TMI Blog2019 (11) TMI 1580X X X X Extracts X X X X X X X X Extracts X X X X ..... ised in this application. Moreover, the contention of the revenue also was that this is not a case of a service PE but only a fixed place PE, which we have already negated earlier. Further, Article 5(9) of India-Japan DTAA stipulates that the mere presence of the subsidiary of a foreign entity in India shall not by itself constitute such subsidiary as a PE of a foreign entity. The fact that the subsidiary has its own corporate personality and is a separate legal entity cannot be overlooked. Even if the holding company exercises acts of control over its subsidiary by getting periodical reports, having review meetings, discussion about achievement of targets etc. does not dilute the separate legal identity of the subsidiary. It is unrealistic to expect that a subsidiary will keep off the clutches of the holding company and conduct its business independent of any control and assistance by the parent company. As already discussed earlier we have no evidence of the subsidiary having undertaken any activities for and on behalf of the parent company. Offshore supply of raw material/components/capital goods and CR-V cars - Title to the Parts supplied by the applicant would be transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) in India by reason of its business transaction and related activities with Honda Siel Cars India Limited ('HSCI'), under the provisions of India-Japan DTAA. 2. The amounts received/receivable by the Applicant from HSCI as a consideration for offshore supply of raw material/components/capital goods and CR-V cars would not be liable to tax in India under the provisions of the Act and India-Japan DTAA subject to verifications as mentioned in para-37 of the ruling. 3.Because of our answer to question No. 1 and 2, the payment to be made by HSCI towards the offshore supplies of Parts made by the Applicant will not be subjected to withholding of tax under section 195 of the Act. - AAR No. 1100 of 2011 - - - Dated:- 23-10-2019 - Mrs. Ranjana P. Desai, Chairperson AND Narendra Prasad Sinha and Ramayan Yadav, member For the Applicant : Percy Pardiwala, Sr. Counsel, Sanjeev Jain, Ms. Meeta Gupta and Keshav Bansal, CA's For the Respondent : G.C. Srivastava, Mayank Patawari, Suvinay Kumar Dash, Adv. and Ratan Kumar Yadav RULING NARENDRA PRASAD SINHA, MEMBER 1. Honda Motor Company Limited ( the applicant or Honda ) is a corporation establishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r models in India on cost insurance basis (C I), wherein the title and risk in goods gets transferred at the port of delivery. In addition HSCI also imports cars (Honda CRV) as a completely built up unit from the applicant on principal to principal basis. Further, certain capital goods were also sold by the Applicant to HSCI on C I basis. It is in connection with this third contract that the applicant has filed the present application seeking advance ruling u/s 245(Q) (1) of the I.T. Act, 1961 on the following questions-: 1. On the facts and circumstances of the case and in law, whether the Applicant i.e. Honda Motor Co., Ltd. would be considered to have a permanent establishment ('PE') in India by reason of its business transaction and related activities with Honda Siel Cars India Limited ('HSCI'), under the provisions of India-Japan DTAA? 2. On the facts and circumstances of the case whether the amount received/receivable by the Applicant i.e. Honda Motor Co., Ltd. from HSCI as a consideration for offshore supply of raw material/components/capital goods and CR-V cars would be liable to tax in India under the provisions of the Act and India-Japan DTAA? 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deputation with HSCI. Amongst ex-patriate employees some are holding senior management positions in HSCI, including the Managing Director (MD) of HSCI and also some Division Heads. The MD of HSCI is also an operating officer of Honda and visits Japan in this capacity to attend the meeting of Directors of Honda Group Companies. It was clarified that the role of the Managing Director as an operating officer of Honda does not have any relation to supply of goods by the applicant to HSCI and does not have any implication on taxability of the applicant in India. HSCI withholds tax on the entire salary payment made to ex-patriate employees. However, the applicant does not cross charge to HSCI the salary cost of such ex-patriate employees which has been paid overseas. 7. It was explained that as per India-Japan DTAA a foreign entity can constitute a PE in India, only if it has a fixed base of business in India through which the business activities of such foreign company are carried out in India. It was explained that the applicant does not have any such fixed place of business in India through which its business activities were carried out. It was further submitted that as per Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side India and only 20-25 % of total raw material and component was sourced from the applicant. The applicant does not have any premises at its disposal in India and the technicians/experts visit India as per specific request of HSCI and render technical training/services without getting any designated place in the office/factory premises of HSCI. Further, no business activity of the applicant was carried out in India. It was further submitted that activities of HSCI do not constitute Agency PE of the applicant in India, as HSCI was not an agent on behalf of the applicant. The applicant's employees were employee of HSCI during their deputation period and work under control and supervision of HSCI. Therefore, they cannot be held to be carrying out any business activity of the applicant in India. Accordingly, it was submitted that the applicant does not