AUDI AG,MUMBAI vs. DCIT (IT) 1(1)(2), MUMBAI

The assessee has challenged the correctness of the DRP order dated 27.06.2017 in the matter of assessment under Sec. 144C(13) of the Income Tax Act, 1961 relevant to assessment year of 2014-15. The assessee has assailed the following grounds: “Based on the facts and circumstances of the case, AUDI AG (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax (International Taxation) - 1(1)(2), Mumbai [hereinafter referred to as the 'AO] under section 144C(13) read with section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - I, (hereinafter referred to as the 'DRP') on the following grounds, each of which are without prejudice to one another: On the facts and circumstances of the case and in law, the learned AO based on the directions of the Hon'ble DRP has: 1. erred in holding that Volkswagen Group Sales India Pvt. Ltd (VGSIPL') constitutes a Permanent Establishment ('PE') of the Appellant in India and assessing the total income at INR 3,14,18,368. Fixed Place PE in India AUDI AG Vs. DCIT(IT)-1(1)(2) 2 2. erred in holding that VGSIPL constitutes a fixed place PE of the Appellant in India under Article 5(1) of the India - Germany treaty ('Tax treaty'); The learned AO/ DRIP failed to appreciate that - Appellant does not have any premises for carrying any business at its disposal in India and hence it does not have any Fixed Place PE in India under Article 5(1) of the Tax treaty; - VGSIPL should not constitute PE of the Appellant merely due to the fact that it is a group company of the Appellant. Agency PE in India 3. erred in holding that VGSIPL constitutes an Agency PE of the Appellant in India under Article 5(5) of the Tax treaty; The learned AO/ DRP failed to appreciate that - Transaction between the Appellant and VGSIPL are on principal to principal basis and there is no agency relationship; - VGSIPL should not be the Appellant's PE merely due to the fact that it is a group company of the Appellant; - VGSIPL is an independent agent and hence does not lead to a Dependent Agent PE of the Appellant in India; - without prejudice to the contention that VGSIPL is an agent of independent status, failed to appreciate that VGSIPL does not exercise authority to conclude contracts on behalf of the Appellant in India, maintain any stock of the merchandise of the Appellant, from which it makes regular deliveries on behalf of the Appellant nor it secures orders wholly or almost wholly for the Appellant in India. - Business connection in India 4. erred in holding that VGSIPL constitutes a business connection of the Appellant in India under Section 9 of the Act. 5. without prejudice to ground no 4, erred in holding that the income from sale of cars and accessories, sale of sales promotional items and sole distribution fees received from VGSIPL in India, accrues or arises to the Appellant through business connection in India. The learned AO/ DRIP failed to appreciate that all the related activities for sale of cars and accessories, sale of promotional items are carried out outside India and hence, no portion of the income of the Appellant from sale of cars, and sales promotional items to VGSIPL in India is taxable in India. Attribution of 35% of income in India and adopting operating profit ratio @ 9.72% 6. without prejudice to the above, erred in attributing income in India for activities of export of cars, accessories and promotional items to India, as operations in connection with such exports viz. manufacture and transfer of property of the goods supplied, are completed outside India. 7. erred in estimating the worldwide profitability rate of AUDI AG at 9.72 percent and attributing 35 percent of the profits from the sale of cars and accessories, sale of sales promotional items, etc in India as attributable to activities carried out by the PE in India. 8. without prejudice to the above, erred in attributing profits to the PE without recording the reason for the same or bring any evidence on record to justify the same.

Brief facts of the case are that the assessee filed its return of income on 28.11.2014 declaring a total income of Rs.422,29,092/- for the assessment year 2014-15. The case was selected for scrutiny assessment. Notices under Sec. 143(2) and 143(1) of the Act were issued and served upon the assessee. C.A. Sapan Choksi attended the proceedings before the AO. The assessment order was passed on 08.12.2016. The assessee filed its objection before the DRP. The DRP passed the order dated 27.06.2017 under Sec. 144C(13) of the Act.

Audi AG is a company incorporated in Germany and engaged in the business of manufacturing car and selling them worldwide. The assessee is an associate enterprise in the form of Volkswagan Group Sales India Pvt. Ltd. (VGSIPL) in India. VGSIPL has been appointed as exclusive distributors of Audi AG in India. During the year under consideration, the assessee offered fee from technical services (information technology fees, market fees, conference and training fees and other professional fees consulting fees) and interest income in its return of income. During the year under consideration, the assessee was asked to show cause as to why the draft assessment order of the assessment year 2009-10 to 2013-14 that the assessee is a permanent establishment in India within the meaning of Article 5(1) and Article 5(5) of the DTAA through its dependant agent VGSIPL. Accordingly, income attributed to the PE was proposed to tax in India in draft assessment order. The assessee filed its objection AUDI AG Vs. DCIT(IT)-1(1)(2) 4 and following earlier order as DRP dismissed the objection and the income of the assessee was proposed as under:

The total income of the assessee is as follows:

Aggrieved, the assessee carried the matter in appeal before us.

