Section 5 of the Act – Article 9 of India-Germany DTAA – Foreign car manufacturing company sold completely built-up cars to Indian company on principal-to-principal basis – Indian company sold such cars to dealers on principal-to-principal basis, each transaction constituted a separate and independent activity, and since Indian company was not acting on behalf of the foreign company, the foreign company could not be said to have PE in India, either u/s 9 of the Act or under article 5 of India-Germany DTAA

5. TS-548-ITAT-2019
(Mum.) Audi AG vs. ADIT ITA No.:
1781/Mum/2014 A.Y.: 2010-11 Date of order: 3^rd
September, 2019

Section 5 of the
Act – Article 9 of India-Germany DTAA – Foreign car manufacturing company sold
completely built-up cars to Indian company on principal-to-principal basis –
Indian company sold such cars to dealers on principal-to-principal basis, each
transaction constituted a separate and independent activity, and since Indian
company was not acting on behalf of the foreign company, the foreign company
could not be said to have PE in India, either u/s 9 of the Act or under article
5 of India-Germany DTAA

FACTS

The assessee was a
car manufacturer based in Germany (F Co). It was a tax resident of Germany. F
Co was inter alia engaged in the business of selling its cars globally
under its own brand name (F Co Brand).

It had appointed an
Indian company (I Co 1), which was its associated enterprise (AE) as its
exclusive distributor for sale of F Co Brand cars in India. During the relevant
year, the assessee had sold completely built-up cars (CBU cars) and accessories
to I Co 1. The assessee also had another AE (I Co 2) in India. The assessee
sold parts and accessories to I Co 2 from which I Co 2 manufactured F Co Brand
cars in India. I Co 2 sold these cars to I Co 1 who, in turn, distributed them
to the dealers / distributors.

The assessee
offered only fees for technical services for tax under the India-Germany DTAA.
However, on the basis of the following observations, the AO held that the
assessee had a business connection and a PE in India in terms of Article 5(1)
and 5(5) of the India-Germany DTAA.

(i)    I Co 1 was an exclusive distributor and its
only business activity and source of income was from the sale of F Co Brand
cars;

(ii)    Activities of the assessee and I Co 1
complemented each other and I Co 1 was functioning as an extended arm of, and
replaced, the assessee in India;

(iii)   The assessee and I Co 1 jointly established
sales targets;

(iv)   Most of the senior officials working with I Co
1 had come from F Co group; and

(v)   The activities 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 were undertaken in India by I Co 1 on behalf of the assessee.

The DRP upheld the
order of the AO. Aggrieved, the assessee appealed before the Tribunal.

HELD

(a)   The manufacture of cars was completed by the
assessee outside India. Hence, it constituted a separate and independent
activity;

(b)   The sale of cars was also completed outside
India. Hence, income arising from sales could not be taxed in India;

(c)   The assessee had contended
that the cars were sold to I Co 1 on principal-to-principal basis outside India
and I Co 1 had sold these on principal-to-principal basis to dealers. I Co 1
was not acting on behalf of the assessee and the assessee was not selling cars
through I Co 1. Income from sale of such cars in India was taxed separately in
the hands of I Co 1 in India. The AO did not bring any material to counter
this. Thus, I Co 1 did not constitute a PE of the assessee in India and income
from sale of cars is not taxable in India. The Tribunal relied on the decision
in the case of ACIT vs. Daimler Chrysler AG¹ .