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TMI Blog2017 (8) TMI 1535X X X X Extracts X X X X X X X X Extracts X X X X ..... 259,88,03,232 under section 40(a)(i) of the Act while holding that Appellant was required to deduct tax at source of payments made for purchase of raw materials, components etc. from non-residents. 3. That the AO/CIT(A) erred in making/sustaining the addition under section 40(a)(i) of the Act while holding that the provisions of chapter XVIIB of the Act were applicable on such payments. 4. That the AO/CIT(A) erred in law in concluding that there existed a Permanent Establishment (PE)/business connection of Honda Motors, Japan and Asian Honda Thailand, being non-resident companies from whom the Appellant had purchased raw materials, components etc. 5. That the AO/CIT(A) grossly erred in law in relying on statements of expatriate employees recorded during the course of survey proceedings on the Appellant, such statements having been selectively reproduced and relied upon by the lower authorities. 6. That the AO/CIT(A) erred in not correctly appreciating that in view of the non-discrimination clause [Article24(3) of the Indo- Japan Double Tax Treaty] no disallowance could be made in the hands of the Appellant owing to non-deduction of tax on purchase of raw materials, comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. 5. On the facts and circumstances of the case and in law the Ld. CIT(A) has deleting the addition of Rs. 31,80,007/- made by AO u/s 14A. 6. The appellant craves leave to, add to, alter, amend or vary from the above grounds of appeal at or before the time of hearing. 4. Facts in brief of the case are that the assessee company i.e. Honda Cars India Limited (HCIL) is a public limited company registered under the companies Act, 1956 and was incorporated on 05/12/1995. The assessee is a subsidiary of Honda Motors Car Company Ltd., Japan (HMCL). The assessee is engaged in business of manufacture and sale of various passenger cars vehicle in India and outside India. For the relevant year, the assessee filed return of income electronically on 25/09/2010 declaring nil income. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short "the Act") was issued and complied with. The assessment under section 143(3) of the Act was completed on 28/03/2014 at total income of Rs. 1683,05,31,645/- under the normal provisions of the Act, inter alia making following disallowances/additions: S. No. Particulars Amount (in Rs.) 1. Disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materials 193,771 Purchase of Spare parts 22,901 9. American Honda Motor, Co. Inc. Purchase of raw materials 77,60,284 10. Honda Trading Asia Co. Ltd. Purchase of raw materials 35,71,68,651 Purchase of Spare parts 90,47,457 11. Honda Malaysia Sdn Bhd. Malaysia Purchase of raw materials 53,223 12. Honda Trading (South China) Co. Ltd Purchase of raw materials 21,68,55,944 13 Honda Autoparts Manufacturing (M) Sdn. Bhd Purchase of raw materials 3 1,162 Total 1290,26,14,576/- 14. Honda Motor Co. Ltd. Japan Purchase of Cars (CRV) 44,33,42,920 Total 44,33,42,920/- 15. Honda Motor Co. Ltd. Japan Purchase of fixed assets 21,82,996 16. Honda Trading Corp. Purchase of fixed assets 2,79,19,292 17. Honda Trading (Thailand) Co. Ltd. Purchase of fixed assets 1,37,56,478 18 Honda Trading Asia Co. Ltd. Purchase of fixed assets 22,16,405 Total 4,60,75,172/- 19. Honda Motor Co. Ltd. Japan Royalty Payment 159,74,53,887 Total 159,74,53,887/- 20. Honda Motor Co. LtdJapan Technical Guidance Fees 7,87,76.635 21. Honda Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and balance was deleted. The assessee is not in appeal against the amount of Rs. 2,50,17,129/- before the Tribunal. In this manner, the Ld. CIT-(A) reduced the amount in dispute related to disallowance u/s 40(a)(i) to Rs. 1341,70,50,197/-. 6.3 Further, after considering the submission of the assessee and the finding of the Assessing Officer based on two survey operations u/s 133A of the Act, the Ld. CIT-(A) in para 9.4 to para 19 of the impugned order, concluded that out of the total 15 AEs, permanent establishment was not established in respect of the 13 AEs , except two entities namely M/s Honda Motors Japan and M/s Asian Honda Thailand. The Ld. CIT- (A) held that those 13 AEs were not chargeable to tax in India being foreign companies having non-resident status and having no business connection or PE in India. The disallowance in respect of the two entities now left was of Rs. 1259,88,03,232/-. In para-19 to 30 of the impugned order, the Ld. CIT-A discussed as why the said amount is disallowable under section 40(a)(i) of the Act. The main reasons for upholding the disallowance by the Ld. CIT-(A) are as under: 1. The payment made to Honda motor Japan and Asia Honda Thailan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Double Tax Avoidance Agreement (DTAA) between India and Japan, following the decision of the jurisdictional High Court in the case of CIT versus Herbalife International India Private Limited, 384 ITR 276 and deleted the disallowance under section 40(a)(i) of the Act. He submitted that in the year under consideration the disallowance has been made on similar grounds and therefore the disallowance of Rs. 630,85,67,113/- for payment to Honda Motor Co. Japan, also needs to be deleted. He submitted that in the case of Asian Honda, Thailand for assessment year 2010-11, the DRP has held that there did not exist any PE of said non-resident company in India and the Revenue has accepted that finding by not filing an appeal against the said decision of the DRP. Accordingly submitted that no portion of the income of the Asian Honda Thailand arising from sale of raw material, spare parts etc was liable to tax in India following the decision of the Tribunal in assessment year 2009-10 , and therefore disallowance for payment of Rs. 629,02,36,119/- made to Asian Honda Thailand, also need to be deleted. 