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TMI Blog2016 (9) TMI 439X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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. - ITA No.2056/Del/2014, ITA No.3229/Del/2014 - - - Dated:- 29-6-2016 - SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER For The Assessee : Shri Deepak Chopra, Shri Amit Srivastava and Ms Manasvini Bajpai, Advocates For The Department : Shri Anuj Arora, CIT, DR ORDER PER J. SUDHAKAR REDDY, A.M. These are cross appeals directed against the order of the CIT(A)-LTU, New Delhi, dated 31.03.2014 for assessment year 2009-10. 2. The assessee, Honda Cars India Ltd., (HCIL) was formerly known as Honda Siel Cars India Ltd. It is a subsidiary of M/s Honda Motor Company Ltd. (HMCL). It is engaged in the manufacturing of cars and sales thereof. HCIL and HMCL entered into an agreement on 21st May, 1996. HMCL Ltd., Japan was the licensor and HCIL was the licencee. For the relevant assessment year, the assessee company filed a e-return declaring nil income on 26.9.2009. The AO passed an order u/s 143(3) read with section 144C of the Act determining the total income of the assessee at ₹ 1665,09,05,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IB 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, components etc. 7 That the AO/CIT(A) grossly erred in not appreciating that all transactions between the Appellant and the non-resident associated enterprises (AE's) had been determined at arm's length basis and in view of the Article 9 of the Double Tax Treaties no further income could be attributed to the non-resident in Indian, irrespec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... da Auto Parts, Malaysia Purchase of raw materials 30,335 8. Honda Trading, Thailand Purchase of raw materials 28,18,79,799 9. Honda Access, Thailand Purchase of raw materials 8,46,73,965 10. PT Honda Precision Indonesia Purchase of raw materials 3,06,545 11. Honda Parts Manufacturing Corp., Philippines Purchase of raw materials 17,51,219 12. Honda Malaysia SDN BHD, Malaysia Purchase of raw materials 2,85,353 13. PT Honda Prospect Motor, Indonesia Purchase of raw materials 15,56,209 14. Honda Trading (China) Co. Ltd., China Purchase of raw materials 6,89,62,819 15. Honda Trading America Corp., USA Purchase of raw materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asian Honda Thailand Reimbursement of miscellaneous expenses 80,91,699 35. Honda Automobile, Thailand Reimbursement of miscellaneous expenses 2,18,44,421 36. Honda Trading Japan Reimbursement of miscellaneous expenses 10,98,326 37. Honda R D Japan Reimbursement of miscellaneous expenses 26,05,415 38. Honda Auto Parts Manf. SDN Reimbursement of miscellaneous expenses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the decision of the Pune Bench of the ITAT in the case of Automated Securities Clearance Inc. vs. Income Tax Officer (2008) 118 TTJ 619 (Pune) and other Tribunal decisions come to the conclusion that the non-discrimination clause does not apply in the case on hand. 8. Aggrieved, the assessee as well as the Revenue are in appeal. The ld. Counsel for the assessee submitted that: a) Honda Motors Company, Japan and Asian Honda, Thailand, do not have a PE in India; b) All other associated non-resident companies, from which, the assessee has purchased raw material, spare parts and components do not have PE in India and this fact was accepted by the DRP and the Revenue has not gone in appeal and hence the issue has attained finality. c) That in the case of Asian 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.CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Anuj Arora, submitted as follows:- (a) The assessee should have relied on Instruction No.2/2014 dated 26.4.2014 and Circular No.3/2015 dated 12.2.2015 and requested the AO to follow these binding Circulars, which would have reduced the quantum of disallowance in this case. (b) Orders of the Allahabad High Court in the case of the assessee on proceedings u/s 201 dated 30.5.2011 is submitted for perusal. (c) As regards the status of determination of the issue whether the non-resident associated companies, other than Honda Motor, Japan, having PE in India or not, the claim by the assessee that the Revenue had adjudicated that these 16 entities do not have PE in India and the Revenue has not filed an appeal against such finding was forwarded to the AO/Addl. CIT and their reply, which does not controvert 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... West Bengal vs. Anwar All Sarkar, AIR 1952 (SC) 75. (h) To establish discrimination, the tax payer has to demonstrate that the treatment is unreasonable, arbitrary or irrelevant. (i) The payment to non-resident does not offend the principle of non-discrimination and that section 40(a)(i) is a deterrent provision which prompts compliance on the part of the resident tax payers. Section 40(a)(i) creates a distinction between nonresident payers and resident payers which has a rational nexus with the object of Sec.40(a)(i). (j) Reliance is placed on extracts from the technical explanation of UN MC and it is submitted that section 40(a)(i) read with Instruction 2/2014 and Circular No.3 of 2015 is a reasonable method for collection of tax from persons who are not resident in India and the treatment cannot be said to be unreasonable, arbitrary 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pan, 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. 14. This leaves us with the issue of applicability of the provisions of S.195 r.w.s. 40(a)(i) to Honda Motor Company Ltd. 15. The issue whether Honda Motor Company Ltd. has a PE in India or not should be preferably adjudicated by the AO in the assessment of that company. It is not advisable to determine this issue in collateral proceedings, as is in the case of the assessee. Thus, we adjudicate the issue by considering the arguments of the assessee without prejudice, invoking the non-discrimination clause in terms of Article 24(3) of the DTAA, between India and Japan. The AO in this case has denied the benefit of the non-discrimination 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 royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be applied and consequently, no disallowance can be made. Before this Court no question has been framed at the instance of the Assessee that the payment is covered by Article 12 (4) of the DTAA. Consequently, this question is not examined by the Court. 