Case Law Details
Court : Mumbai bench of the Income-tax Appellate Tribunal
Citation : DDIT Vs. Daimler Chrysler AG [2010-TII-99-ITAT-Mum-INTL]
Brief :
Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of DDIT v. Daimler Chrysler AG [2010-TII-99-ITAT-Mum-INTL] dealt with the issue of Permanent Establishment (PE) under the India-Germany tax treaty (the tax treaty).
The Tribunal held that mere existence of subsidiary does not by itself constitute the subsidiary company a PE of the parent company. The main condition for constitution of PE is carrying on of business in India. However, no operations in respect of the manufacture and sale of parts and Completely Knocked Down (CKD) kits to subsidiary was carried out by the taxpayer in India.
Accordingly, the Tribunal held that the taxpayer did not form PE under Article 5(1) and 5(2) of the tax treaty.
Facts of the case
- The taxpayer, a tax resident of Germany, set up a joint venture, Daimler Chrysler India Private Limited (DCIL), with TELCO for the manufacture/ assembly and sale of cars in India. The stake of the taxpayer in DCIL subsequently increased to 86 percent and the balance stake was held by TELCO. The taxpayer filed its return of income for the year under consideration, and declared income of INR 33.39 million including royalty income of INR 32.51 million and FTS of INR 649,837.
- The taxpayer sold raw materials, parts and CKD of INR 603.37 million to DCIL during the year and had direct sales of CBU cars of INR 264.33 million to Indian customers, for which DCIL rendered certain assistance services. However, the taxpayer did not offer income in respect of these items on the ground that in the absence of any office or place of business in India, the taxpayer did not have a PE in India and hence such income was not taxable in India.
- However, the Assessing officer (AO) held that the taxpayer had a place of management, branch, office, and warehouse/sales outlet in India in the form of DCIL’s premises and therefore, DCIL constituted a business connection of the taxpayer in India as per Section 9 of the Income-tax Act, 1961 (the Act). The AO, further, held that DCIL also constituted a dependent agent of the taxpayer and hence, the taxpayer had a PE in India as per Article 5 of the tax treaty. Accordingly, the profits from the sale of CBU cars directly to Indian customers and CKD kits to DCIL were attributable to the PE by the AO.
On the issue of Business Connection
Taxpayer’s contentions
- The taxpayer contended that the sales of parts/CKD to DCIL were made outside India and the payment was also received outside India. Further, DCIL utilises these parts/CKDs in their own manufacturing activity in India and since no operations were carried out by the taxpayer in India, no income from sale of parts/CKDs accrues in India.
- The sale of parts/CKD by taxpayer to DCIL was made on principal¬to-principal basis and therefore as per CBDT Circular 23 of 1969 dated 23 July 1969, no part of the income from sale is taxable in India.
Tribunal’s ruling
- The Tribunal observed that the taxpayer merely sold the raw materials/CKD units to DCIL and there were no further activities carried out by the taxpayer in India in that connection. The transaction ended with the taxpayer selling the raw materials/CKD to DCIL and it was DCIL who carried out further activity of assembling the same and selling the finished cars. Accordingly, it was held that no income from such sale accrues or arises to the taxpayer in India. The Tribunal also relied on certain Supreme Court decisions in the case of CIT v. Hyundai Industries Ltd. [2007] 291 ITR 482 (SC) and Ishikawajima Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC) and held that the subsequent amendment to section 9(1)(i) of the Act will not affect the decision on profit arising from sale of equipment offshore.
- Accordingly, the Tribunal held that mere sale of raw materials/components will not result in business connection and therefore, the taxpayer’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.
On the Issue of PE
Tax department’s contentions
- The tax department contended that the DCIL derives its entire business on account of the taxpayer and during the year under consideration, DCIL earned INR 24.71 million out of its total income of INR 173.6 million by way of commission income received from the taxpayer.
- The Managing Director (MD) and Executive Director (ED) of DCIL were expatriate employees deputed by the taxpayer to DCIL and through these employees, the taxpayer effectively controlled all the employees of DCIL. Further, DCIL executed the business generated by the taxpayer and controlled day-to-day affairs of the taxpayer.
- Accordingly, the taxpayer constituted PE under Article 5(1) read with Article 5(2) of the tax treaty.
Taxpayer’s contentions
- As per the OECD commentary on Article 5, mere existence of a subsidiary does not by itself constitute the subsidiary company a PE of the parent. In order to constitute a PE in India under Article 5(2) of the tax treaty, the conditions stated in the definition of PE in Article 5(1) of the tax treaty must be satisfied i.e. the enterprise must carry out its business operations in the other contracting state and such business of the enterprise must be carried on through a fixed base.
- As regards sale of parts/CKD and CBU sales, no operations in respect of the manufacture and sale of the parts were carried out in India. Thus, the key condition for constitution of PE i.e. carrying on business in India was not satisfied. Further, the taxpayer did not have right to use DCIL’s premises and the premises were not at the disposal of the taxpayer. Accordingly, DCIL did not constitute PE of the taxpayer in India.