8. The Ld. counsel also submitted that the coordinate bench noted that the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of inadequate Inquiry or defects, non-consideration of the facts and that the issue should be set-aside to the file of the AO for ascertaining the correct facts. For this proposition reliance was placed on the judgment of the Hon'ble High Court in the case of CIT Vs. Jansampark Advertising and Marketing(P) Ltd., (2015) 56 taxmann.com 285(Delhi). (f) that under section 40(a)(i) of the Act, all the payers whether residents or nonresidents are subjected to the disallowance for non-deduction of the tax and therefore, there was no discrimination qua the payer. (g)that the assessee in current proceedings, is a domestic company and resident of India, whereas the clause of nondiscrimination available in the DTAA, can be can be raised by the payee and not by the payer. In view of the arguments, he submitted that nondiscrimination clause cannot be invoked in the case of present assessee. (h)that the order of the Hon'ble Delhi High Court in Herbalife (supra) relied upon by the assessee does not deal with the provision of section 40(a)(i) as amended by Finance Act (No.2) 2004, w.e.f., 01/04/2005. 10. In rejoinder, the Ld. counsel of the assessee submitted that all the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o two entities only i.e. HMCJ and AH, Thailand. 13. It is pertinent to mention here that the issue in dispute has been adjudicated by the coordinate bench of this Tribunal in assessee's own case for assessment year 2009-10 in ITA No. 2056 and 3229/Del/2014. The disallowance under section 40(a)(i) in assessment year 2009-10 has been deleted by the Tribunal in paras 13 to 20 of the order. The Tribunal held that in case of Asia Honda Thailand, the dispute resolution panel (DRP) held that the non-resident company had no PE in India and accordingly, the Tribunal reversed the finding of the Ld. CIT-(A) that Asia Honda Thailand had a PE in India, and held that section 195 and consequently 40(a)(i) were not applicable related to the payment to Asia Honda Thailand. Regarding the payment to Honda Motor Co. Ltd Japan, the Tribunal observed that this issue of PE was not adjudicated by the Assessing Officer of that company and therefore disallowance u/s 40(a)(i) of the Act was adjudicated by the ITAT invoking non discrimination clause of the DTAA. The Tribunal deleted the disallowance related to payment to Honda Motor Japan applying the proposition of law laid down by the Hon'ble Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A), he held that the term used in Article 24(3) related only to royalties, fee for technical services, interest and the term 'other disbursements' necessarily related to payments in the same generic and thus the payments for purchases are not covered by Article 24(3) and hence the benefit of DTAA cannot be given. 16. We find that this issue is no more res integra. The jurisdictional High Court in the case of CIT vs. Herbalife International India Pvt. Ltd., judgment dated 13th May, 2016, has, after considering the argument of the intervener, Mitsubishi Corporation, and the provisions of the Indo-Japanese DTAA has on the issue of 'other disbursements' in para 38 to 42, held as follows:- "38. The question that next arises is whether the payment by the Assessee to HIAI qualifies as 'other disbursements' for the purpose of Article 26 (3) DTAA? 39. To recapitulate, the case of the Revenue is that the expression 'other disbursements' should take colour from the context and would apply only to income which is of passive character just like interest and royalties. The Revenue invokes the doctrines of 'noscitur-a-sociis' and 'ejusdem gener ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of Section 37 (1) of the Act but before such payment can be allowed the condition imposed in Section 40 (a) (i) of the Act regarding deduction of TDS has to be complied with. In other words if no TDS is deducted from the payment of FTS made to HIAI by the Assessee, then in terms of Section 40 (a) (i) of the Act, it will not be allowed as a deduction under Section 37 (1) of the Act for computing the Assessee's income chargeable under the head 'profits and gains of business'. 47. Article 26(3) of the DTAA calls for an enquiry into whether the above condition imposed as far as the payment made to HIAI, i.e., payment made to a non-resident, is any different as far as allowability of such payment as a deduction when it is made to a resident. 