have any PE in India. Revenue's submissions 9. The Revenue, represented by Mr. G C Srivastava, Special Counsel, submitted that while a subsidiary cannot be regarded as a P.E. of the parent under normal circumstances, in this case the survey conducted at the premises of the subsidiary HSCI has thrown ample proof that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvisory heads in Japan or Thailand. They were paid bulk of their salary by Honda, Japan and the Indian company was called upon to bear only lodging, transport and other local expenses apart from a small amount per month which was just adequate to sustain these employees with their day to day expenses in India. The Indian subsidiary did not reimburse such payments and the major part of salary was not only paid but borne by the parent company. The argument that the parent company was not charging back major part of the salary in order to provide financial support to the Indian Company was highly fallacious. It was submitted that the Parent can support the subsidiary either through equity or debt. However, if no distinction is kept between the financial liabilities of the parent entity and that of the subsidiary, it impinges upon the corporate veil which separates the subsidiary from its parent. Further, all the employees of Honda, Japan had lien over their employment with Honda, Japan and they were assigned the jobs in India for a specific period by either the Head Office or the Regional Offices of Honda. The Parent company or the Regional Headquarter Office decided as to how long an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that these ex-patriate employees seconded by the applicant constituted a P.E. under Para (1) of Article 5 of the DTAA. These employees who were under the employment of the applicant and being paid major component of their salary for the entire part of their tenure including the bonus for their performance by the applicant, had a fixed place of business at the premises of the Indian subsidiary and they were doing business functions for and on behalf of the applicant and, therefore, their activities in India would constitute a Fixed Place P.E. for the applicant. These employees represented the applicant in India and they constituted a virtual projection of the applicant. The Indian subsidiary company, HSIL, was rendered or relegated to the position of a Branch of the applicant. If despite its legal corporate status, the Indian subsidiary, in reality and in substance, assumed the character of a branch office, it definitely constituted a P.E. of the applicant Company in India. 13. According to revenue these employees of Honda, Japan were not only controlling and supervising the operations of the Indian company, but they were also carrying out the business functions of the Parent c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and risks of the applicant had been taken into consideration while determining such a price. The revenue relied upon the decision of Hon'ble Supreme Court in the case of Formula One World Championship reported in (394 ITR 80) for the legal framework for the determination of P.E. under Article 5(1) of the Indo-Japan DTAA. The revenue submitted that once it is found as matter of fact that the foreign company had P.E. in India, then the attribution of profits was altogether a separate exercise and the foreign company would be chargeable to tax in India only in respect of profits attributable to its operations in India. Rebuttal of the Applicant 15. The applicant has filed a detailed point to point rebuttal of the issues raised by the revenue. The Ld. Counsel of the applicant strongly denied the allegation of the revenue that the applicant had a fixed place of business in India through which its business was either wholly or partly carried out, so as to constitute a PE in India. It was reiterated that the applicant had neither any fixed place of business nor any place was at its disposal for use. The deputed expatriate employees were working as employees of HCIL and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier entities was done by HCIL and the parts were imported from the entity offering the least cost on competitive basis. In this regard, specimen copy of cost comparison sheet was filed by the applicant. 18. As regards warranty claims it was submitted that HCIL discharges warranty claims after sale on its own account and was not working as an agent of the applicant. Since the CRV were purchased by the subsidiary from the applicant, they give warranty to HCIL. In this regard, reliance was place on the statement of Mr. Morisawa who had explained that where there were defective parts observed in any car, the dealer replaces those parts on the complaint of the customer and sends the bill to HCIL who in turn makes payment of the bills and recovers the warrant expenses from the respective suppliers of those parts. 19. The applicant strongly denied that the applicant had any PE in India. It was submitted that the onus of establishing the existence of PE was on tax authorities as held by the Delhi High Court in the case of CIT v. Mitsui and Co. Ltd. (399 ITR 505) and that the tax authorities had completely failed to discharge this onus. The applicant submitted that the lien of the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State. 5. Notwithstanding the provisions of paragraphs 3 and 4 an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in that Contracting State for more than six months in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State. 