TMI Blog2020 (8) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2009-10, we hold no disallowance could be made under section 40(a)(i) of the Act for payment made to Honda Asia Thailand without deduction of tax at source. We are of the considered view that addition made/sustained by the AO/CIT(A) u/s 40(a)(i) for not deducting the tax at source of payments made for purchase of raw material, components, etc. from non-resident Indian is not sustainable in the eyes of law, hence ordered to be deleted. - Decided in favour of assessee. - ITA No.375/Del./2016 - - - Dated:- 17-7-2020 - Shri N.K. Billaiya, Accountant Member And Shri Kuldip Singh, Judicial Member For the Assessee : Shri Deepak Chopra, Advocate, Shri Amit Srivastava, Advocate, Shri Ankul Goyal, Advocate For the Revenue : Shri Sanjay Goel, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. Honda Cars India Limited (hereinafter referred to as the assessee ) by filing the present appeal sought to set aside the impugned order dated 06.11.2015 passed by the Commissioner of Income-tax (Appeals)-22, New Delhi in an appeal challenging the orders passed by the ld. TPO/AO qua the assessment year 2006-07 on the grounds inter alia that : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany were working on behalf of the HMJ and as such controlled the day-today functioning of the Appellant in terms of technology, economic and other control. 5.2 That the CIT(A) grossly erred in law and facts in accepting the DRP direction that the HTAS has a business connection and PE in India, basis the alleged facts and relationship of the Appellant and HMJ. 5.3 That the CIT(A) erred in following the order of the Hon'ble Dispute Resolution Panel ( DRP') in concluding that the expatriate employees of HMJ constituted a PE of HTAS in India given complete absence of any expatriate employee of the HTAS in the Appellant company. 5.4 That the CIT(A) erred in following the order of the Hon'ble Dispute Resolution Panel CDRP') in coming to the conclusion that the Appellant is dependent upon HTAS for employees, technology and economically when no employee has been seconded by the HTAS to Appellant, no technology has been provided by the HTAS to Appellant and Appellant has no economic dependence on HTAS. 6 That the AO/CIT(A) grossly erred in law in relying on statements of expatriate employees recorded during the course of survey proceedings on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a)(i) of the Act could have been applied on to the amounts which remained payable at the end of the year and could not be applied to all the transactions conducted during the period under consideration. 14 That the CIT(A) grossly erred in remanding the issue relating to allowability of TDS credit in the absence of any power of remand whereas the CIT(A) should have verified and allowed the claim himself. 15 That the AO has grossly erred in law and facts in charging interest under sections 2348, 234C and 234D of the Act. 16 That the AO has erred in law in initiating penalty proceedings under section 271(1)(c) of the Act against the appellant. 2. Briefly stated the facts necessary for adjudication of the issue at hand are : M/s. Honda Cars India Limited (formerly known as Honda Siel Cars India Limited) (hereinafter referred to as the assessee ) is a subsidiary of M/s. Honda Motor Company Limited, Japan is into the business of manufacture and sale of premium segment passenger cars in India and outside India. During the year under assessment, initially assessment was completed under section 143(3) of the Income-tax Act, 1961 (for short the Act ) on 23.12.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,34,83,053 8 Honda Auto Parts, Malaysia Purchase of raw materials 2,07,17,351 9 Honda Trading, Thailand Purchase of raw materials 1,10,77,314 10 Honda Access, Thailand Purchase of raw materials 59,44,576 11 Honda SDN, Malaysia Purchase of raw materials 94,26,344 12 Honda Parts Manufacturing Corpn., Philippines Purchase of raw materials 4,66,236 13 Honda Trading, America Purchase of raw materials 18,53,115 14 Honda Access, Thailand Purchase of spare parts 54,153 15 Honda Trading, Japan Purchase of spare parts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,71,750 32 Honda Automobiles, Thailand Reimbursement of misc. expenses 53,45,204 33 Honda Trading, Japan Reimbursement of misc. expenses 8,21,076 Total 1057,30,04,248 4. AO further proceeded to conclude that recipient companies had a business connection and a PE in India and the assessee company is liable to deduct tax on these payments u/s 195 of the Act which the assessee company had failed to deduct and consequently, provisions contained u/s 40(a)(i) of the Act are attracted and the amount of ₹ 1057,30,04,248/- was liable to be disallowed u/s 40(a)(i) of the Act. AO finding these reasons sufficient to believe that due to the failure on the part of the assessee to disclose all material facts truly and fully, income of ₹ 1057,30,04,248/- had escaped assessment and consequently initiated the proceedings u/s 147 of the Act. 5. AO noticed that the assessee has made payments to var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 31,162 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 6. Consequently, AO assessed the total income u/s 143 (3)/147 of the Act at ₹ 12,86,00,74,220/- on account of disallowance u/s 40(a)(i) of the Act. 7. Assessee carried the matter by way of an appeal before the ld. CIT (A) who has sustained the addition of ₹ 13,09,82,982/- made u/s 40(a)(i) of the Act by partly allowing the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1 2 9. Grounds No.1 2 are dismissed having become infructuous as the reassessment proceedings have been quashed by the Hon ble Supreme Court in the case of Assistant Director of Income-tax, Noida vs. Honda Motors Co. Ltd., Japan in case cited as (2019) 108 taxmann.com 300 (SC) , copy available at page 17 of the synopsis. GROUNDS NO.4 to 7 9 to 15 10. Grounds No.4 to 7 9 to 15 have been dismissed having not been pressed during the course of arguments by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed part relief the assessee is in appeal on disallowance u/s 40(a)(i) for payments made to 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 paras13 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 nondiscrimination clause of the DTAA. The Tribunal deleted the disallowance related to paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the DTAA and hence no benefit could be given to the assessee. When the matter came up before the ld.CIT(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness income would be subject to deductibility condition in Section 40of the Act. The payment of FTS to HIAI would be allowable in terms 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 anon-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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collect its tax later, when a tax return is filed. Non-residents may be beyond the collection jurisdiction of the taxing country. (emphasis supplied) 50. While the above explanation provides the rationale for insisting on deduction of TDS from payments made to non-resident, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides. ‖ The Court acknowledged that developing countries allow 'treaty shopping' to encourage capital and technology inflows which developed 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 non-tax 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 ofArticle14of 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 disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the provision of a DTAA treaty is not in conformity with the Act.: ― Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provision of the Income Tax Act. Where there 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing a deduction of ₹ 5.83 crores being the administrative fee paid by the Assessee to HIAI. These findings are binding on us. Thus, we have to uphold the arguments of the ld. counsel for the assessee and reverse the findings of the AO as confirmed by the ld.CIT(A). 18. Coming to 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 brou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-discrimination article in the Double Taxation Avoidance Agreement between India and Japan. We do not adjudicate the other issues argued before us for the reasons already discussed. 14. In the year under consideration, the Ld. CIT(DR)repeated the arguments made before the Tribunal in assessment year 2009-10 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 year2009- 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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