48. Section 40 (a) (i) of the Act, as it was during the AY in question i.e. 2001-02, did not provide for deduction in the TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of Section 40 (a) (ia) of the Act with effect from 1st April 2005. Then again as pointed out by Mr. M.S. Syali, learned Senior Advocate for the Intervene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides the rationale for insisting on deduction of TDS from payments made to nonresident, the point here is not so much about the requirement of deduction of TDS per se but the consequence of the failure to make such deduction. As far as payment to a non-resident is concerned, Section 40 (a) (i) of the Act as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable profits of the payer. No such consequence was envisaged in terms of Section 40 (a) (i) of the Act as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under Article 26 (3) of the DTAA. 51. The arguments of counsel on both sides focussed on the expression 'same conditions' in Article 26(3) of the DTAA. To recapitulate, a comparison was drawn by learned counsel for the Revenue with Article 26(1) which speaks of preventing discrimination on the basis of nationality and which provision employs the phrase 'same circumstances'. Article 26 (2) which talks of prevention of discrimination vis-a-vis computing tax liability of PEs and employs the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed countries are keen to provide to them. It was further noted that the corresponding loss of tax revenues could be insignificant compared to the other nontax benefits to the economies of developing countries which need foreign investment. The Court felt that this was a matter best left to the discretion of the executive as it is ―dependent upon several economic and political considerations. 55. Consequently, while deploying the 'nexus' test to examine the justification of a classification under a treaty like the DTAA, the line of enquiry cannot possibly be whether the classification has nexus to the object of the 'statute' for the purposes of Article 14 of the Constitution of India, but whether the classification brought about by Section 40 (a) (i) of the Act defeats the object of the DTAA. 56. The argument of the Revenue also overlooks the fact that the condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from that when made to a resident. Under Section 40 (a) (i), as it then stood, the allowability of the deduction of the payment to a non-resident mandatorily required deduction of TDS at the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no specific provision in the Agreement, it is the basic law, i.e., Income Tax Act, that will govern the taxation of income." 58. Further in Union of India v. Azadi Bachao Andolan (supra), after taking note of the decisions of various high courts on the purpose of Double Taxation Avoidance Conventions qua Section 90 of the Act, the Supreme court observed as under: "A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections ‗subject to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the argument of the ld. DR that the conditions stated in Article 24(3) are not satisfied, as provisions of Article 9(1) applies, as the transactions are between AEs and the profits which would, but for those conditions would have accrued to one of the enterprises, but by reason of those conditions have not so accrued, we find that the Transfer Pricing Officer in all these cases has come to the conclusion that the transactions between the Associated Enterprises are at arm's length price. The ld. DR made strenuous and elaborate submissions bringing out certain issues raised by the AO, to persuade us that TPO was wrong in coming to the conclusion that the transactions between the AEs and the assessee are at arm's length. We find that the TPO has passed the order after the surveys were conducted on the assessee. If the AO had certain additional material facts, he could have brought it to the notice of the TPO and asked for a fresh report. In our view, this argument of the Ld. D.R. is erroneous, as the revenue wants to take a stand that the transactions between the assessee and its AE are not at arm's length for the limited purpose of denying the benefit of the nondiscrimin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009-10 and also contested that non-discrimination clause of article 24(3) of the DTAA between India and Japan is not applicable over the assessee and there was no discrimination qua the payer. However, we find that as far as the payment to Honda motor Japan is concerned, the issue in dispute is squarely covered by the decision of the Tribunal in assessment year 2009-10, wherein the Tribunal has followed the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Herbalife(supra). We note that Hon'ble High Court in the case of Herbalife (supra) has also considered the amendment in provisions of section 40(a)(i) of the Act by way of insertion of sub-clause(ia) w.e.f. 01/04/2005. Accordingly, respectfully following the decision of the Hon'ble Delhi High Court and the order of Tribunal (supra), we delete the disallowance in respect of payment to Honda motor Japan. 