M/S TESLA TRANSFORMERS ,BHOPAL vs. ITO(INTERNATIONAL TAXATION),, BHOPAL

आदेश/ORDER

PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

This assessee’s appeal for A.Y. 2015-16, arises from order of the CIT(A)-13, Ahmedabad dated 20-12-2017, in proceedings under section 201(1)/201(1a) of the Income Tax Act, 1961; in short “the Act”.

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“1. That the ld. CIT(A) ought to have held that the order passed by Id. A.O. u/s 201(1)/201(1a) of the Act was bad in law. 2. That the ld. CIT(A) erred in confirming order of Id. A.O. calculating TDS default u/s 195 amounting to Rs.27,66,720/- u/s 201(1) of the Act. 3. That the ld. CIT(A) erred in holding that in the transaction of import of raw- material valuing Rs.4,02,92,017/- from foreign companies , income accrued under the provisions of section 9 of the Act amounting to Rs.40,29,203/- merely on account of activity of order booking @10% of transaction value which was liable for TDS under the provisions of section 195 of the Act. 4. That the Id. CIT(A) erred in confirming levy of interest u/s 201(1a) amounting to Rs.5,35,081/-.

Sr. Name of the supplier Total Amount Name of the No. Remitted in agent/subsidiary engaged to Rs. carry out the transaction

1 Toyota Tsusho Corporation, 1,53,59,350/- Toyota Tsusho India Pvt. Ltd Japan New Delhi

2 ABB AB Components, Sweden 40,46,559/- ABB India Limited Mumbai

3 Messko GmbH, Germany 1,86,557/- Macht Consultant Pvt. Ltd Mumbai

4 Stat Products S.A, Poland 2,06,99,551/- Pravarsh Impex Pvt. Ltd Mumbai

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made to such parties. During the course of 201 proceedings, the assessee submitted letter dated 29-09-2015, wherein the accountant of the assessee submitted that the “process is that after raising queries their agents/residential sales representatives will contact us personally or telephonically and after negotiations the price will be finalised and the contract may be converted in the form of purchase order or sale agreement”. During the course of proceedings, the TDS Officer observed that the assessee has not submitted any tax residency certificate (TRC) and Form 10F in respect of any of the non-residents to whom the payments have been made. The TDS officer discussed the facts in relation to each of the payments made to the above parties and held that the overseas party had business connection/PE in India, the Indian marketing/sales agent was vested with the authority to negotiate/conclude on behalf on the overseas company and the agents sitting in India were not acting in the ordinary course of business, and accordingly, the assessee under an obligation to deduct TDS under the Act. The Ld. Assessing Officer made the following observations in the 201 order:

(i) Payment to Toyota Corporation Japan (TTC Japan ) for � 1,53,59,350/-:

- The AO observed that MOU dated 21-03-2014 and MOU dated 19- per-2012 between the assessee and TTC Japan mentioned the name of Shri Rudrajit Mondal of TTIPL, New Delhi (which is a wholly-owned subsidiary of TTC Japan) has been vested with the authority to sign contracts on behalf of TTC Japan.

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- The primary business of TTIPL is purchase and sale of various auto part components and it is also engaged in purchase and sale of polypropylene granules used in auto industry. Accordingly, it is not ordinarily engaged in acting as a commissioned agency business in the ordinary course of business - TTIPL has primarily received its commission from TTC and other group companies and hence is not economically independent in this line of business

4.1 Accordingly in the above facts, the AO held that assessee is liable to deduct TDS on payments made to TTC Japan. The AO computed 10% of the amount remitted as being attributable to operations carried out in India.

(ii) Payment to ABB Components Sweden (ABB Sweden) for � 40,46,559/-: The assessee made payment of � 40,46,559/- for the purchase 4.2 of raw materials. To carry out the transactions with the ABB Sweden, the assessee engaged with its Indian agent company, ABB India Ltd Mumbai. The AO observed as below:

- The assessee himself is accepted in its reply dated 29-12-2015 that “the process is that after raising queries their agents/residential sales representatives will contact us personally or telephonically and after negotiations, the price will be finalised and the contract to be

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converted in the form of purchase order or sales agreement”. This submission made by the AR of the assessee in the course of 201 proceedings clearly demonstrates that ABB India Ltd, Mumbai is undertaking detailed negotiations and finalisation of price and after which, the contract is converted in the form of purchase order or sales agreement. - ABB India Ltd is primarily involved in manufacture of various power and automation products and offers turnkey systems and solutions. Hence, ABB India Ltd is not acting in the ordinary course of business.

