In the case of Exclusive Motors [1] (Taxpayer), an Indian resident company, the Taxpayer was appointed as an exclusive dealer of Bentley cars in India i.e., the Taxpayer would purchase Bentley cars for resale in Indian market. At the time of purchase of cars, customers have an option to buy extended warranty for their cars. If the customer opts to buy an extended warranty, the Taxpayer buys extended warranty from a Bentley-nominated the UK resident company (UK Co) and then sells it to Indian customer.
For purchase of such an extended warranty, the Taxpayer made a payment to the UK Co. However, the Taxpayer did not withhold taxes on such payment on the basis that, under the Indian Tax Laws (ITL), taxes are to be withheld only if the amount paid/credited was chargeable to tax in the hands of non-resident (NR). In this case, the UK Co. did not have a permanent establishment (PE) in India under India-UK double taxation avoidance agreement (DTAA) and, hence, amounts paid to the UK Co. were not taxable in India. Accordingly, there was no obligation to deduct taxes on the payments made to the UK Co.
However, the tax authority contended that the Taxpayer had secured orders and entered into a contract for extended warranty with the Indian customers on behalf of the UK Co. Hence, the taxpayer constitutes a dependent agent PE (DAPE) of the UK Co. in India and accordingly, taxes were required to be withheld on payments made to the UK Co. In the absence of the same, such payments are to be disallowed in the hands of the Taxpayer.
Accordingly, the issue before the Delhi Income Tax Appellate Tribunal (Tribunal) was whether the UK Co. has DAPE in India. While analyzing the issue, the Tribunal noted the following facts:
- The extended warranties are in the nature of security and assurance to customers against any kind of defect/repair after the lapse of original warranty and purely optional in nature. There is no compulsion on the customers to buy the extended warranty.
- If some customers agree for an extended warranty, the Taxpayer purchases such warranty from the UK Co. and resells the same to customers. Technically, the Taxpayer can buy extended warranty from anyone, subject to availability of original Bentley spares and accessories.
- Invoices raised by the Taxpayer on customers and those raised by the UK Co. on the Taxpayer indicated that the price at which the extended warranty is purchased by the Taxpayer from the UK Co. is different from the price at which it is sold to the customers. The Taxpayer independently negotiates a price with the customers.
- The sales invoices raised by the Taxpayer to the Indian customers towards extended warranty are in its own name and does not mention the name of the UK Co.
- The consideration received from the customers towards the extended warranty by the Taxpayer is remitted to the UK Co. after the Taxpayer retains a part of it.
Therefore, it was concluded that the privity of contract is between the Taxpayer and Indian customers, wherein the UK Co. had no role to play. Thus, the Taxpayer did not constitute a DAPE of the UK Co. in India and, hence, there is no requirement to deduct taxes on extended warranty payment made to the UK Co.
