AUDI AG,GERMANY vs. DEPUTY COMMISSIONER OF INCOME TAX - INTERNATIONAL TAX CIRCLE - 1(1)(2), MUMBAI

On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in concluding that Skoda Auto Volkswagen India Private Limited (SAVWIPL) constitutes DAPE of the Appellant in India under Article 5(5) of India Germany Double Taxation Avoidance Agreement ('DTAA'). Erroneous conclusion of a Fixed Place PE in India 5. On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in concluding that premises of SAVWIPL constitutes a Fixed Place PE of the Appellant in India under Article 5(1) of India Germany DTAA on the basis that the premises of SAVWIPL were at the disposal of Audi AG 6. On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in concluding that premises of SAVWIPL constitutes a Fixed Place PE of the Appellant in India on account of 'place of management' under Article 5(2) of India Germany DTAA. Sale of goods outside India by a non-resident on principal to principal basis, not taxable in India 7. On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in not appreciating that in the present case, the transaction is of sale of goods, where transfer of title in goods' has taken place outside India on principal-to-principal basis (i.e., sale transaction concluded outside India), and hence the same ought not to be taxable in India Erroneous attribution of income 8. Without prejudice to the aforesaid grounds, on the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. AO has failed to appreciate and ought to have held that where transactions between associated enterprises are undertaken at arm's length, there can be no further profits that can be attributable to the PE in India. 9. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in attributing 35% of the income to the alleged PE of the Appellant in India for the activities carried out in India and further erred in adopting, on an ad-hoc basis, the global profit margin at the rate of 10.30%. Erroneous computation of income in the computation sheet annexed to the final assessment order. 10. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in determining the total income at INR 70,98,44,137 as against INR 61,00,88,151 in the computation sheet annexed to the final assessment order. Erroneous levy of interest under section 234B of the Act 11. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234B amounting to INR 6,14,07,094 (however added INR 6,35,03,630 to the total interest and fee payable head), which is consequential in nature. Penalty proceedings are bad in law 12. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act on the premise that there is under-reporting of income by the Appellant, without appreciating the fact that the additions made by the Ld. AO is not in accordance with the law.”

During the assessment, the assessing officer on going through the Importer agreement (IA) in para 11 of the draft assessment order observed that: ➤ VGSIPL is the exclusive distributors of Audi Product in India whose only source of income is from Audi sales, ➤ Business activities of VGSIPL are devoted wholly on behalf of assessee,

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. Accordingly the assessing officer attributed 35% of the total income of the assessee in India as attributable to Indian PE. The assessing officer worked out the 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/-. The ld DRP conformed the action of the assessing officer it its direction dated 06.09.212 holding that that marketing, activity of storage, advertisement, promotion of product of the 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 the assessee and are carried out from fixed place of business maintained in India. Sales targets are meet jointly established by the assessee and VW group. VW Group sales has no independent authority to act on his own, but is bound by the terms and conditions of the assessee. The ld DRP also relied on the decision of Aramex International Logistic Pvt Ltd. (supra). 16. The foremost us, and primary controversy before whether VW group sales constitute assessee's PE in India or not. The 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 the foreign entity has a fixed place in India through which its business is wholly or partly carried on. 17. During the submission the learned AR of the assessee has pointed out that similar facts were considered by In PE and with Mumbai Tribunal in case of Daimler AG (supra). Daimler AG (supra) it has been held that the subsidiary of that company cannot be regarded as respect to carrying or business in India as a parts and completely knocked down (CKD) sales Ltd on are made by the (DCIL) to Daimler Chrysler principle to principle basis and on sale such parts /CKD India become property of DCIL, which does not constitute sales outlet or warehouse of the assessee has, that assessee does not carry out any operation in India in respect of sales of part of CKD to DCIL and therefore cannot qualify to have a PE in India accordance with Article 5(1) and 5 (2) of Indo German tax treaty. The learned AR of the assessee while arguing his case submitted before us the transaction between VW group sales and assessee is on principle to principle basis and the transaction is completed outside India and the title/delivery is made outside India. Therefore, profit on sales does not accrue or arise to assessee in India. For completeness of order this the relevant part of the order is extracted below: 6. -------the Tribunal had examined the issue in assessee's own case in A.Y. 2001-02. Both the parties agreed that the issue raised by the revenue in this appeal have already been considered and decided by the Tribunal in A.Y. 2001-02. On the issue of accrual of income on sale of CBU Cars in India the Tribunal in assessment year 2001-02 in ITA No. 9211/M/04 held as follows: "11. After hearing both the sides, we find force in assessee's arguments. The Assessee merely sells the raw materials/CKD units to DCIL. It is DCIL which carries out further activity of assembling the same and selling the finished cars. There are no further activities carried out by Appellant in India in India in this connection. This transaction ends with the Appellant selling the raw materials/CKD. No income from such sale accrues or arises to the Assessee in India. In other words no part of such profits accrue from or can be attributed to any activities of the assessee or his agent in India. The Apex Court in the case of CIT v. Hyundai Industries Ltd. (29 1 ITR 482) has held that in the case of an agreement with a South Korean Company for fabrication and installation of Oil exploration platform, the PE attributable to installation and commissioning came into existence only after the supply of the equipment. Therefore, profits from supply of the platform did not accrue in India. Similarly in the case of Ishikawajima Harima Heavy Ind. Ltd v. DIT (288 ITR 408), the 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 the 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 the terms and conditions of the contract between the Assessee and DCIL no income accrues to the Assessee on the basis of any activities carried out, on behalf of the Assessee in India. Therefore in our opinion DCIL does not constitute the Assessee's business connection in India and thus the Assessee's income from sale of raw material/CKD units to DCIL would not be liable to tax in India under the provisions of 9 the Act. We therefore, concur with the decision of the CIT (A) on this issue and dismiss the ground No. 1(i) of the Revenue's appeal," 7. The above observation in the context of sale of raw materials/CKD Units sale equally apply to sale of CBU Cars also. The finding of the CIT (A) is that on a perusal of the General Agency Agreement between the assessee and MBIL it was clear that delivery of goods took place outside India and the payment was also being made for purchase of goods outside India.