- The taxpayer was a company incorporated in Germany and was managed by its Board of Directors who manages the taxpayer’s business from Germany and not through a fixed place of business in India. The taxpayer does not carry out any business operations in India and thus, no decisions are taken by DCIL. Accordingly, DCIL does not constitute a place of management of the taxpayer in India.
- The MD and ED have signed separate agreements with DCIL which specifically state that the management powers exercisable by the MD and ED shall be subject to the supervision and control of the Board of Directors of DCIL. Further, the taxpayer after relying on the judgment in the case of (Carborundum Co. v. CIT [1977] 108 ITR 335 (SC) contended that the deputation of the MD and ED did not constitute a PE for the taxpayer in India.
- The goods stored in the warehouses of DCIL and sold at the sales outlets of DCIL were those which belong to DCIL. As regards sale of parts/CKD, such sales were made by the taxpayer to DCIL on a principal-to-principal basis and on sale, such parts/CKD became the property of DCIL. As far as CBU sales are concerned, the DCIL does not maintain a stock of such cars and does not display them in its sales outlets. Accordingly, DCIL does not constitute a sales outlet warehouse of the taxpayer.
Tribunal’s ruling
- The Tribunal held that mere existence of subsidiary does not by itself make subsidiary company as PE of the parent company. The main condition for constitution of PE is carrying on of business in India and as regards sale of parts/CKD no operations in respect of the manufacture and sale of parts was carried out by the taxpayer in India. Further, the taxpayer did not have a right to use DCIL’s premises.
- The Tribunal also observed that DCIL did not constitute a place of management of the taxpayer in India as the management of the taxpayer’s business is by the Board of Directors in Germany. The MD and ED were on deputation as employees of DCIL and work under the directions and control of the Board of DCIL.
- Sales of parts/CKD were made by the taxpayer to DCIL on principal-to-principal basis and on sale of such parts/CKD, it became the property of DCIL. Hence, DCIL does not constitute sales outlet/warehouse of the taxpayer. Accordingly, the Tribunal held that the taxpayer did not have PE under Article 5(1) and 5(2) of the tax treaty.
On formation of Agency FE
Taxpayer’s contentions
- The taxpayer contended that the DCIL merely acts as a communication channel for the taxpayer in respect of CBU sales. No inference can be made that DCIL assists the taxpayer in the sale of CBU cars in material manner which can be considered as DCIL acting as an agent in concluding the sale of cars.
- Further, DCIL does not bear any risk in the transaction but merely acts as communication channel and for which they are compensated. Hence, no part of the profits accruing to the taxpayer can be attributed to the activities of DCIL in India.
Tax department’s contentions
- DCIL was a dependent agent of the taxpayer inasmuch as the entirety of the transactions of the taxpayer in India is through DCIL and DCIL undertakes an active part in concluding a deal for and on behalf of the taxpayer.
Tribunal’s ruling
- The Tribunal observed that the activity of DCIL were twofold i.e. manufacture of cars using CKD packs and other components and acting as communication exchange in respect of direct sale of CBUs by the taxpayer directly to the clients in India.
- Even though DCIL received commission for helping the sale of CBUs, it was clear that their main activity was that of manufacture of cars and acting as communication conduit was not their main business. Negotiations of price, specifications, deal etc. were concluded by the taxpayer and DCIL had no role to play from the sale or in any activity in promoting the sale. They were only collecting information and carrying out preparatory or auxiliary activities.
- Thus, mere acting as post office between the taxpayer and the client will not render DCIL as a dependent agent. Accordingly, no profits can be attributed to the services of DCIL in India.
Our Comments
The Mumbai Tribunal has reiterated the principle that mere existence of subsidiary does not by itself make subsidiary company as PE of the parent company. Further, the main condition for constitution of PE is carrying on of business in India.
It is important to note that in the case of Rolls Royce Plc v. ADIT [2005] 148 TAXMAN 66 (Delhi), the Delhi Tribunal held that since subsidiary company neither had authority to negotiate or conclude contracts on behalf of taxpayer and nor did it habitually exercise such authority on behalf of taxpayer, it could not be said to be PE of taxpayer in India. Further, in the case of DCIT v. Perfetti SPA [2008] 19 SOT 433 (Delhi) the Delhi Tribunal held that since taxpayer only supplied machinery and raw materials to its subsidiary company on cost-to-cost basis for which contract was executed in Italy and moreover, it was not having any control over said company nor said company was acting as an agent of taxpayer in India, in such circumstances, it could not be said that subsidiary company was a PE of taxpayer in India.
The Mumbai Tribunal decision is a welcome addition to the above list of judicial precedent.
can architects do income tax valuation?plzzzzzz reply me