At the very outset of the ld. Representative of the assessee has argued that the issue has duly been covered with the decision of the Hon’ble ITAT in the assesse’s own case for the assessment year 2009-10 and 2010-11 bearing and 1781/Mum/2014 decided on 03.09.2019, therefore, in the said circumstances the claim of the assessee is liable to be allowed. However, on the other hand, the ld. Representative of the department of the has AUDI AG Vs. DCIT(IT)-1(1)(2) 5 refuted the said contention. Before going further, we deem it is necessary for us to go into the finding of the assesses own case:

Ground No.1 to 3 relates to Permanent Establishment, independent agent and business connection in India. The ld. AR of the assessee submits that offshore sale is not taxable in India. The ld. AR of the assessee submits that Assessing Officer has not appreciated the different nature of activities that have been performed by assessee and Volkswagon Group Sales. The assessee performs the activities of manufacturing, quality control, Research & Development in Germany whereas the activities of import, warehousing, marketing etc. have been done by Volkswagen Group Sales (VW Group). The sales are made by assessee Mum 2012 & 1781 Mum 2014-Audi AG 9 to AE on principle to principle basis. The ld. AR of the assessee explained that term of sales made by assessee to Volkswagon Group Sales in the following manner: (i) Invoices are raised by Audi AG for export of Car on Volkswagon Group Sales. (ii) Shipping documents are issued in the name of Volkswagon Group Sales. (ii) The 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 the 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, the transaction between Volkswagon Group Sales and Audi AG is on FOB basis. Bill of lading confirms that the transaction is on FOB basis. (vi) The 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 the goods have been handed over to the first or main carrier, so that the risk transfer to buyer upon handling goods over to without carrying at the place of shipment in the country of export.

The ld. AR of the assessee submits that similar ground of appeal

The ld. DR further submits that the assessee cannot get business of sale of Audi cars in India without the role being played by VW Group Sales having business at a fixed place in India. Accordingly, considering the business arrangement, the assessee has its subsidiary, it is clear that the premise of AUDI AG Vs. DCIT(IT)-1(1)(2) 7 VW Group sales is a fixed place PE of the assessee within the meaning of Article 5(1) and (2). The premise of VW Group sales are used by the assessee and the personnel of AUDI AG are following the necessary guidelines/recommendations fixed by the AUDI AG at the premised of VW Group sales.

The ld. DR further submits that the VW Group sales also constitutes agency PE in as much as 100% of the business relating to trading of Audi AG Group brand cars on behalf of assessee in India. A subsidiary Mum 2012 & 1781 Mum 2014-Audi AG 14 can also be regarded as PE of the Parent company. The Ld. DR referred to extracts by the renowned jurist, Klaus Vogel: "On the basis of special parent / subsidiary relationship - other than one of control under law - a subsidiary may however individual cases be an agent and consequently for that reason a permanent establishment of its parent company Like any other unrelated company a subsidiary even if an independent agent can very well constitute permanent establishment of its parent company under the conditions laid down in Art 5(6). A subsidiary may for instance act as an agent of its parent company and conclude such contracts for the latter on the basis of a corresponding authority as to go beyond the limits of the ordinary course of its business" 12.The ld. DR further submits that one has to look at the various clauses mentioned in the importer agreement (IA) and different agreements between the appellant and VW Group sales and also should keep in mind the nature of services rendered by the assessee and nature of business of the assessee. Accordingly, the corporate veil needs to be lifted and the real nature of the transaction required to be looked at. In support of his submission, the ld. DR for the revenue relied upon the decision of AAR ruling in case of Aramex International Logistic Pvt Ltd (supra) and would submit that the business model of the assessee constitutes PE in India. 13.We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also gone through the other material consisting of various paper books and the various case laws relied by learned representative of the parties. We have also gone through the contents of the Importer agreement between the assessee ITA No. 7335 Mum 2012 & 1781 Mum 2014- Audi AG 15 and its AE. The assessee is tax resident of Germany and India had entered in tax treaty with Germany. And as per the provisions of section 90(2) the assessee is entitled to invoke the provision of Income Act or the India Germany DTAA, which is more beneficial to them. A non-resident entity will be liable to tax in India if the activities under taken by them constitute its business connection which constitute permanent establishment. The question is whether the 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 the meaning of section 9 or Article 5 of India Germany tax treaty, has to be determined on the facts of each case. 14.During the assessment, the assessing officer on going through the Importer agreement (IA) in para 11 of the draft assessment order observed that:  VGSIPL is the exclusive distributors of Audi Product in India whose only source of income is from Audi sales,  Business activities of VGSIPL are devoted wholly on behalf of the assessee,  Activities of the assessee and VGSIPL complement each other and VW Group sales is functioning as an extended arm and replacement of assessee in India,  As per clause 1 of Importer agreement, the assessee and VW group sales are jointly establishing the sales targets,  Most of the senior officials working with the VW group sales have all come from Audi Group abroad.

