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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 ..... . 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 [2015 (4) TMI 949 - DELHI HIGH COURT] . Disallowance under section 40(a)(i) - TDS u/s 195 - Held that:- the assessee is seeking the benefit of article 24 qua the disallowance u/s 40(a)(i) and not in respect of any transfer pricing adjustment made by bringing transactions between two AEs at arm’s length price. Disallowance u/s 40(a)(i) is an independent component of the computation of total income which 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of transfer pricing adjustment amounting to ₹ 9,62,59,809/-. 3. Succinctly, the assessee, an Indian company, is a wholly owned subsidiary of Mitsubishi Corporation, Japan (MCJ), a general trading company headquartered in Tokyo. MCJ is one of Japanese leading sogo shosha, engaged in linking buyers and sellers of various products across the globe. The assessee reported certain international transactions in Form 3CEB. The only international transaction in dispute is Service fee received amounting to ₹ 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 ₹ 2.66 crores, the assessee was called upon to state the cost of goods in the hands of the associated enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under which `Service fee was received without making purchase or sale of goods as an owner. In such circumstances, the question arises as to whether the cost of goods, for which the assessee simply provided services by acting as an agent, can be considered in the hands of the assessee and the transaction of receipt of `Service fee be treated as that of a trading nature? In our considered opinion, the answer to this question cannot be in affirmative. The fact that the assessee did 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co-ordinating between customers and its AEs. By no standard, the assessee can be said to have dealt with the goods of its AEs as an absolute owner. Once position is such, we fail to comprehend as to how financial results of the commission segment can be adjusted for making a comparison with trading segment. The ld. AR has drawn our attention towards the Tribunal orders passed in assessee s own case for the earlier years reversing similar stand of the Revenue authorities on the international 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of tax at source in terms of section 195 of the Act. On being show-caused as to why disallowance be not made under section 40(a)(i) of the Act towards such purchases made from nonresident group companies, the assessee stated that the Tribunal has deleted such disallowance for the assessment year 2006-07 by observing that in some cases, the group entities did not have a permanent establishment in India, while in others, the assessee was entitled to the benefit of non-discrimination clause in the Double Taxation Avoidance Agreement between India and Japan (DTAA). The facts of the instant year were claimed to be similar to the said earlier year. Reliance was also placed on certain other tribunal decisions in support of the assessee s entitlement for making the payment of purchase price without deduction of tax at source. Not convinced, the Assessing Officer held that the assessee was required to deduct tax at source on the business profits of these companies as per the provisions of section 195 of the Act. In holding so, he followed the view taken by him for the immediately preceding year, that is, A.Y. 2009-10. He also relied on Instruction dated 26.02.2014 issued by the CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lia, on other sum chargeable under this Act which is payable outside India or in India to a non-resident, not being a company or to a foreign company on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200. Thus, in order to invoke the provisions of section 40(a)(i), it is essential that the amount payable by the assessee to a foreign company etc. should be chargeable to tax under this Act in the hands of such foreign company etc. The AO has pressed into service the provisions of section 195 of the Act for treating the failure of the assessee in making deduction of tax at source from the payments made to the non-residents AEs. Sub-section (1) of section 195 states that any person responsible for paying to a non-resident, not being a company, or to a foreign company, any payments specified in the provision `or any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted by non-resident. Price was received and delivery was given outside India. No operations, such as, procuring of material or manufacture of finished goods, took place within India. It was held that no business connection was there and, in the absence of the non-resident having any place of business in India, the case was not covered within the provision analogous to section 9(1)(i) of the Act. Similar view has been reiterated by the Hon ble Supreme Court in CIT vs. T.I M Sales Ltd. (1987) 166 ITR 93 (SC) and more recently in GVK Industries Ltd. And Another vs. ITO and Another (2015) 371 ITR 453 (SC). It, therefore, follows that when a non-resident makes offshore supply of goods to an Indian enterprise, without performing any activity in India, no income accrues or arises to him in India. If, however, some activity is done in India or some operations are performed in India, then, the income attributable to such operations is chargeable to tax under the Act. The absence of a Permanent Establishment of a non-resident in India ordinarily implies that no business operations were carried out by him in India. The existence of a PE in India may require examination as to whether such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Department and appeal is pending against it before the High Court. The case of Metalone Corporation was originally taken cognizance of by him in an earlier year for holding that all the foreign AEs would be deemed to have PE in India because of some common activity carried out in India on behalf of all of them. This contention of the Revenue came to be turned down by the Tribunal in its order of Metalone Corporation by holding that the existence of PE cannot be inferred in such circumstances. In view of the fact that the AO has not drawn any line of distinction between the three new AEs from which the assessee made purchases in the current year alone vis-a-vis the remaining three from which imports were made in earlier years as well, and, further, on the failure of the ld. DR to point out any difference in the factual or legal position existing in respect of these three new entities, we are inclined to follow the same conclusion as given for the three parties coming from the earlier year for which the Tribunal has held that they did not have any PE in India. The crux of the matter is that since these six AEs did not have any PE in India, the off-shore sales made by them to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first mentioned Contracting State......... . 17 It is equally important to consider the prescription of Article 9, the relevant part of which runs as under :- `ARTICLE 9 - 1. Where : (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise, the provisions of the Act, including disallowance u/s 40(a)(i), shall apply as if the purchases made from a Japanese enterprise are made from an Indian enterprise. Once purchases are construed to have been made by an Indian enterprise from another Indian enterprise, not requiring any deduction of tax at source from the purchase consideration and consequently ousting the application of section 40(a)(i), the non-discrimination clause shall operate to stop the making of disallowance in case of purchases actually made from a Japanese enterprise, which would have otherwise attracted the disallowance. Thus, it is evident that para 3 of Article 24, without considering the effect of Article 9 and other Articles referred to in the beginning of this para, rules out the making of disallowance u/s 40(a)(i) of the Act. 19. Now let us examine Article 9 of the DTAA and its setting in Article 24(3), which in the opinion of the ld. DR, comes to the rescue of 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-dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial or financial relations. And if the profit accruing to an enterprise has been understated due to such commercial or financial relations, then, such understated profits should also be taxed. On circumspection of Article 9 read with Article 24, the position which emerges is that the enhancement of income made by virtue of Article 9 in treating the inhibited transactions between two enterprises as at arm s length price, cannot be neutralised by the application of Article 24. In other words, Article 24 applies on all discriminations as set out in it except those specifically excluded including Article 9. Reverting to the facts of the instant case, we find that the assessee is seeking the benefit of article 24 qua the disallowance u/s 40(a)(i) and not in respect of any transfer pricing adjustment made by bringing transactions between two AEs at arm s length price. Disallowance u/s 40(a)(i) is an independent component of the computation of total income which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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