6. Notwithstanding the provisions of the preceding paragraphs of this article, the term 'permanent establishment' shall be deemed not to include : (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E. in Article 5(1) of India-Japan DTAA postulates two conditions to be fulfilled (i) the existence of a fixed place of business, and (ii) the business of an enterprise is wholly or partly carried out in India through such fixed place. The questions that is required to be decided in this case is whether the expatriate employees of HSCI seconded by Honda constitute the existence of fixed place of business and, if yes, whether activities undertaken by HSCI through its expatriate employees will also fall within the ambit of the expression the place through which the business of an enterprise is wholly or partly carried out in Article 5(1). 22. The primary facts of the case are not in dispute. The applicant, Honda Motors Limited, is a parent company located in Japan and the subsidiary HSCI is operating in India. The revenue's case is that HSCI does not function as an independent corporate entity and the business functions of the parent company in Japan are carried out in India through the expatriate employees of HSCI. It is contended that HSCI serves as a fixed place of business through which the business of Honda Japan is being carried out. The entity HSCI is acting more like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Statement of Sh. H. Murai Harada, VP Director (Manufacturing) of HCIL Qn. How did you come to India and who posted you to India? Ans. At the instruction of Mr. Ike, President, M/s Asian Honda Co. Thailand. It was not through any interview process but was an order. Qn. What is the process of posting in Honda Motors and what is the structure in Honda Motors? Ans. It is decided by senior management of Honda Motor Co. and I am not aware about my postings. Qn. What services rendering to Honda Motor Co. Ltd. Japan for which you are getting salary from them? Ans. We are Honda Motor Co. Ltd. Japan employees and continued to be their employee while working in India. I get salary from Honda Motor Co. Ltd. Japan because I am their employee. The contract with Honda Motor Co. Ltd. Japan, is still valid. Qn. How much salary you are getting in India as well as in abroad? Ans. I get salary of ₹ 66000/- p.m. in India and 835000 Japanese Yen. Qn. .Also let me know the procedure you underwent for the job? Ans. . I was told by Asia Oceania Regional Head of Honda Group Mr. Ike. I did not know the procedure of my appointment in HCIL India. I only remember I g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard? Ans. Four times instead of somebody deciding we receive meeting notices and based on that I make my plans. The first visit was made to Japan in the end of April to participate in the duty evaluation at General Manager level. This was in the capacity as Honda Motor Operating Officer. This was to evaluate the duty performance of the Honda Motor Global employees at GM level where the top management from all the department like marketing and production, admin etc participate and make multiple cross evaluation. I was there as a evaluator of the performance of GM from all over the world including India. There are approx.. 30 evaluators. The next visit was also not as a president of HSCIL, but as an employee of Honda Motor Co. Ltd. Japan. Third visit was to participate in AGM as an operating officer of Honda Motor Co. Ltd. Japan. The last visit was to Japan last week to participate new model evaluation meeting. This time I went as HSCIL President. All my visits to abroad were paid by HSCIL including the visits where I went as an operating officer of Honda Motor Co. Ltd. Japan. Qn. Do you report to Honda Motor Co. Ltd Japan Marketing (Overseas Export sales)? Ans. I do not kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. So I have joined on the instruction of Mr. Urakami, I do not have any letter. Statement of Sh. Shigeru Yamazaki Q.6 Please explain the procedure you underwent for your appointment in this company? Ans. Regarding the appointment in HCIL I only know that my boss Mr. Kobayashi who is President of Asian Honda Motor Company Thailand where I was working under him directed me to join HCIL in India. Q.7 What were the instructions of Mr. Kobayashi? Ans. I was told that the product line of Honda cars is very weak in India and I have to strengthen the line up. I would have to report to Mr. Kanayama, President and CEO-HCIL. Q.24 For how long you were asked to stay in India initially? Ans. I was not informed for how long I will have to stay in India. Nor do I know now for how long I will be staying here in India. Statement of Sh. H Kanayama President and CEO, HCIL Q4 Let me know the procedure you underwent for the job? Ans. I was appointed by Honda Management of Honda Motor Co. Ltd. Japan. Mr. Kobayashi who is COO of Asia Pacific Region of Honda Motor Co. Ltd. He is also the managing officer of Honda Motor Co. Ltd. He instructed me to go to HCIL, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may import more inventories from Japan. We send the reports periodically on the operations to the Head Office. Q. How the pricing of the product for import and for sale is determined by whom? Ans. Our selling price is set by ourselves. Import prices are set by HM, Japan. 