17. Thus, the findings of the ld.CIT(A) on this issue have to be necessarily reversed. Coming to the findings of the AO, we find that the Hon ble High Court vide paras 46 to 62 of the order in the case of Herbalife International India (supra) has dealt with the issue as under, and when the proposition laid down in this judgement is applied to the facts of this case, the finding of the A.O. has to be reversed. 46. Section 40 is in the nature of a non-obstante provision and therefore, it overrides the other provisions as contained in Sections 30 to 38 of the Act. This means that the expenditure which is allowable under Sections 30 to 38 of the Act in computing 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discrimination obligations in tax conventions reflect the practical problems of cross-border taxation. For example, countries frequently collect taxes from non-residents through a system of withholding at source. Withholding is most frequently imposed on passive income, such as dividends, interest, rents, and royalties. Because the recipient may have no connection with the country of source other than the investment generating the income, withholding at the time of payment is likely to be the only realistic opportunity for the source country to collect its tax. Withholding is often not required on payments to residents. However, the application of withholding tax systems is appropriate. Residents have substantial economic connections with their country of residence; so that country is likely to have ample opportunity to 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de to non-residents, the two payments could not be said to be under the ‗same condition . The further submission is that if they are not made under the same condition', the nondiscrimination rule under Article 26 (3) of the DTAA is not attracted. 54. In the first place it requires to be noticed that DTAA is as a result of the negotiations between the countries as to the extent to which special concessional tax provisions can be made notwithstanding that there might be a loss of revenue. In Union of India v. Azadi Bachao Andolan (supra) the Supreme Court noted that treaty negotiations are largely ―a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may 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 developin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S to be deducted while making payment of FTS in terms of Section 40 (a) (i) of the Act. 57. A plain reading of Section 90 (2) of the Act, makes it clear that the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the Assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision. In Union of India v. Azadi Bachao Andolan (supra) the Supreme Court took note of the Circular No. 333 dated 2nd April 1982 issued by the CBDT on the question as to what the assessing officers would have to do when they find 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 taki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Securities Clearance Inc. v. Income Tax Officer (supra)is no assistance to the Revenue since the said decision is said to be overruled by the Special Bench of the ITAT in the case of Rajeev Sureshbhai Gajwani vs ACIT (2011) 8 ITR (Trib) 616 (Ahmedabad). 61. In light of the above discussion, question (b) is answered in the affirmative, i.e., 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. 62. Accordingly, question (a) is answered in the affirmative, i.e., in favour of the Assessee and against the Revenue by holding that the ITAT was correct in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed as devoid of merits. On the submissions made by the Ld.D.R. on Article 14, 15 and 16 of the Constitution, technical expression in the UN Model Convention, etc., we find that the Jurisdictional High Court has considered all these issues in the case of Herbalife International India (supra). Respectfully following the same, these arguments are rejected. 20 . In view of the above discussion, we allow this ground of the assessee and delete the disallowance made u/s 40(a)(i) of the Act, by applying the propositions of law laid down by the Jurisdictional High Court regarding interpretation of 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. 21 . In the result, the appeal of the assessee is allowed. 22 . We now come to the Revenue s appeal in ITA No.3229/2014. The grounds of appeal read as follows:- 1. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of goods by these 18 parties has been made in India to the assessee and therefore income arising as a result of the sale of taxable in India. 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. 23. The brief facts of the case with regard to Ground Nos.1 to 4 are that the assessee is engaged in manufacturing of cars and sales thereof. Return was filed at nil income. The AO assessed the income of the assessee at ₹ 8,37,36,95,940/-- after making the following additions:- (i) Royalty and lump sum fee Rs.1,56,32,14,000/- (ii) Airfare of Technicians booked under technical guidance ₹ 4,61,29,639/- (iii) Entry tax ₹ 6,04,047/- (iv) Software expenses ₹ 10,71,206/- 24. Dissatisfied with the orders of AO, the assessee carried the matter to Ld. CIT(A). Ld. CIT(A) by following the order of Tribunal in assessee s own case in earlier assessment years, del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T s order for the earlier year, on identical facts, it is held that the expenditure of ₹ 4,61,29,639 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 No.3 is allowed in favour of the appellant. We uphold this finding of the Ld.CIT(A) as he applied the decision of the ITAT and dismissed this ground of Revenue. c) Entry tax u/s 43B of Income Tax Act The AO made this addition of Entry Tax u/s 43B of the Act. Ld. CIT(A) deleted the addition holding as under:- I have carefully considered the submissions of the appellant and perused order of the AO and have also considered the fact and the evidences placed on record. Since this issue has already been decided in appellant s favour as mentioned above by the ITAT and also by the Delhi High Courtt vide their order dated 03.01.2012, which was followed by my Ld. Predecessor, while deciding the appeal for AY 2008-09. In view of this, respectfully the same. It is held that the appellant is entitled to deduct this amount in computing its total income. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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