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

Even though the issues raised in this appeal are admittedly covered by the decision of coordinate bench dated 3rd September 2019, in assessee’s own cases for the assessment year 2009-10 and 2010-11, the matter was heard at length. We however see no reasons to take any view of the matter then the view taken by the coordinate bench in the aforesaid decision wherein the coordinate bench has inter alia observed as follows:-

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 Assessment year: 2013-14 Page 5 of 17 laws relied by learned representative of the parties. We have also gone through the contents of the Importer agreement between the assessee 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.

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,   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. 15. 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 Assessment year: 2013-14 Page 6 of 17 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 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: 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 Assessment year: 2013-14 Page 7 of 17 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 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 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."

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 Assessment year: 2013-14 Page 8 of 17 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. Therefore, there was no business activity carried out by the assessee regarding sale of CBU Cars directly to the customers in India. Thus the assessee does not have a business connection and that MBIL does not constitute a business connection with the assessee in India under section 9 of the Act, therefore, income in respect of sale of CBU Cars are not taxable in India.

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 Assessment year: 2013-14 Page 9 of 17 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. "The decision of the 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 the Hon'ble Apex Court has observed that since the assessee did not conclude any contracts on behalf of Morgan Stanley & Co. Inc (MSCo), it did not have an agency PE in India. Similar view has also been taken by the 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 the Authority for Advance Rulings in case of TVVM Ltd. v. CIT (1999) 237 ITR 230 (Refer page 600 & 618 of Paper Book Volume II). The Hon'ble Delhi Tribunal has in the 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 the extent of their activities for the assessee, compared to oil their activities, is so large that it can be said that they are dependent on the assessee for their earnings or revenues. Accordingly, the agents are not economically dependent upon the assessee. Further, there is no authority with the agents to conclude contracts. The agents are merely performing their duties and not exercising any authority. Based on the above, the 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), the Authority for Advance rulings has observed that since the applicant does not conclude any contract on behalf of the foreign company, does not maintain stock of goods/merchandise belonging to the Assessment year: 2013-14 Page 10 of 17 foreign company and also carries on a variety of activities besides promoting examinations of the foreign company, the applicant enjoys an independent status. Accordingly, the applicant cannot be deemed to be a PE of the foreign company in India. Similarly, in case of Specialty Magazines P Ltd (274 ITR 310 ) (Refer Pg 633 & 644 of Paper Book Volume II), the AAR ruled that since 22% - 25% of the income of the applicant is derived from other clients, it cannot be said that its activities are carried out wholly or almost wholly for the foreign company. Thus the applicant, being an independent agent is not covered by the definition of PE in article 5 of the DTAA"

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.

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 Assessment year: 2013-14 Page 11 of 17 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: Particulars Facts in case of Daimler Facts in case of Audi AG Chrysler AG (assessee) Transaction with Indian Sales of raw material and Export of CBU cars to VW entity parts and completely group sales knocked down kit (parts Exports of parts and /CKD) to DCIL accessories for assembling Direct sales of CBU cars to of Audi brands cars to Indian Customers, for which Skoda India. DCIL rendered certain Export of sales promotional services. material to VW group sales. Fee for technical services Fee for technical services.

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. 23.In view of the aforesaid discussions, we are of the V W Group sales is an independent and separate entity, Assessment year: 2013-14 Page 15 of 17 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 in alternative. Considering the fact that we have allowed Ground No.1 to 3 of the appeal, therefore, the 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 the Ground No. 1 to 3 of the appeal, which we have allowed holding that the assessee has no PE in India and accordingly, the Assessment year: 2013-14 Page 16 of 17 income earned by assessee is not taxable in India. Therefore, the adjudication of this ground of appeal is also become academic. 28.Ground No.7 relates to levy of interest under section 234B & 234C. Considering the fact that the assessee is a foreign company and tax resident of Germany. The entire income of the Audi AG is subject to tax deducted at source under section 195 of the Act. The assessee has no liability to pay advance tax and the fact that we have already hold that income earned by assessee is not taxable in India, we direct the Assessing Officer to recompute the tax/interest by following the decision of the jurisdictional High Court in case of NGC Network Asia LLC (313 ITR 187). 29.In the result, appeal of the assessee is allowed. by assessee 30.The assessee has raised the 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 the assessee raised the identical grounds of appeal as raised in appeal for A.Y. 2010-11, which we have allowed. Therefore, considering the fact that the issues raised in the year under consideration are based on similar set of facts, therefore, the appeal for the year under consideration is also allowed with similar directions.