9911796707
TMI Blog2016 (9) TMI 439X X X X Extracts X X X X X X X X Extracts X X X X ..... ter alia, making the following additions:- S.No. Particulars Amount (Rs.) Amount (Rs.) A. Total Profit as per Profit & Loss Account (-) 328,11,76,662 B. Additions i. Royalty & Lumpsum fee 156,32,14,000 ii. Airfare Fare under Technical Guidance fee 4,61,29,639 iii. Entry Tax 6,04,047 iv. Software Exp. 1,07,12,063 v. Disallowance u/s 40(a)(i) 1831,14,22,555 1993,20,82,304 Total Income 1665,09,05,642 3. Aggrieved, the assessee carried the matter in appeal. The first appellate authority granted part relief. Both the revenue and the assessee have filed these appeals on the issues they are aggrieved by the findings of the first appellate authority. 4. We have heard Shri Deepak Chopra, the ld. counsel for the assesseeand Shri Anuj Arora, the ld.CIT, DR on behalf of the revenue. Paper books and written submissions were filed by both the sides. On a careful consideration of these submissions and after perusal of the paper books filed, the orders of the authorities below and the case laws cited, we hold as follows. 5. We first take up the assessee's appeal in ITA No.2056/Del/2014. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable only in respect of 'income chargeable to tax' the disallowance of gross amounts of transactions could not have been made in view of CBDT circular no. 02/2014. The above grounds of appeal are without prejudice to each other. The Appellant reserves the right to add, alter, amend and or vary the grounds of appeal at the time or before the hearing of the appeal. 6. Though a number of grounds have been taken, the sole issue is the disallowance made u/s 40(a)(i) of the Act. The facts leading to this issue are as follows. During the course of assessment proceedings, the AO noticed that the assessee company had made certain payments to non-resident companies without deducting tax at source u/s 195 of the Act. The list is given at pages 14, 15 and 16 of the assessment order in paragraph 6. This is extracted for ready reference. S.No. Payment made to Nature of payment as per 3CEB Amount (in Rs.) 1. Honda Motor, Japan Purchase of raw materials 5,02,34,98,712 2. Honda Trading, Japan Purchase of raw materials 12,96,57,971 3. Asian Honda, Thailand Purchase of raw materials 4,87,66,61,843 4. Honda Cars, Philippines Purchase of raw materials 40,640 5. Honda Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses 1,09,128 39. Honda Mfg. of Albama LLC Reimbursement of miscellaneous expenses 9,62,737 7. The assessee was required to furnish an explanation as to why disallowance u/s 40(a)(i) of the Income-tax Act should not be made. The AO was of the opinion that the non-resident companies and the parent company, have business connection and a permanent establishment in India and therefore the assessee was liable to deduct tax at source u/s 195 of the Act. The assessee submitted that neither the parent company nor the other affiliated company referred to, have a PE in India. It was argued that the non-discrimination clause in the Double Taxation Avoidance Agreements apply and hence, a disallowance u/s 40(a)(i) cannot be made. The AO rejected these contentions for the detailed reasons given in his order. On appeal, the first appellate authority held that: a) Out of 17 associated enterprises (AEs), permanent establishment is not established in respect of 16 AEs of the assessee company; b) Merely because these companies were also subsidiaries of HMCJ, it does not imply that, even in the absence of relevant facts required for proving existence of PE, it can be held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sian Honda, Thailand, the DRP for assessment year 2009-10 has held that no PE exist in India and the Revenue has not preferred any appeal on this decision. Hence, no portion of the income of Asian Honda Thailand, arising from supply of parts, was liable for taxation in India and hence, the provisions of section 195(2) read with section 40(a)(i) would not apply; d) In the case of Honda Motors, Japan, the ld.CIT(A) had held that it has a PE in India, while disposing of the assessee's case and whereas no such finding was till date given by the Revenue authorities in the case of non-resident company, Honda Motors, Japan; e) That a notice issued u/s 148 dated 17.3.2016 to Honda Motors, Japan, has not culminated into an order till date; f) That the determination of the issue, as to whether Honda Motors Japan, has a PE in India or not, can be made in any proceedings in the case of Honda Motors, Japan and not in the present proceedings; g) In view of the above situation, the assessee submits that the issue in question can be determined by applying the non discrimination clause in Article 24(3) of DTAA between India and Japan and that the issue now stands covered in favour of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt this claim of the assessee, is filed before the Bench. (d) On the assessee's reliance on Article 24(3) of DTAA i.e. the nondiscrimination clause, he made the following alternative and without prejudice, submissions: (i) Article 24(3) mentions three exceptions and that provisions of Article 9(1) apply to the facts of this case and consequently the assessee cannot invoke Article 24(3); (ii) That in the case of Herbalife International India Pvt. Ltd. (supra), the Hon'ble High Court at para 34 has recorded that it is not the case of the Revenue that Article 9(1) or Article 11(7) applies in that case and hence this case is distinguishable; (iii) That in para 30, the High Court considered the submissions that Article 9 contemplates an AE and once the status is that of an AE, the entire Article 26(3) is ruled out and whereas in the case on hand Article 9(1) clearly applies; (iv) The