2010 (11) TMI 979 - AT - Income Tax

Issues Involved:
1. Determination of Permanent Establishment (PE) status of Daimler Chrysler India Pvt Ltd (DCIL) under the India-Germany Tax Treaty.
2. Attribution of income from sales of Completely Built Units (CBU) and raw materials to the PE in India.
3. Classification of license fees for Symantec Norton Antivirus software as royalty.
4. Business connection under Section 9 of the IT Act, 1961 for sales of raw materials and CKD units.
5. Applicability of interest under Section 234B of the IT Act, 1961.

Detailed Analysis:

1. Determination of Permanent Establishment (PE) Status:
The CIT(A) held that DCIL is a dependent agent of the appellant for the sale of CBU in India, constituting a PE under Article 5(5) of the India-Germany Tax Treaty. The Tribunal referred to its previous decisions for AY 2001-02 and 2002-03, where it was established that DCIL merely acts as a communication conduit and does not actively canvass orders or negotiate contracts for the appellant. The Tribunal concluded that DCIL does not constitute a dependent agent of the appellant, and no profits can be attributed to DCIL's activities in India. Therefore, DCIL does not create a PE for the appellant.

2. Attribution of Income from Sales to PE:
The CIT(A) attributed income from CBU sales to the PE in India. The Tribunal, following its earlier decisions, held that no profit from the sale of CBU cars directly to Indian customers can be attributed to DCIL's activities. The Tribunal dismissed the grounds raised by the assessee regarding the attribution of profits as infructuous, as it had already determined that no profits could be attributed to DCIL's activities.

3. Classification of License Fees as Royalty:
The CIT(A) upheld the AO's classification of license fees for Symantec Norton Antivirus software as royalty under Section 9(1)(vii) of the IT Act, 1961, and Article 12 of the DTAA. The Tribunal, however, referred to various decisions, including Kansai Nerolac Paints Ltd, and held that the fees paid by DCIL for the software license do not constitute royalty. The Tribunal allowed the ground raised by the assessee, stating that the license fees are not taxable as royalty in India.

4. Business Connection under Section 9:
The CIT(A) held that DCIL constitutes a business connection under Section 9 of the IT Act, 1961, for sales of raw materials and CKD units. The Tribunal, following its consistent decisions, held that DCIL does not constitute the assessee's business connection in India. The Tribunal reiterated that the sale of raw materials/CKD units to DCIL does not result in any income accruing or arising to the assessee in India. Therefore, the income from such sales is not liable to tax in India.

5. Applicability of Interest under Section 234B:
The CIT(A) held that interest under Section 234B is not chargeable as the assessee's income is subject to tax deduction at source under Section 195. The Tribunal, referring to its decision for AY 2003-04, stated that the charging of interest under Section 234B is consequential. The AO was directed to calculate the interest accordingly, and the ground raised by the revenue was allowed for statistical purposes.

Conclusion:
The Tribunal allowed the grounds raised by the assessee regarding the non-attribution of profits to DCIL's activities and the classification of license fees as non-royalty. The grounds raised by the revenue were dismissed, except for the issue of interest under Section 234B, which was allowed for statistical purposes. The Tribunal's decisions were based on consistent rulings in the assessee's own case for previous assessment years.

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