4.3 Accordingly in the above facts, the AO held that assessee is liable to deduct TDS on payments made to ABB Sweden. The AO computed 10% of the amount remitted as being attributable to operations carried out in India.

(iii) Payment to Messko GmbH Germany:

The assessee made payment of � 1,86,557/- to the non-resident for 4.4 the purpose of purchase of some materials. The transactions were carried out through an Indian company Macht Consultants Private Limited, Mumbai as an agent. The AO held that the non-resident had a PE/business connection in the form of agent for the following reasons:

- the assessee himself accepted in his reply dated 29-12-2015 that “the process is that after raising enquiries their agents/residential sales representatives will contact us personally or telephonically and after

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negotiations, the price will be finalised and the contract may be converted in the form of purchase order or sales agreement” - The Indian agent is doing detailed negotiations and finalising the price and after that the contract is converted in the form of purchase order or sales agreement - In response to notice under section 133(6) , the agent admitted that they are acting as official authorised representatives of the overseas market manufacturers from Europe and promote their products in the Indian markets. Further they admitted that they secure orders frequently for the non-resident company. - Accordingly, the AO held that the assessee was liable to deduct TDS under section 195 of the Act in respect of payments made to the non- resident German entity

(iv) Payment to Stal Products SA, Poland:

During the year, the assessee made payment of � 2,06,99,551/- 4.5 to the non-resident for the purpose of purchase of some materials. To carry out transactions with the non-resident, the assessee was engaging with an Indian company Pravarsh Impex Private Limited, Mumbai as an agent. The AO held that the Poland non-resident company had a PE/business connection in India through its agent for the following reasons:

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- the assessee himself accepted in his reply dated 29-12-2015 that “the process is that after raising enquiries their agents/residential sales representatives will contact us personally or telephonically and after negotiations, the price will be finalised and the contract may be converted in the form of purchase order or sales agreement” - Pravarsh Impex private Ltd, Mumbai is doing detailed negotiation and finalising the price and after that the contract is converted in the form of purchase order or sales agreement - In response to notice under section 133(6) Pravarsh Impex Private Ltd, Mumbai stated that the main business activity is dealing in CRGO steel coils. Hence the activities carried out by the agent in the case of the assessee cannot be said to be done in the ordinary course of business.

4.6 For the above reasons, the AO held that the assessee has been making payments during the course of its business, primarily for the purchase of raw materials, on which the assessee was liable to deduct TDS since the non- resident entities had business connection/PE in India in the forms of agents, with whom the assessee was engaging with. Further, the agents employed by the non-resident entities were not acting in the ordinary course of their business. Also, the assessee has not been able to furnish the tax residency certificates of the non-resident entities as well.

Estimation of profits:

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Regarding the estimation of profits that could be attributed to India in respect of the activities carried out by the Indian agents of these non-resident entities, the AO held that 10% of the payments received by the non-resident entities could be attributed to the activities carried out by the agents in India. Accordingly, the AO held that the assessee has defaulted in not deducting TDS on the amount which was attributable to operations being carried out in India. The AO further noted that Rule 10 of the Income Tax Rules, 1962 provides that AO can attribute such percentage of the turnover so accruing or arising as he may consider to be reasonable/ in such manner as the AO may deem suitable.

Grossing up:

The AO held that when the assessee has made payment without deduction of tax at source, it has to be inferred that the payee has agreed to bear the amount of taxes and hence accordingly, the payments made were to be grossed up in view of section 195A of the Act.

Proceedings before CIT(Appeals):

In appeal, Ld. CIT(Appeals) dismissed the appeals of the assessee and confirmed the order of the AO.