15. Regarding payment to Honda Asia Thailand in the year under consideration, the assessee contended that no PE has been held by the DRP in the case of non-resident company in assessment year 2010-11 and this fact was not controverted by the Ld. CIT-(DR), thus, following the decision of the Tribunal in assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility. He submitted that the Hon'ble Supreme Court had not given any opinion on the issue of allowability of the running royalty as was the payment in the present assessment year. In the said case the assessment year involved were initial assessment years and in those facts it was held that payments are made for setting up of the plant project for manufacturing of cars and thus the expenditure was in the nature of capital expenditure and not revenue expenditure. In the present case the payment of royalty and lump sum model fee was paid in terms of Technical Collaboration Agreement (TCA) dated 01/04/2005, whereas the payments in the relied upon Supreme Court judgment were made under TCA dated 21/05/1996 entered at the time of setting up/commencement of business of the assessee. 22. The Ld. Counsel for the assessee drew our attention to the para of the Apex Courts judgment where the court had confined itself only to answering the question raised regarding the lump sum payment of US Dollars 30.5 million and not on running royalty- The dispute which has arisen is as to whether the said technical fee of 30.5 million US Dollar payable in five equal installments on yearly basis is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w plant for the first time to manufacture cars. The Delhi High Court specifically noted this fact in para 14 of the judgment. While analysing the agreement in that case which was for providing technical know-how in relation to the product i.e. two wheelers and three wheelers and the purpose was to introduce 'new models' of the said product developed by the Japanese Company, the High Court noted that the agreement specifically recorded that the respondent assessee was already engaged in the business of manufacturing, assembling, selling and otherwise dealing with two/three wheelers and their parts as a joint venture. It referred to the earlier collaboration agreement dated January 24, 1984 and the subsequent amendment thereto which conferred and had granted to the respondent assessee a right and licence to manufacture, assemble, sell, distribute, repair and service two/three wheelers. The aforesaid distinction between the two Agreements has made all the difference in the results." 25. He further submitted that it was evident and apparent that even the Hon'ble Apex Court was of view that where unit was already in existence and the technical know-how was obtained merely to impro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Million (Japanese Yen 200 Million) shall be payable within 60 days after signing of Model Agreement and receipt of the Technical Information necessary for mass production of the Model by the LICENSEE, as per Article 4, and ii) The second and final instalment of JP¥ 200 Million (Japanese Yen Two Hundred Million) shall be payable within 60 days after commencement of Commercial Production of the specific MMC of the products. Provided that not more than one Model Fee for Minor Model Change (MMC) in respect of any Existing Model or FMC Model or New Model shall be payable a during the term of this Agreement. The model fee shall be payable by LICENSEE in currency of Japanese Yen by bank transfer remittance to the bank account designated by LICENSOR. ROYALTY In consideration of the right and license granted to the LICENSEE under Article 2 hereof, the LICENSEE shall pay to LICENSOR a Royalty on all Products, while this Agreement is effective. The rate of royalty payable by the LICENSEE to the LICENSOR shall be as a. On Domestic Sales 5% (Five Percent) net remittable to LICENSOR, after deduction from the Gross rate, the applicable withholding taxes, which shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty was not conveyed to the respondent assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to the respondent assessee for day to day running and operation, i.e. to carry on business. In fact, the business was not exactly new. Manufacture and sates had already commenced under the agreement dated 24th January, 1984. After expiry of the first agreement, the second agreement dated 2nd June, 1995, ensured continuity in manufacture, development, production and sale. The period of agreement, 10 years in the present case, would be inconsequential for the agreement merely permitted and allowed use of technology subject to payment of royalty and compliances and the proprietorship and ownership right was never granted or transferred. The factum that after 10 years and after returning the tangible properties, the respondent assessee could still have continued to use technical knowhow and information would be a trivial and inconsequential factum as in the automobile industry, technology upgradation is constant and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture.... " 32. He submitted that it becomes clear that the judgment of the Hon'ble Supreme Court is distinguishable on facts and is applicable for the payments made at the time of setting up of plant and is not applicable in the present case. In the present case, there is no dispute that the payments were made pursuant to the agreement dated 01.04.2005. At the time the agreement was executed, the assessee was in existence and in operation for more than 10 years. Thus, in line with the Hon'ble Supreme Court judgement the said agreement dated 01.04.2005 has been entered into by the assessee to improvise the existing business and the said expenditure has to be held as revenue expenditure." 