contention of the assessee that TPO has found all the transactions to be at arm's length and hence the conditions laid down in Article 9(1) are not satisfied, the ld. DR submits that: (a) The TPO's order has been constrained by the disclosures made before him by the assessee; (b) The orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or irrelevant. (k) The claim of the assessee that the payments in question fall under the phrase 'other disbursements of either Article 24(3) is not correct or justified.' Reliance is placed on OECD MC commentary. (l) Benefit of DTAA is available to a non-resident and as the assessee is a resident company, it cannot claim the benefit of DTAA. (m) The DTAA benefit can be availed only where the specific provision overrides the modes provided in the Act. As no corresponding provision exists in the DTAA, section 40(a)(i) needed to be given full effect to. (n) Section 40 of the Act is not a deductibility provision and hence outside the purview of Article 24(3) of DTAA. That the definition of section 40(a)(i) is 'of citus of payment' which was not a prohibited distinction under DTAA. Thus, it cannot be covered by Article 26(3) of the DTAA. 11. The ld.CIT, D.R. listed certain findings of the AO, which, as per him are crucial for coming to the conclusion that Honda Motor, Japan has a PE in India, by way of a table. Written submissions were filed and the matter argued at length by both parties. 12. In reply, the ld. counsel for the assessee drew the attention of the Bench to the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ination clause to the assessee by holding that the provisions of the Income-tax Act are different from the provisions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputing business income would be subject to deductibility condition in Section 40 of 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 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 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 nationality and which provision employs the phrase ‗same circumstances'. Article 26 (2) which talks of preventio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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-resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances of the case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 1,56,32,14,000/- made by AO treating the amount of royalty and lump sum fee paid by assessee as capital instead of revenue claimed by assessee. 2. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 4,61,29,639/- made by AO treating the amount of expenditure on airfare booked under technical guidance fee as capital instead of revenue claimed by assessee. 3. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 6,04,047/- made on account of disallowance of entry tax, which was claimed as a deduction u/s 43B. 4. On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs. 10,71,206/- made by AO treating the expenditure incurred on software expenses as capital instead of revenue. 5. On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in granting relief of Rs. 6,55,17,18,887/- by reducing the addition from Rs. 18,31,14,22,555/- to Rs. 11,75,97,03,668/- made by AO u/s 40(a)(i) of the IT Act. 5 (a) On the facts and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e The AO had made the additions on the basis that the payment made by assessee had resulted into a benefit of enduring nature and that the expenditure was capital in nature. The Ld. CIT(A) following the order of the Tribunal for assessment year 2003-04 in ITA No.3173/Del/2007, wherein the identical issue was involved and deleted the addition holding as under:- "I have carefully considered the submissions of the appellant and perused the order of the AO and have also considered the facts and the evidences placed on record which show that an identical issue was involved in assessment year 2003-04 wherein Hon'ble Tribunal, vide their order dated 16.05.2008 in ITA No.3173/del/2007, have decided this issue in favour of the appellant. Since the issue involved in the year under consideration is identical to the one decided by the Hon'ble ITAT in the Assessment Year 2003-04, which is being followed by the CIT(A) & ITAT in the subsequent Assessment Years on identical facts, hence, in view of the same, the payment of lumpsum fees of Rs. 54,86,95,000/- and royalty of Rs. 101,45,19,188/- is held as allowable revenue expenditure. The addition made by the AO on this ground is therefore dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the last addition of software expenses, the Ld. AR submitted before Ld. CIT(A) that, website tracking and website online statistic tools was used, for the purpose of tracking or providing security to website and not to acquire an asset and that it was to promote business. Reliance was placed on the judgement of Hon'ble Delhi High Court in CIT vs Indian Visit Com Pvt. Ltd. reported in 2008-TOIL-448-HC-DEL-IT in which it was held that, merely because expenditure may result in enduring benefits, it cannot be classified as expenditure of a capital nature. It was further held in that case that in case of expenditure on website, there is no change in fixed assets of the assessee. Reliance was also placed on the judgement of Hon'ble Delhi High Court in the case of CIT vs Asahi India Safety Glass Ltd. 245 CTR 529 wherein it was held that expenditure incurred on application software was allowable revenue deduction. The Ld. CIT(A) on the basis of above submissions held as under :- "I have carefully considered the submissions of the appellant and perused the order of the AO in the light of the evidences placed on record, which show that this issue was involved in the AY 2007-08 andAY ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