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copies of information received from different companies/agents under section 133(6) of the Act and Circular issued by CBDT and also certain publically available material, which according to the counsel for the assessee could be analysed during the course of appellate proceedings itself. The counsel for the assessee submitted that as per the statements of the Indian companies (which could be obtained only after conclusion of hearing before Ld. CIT(Appeals), who were acting as agents of the non-resident companies, it is clear that they have categorically submitted that these companies do not have the authority to conclude contracts on behalf of the non-resident companies. In the statement recorded of ABB India Limited, it has submitted that “we do not have any such transactions which the company has entered with Tesla Transformers Ltd, Bhopal during financial year 2014-15 in connection with/on behalf of any non-resident”. Further, Toyota Tsusho India Private Limited (TTIPL) submitted that no business activities was carried out in India by TTIPL on behalf of Toyota Corporation, Japan. It further submitted that TTIPL is not authorised to negotiate the price or other business dealings on behalf of Toyota Corporation, Japan. Further, TTIPL is not authorised to conclude contracts on behalf of Toyota Corporation, Japan. In the statement recorded of Macht Consultants Private Limited, Bhopal, again the agent submitted that it does not have any independent authority to conclude contracts and all the terms and conditions of the contract are decided by Messko GmBH Germany. Macht Consultants Private Limited however admitted, that they frequently secure orders on behalf of Messko GmBH Germany. The counsel for the assessee submitted that the statements of the agents were received after passing of Ld. CIT(Appeals) order and hence he could not rely upon the same at any prior stage of the proceedings.

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The counsel for the assessee submitted that a perusal of the statements show that the agents did not play any role in concluding the contracts and further the AO in the order has incorrectly stated that the agents were appointed by the assessee company. Accordingly, no part of payments is taxable in India, in absence of PE/ Business Connection of non-resident companies in India and accordingly, there was no liability on the part of the assessee to deduct taxes on such payments.

Business Connection / Permanent Establishment of non-resident in India:

The first issue for consideration before us is whether in the instant set of facts, it can be held that the non-resident companies have business connection/permanent establishment in India on account of the activities carried out by its agents in India. The learned counsel for the assessee has primarily relied upon the statements given by the agents in response to notice under section 133(6) in which they have averred that they do not have

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the authority to conclude contracts on behalf of non-resident entity. However, notably, the AR of the assessee, during the course of assessment proceedings has himself accepted in his reply dated 29-12-2015 that “the process is that after raising enquiries their agents/residential sales representatives will contact us personally or telephonically and after negotiations, the price will be finalised and the contract may be converted in the form of purchase order or sales agreement”. Further at page 14-15 of the AO's order, it is seen as per the MOU signed between the assessee and Toyota Corporation, Japan the contract has been signed by one Mr Rudrajit Mondal, who is an employee of Toyota India Private Limited (agent). Therefore, clearly the statement by the agent i.e. Toyota Tsusho India Private Limited at page 4 of the paper book submitted by the counsel for the assessee, wherein the agent has submitted “no business activities carried out in India by TTIPL on behalf of Toyota Corporation, Japan” is incorrect and hence the statement by TTIPL in response to notice under section 133(6) of the Act cannot be relied upon. Further the statement of ABB India Ltd at page 2 of the paper book in which he has stated “that as per records, we do not have any such transactions which the company i.e. agent has entered on behalf of the non-resident entity” is also at complete variance with what the AR of the assessee himself submitted during the course of 201 proceedings before the TDS Officer. Hence, though in response to notice under section 133(6) of the Act, ABB India Ltd has completely denied any role at the India level on acting on behalf on the non-resident entity, the facts placed on record by the AR of the assessee during the course of 201 proceedings are completely different. Hence, the statement of ABB India Ltd also cannot be relied upon. In the statement of Macht consultants Private Limited, in

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response to question number 8 at page number 6 of the paper book submitted by the counsel for the assessee, the agent has admitted that he “secures orders” frequently for MesskoGmBH Germany. Therefore, in view of the above facts, it is evident that the Indian entities to whom payments were made by the assessee were acting for an on behalf of the non-resident entities. The AR of the assessee during the course of 201 proceedings himself made a categorical statement that they played an active / critical role in price negotiation leading the conclusion of contract. In the case of Toyota Corporation Japan, a specific authority has been given to employees of TTISL, India (its subsidiary) to sign contracts on its behalf of Toyota Corporation, Japan as per Memorandum of Understanding produced by the AO in the 201 order. Accordingly, looking into the totality of facts placed before us, we are of the considered view, that in the instant set of facts, the Agents have been vested with the authority to negotiate all elements of the contract/conclude contracts on behalf of the non-resident.

