ITAT wants Volkswagen to pay taxes for a six-year-old deal with Nicolas Cage

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ITAT wants Volkswagen to pay taxes for a six-year-old deal with Nicolas Cage

When Nicolas Cage flew down from LA to Dubai in 2014 for the launch of the Audi A-8L facelift model, his host, the German auto giant, Volkswagen had probably not imagined that the deal with the Hollywood actor would come under the glare of Indian tax authorities. To get more latest auto industry news china, you can visit shine news official website.

Six years later a tax tribunal has ruled that the payment of $440,000 by Volkswagen Finance, a Volkswagen arm in India, for the celebrity appearance should be taxed in India.

According to the Income tax Appellate Tribunal (ITAT), a quasi-judicial body, even though Cage is a non-resident and the launch was in Dubai, the event was India-centric, carried out at the instance of Indian entities for advancing their business interests in India, and specifically targeted for Indian customers by way of ‘below the line publicity’ through the Internet, social media, press release and news reports.

The unexpected ruling, say tax practitioners, will have wider implications. “The ruling takes a dynamic view of `business connection’. According to ITAT, due to evolving business models, virtual and intangible business connections are common today and must be recognized even if the law or the jurisprudence may not cover them within scope. This is a futuristic and aspirational approach to interpretation of law,” said Shefali Goradia, Partner – Business Tax , Deloitte Touche Tohmatsu India LLP.

If ITAT’s view is extended to other cases, all payments made by Indian residents would be deemed to be sourced in India and would become taxable in India. At present, such deeming rule is applied only to certain types of income such as interest, royalty or technical service fee. “For artists and entertainers, their income would generally be taxable in India only if their activities are performed in India. This ruling shifts the nexus and source to where the payer is located and ignores the place of performance,” said Goradia.

Thus, any income which arises, directly or indirectly, to a non-resident through or from any ‘business connection’ in India is also chargeable in India. If the judgement prevails, all types of incomes earned by non-residents not having any physical presence in India would become taxable in India. “Applying this stretched logic may mean all cases of commission paid on Indian exports to non-resident agents or all cases of imports of goods, even where title passes outside India, would now become taxable in India. This would unsettle a plethora of well settled cases on the subject,” said Hitesh D. Gajaria, partner and co-head of tax, KPMG India.

An email sent to the company went unanswered till the time of going to Press. ET however learns that Volkswagen is likely to challenge the ruling before the High Court.

Kim Productions Inc, a company incorporated in the USA, facilitated the three–hour appearance of Nicolas Cage who was to be driven into the venue as passenger in the new Audi, chat with the Audi India director and guests, be photographed and interact with select members of the Indian media. According to the Tribunal, once the expenses for holding this event is in connection with business in India, it is only a natural corollary that income from participation to a non-resident has a business connection in India. The very concept of ‘below the line publicity’, said the Mumbai bench of the Tribunal -- comprising vice-president and judicial member Amarjit Singh -- is something quite fundamentally new and none of the judicial precedents cited before them had anything to do with such contemporary instruments influencing customer behaviour.

“The business models are constantly evolving, and as the rapid communication modes such as internet and social media have completely transformed the way businesses communicate, it is time that the law is seen in tandem with the ground realities of the business world,” said the ruling.