33. We have considered the rival submission and perused the relevant material on record. In the present case, payments are made pursuant to the agreement dated 01/04/2005. At the time of the agreement was executed, the assessee was in existence in operation for more than 10 years. Thus, it cannot be said that the technical knowhow given under the agreement was for setting up of the business of the assessee. It was also brought to our attention that a coordinate Bench of this tribunal in assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d commenced manufacturing activity in the year 1998 itself and by virtue of the new TCA dated 01/04/2005 the technical information provided to the assessee was in respect of addition of the existing product profile already been manufactured by the assessee. The Hon'ble Delhi High Court in the case of CIT Vs. Hero Honda Motors (supra) in para - 16 of the order (reproduced in para -29 of this order) has held the royalty for carrying on the day-to-day business as revenue expenditure. 36. The Hon'ble Supreme Court in the decision in the case of assessee (supra) has further observed as under: "22) When we apply the aforesaid parameters to the facts of the present case, the conclusion drawn by the High Court that expenditure incurred was of capital nature, appears to be unblemished. Admittedly, there was no existing business and, thus, question of improvising the existing technical know-how by borrowing the technical know-how of the HMCL, Japan did not arise. The assessee was not in existence at all and it was the result of joint venture of HMCL, Japan and M/s. HSCIL, India. The very purpose of Agreement between the two companies was to set up a joint venture company with aim and ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the appellant for the assessment year tabulated above. Since in the year under consideration on this issue also there is no change in facts as were existing in assessment year 2005-06, 2006-07, 2007- 08 and 2008-09, in which ITAT has given finding in appellant's favour. Therefore, respectfully following the ITAT's orders for the earlier year, on the identical facts, it is held that the expenditure of Rs. 2,85,14,345/- claimed by the appellant on account of air fare and travel expenses is in nature of revenue expenditure and, therefore, the addition made by the AO on this ground is deleted. Accordingly, Ground is allowed in favour of the appellant." 39. In support of the ground of the appeal, the Ld. CIT(DR) relied on the assessment order, whereas the learned counsel of the assessee relied on the finding of the Ld. CIT-A 40. We have heard the rival submission and perused the relevant material on record. Since there is no change in the facts as were existing in assessment year 2008-09 and 2009-10 and the learned CIT-(A) has followed the finding of the Tribunal in those years in the case of the assessee itself, we do not find any infirmity in the order of the Ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciple with regard to the issue remained same i.e. allowability of taxes paid under protest as deductible expenditure under section 43B of the Act. According to him, the observation of the Tribunal made in assessment year 2009-10 are squarely applicable to the instant case. 44. We have heard the rival submission of the parties and perused the relevant material on record. We find that the payment of sales tax as well as entry tax both are governed by the section 43B of the Act. Since the Ld. CIT-(A) has adjudicated the issue in dispute following the order of the Tribunal in earlier years, we do not find any infirmity in the order of the Ld. CIT-(A) on the issue in dispute and accordingly, we uphold the same. The ground of the appeal is accordingly dismissed. 45. The ground No. 4 relates to the addition of Rs. 97,32,768/- made by the Assessing Officer treating the software expenses as capital expenditure. 46. Before the learned CIT-(A), the assessee provided detail of the software expenses and submitted that the expenditure was in respect of annual fee of the softwares, software development charges, AMC of software and others like monthly web hosting, web designing, developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in assessee's own case for assessment year 2009-10. Further, the said issue is also been held in favour of the assessee by the Hon'ble Delhi High Court in assessee's own case in ITA No. 34 of 2016 dated 18/01/2016. 50. We have heard the rival submission and perused the relevant material on record. We find that the Ld. CIT-(A) has followed the order of the Tribunal in earlier years on the issue in dispute and accordingly adjudicated the matter. Further, the Revenue has failed in establishing that the expenditure in question has generated enduring benefit to the assessee. In view of the facts being identical to assessment year 2009- 10, we do not find any error in the order of the Ld. CIT-(A) on the issue in dispute and accordingly we uphold the same. The ground of the appeal is dismissed. 51. In ground No. 5, the Revenue has challenged deletion of the addition of Rs. 31,80,007/- in terms of section 14A of the Act. The Assessing Officer held that the assessee has incurred direct and indirect expenses in the activity of earning tax exempt income and accordingly invoking the rule 8D of the Income Tax rules, 1962 (in short "the Rules") made disallowance of Rs. 18,97,822/- under Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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