7.1 The alternate argument of the Ld. Counsel for the assessee was that the agents were “Independent Agents” and hence there could be no Business Connection / Permanent Establishment of non-resident in India. It would be useful to reproduce the relevant extracts of section 9(1)(i) of the Act for reference:

Income deemed to accrue or arise in India.

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(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. ………. Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business :

Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.

7.2 As may be seen, the term “independent status” is qualified with the words “acting in the ordinary course of his business”. However, from the facts, we observe that the assessee has not placed any material/supporting documents to substantiate that the Indian agents were having “independent status” either economically and legally from its overseas non-residents companies they represented. So far as TTISL, India is concerned, since as

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per the MOU, employees of TTISL, India were vested with authority to sign contracts on behalf of Toyota Corporation, Japan, it could be inferred that it was not legally independent of Toyota Corporation, Japan. Further, in respect of other entities they assessee has not placed any document to substantiate economic independence of the Indian agents.

7.3 Further, the term “independent agent” is also qualified with the condition that he should be acting “in the ordinary course of business”, while concluding contracts on behalf of the overseas entities. We observe that ABB India Ltd, Mumbai is mainly engaged in the business of manufacturing of various power and automation products and offering turnkey systems and solutions. Further, as noted by Ld. AO, Pravarsh Impex Pvt Ltd, Mumbai is engaged primarily in the business of trading in the CRGO steel coils. Accordingly, so far as the above two entities are concerned, they are not acting in the ordinary course of business of acting as commission agents for an on behalf of the non-resident entities as part of the regular business. Accordingly, in view of the above facts, we are of the considered view that the Indian agents of the non-resident companies were not having independent status- either economically or legally of the non-resident entities (the assessee has not been able to substantiate their economic/legal independence at any stage of the proceedings) and further they were also not acting in the ordinary course of the business. Accordingly, in our considered view, the assessee was liable to deduct TDS on the payments made to such non-residents, on account of the activities carried out by the agents of such non-residents in India.

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Attribution of profits

So far as attribution of profits in India is concerned, there can be no hard and fast rule for attribution of profit to marketing activities carried out in India at a particular level under rule 10 of the Income Tax Rules. In fact, attribution of profits to PE in India is fact based, depending upon the role played by the Agent in the overall generation of income. Such activities carried out by a PE in India resulting in generation of income, may vary from case to case. Attribution of income has to be in line with the extent of activities of PE in India. In Galileo International Inc. (supra) as well as in Hukum Chand v. UOI [1976] 103 ITR 548 (SC), it was stressed that what are the proportions of profit of sales attributable to the profits carried on in a national jurisdiction is essentially dependent upon facts and circumstances of the case. The Court held that there cannot in the very nature of things great precision and exactness in the matters. As long as the attribution is based upon the relevant material, it should not be disturbed." In various other decisions on the issue, it has been held that in absence of statutory or other formal framework in respect of attribution of profits, the task is dependent to some extent on guess work and that the endeavour is be to be able arrive at an approximately correct figure. The Delhi Bench of the ITAT in Dy. DIT,(IT) v. Nipro Asia Pte. Ltd. [2017] 79 taxmann.com 154 (Delhi - Trib.) held that "There can be no hard and fast rule of attribution of profit to marketing activities carried out in India at a particular level. In fact, attribution of profits to PE in India is fact based, depending upon the role played by the PE in the overall generation of income. Such activities carried out by a PE in India resulting in generation of income, may vary from case