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 AUDI AG Vs. DCIT(IT)-1(1)(2) 8 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 activity of storage, marketing, 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 Mum 2012 & 1781 Mum 2014-Audi AG 17 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 and primary controversy before us, 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, a 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 Mumbai Tribunal in case of Daimler AG (supra). In Daimler AG (supra) it has been held that the subsidiary of that company cannot be regarded as PE and with respect to carrying or business in India as a parts and completely knocked down (CKD) sales are made by the 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 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 this order the relevant part of the order is extracted below:

We agree with the order of the CIT(A) on this aspect. On the issue whether MBIL constitute a PE of the assessee in India within the meaning of Article-5 (2) of the India - Germany DTAA the Tribunal in A.Y 2001-02 the CIT(A)held as follows: "30. Now the activity of DCIL are twofold. (1) manufacture of cars using CKD packs and other components. (2) Act as communication exchange in respect of direct sale of CBUs by the Assessee directly to the clients in India. Even though the commission received by DCIL for helping the sale CBUs it is obvious that their main activity is that. of manufacture of cars. Acting as communication conduit is not their main business. Further the dept has not established that DCIL actively canvasses orders for CBUs of Assessee or is actively engaged in negotiating and concluding contracts. If and when clients approach DCIL or their agents evidencing to buy CBUs from the Appellant DCIL passes on communication both sides. Negotiations of price, specifications etc were concluded by the Appellant. The sale to the customer was on principle to principle basis. The risk of diminishing in value or damages to the cars is to the account of customer's right from the port of shipment at the manufacturing end. The cars were cleared through customs in India for and on behalf of the ultimate customers. Thus, DCIL had no role to play from the sale or in any activity in promoting the sale to the Assessee directly to the customers in India. They are only collection of information and activities of preparatory or auxiliary in nature. The prices offered to the clients are as per the list price notified by the Assessee. DCIL has no authority to conclude any deal. Thus the mere acting as post office between the Assessee and the client will not render DCIL as a dependent agent. DCIL cannot be considered as habitually procuring orders for the Assessee. In fact DCIL themselves are manufacturing and selling the cars aid procurement of orders for direct shipment of cars by the assessee would in fact he contrary to and against the interest of the DCIL in its manufacturing activity. DCIL by passing on communication from Assessee to the client and vice versa, are merely rendering a very insignificant auxiliary/preparatory service in the sale of CBUs by the Assessee to Indian clients. Therefore DCIL does not constitute a dependent agent of the Assessee. The prices offered to the Indian clients arc as per list price notified and so whether DCIL is involved or not the price charged to the customer would be the same. No profits can be attributed to the services of DCTL in India. In fact by engaging the services of DCIL, the profit of the Assessee is reduced to the extent of he commission paid to DCIL.

The following decisions cited by the assessee can be extracted for this purpose.

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 AUDI AG Vs. DCIT(IT)-1(1)(2) 10 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.

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

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.

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 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:

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 porpose of allocating profit. The assessee is not undertaking any definite activity to which profit can be attributed.

In view of the aforesaid discussions, we are of the V W Group sales is an independent and separate entity, which is engaged in selling of fully built up cars imported from the assessee, Volkswagen AG and Skoda India to dealers and distributors. Thus, VW Group cannot be regarded as a PE of assessee in India. 24. The case law relied by ld. DR for the revenue in Aramex Logistic Private Limited (supra) is not helpful to the revenue as the said case is based on the different set of facts. 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. The privity of contract was between Aramex and customer outside India. The completion of the contract for the delivery of the parcel will only be complete once the parcel is delivered to the location in India. Accordingly, the activity performed in India by Aramex India, viz; delivery of the parcel to the location in India is part of one transaction which cannot be independently performed. Thus, the decision cited by the ld. DR for the revenue is on different set of facts. 25. However, in the case of present assessee the care is manufactured by the Audi AG outside India and constitutes a separate and independent activity. As noted earlier the 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 AG selling cars through VW Group sales. Moreover, the cars are sold on principle to principal basis. Hence, we are of the view that Assessing Officer was not justified in invoking section 9 of the Act and the Article 5 of Indo-Germany Tax Treaty for taking view that assessee has PE in India. In the result, Ground No.1 to 3 of appeal is allowed. 26. Ground No. 4 & 5 relates to attribution of income and estimation of Gross Profit. The assessee has raised these grounds of appeal