Delhi Tribunal rules that mere selling and marketing activities does not constitute dependent agency permanent establishment (DAPE) in India

In the case of Krones Aktiengesellschaft^[1], the Taxpayer, a German Company, was engaged in the business of providing products and services ^[2] from outside India pertaining to beverage filling and packaging technology to various customers in India. Its wholly owned subsidiary (WOS) in India (Indian company or ICo) was primarily engaged in the trading of machinery spares, undertaking engineering installation and commissioning projects, providing after-sales services and marketing of products of its associated enterprises (AEs).

ICo’s transfer pricing study report showed that ICo procures machinery spares from its AEs and sells them to its customers along with undertaking engineering, commissioning and after-sales services. ICo is wholly dependent on the use of intangibles owned by the Taxpayer, is the sole selling and marketing agent of the Taxpayer’s products. Further, ICo co-ordinates with the delivery and payment with the customers of the Taxpayer in return for a commission. 

Tax authority contended that ICo created a DAPE of the Taxpayer in India on the grounds that ICo was economically dependent on the Taxpayer, habitually maintains its stock inventory, markets its goods and habitually secures orders for the Taxpayer in India. 

The Tribunal held that ICo was not DAPE of the Taxpayer in India due to the following reasons:

• ICO was not economically dependent on the Taxpayer as ICo’s commission income was only 11.5% of its total revenue and the balance revenue is from its other sources. Further, ICo maintained its own trading inventory.
  
• Terms of the agreement between Taxpayer and ICo showed that ICo did not carry out any manufacturing or processing activity in India using intangibles of the Taxpayer. The tax authority’s assumption that ICo uses Taxpayer’s intangibles for manufacturing and is thus dependent is factually incorrect. 
• Contract of supplies of machinery were directly negotiated, concluded and signed by the Taxpayer with Indian customers based on referral made by ICo. ICo was only required to coordinate the delivery and payment with the customer with respect to the order, for which it gets a commission.
• ICo was not habitually securing and/or concluding order on behalf of the Taxpayer. Merely undertaking marketing activities by meeting customers does not constitute habitually scuring/concluding orders an enterprise to be considered as habitually securing orders wholly or almost wholly for the other enterprise. It is essential that the enterprise frequently  accepts orders on behalf of the other enterprise or takes action that gives buyers the basis for reasonable belief that such person has authority to bind the other enterprise.
• Reliance was also placed on the Supreme Court ruling in the case of Morgan Stanley [292 ITR 416], to hold that once arm's length remuneration is paid to ICo, nothing further survives for attribution in the hand of the Taxpayer.

[1] TS-1015-ITAT-2022(DEL), Assessment Year (AY) 2011-12, Order dated 30 December 2022
[2] It plans, develops and manufactures, supplies and installs machinery and complete systems for filling and packaging for beverage production