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TMI Blog2015 (5) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transaction in dispute is "Service fee received" amounting to Rs. 2,66,29,622/-. In order to demonstrate that its international transactions were at Arm's Length Price (ALP), the assessee employed the Transactional Net Margin Method (TNMM) as the most appropriate method. Certain comparables were chosen. By using the multiple-year data of the comparables, the assessee tried to show that its international transactions were at ALP. The TPO rejected the assessee's use of multiple-year data and restricted it to the current year alone. While scrutinizing the international transaction of `Service fee' received amounting to Rs. 2.66 crores, the assessee was called upon to state the cost of goods in the hands of the associated enterprises (AEs) on which such service fee was received. The assessee submitted the cost of such goods at Rs. 6,65,58,05,980/- in the hands of its AE, on which it had earned the above referred Service fee. The TPO proposed to treat the `Service commission' segment as equivalent to the Trading segment. The assessee's cost base of Service Fee segment was accordingly worked out at Rs. 6,82,08,06,478/-, by clubbing the cost of goods amounting to Rs. 665.58 crore i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id not purchase and sell the goods under the `Service fee' segment, has not been disputed by the TPO. There is no finding given by the Officer that the assessee actually undertook trading but wrongly gave it a colour of agency in its books of account. Once the position is that the assessee sold the goods as an agent of its AEs and simply earned commission, how the cost of such goods in the hands of the AE can be taken into consideration and the entire transaction be considered as that of sale and purchase, is anybody's guess. We do not subscribe to the view canvassed by the TPO in this regard. By equating commission business with the trading business, the TPO has ventured to recharacterize the commission transaction as a trading transaction, which is patently unacceptable. The Hon'ble jurisdictional High Court in CIT VS. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi) has held that the authorities should not disregard the actual transaction or substitute other transactions for them. Examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken. Further, their Lordships have carved out two exceptions to the aforesaid principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction of receipt of Service fee. As such, we set aside the impugned order on this score and remit the matter to the TPO/AO for a fresh determination of ALP of the international transaction of receipt of `Service fee' as per law after allowing a reasonable opportunity of being heard to the assessee. In doing so, the assessee will initially propose comparable instances having undertaken activity similar to it under this segment. Then it will be for the TPO to decide on their comparability or otherwise and determine the ALP of this transaction as per law. We further add that in doing so, the TPO will consider the figures of the comparables for the current year alone and not the multiple-year data as has been held by the Hon'ble jurisdictional High Court in ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT (Del) vide its judgment dated 27.4.2015. 7. The next ground of the appeal is against the disallowance of Rs. 70,37,18,502/- made under section 40(a)(i) of the Act. 8. The facts apropos this ground are that the assessee made purchases from its AEs as under : - S. No. Name and Address of the AE Description of transaction Amount of purchases (Rs.) 1 Asia M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on Instruction dated 26.02.2014 issued by the CBDT and thus computed the amount of disallowance under section 40(a)(i) at Rs. 70,37,18,502/- by applying gross profit rate of 6.54% (as applied for the assessment year 2009-10) on total purchase transactions of Rs. 2152.04 crore and attributing 50% of the same to the business operations of such companies in India. This resulted into an addition of Rs. 70.37 crore, against which the assessee has come up in appeal before us. 10. We have heard the rival submissions and perused the relevant material on record. The AO has made disallowance u/s 40(a)(i) of the Act in respect of purchases made by the assessee from its seven AEs to whom payments were made without deduction of tax at source. First category consists of purchase transactions entered with its six related parties situated in Japan, Thailand and Germany. The case of the assessee is that these non-resident AEs did not have any permanent establishment during the year in India and, hence, income arising from sale of goods to India could not be charged to tax under the Act in their hands. Second category comprises of items at serial nos. 3 and 4 of the above Table which are, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Thus deductibility of tax at source pre-supposes the chargeability of income under the Act and disallowance u/s 40(a)(i) follows from non-deduction/payment of tax at source by the person responsible on such payments. In other words, unless income from the transaction is chargeable to tax under the Act in the hands of non-resident etc., there can be no question of deduction of tax at source and the consequential disallowance u/s 40(a)(i) of the Act cannot follow. 