From the above it can be seen that merely acting for a non resident principal wou1d not by itself render an agent to be considered as PE for the purpose of allocating profits taxable in the hands of the principal. There should be some definite activity of the PE to which profits can he attributed. Unless it is so established, merely calling a person as agent acting on behalf of foreign non-resident would not by itself render him to be considered as an agency PE and pro tanto part of the profits of the non-resident is liable to be taxed in India. We find that the Revenue has not established that DCIL had carried out any activity to which any profit can he attributed. DCIL was merely carrying out the work of a post office transferring communication from one to another. Therefore, we are not. convinced that the department had established that the activity of DCIL, even if it is to be considered as PE has resulted in any profits to the Assessee and in view of the specific provisions of the Article 7 of the Double Taxation Avoidance Agreement between Indian and Germany no part of the profit of the non-resident. Assessee can be attributed to the activity with DCIL and hence is not taxable in India. 33. As we have held that no profit accruing to the Assessee on sale of CBU cars directly to Indian customers can be attributed to the activities of OCIL, we are not deciding upon the correctness or otherwise of the percentage of profits, estimated by the CIT(A), as attributable to the activities of PE in India. Hence Ground No.3 raised by the assessee is not decided as being infructuous."

As can be seen from the order of the Tribunal on identical facts, MBIL does not constitute PE of the assessee in India. Respectfully following the decision of the Tribunal referred to above we hold that income on sale of CBU Cars by the assessee in India does not give rise to a business connection in India and income on such sale is not taxable in India. We also hold that the MBIL does not constitute a PE of the assessee in India under Article 5(2) of the India- Germany DTAA. For the reasons given above both the grounds of appeal raised by the revenue are dismissed.

In the result, appeal by the revenue is dismissed.”

The learned AR for the assessee also vehemently relied upon the decision of Hon’ble Supreme Court in case of Ishikawajima-Harima (supra), wherein it has been held that where the entire transaction has been completed offshore the profit on sale should not /could not be taxable in India.

