INCOME TAX ACT, 1961

Section 9(1)(i)

Income deemed to accrue or arise in India - Under section 9(1)(i) - Permanent establishment in India - Assessee manufactured car outside India and sold to Associated Enterprise on Principal to Principal basis

The assessee was a part of Volkswagen Group Sales India private Limited ('VGSIPL'). The assessee offered income in the nature of fee for technical services and interest income received from its group entity in India to tax @ 10% as per India Germany Double Taxation Avoidance Agreement (India Germany tax treaty/DTAA). During the relevant Financial Year, the assessee had sold fully built-up Cars and accessories to Associated Entities (AE) in India. The AO held that assessee had business connection in India and had a permanent establishment in India in the form of Volkswagon Group Sales as per Article-5(1) and 5(5) of India-Germany Tax Treaty (Indo-Germany DTAA) and accordingly, income attributable to permanent establishment was taxable in India. Assessee submitted the activities of manufacturing of car were completed by assessee (Audi AG) outside India and constituted a separate and independent activity. The assessee claimed that cars were sold to Volkswagen Group Sales for further sales in India and Volkswagon Group sales was not acting on behalf of Audi AG nor Audi AG was selling Car through Volkswagon Group Sales. The assessee also claimed that Cars were sold to Volkswagon Group Sales principle to principle basis and thereafter, Volkswagon Group sold it on a principle to principle basis to the dealers. The sales of goods/Car were completed outside India than income arising from sales by no stretch of imagination can be said to be taxed in India. Held: As evident, cars were manufactured by assessee outside India and constituted separate and independent activity cars were sold to VW Group for further sale in India and VW Group sale was not acting on behalf of assessee nor was assessee selling cars through VW Group sales. Moreover, cars were sold on principle to principal basis. Hence, AO was not justified in invoking section 9 and article 5 of Indo-German DTAA for taking view that assessee had PE in India.

Distinguished:Aramex International Logistics v. DIT (2012) 348 ITR 0159 (AAR) : 2012 TaxPub(DT) 2390 (AAR)

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