13. It, therefore, becomes essential to first determine if the nonresident AE sellers were liable to tax in India for the goods sold by them to the assessee in India. As against a resident chargeable under the Act in respect of his world income, a non-resident as per section 5(2) of the Act is chargeable only in respect of income from whatever source derived, which is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India. Section 9(1) of the Act provides that all income accruing or arising, wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quire examination as to whether such PE was involved in specific transactions between non-resident and an unrelated Indian enterprise. In case there is no PE of the foreign enterprise in India and the goods are directly sold offshore by such non-resident enterprise without performing any operations in India, then, no income can accrue or arise or deemed to accrue or arise to him in terms of section 9(1)(i) of the Act. 14. Reverting to the facts of the instant case, we find that out of the assessee's import transactions with six AEs, three are with Mitsubishi Shoji Light Metal, Japan, Thai MC Company Ltd., Thailand and Petro Diamond Corporation, Japan. The assessee made purchases from these three AEs in the immediately preceding assessment year and the Tribunal was pleased to hold that in the absence of any PE of these three enterprises in India, the provisions of section 40(a)(i) were not attracted. The AO, while finalising the assessment for the current year, has noticed on pages 52 and 54 of his order that the assessee made identical reply which was made during the course of assessment proceedings for the assessment year 2009-10. In rejecting the assessee's contention put forth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f-shore sales made by them to the assessee in India would not generate any income chargeable under the Act to the AEs from such sale transactions. 15. Now we take up the second category of purchases made from MCJ, for which the ld. AR claimed the benefit of nondiscrimination clause of the DTAA to bolster his submission of non-applicability of the provisions of section 40(a)(i) of the Act. The sum and substance of his arguments is that total purchases amounting to Rs. 2141.78 crore were made by the assessee from MCJ including its overseas branch office and non-discrimination clause under Article 24 of the DTAA applies warranting nondeduction of tax at source. Au contraire, the ld. DR put forth that the case of the assessee is covered under Article 9 of the DTAA and for that reason, the application of Article 24 is ousted. 16. In order to appreciate the above rival contentions, it would be apposite to consider the mandate of Article 24, the relevant part of which, is as under:- `ARTICLE 24 - 1. Nationals of a Contracting State shall be subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.....'. 18. The case of the ld. AR is that the assessee is entitled to the benefit of Article 24 in terms of para 3. A perusal of this para transpires that except where the provisions of Article 9 etc. apply, interest, royalties and other disbursements paid by an Indian enterprise to a Japanese enterprise, shall, be deductible in determining the taxable profits of the Indian enterprise under the same conditions as if they had been paid to an Indian resident. Simply stated, para 3 of Article 24 provides that any payment made by an Indian enterprise to a Japanese enterprise shall, for the purposes of determining the taxable profit of an Indian enterprise, be taken up under the same conditions as if the payment had been made to an Indian resident and not to a nonresident. In simple words, for the purpose of computing the taxable profit of an Indian enterprise, the provisions of the Act shall apply on a transaction with a Japanese enterprise as if it is a transaction with an Indian enterprise. If the transaction with a Japanese enterprise entails some adverse consequences in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue in making inoperative the otherwise applicability of para 3 of Article 24. The opening part of para 3 provides that `Except where the provisions of article 9 .... apply'. Then it talks about the application of non-discrimination as discussed above. This shows that the provisions of Article 24(3) shall be restricted to the extent of applicability of Article 9. In other words, whatever has been provided in Article 9 shall remain intact and will have superseding effect over the mandate of Article 24(3). The contention of the ld. DR that once Article 9 applies, then the application of Article 24(3) is thrown out, is not wholly correct. The writ of Article 9 does not stop the application of Article 24(3) in entirety. The overriding effect of Article 9 over para 3 of Article 24 is limited to its content alone. In other words, the mandate of Article 24 applies save and except as provided in Article 9 etc. It does not render Article 24(3) redundant in totality. A conjoint reading of these two Articles brings out that if there is some discrimination in computing the taxable income as regards the substance of Article 9, then such discrimination will continue as such. But, in so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is distinct from any transfer pricing adjustment. Article 24 read with Article 9 albeit prohibits the deletion of enhancement of income due to the making of transactions at ALP, but permits the deletion of enhancement of income due to disallowance u/s 40(a)(i) of the Act. Be that as it may, we find that the TPO has not proposed any transfer pricing adjustment in respect of `Trading segment' of the assessee under which the purchases in question were made. The addition on account of TP adjustment is in respect of `Service fee received', which was earned by the assessee without making purchases of the goods from its AEs. As disallowance u/s 40(a)(i) is in respect of purchases made from the AEs, which is in no manner connected with the Commission segment, we hold that the assessee is entitled to the benefit provided by article 24 of the DTAA and cannot be visited with the disallowance u/s 40(a)(i) of the Act. 21. The foregoing discussion divulges that there existed no liability on the assessee to deduct tax at source from the payments made by it to the above listed seven foreign AEs, either because of non-chargeability of income under the Act from sale of such goods to the assessee o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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