Thus, DCIL had no role to play from sale or in any activity in promoting sale to Assessee directly to customers in India. They are only collection of information and activities of preparatory or auxiliary in nature. prices offered to clients are as per list price notified by Assessee. DCIL has no authority to conclude any deal. Thus mere acting as post office between Assessee and client will not render DCIL as dependent agent. DCIL cannot be considered as habitually procuring orders for Assessee. In fact DCIL themselves are manufacturing and selling cars aid procurement of orders for direct shipment of cars by assessee would in fact he contrary to and against interest of DCIL in its manufacturing activity. DCIL by passing on communication from Assessee to client and vice versa, are merely rendering very insignificant auxiliary/preparatory service in sale of CBUs by Assessee to Indian clients. Therefore DCIL does not constitute dependent agent of Assessee. prices offered to Indian clients arc as per list price notified and so whether DCIL is involved or not price charged to customer would be same. No profits can be attributed to services of DCTL in India. In fact by engaging services of DCIL, profit of Assessee is reduced to extent of he commission paid to DCIL. 31. following decisions cited by assessee can be extracted for this purpose. "The decision of 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 Hon'ble Apex Court has observed that since assessee did not conclude any contracts on behalf of Morgan Stanley & Co. Inc (MSCo), it did not have agency PE in India. Similar view has also been taken by 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 Authority for Advance Rulings in case of TVVM Ltd. v. CIT (1999) 237 ITR 230 (Refer page 600 & 618 of Paper Book Volume II). Hon'ble Delhi Tribunal has in 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 extent of their activities for assessee, compared to oil their activities, is so large that it can be said that they are dependent on assessee for their earnings or revenues. Accordingly, agents are not economically dependent upon assessee. Further, there is no authority with agents to conclude contracts. agents are merely performing their duties and not exercising any authority. Based on 20 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG above, 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), Authority for Advance rulings has observed that since applicant does not conclude any contract on behalf of foreign company, does not maintain stock of goods/merchandise belonging to foreign company and also carries on variety of activities besides promoting examinations of foreign company, applicant enjoys independent status. Accordingly, applicant cannot be deemed to be PE of foreign company in India. Similarly, in case of Specialty Magazines P Ltd (274 ITR 310 ) (Refer Pg 633 & 644 of Paper Book Volume II), AAR ruled that since 22% - 25% of income of applicant is derived from other clients, it cannot be said that its activities are carried out wholly or almost wholly for foreign company. Thus applicant, being independent agent is not covered by definition of PE in article 5 of DTAA" 32. From above it can be seen that merely acting for non resident principal wou1d not by itself render agent to be considered as PE for purpose of allocating profits taxable in hands of principal. There should be some definite activity of PE to which profits can he attributed. Unless it is so established, merely calling person as agent acting on behalf of foreign non-resident would not by itself render him to be considered as agency PE and pro tanto part of profits of non-resident is liable to be taxed in India. We find that Revenue has not established that DCIL had carried out any activity to which any profit can he attributed. DCIL was merely carrying out work of post office transferring communication from one to another. Therefore, we are not. convinced that department had established that activity of DCIL, even if it is to be considered as PE has resulted in any profits to Assessee and in view of specific provisions of Article 7 of Double Taxation Avoidance Agreement between Indian and Germany no part of profit of non-resident. Assessee can be attributed to activity with DCIL and hence is not taxable in India. 33. As we have held that no profit accruing to Assessee on sale of CBU cars directly to Indian customers can be attributed to activities of OCIL, we are not deciding upon correctness or otherwise of percentage of profits, estimated by CIT(A), as attributable to activities of PE in India. Hence Ground No.3 raised by assessee is not decided as being infructuous." 21 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG 9. As can be seen from order of Tribunal on identical facts, MBIL does not constitute PE of assessee in India. Respectfully following decision of Tribunal referred to above we hold that income on sale of CBU Cars by assessee in India does not give rise to business connection in India and income on such sale is not taxable in India. We also hold that MBIL does not constitute PE of assessee in India under Article 5(2) of India- Germany DTAA. For reasons given above both grounds of appeal raised by revenue are dismissed. 10. In result, appeal by revenue is dismissed. 18. learned AR for assessee also vehemently relied upon decision of Hon ble Supreme Court in case of Ishikawajima-Harima (supra), wherein it has been held that where entire transaction has been completed offshore profit on sale should not /could not be taxable in India. 