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2016 (9) TMI 439 - AT - Income TaxDisallowance made u/s 40(a)(i) - payments to non-resident companies without deducting tax at source u/s 195 - Held that - there is no dispute of the fact that out of 18 non-resident associate companies to whom payments have been made, it was held that 16 associated enterprises do not have a P.E. in India. The D.R.P. in the case of Asia Honda Thailand for the A.Y. 2009-10 has held that the Non-resident company had no P.E. in India. Revenue has not filed an appeal on this finding of the D.R.P. Hence we have to reverse the finding of the Ld.CIT(A) that Asia Honda Thailand has a P.E. in India in this A.Y. Thus we have to hold that, except in the case of Honda Motors Japan, payments made to all other 17 non-resident associate companies do not attract the provisions of S.195 and consequently 40(a)(i) of the Act, as no portion of the income of these companies arising from the supply of parts etc. was liable for tax in India. Applicability of the provisions of S.195 r.w.s. 40(a)(i) to Honda Motor Company Ltd issue decided in favour of the Assessee and against the Revenue by holding that Section 40 (a) (i) of the Act is discriminatory and therefore, not applicable in terms of Article 26 (3) of the Indo-US DTAA.
Issues Involved:
1. Disallowance under section 40(a)(i) of the Income-tax Act. 2. Permanent Establishment (PE) of non-resident companies in India. 3. Application of the non-discrimination clause under the Indo-Japan Double Tax Treaty. 4. Classification of expenses as capital or revenue in nature. Issue-wise Detailed Analysis: 1. Disallowance under section 40(a)(i) of the Income-tax Act: The core issue was whether the disallowance made under section 40(a)(i) of the Act, due to non-deduction of tax at source on payments made to non-resident companies, was legally valid. The assessee argued that the non-resident companies did not have a PE in India, and thus, the provisions of section 195 of the Act were not applicable. The CIT(A) partially accepted this argument, holding that 16 out of 17 associated enterprises did not have a PE in India. However, the CIT(A) upheld the disallowance for payments made to Honda Motors, Japan, and Asian Honda, Thailand, considering them to have a PE in India. The Tribunal reversed the CIT(A)'s finding on Asian Honda, Thailand, following the DRP's decision that it did not have a PE in India, and thus, disallowance under section 40(a)(i) was not applicable. 2. Permanent Establishment (PE) of non-resident companies in India: The Tribunal held that the issue of whether Honda Motors Japan had a PE in India should preferably be adjudicated in the assessment of that company and not in the collateral proceedings of the assessee. The Tribunal decided to address the issue by considering the non-discrimination clause in the Indo-Japan DTAA, ultimately ruling that the disallowance under section 40(a)(i) was not applicable to Honda Motors Japan. 3. Application of the non-discrimination clause under the Indo-Japan Double Tax Treaty: The Tribunal relied on the jurisdictional High Court's decision in CIT vs. Herbalife International India Pvt. Ltd., which held that section 40(a)(i) of the Act is discriminatory and not applicable in terms of Article 26(3) of the Indo-US DTAA. Applying this precedent, the Tribunal found that the non-discrimination clause in the Indo-Japan DTAA was applicable, and thus, the disallowance under section 40(a)(i) was not justified. 4. Classification of expenses as capital or revenue in nature: The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO on account of royalty and lump sum fees, airfare of technicians, entry tax, and software expenses. The CIT(A) had followed the Tribunal's earlier orders in the assessee's own case for previous assessment years, classifying these expenses as revenue in nature. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal on these grounds. Separate Judgments: The Tribunal delivered a single comprehensive judgment covering both the assessee's and the Revenue's appeals. The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, providing detailed reasoning for each issue involved.
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