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