19. learned AR also relied upon decision of Special Bench in case of Nokia Networks (supra) and submitted that ratio of said decision it is squarely applicable on facts of case of assessee. relevant part of decision in Nokia Network (supra) is extracted below; 56. We have heard rival contentions made by parties and also material placed on record. First of all, we find that Hon'ble High Court in context of LO has held that there is no material or evidence on basis of which it can be said that LO can offer business connection to assessee in India and it does not constitute PE of assessee in India. same reason ostensibly applies to NIPL also, as terms and conditions of supply contract continues as spelled out in para 17 of judgment remains same. Further, Hon'ble High Court in paragraph 13 has noted that income which has been earned by assessee is result of supply of software and hardware license under supply agreement and if supply agreement is taken on standalone basis then such supplies under this agreement were made 22 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG outside India. properties and goods has passed on to buyers under supply contract outside India where equipment was manufactured and for coming to this conclusion, Hon'ble High Court has referred and relied upon judgment of Hon'ble Supreme Court in 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, Hon'ble Court has further observed that no doubt contract in question was signed in India but it may not be relevant circumstance to determine taxability of such income and for this proposition they have referred judgment of Hon'ble Andhra Pradesh High Court in case of Skoda Export v. Addl. CIT [1983] 143 ITR 452/[1984] 17 Taxman 256. Finally in paragraph 17 as incorporated above, Hon'ble High Court has categorically said that taxable event took place outside India with passing of property from seller to buyer and acceptance test is not determinative of this factor and further referring to judgment of Hon'ble Supreme Court in case of Mahabir Commercial Co. Ltd. v. CIT [1972] 86 ITR 417 (SC), held that overall agreement does not result income accruing in India and execution of overall agreement is promoted by purely commercial considerations as India Cellular Operator would be desirous of having single entity that could liaise with. Thus, it was concluded that place of negotiation, place of signing of agreement or formula acceptance thereof or overall responsibility of assessee are relevant circumstances. Since transaction is relating to sale of goods, relevant factor and determinative factor would be as to where property in good passes and in present case, finding is that property has passed on high seas. In present case, goods were manufactured outside India and even sale has taken place outside India and once this fact is established even in those cases where there is 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 Act, which makes income taxable in India to extent it arises in India. 23 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG 58. ----------- Thus, Hon'ble High Court in Nortel's case has clearly concluded that equipments supplied overseas cannot be taxed under Act and as per clause (a) of Explanation 1 to Section 9(1)(i) which postulates principle of apportionment, only such income that can be reasonably attributed to assessee in India could be chargeable to tax under Act and therefore, under 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 clinches issues in hand, both on point of taxability u/s. 9(1)(i) and also in context of PE. Thus, respectfully following ratio laid down in aforesaid judgment of Hon'ble High Court in case of assessee as well as in case of Nortel, we hold that income of 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 activities of manufacturing of Car is completed by assessee (Audi AG) outside India and constitute separate and independent activity. 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. assessee also claimed that Cars are sold to Volkswagon Group Sales principle to principle basis and thereafter, Volkswagon Group Sales it on principle to principle basis to dealers. 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. assessing officer has not brought any material to counter stand of assessee that Cars are not sold to Volkswagon Group Sales on principle to principle basis and thereafter, Volkswagon Group Sales it on principle to principle basis to dealers. 24 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG 21. We are also in agreement with submissions of ld. AR for assessee that facts of decision in Daimler Chrysler AG (supra) are similar to some extent with assessee in present case. In said case assessee assessee is also in business of manufacturing and selling of premium vehicles worldwide (Mercedes) and tax resident of Germany. assessee (Audi AG) is also tax resident of Germany. comparative chart of case in hand and that of Daimler Chrysler AG relied by ld AR for assessee is refereed below: Particulars Facts in case of Daimler Facts in case of Audi AG Chrysler AG (assessee) Transaction Sales of raw material and Export of CBU cars to VW with Indian parts and completely group sales entity knocked down kit (parts /CKD) to DCIL Exports of parts and accessories for assembling of Audi brands Direct sales of CBU cars to cars to Skoda India. Indian Customers, for which DCIL rendered certain Export of sales promotional services. material to VW group sales. Fee for technical services Fee for technical services. from DCIL Interest on delayed payment Interest on delayed payments Whether any No officer or place of No officer or place of business in place in India business in India India Term of Delivery of parts CKD/CBU Delivery