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2014 (10) TMI 943 - AT - Income TaxArm’s length price adjustment - commission /service fees segment of assessee’s activities - Held that:- We deem it appropriate to uphold the grievances of the assessee in principle, as the terms above, delete the notional adjustments by TPO’s adopting cost base of the AEs in assessee’s ALP determination, and remit the matter to the file of the TPO for the necessary factual verifications on impact of this corrections. Accordingly, the matter stands restored to the file of the TPO in this respect also. Disallowance under section 40(a)(i) - payments made, without deduction of tax at source, to the foreign entities which did not have any permanent establishment in India - Held that:- We find that once it is an undisputed position that the recipient entities did not have any permanent establishment in India and the transactions in question, as in these cases, are of purchases simplictor, the payments made to entities cannot give rise to any income taxable in India. It is so for the reason that it is only when the recipient has a PE in India under article 5 of India Japan tax treaty, it’s income from trading can be brought to tax in India only when such an income is “directly or indirectly” attributable to such a PE.Once we come to the conclusion that the assessee did not have any obligation to deduct tax at source from these payments, the very foundation of impugned disallowances ceases to hold good in law. By no stretch of logic, therefore, payments made to these entities can be disallowed under section 40(a)(i) on the ground that taxes have not been deducted at source from these payments. Disallowance of payments under section 40(a)(i) made to the foreign entities, without deduction of tax at source, which may not have any permanent establishment in India but there is no material to establish that fact and there is also no material on record to show that revenue’s claim of their having PE in India is negated by the judicial authorities - Held that:- Normal purchases from non-resident companies based in Thailand, Singapore and USA, as these vendors are, cannot give rise to taxability of income from such purchases, in the hands of the non-resident vendor, unless such non-resident companies have a permanent establishment in India. The onus to show that a foreign company has a PE in India is on the revenue and when that onus is not discharged, there cannot be any occasion to hold taxability of business profits of those entities in India. It is also well settled legal position that when the income embedded in the payments in question is not held to be taxable in India, there is no requirement to deduct tax at source under section 195. There is no failure on the part of the assessee in deducting tax at source under section 195 and there is no cause of action for disallowance under section 40(a)(ia). In view of these discussions, we deem it fit and proper to direct the Assessing Officer to delete the impugned disallowance under section 40(a)(ia) in respect of payment to Mitsubishi Corporation Singapore, MC Tubular Inc USA, Thai MC Co Ltd, Thailand, and Peto Diamond Corporation, Japan. Disallowance under section 14A - Held that:- It is not open to the Assessing Officer to make the aforesaid disallowance under section 14A as admittedly there was no tax exempt in this assessment year. For this short reason alone, the grievance of the assessee must be upheld. The impugned disallowance is thus deleted.
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