We have heard the rival contentions made by the parties and also material placed on record. First of all, we find that the Hon'ble High Court in the context of LO has held that there is no material or evidence on the basis of which it can be said that LO can offer a business connection to assessee in India and it does not constitute PE of the assessee in India. The same reason ostensibly applies to NIPL also, as the terms and conditions of supply contract continues as spelled out in para 17 of the judgment remains the same. Further, the Hon'ble High Court in paragraph 13 has noted that income which has been earned by the assessee is a result of supply of software and hardware license under the supply agreement and if supply agreement is taken on standalone basis then such supplies under this agreement were made outside India. The properties and goods has passed on to the buyers under the supply contract outside India where the equipment was manufactured and for coming to this conclusion, the Hon'ble High Court has referred and relied upon the judgment of Hon'ble Supreme Court in the 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, the Hon'ble Court has further observed that no doubt the contract in question was signed in India but it may not be a relevant circumstance to determine the taxability of such an income and for this proposition they have referred the judgment of Hon'ble Andhra Pradesh High Court in the 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 the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test is not the determinative of this factor and further referring to the judgment of Hon'ble Supreme Court in the case of Mahabir Commercial Co. Ltd. v. CIT [1972] 86 ITR 417 (SC), held that overall agreement does not result the income accruing in India and the execution of an overall agreement is promoted by purely commercial considerations as India Cellular Operator would be desirous of having a 13 single entity that could liaise with. Thus, it was concluded that the place of negotiation, the place of signing of agreement or formula acceptance thereof or overall responsibility of the assessee are relevant circumstances. Since the transaction is relating to the sale of goods, the relevant factor and determinative factor would be as to where the property in good passes and in the present case, the finding is that the property has passed on high seas. In the present case, the goods were manufactured outside India and even the sale has taken place outside India and once this fact is established even in those cases where there is a one composite contract supply has to be segregated from installation and only then would question of apportionment arise having regard to expressed language of Section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arises in India. 58. ----------- Thus, the Hon'ble High Court in Nortel's case has clearly concluded that equipments supplied overseas cannot be taxed under the Act and as per clause (a) of Explanation 1 to Section 9(1)(i) which postulates the principle of apportionment, the only such income that can be reasonably attributed to assessee in India could be chargeable to tax under the Act and therefore, under the fact where there is off shore supply of equipments nothing can be held to be taxed in India in terms of Section 9(1). ----------- This judgment of Hon'ble Delhi High Court clearly clinches the issues in hand, both on the point of taxability u/s. 9(1)(i) and also in the context of PE. Thus, respectfully following the ratio laid down in aforesaid judgment of Hon'ble High Court in the case of assessee as well as in the case of Nortel, we hold that income of the assessee from off-shore supply of equipments in pursuance of supply contract cannot be brought to tax in India.

There is no dispute that the activities of manufacturing of Car is completed by assessee (Audi AG) outside India and constitute a separate and independent activity. The 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. The assessee also claimed that Cars are sold to Volkswagon Group Sales principle to principle basis and thereafter, Volkswagon Group Sales it on a principle to principle basis to the dealers. The sales of goods/Car are completed outside India than income arising from sales by no stretch of imagination can be said to be taxed in India. The assessing officer has not brought any material to counter the stand of the assessee that Cars are not sold to Volkswagon Group Sales on principle to principle basis and thereafter, Volkswagon Group Sales it on a principle to principle basis to the dealers. 21. We are also in agreement with the submissions of the ld. AR for the assessee that the facts of the decision in Daimler Chrysler AG (supra) are 14 similar to some extent with the assessee in the present case. In the said case the assessee the assessee is also in the business of manufacturing and selling of premium vehicles worldwide (Mercedes) and tax resident of Germany. The assessee (Audi AG) is also tax resident of Germany. The comparative chart of the case in hand and that of Daimler Chrysler AG relied by ld AR for the assessee is refereed below: -------- 22. We have noted that in case of Daimler AG (supra), despite the fact that the AE was performing more activities as narrated in the chart above, it was held that the associated entity not created either fixed place PE nor dependent agent. Further, the income arising on the sales of Car by Volkswagen Group Sales to dealers in India is income accruing or arising in India and is taxed separately in the hands of Volkswagen Group Sales. In our view merely acting for non-resident principal would itself render an agent to be considered PE for the purpose of allocating profit. The assessee is not undertaking any definite activity to which profit can be attributed.

Learned representative has also fairly agreed that the issues raised on this appeal are squarely covered by the aforesaid decision. We see no reasons to take any other view of the matter then the view so taken by the coordinate bench. Respectfully following the same we uphold the plea of the assessee and direct the Assessing Officer to give relief as prayed for. The Tribunal observations in the assessment year 2009-10 and 2010-11 will apply mutatis mutandis on this year as well. 5. In the result, the appeal is allowed, in the terms indicated above. Pronounced in the open court today on the 16th day of December, 2019.”