of parts/ CBU is delivery for sale is outside India. outside India. of parts/ CKD/FBU Sale is concluded outside Sale is concluded outside India. India. risk of damage and loss is risk of damage and loss borne by VW group sales is borne by DCIL Import duty is paid by VW group 25 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG Import duty is paid by sales. Custom clearance by VW DCIL. Custom clearance by group sales. DCIL payment is received in payment is received in foreign currency in bank outside foreign currency in bank India. outside India. Authority to No authority to conclude No authority to conclude conclude contract contract contract Activities DCIL imports raw material VW group sales imports and carried out by /CKD units and carries out sells to dealers on principal to DCIL/ VW assembling and selling of principal basis. Group sales finished cars. Providing liaising services in case of direct sales of CBU cars to Indian customers by DAG Term of sales On principal to principal On principal to principal basis basis Any Commission is paid to No commission is paid commission liaising services in case of paid direct sales 22. We have noted that in case of Daimler AG (supra), despite fact that AE was performing more activities as narrated in chart above, it was held that associated entity not created either fixed place PE nor dependent agent. Further, income arising on sales of Car by Volkswagen Group Sales to dealers in India is income accruing or arising in India and is taxed separately in hands of Volkswagen Group Sales. In our view merely acting for non-resident principal would itself render agent to be considered PE for porpose of allocating profit. assessee is not undertaking any definite activity to which profit can be attributed. 26 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG 23. In view of aforesaid discussions, we are of V W Group sales is independent and separate entity, which is engaged in selling of fully built up cars imported from assessee, Volkswagen AG and Skoda India to dealers and distributors. Thus, VW Group cannot be regarded as PE of assessee in India. 24. case law relied by ld. DR for revenue in Aramex Logistic Private Limited (supra) is not helpful to revenue as said case is based on different set of facts. In said case Aramex entered in to contract with customer outside India for delivery of parcel, where delivery of parcel located in India, further Aramex had agreement with Aramex India for delivery of parcel to location in India. privity of contract was between Aramex and customer outside India. completion of contract for delivery of parcel will only be complete once parcel is delivered to location in India. Accordingly, activity performed in India by Aramex India, viz; delivery of parcel to location in India is part of one transaction which cannot be independently performed. Thus, decision cited by ld. DR for revenue is on different set of facts. 25. However, in case of present assessee care is manufactured by Audi AG outside India and constitutes separate and independent activity. As noted earlier 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 27 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG AG selling cars through VW Group sales. Moreover, cars are sold on principle to principal basis. Hence, we are of view that Assessing Officer was not justified in invoking section 9 of Act and Article 5 of Indo-Germany Tax Treaty for taking view that assessee has PE in India. In 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. assessee has raised these grounds of appeal in alternative. Considering fact that we have allowed Ground No.1 to 3 of appeal, therefore, 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 Ground No. 1 to 3 of appeal, which we have allowed holding that assessee has no PE in India and accordingly, income earned by assessee is not taxable in India. Therefore, adjudication of this ground of appeal is also become academic. 28. Ground No.7 relates to levy of interest under section 234B & 234C. Considering fact that assessee is foreign company and tax resident of Germany. entire income of Audi AG is subject to tax deducted at source under section 195 of Act. assessee has no liability to pay advance tax and fact that we have already hold that income earned by assessee is not taxable in India, we direct 28 ITA No. 7335 Mum 2012 & 1781 Mum 2014-Audi AG Assessing Officer to recompute tax/interest by following decision of jurisdictional High Court in case of NGC Network Asia LLC (313 ITR 187). 29. In result, appeal of assessee is allowed. ITA No. 1781/Mum/2014 by assessee 30. assessee has raised following grounds of appeal: (a) Ground No. 1 to 12 relates to Fixed Place PE/Agency PE in India. (b) Ground No. 13 to 16 relates to attribution of income in India. (c) Ground No. 17 to 18 relates to levy of interest under section 234B. (d) Ground No. 19 to 21 relates to levy of interest under section 234C. 31. We have noted that assessee raised identical grounds of appeal as raised in appeal for A.Y. 2010-11, which we have allowed. Therefore, considering fact that issues raised in year under consideration are based on similar set of facts, therefore, appeal for year under consideration is also allowed with similar directions. Order pronounced in open court on 03/09/2019. Sd/- Sd/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER Mumbai, Date: 03.09.2019 Copy of Order forwarded to 1. Assessee 2. Respondent 3. concerned CIT(A) 4. concerned CIT 5. DR I Bench, ITAT, Mumbai 6. Guard File BY ORDER, Dy. Asst. Registrar ITAT, Mumbai Audi AG v. ADIT Range-1(1), Mumbai
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