24. It is evident from the above statements that the Indian subsidiary HSCI had a minimal role in mode and manner of selection and placement of the expatriate employees of the parent company for their assignments in India. The expatriate employees came to serve in India on the instruction/directions of their supervisory heads in Japan or Thailand and the Indian subsidiary had virtually no role in their selection process. The expatriate employees were paid bulk of their salary by Honda Japan and they retained lien over their employment with Honda. They were assigned the jobs in India for a specific period either by the Head office or the regional office of Honda and their period of stay in India was also decided by the parent company or the regional headquarter. Thus, the appointment and transfer of the expatriate employees was regulated by Honda Japan or its regional headquarters. The bulk of the salary of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by revenue that the expatriate employees were not only controlling and super-visioning the operations of Indian companies but were also carrying out the following business functions of the parent company: (i) Conducting market surveys to explore business opportunities in India. (ii) Supervision, maintenance, development and promotion of Honda brand in India. (iii) Negotiating and concluding the price at which cars and spare parts are to be exported to the Indian company and the import of the same by the Indian company. It may be emphasised here that in their capacity as Heads of various divisions of the Indian company, these employees represented both the entities involved in the transaction. The contract for import by one and export by the other was both getting finalised by persons who were representing the two entities who were supposed to be distinct and independent in their decision making. (iv) Looking after every aspect of foreign operations of the Parent company in India. (v) Undertaking post sale functions in respect of CRV cars on behalf of HM, Japan. 27. We have carefully considered the submissions of the revenue and the materials and evidences broug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted from the entity offering the least cost on competitive basis. In view of these evidences the allegation of the revenue has no substance. It was explained that the orders were placed by HCIL at a global portal through Global Logistic Operation Systems, an online system established by the applicant. If the expatriate employees had placed order on the global portal for purchasing goods from the applicant, they do not become an extension of the applicant. The placing of order was done on behalf of HCIL only. The revenue has not come with any evidence in support of the allegation that the price negotiations on behalf of the applicant was done by the expatriate employees. A survey operations u/s 133A of the Act was conducted by the revenue on the premises of HSCI twice, the primary purpose of which was to collect evidences. As the revenue has been unable to lay hands on any concrete material which impacts on the veracity of applicant's version of the facts and get hold of any incriminating evidence, we find no basis to accept the contention of the revenue that the expatriate employees were functioning in dual roles. 30. The revenue has pointed that these expatriate employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds the holding company. 33. For the reasons as above, we are of the considered opinion that no business of the applicant was conducted through the expatriate employees working with the subsidiary HSCI in India. As the condition of carrying on of the business of the enterprise is not fulfilled, it cannot be held that the applicant had a PE under Article 5(1) of DTAA, even if it had a fixed place of business in the form of expatriate employees. 34. The reliance of the revenue on the decision of this Authority in the case of AB Mauritius (supra) is found to be misplaced. In that case the parent had acted and taken decision on behalf of the subsidiary and, therefore, the corporate veil between the company's subsidiary and parent was torn by the conduct of the group. In the present case, we have no evidence that the subsidiary HSCI was acting as an agent of the parent or that the parent had taken all the decisions on behalf of the subsidiary. Further, we have no evidence in this case to establish that the subsidiary's decision making was fully subordinate to the holding company or that the subsidiary's Executive Directors were no more than puppets. No evidence has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase contracts (hereinafter referred as Parts) from time to time. It was stipulated in the said Memorandum that these Parts will be sold at prices on FOB port of shipment in Japan basis in case of delivery by sea or on FCA place of delivery in Japan basis in case of delivery by air; plus cost of insurance for transportation from the port of shipment/delivery to Nava Sheva/Delhi, India. The payment of the price of the parts delivered was to be made via telegraphic transfer in Japanese Yen (JPY) to the bank account of the seller. The Article 8 of the contract regarding transfer of title and ownership stipulated as under: Title to and ownership of the Parts sold to BUYER hereunder shall pass to BUYER at the moment when the Parts shall have effectively passed the ship's rail at the port of delivery in case of delivery by sea or when the Parts shall have effectively made into the charge of an air carrier or its agent in case of delivery by air referred to in Article 6.1 hereof. The responsibility for, and the risk concerning, the Parts sold to BUYER hereunder shall be transferred to BUYER simultaneously with the passing to BUYER of the title to and ownership of such Parts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out in India, only that part of income which can be reasonably attributed to the operations in India, would be deemed to accrue or arise in India. The Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT (supra), in respect of offshore supply had held as under: Re : Offshore Supply : (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular state determines its capacity to tax an event, has to be followed. (4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. In view of the clause (a) of Explanation 1 to Section 9(1)(i) and respectfully following the decision of the Apex Court in the case of Ishikawajim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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