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to case. Attribution of income has to be in line with the extent of activities of PE in India." The ITAT Delhi in the case of Rolls Royce PLC vs. DDIT 2007-TII-32-ITAT-DEL-INTL, held that looking into the role played by the Agents in India, 35% of the total profit pertaining to marketing activities carried out by the agents was held to be taxable in India. The said order of the Tribunal was affirmed by the Hon'ble Delhi High Court in Rolls Royce PLC vs. DIT (IT) (2011) 339 ITR 147 (Del). The Delhi Bench of the Tribunal in ZTE Corporation vs. Addl. DIT (2016) 159 ITD 696 (Del) has also attributed 35% of the profits attributable to marketing activities in India. In ZTE Corporation (supra) the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that, "the most important aspect to be kept in mind is the level of PE's participation in the economic life of the source country. It is primarily nexus between the source country and PEs activities which produce the taxable income to the taxpayer". The Delhi High Court in the case of GE Energy Parts Inc. v. CIT [2019] 101 taxmann.com 142 (Delhi) held that where L.O. of U. S. Company established to act as communication channel, was carrying core activity of marketing and selling highly sophisticated equipments to US company, L.O. was fixed place P.E. of assessee company in India. The Delhi High Court further confirmed that on facts, there was no infirmity in attributing income to extent of 10 per cent in India. In the case of Daikin Industries Ltd. v. ACIT [2018] 94 taxmann.com 299 (Delhi - Trib.), the ITAT held that in absence of assessee, a Japanese company, furnishing any shred of credible evidence showing its direct involvement from Japan in making sales to customers in India and proving that role of its Indian subsidiary (DAIPL) was simply confined to a communication channel, inescapable conclusion

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was that entire activity starting from identifying customers, approaching them, negotiating prices with them and finalization of products and prices were done by DAIPL in India not only for products sold directly by them as distributor, but also for which assessee was claiming to have made direct sales and, thus, Indian subsidiary was dependent agent PE of assessee. He further held that on facts, estimation of amount of net profit attributable to marketing activities carried out in India would be 30 per cent of amount of net profit relatable to sales in India. In the case of GE Nuovo Pignone SPA [2019] 101 taxmann.com 402 (Delhi - Trib.), Delhi ITAT held that where PE of assessee an Italy based company in India, conducted core activities and extent of activities by assessee in making sales in India was roughly one fourth of total marketing effort, 26 per cent of total profit in India would be attributable to operations carried out by PE in India.

7.8 In light of the above rulings the facts on record regarding the role played by the agents in negotiating prices and concluding contracts on behalf of the overseas non-resident companies, we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law in holding that 10% of the payments received by the non-resident companies from the assessee in India are liable to tax in India on account of the activities carried out by the non-resident in India.

Grossing Up and applicability of section 195A of the Act:

In the instant facts, we observe that the AO has held that in the instant set of facts, when the assessee has made payment without deduction of tax at

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source, it has to be inferred that the payee has agreed to bear the amount of taxes and hence accordingly, the payments made was required to be grossed up in view of section 195A of the Act. We are of the considered view, that in the instant set of facts section 195A of the Act has no applicability and the AO has not brought anything on record to show that the assessee/payer has agreed to bear the Indian taxes at the time of payment. In the case of Tetra Pak India (P.) Ltd. [2019] 111 taxmann.com 205 (Pune - Trib.), the Assessing Officer had grossed up various payments made in accordance with provisions of section 195A while calculating tax payable. The ITAT held that there being nothing on record to conclude that assessee had agreed to bear tax liability of foreign companies, hence provisions of section 195A were not applicable. Accordingly, in our view, the AO has erred in facts and in law in coming to the conclusion that the payments were required to be grossed of in terms of section 195A of the Act (however, we observe that the assessee has not specifically raised a Ground of Appeal on this issue in Form 36 and had taken this argument during the course of hearing only).

Order pronounced in the open court on 29 -11-2022

Sd/- Sd/- (B.M. BIYANI) (SIDHHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 29/11/2022

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आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order,

Sr. Private Secretary, Income Tax Appellate Tribunal, Indore

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Strengthened preparation & delivery of orders in the ITAT 1) Date of dictation 28 /11/2022 formatting and reproduction 2) Date on which the typed draft is placed before the 28/11/2022 Dictating Member & Other Member

3) Date on which the approved draft comes to the Sr. /11/2022 P.S./P.S. 4) Date on which the fair order is placed before the /11/2022 Dictating Member for pronouncement 5) Date on which the fair order comes back to the Sr. /11/2022 P.S./P.S. 6) Date on which the file goes to the Bench Clerk /11/2022 7) Date on which the file goes the Head Clerk 8) Date on which the file goes to the Assistant Registrar for signature on the order 9) Date of Dispatch of the order a.k