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TMI Blog2020 (8) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... was not controverted by the Ld. CIT-(DR), thus, following the decision of the Tribunal in 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Appellant, such statements having been selectively re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 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 23.12.2009 at an income of ₹ 377,06,86,160/- by way of making various additions on account of model fees, royalty, provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase of cars 98,28,95,774 19 Honda Automobiles, Thailand Purchase of capital goods 45,07,836 20 Honda Trading, Thailand Purchase of capital goods 2,01,057,857 21 Honda Trading, Japan Purchase of capital goods 48,22,78,936 22 Honda Motor, Japan Purchase of capital goods 3,48,49,947 23 Honda Motor, Japan Payment of technical know-how 61,20,05,000 24 Honda Motor, Japan Payment of Royalty 81,71,60,464 25 Honda Motor, Japan Payment of technical services 13,71,60,464 26 Honda Trading, Japan Payment of technical services 83,74,855 27 Honda Trading, Thailand Payment of technical services 1,61,785 28 Honda Motor, Japan Payment of export commission 3,72,207 29 Honda Motor, Japan Reimbursement of misc. expenses 45,19,714 30 Asian Honda, Thailand Reimbursement of misc. expenses 32,34,687 31 Honda Auto Parts, Malaysia Reimbursement of misc. expenses 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 busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 17 Honda Trading (Thailand) Co. Ltd. Purchase of fixed assets 1,37,56,478 18 Honda Trading Asia Co. Ltd Purchase of fixed assets 22,16,405 Total 4,60,75,172 19 Honda Motor Co. Ltd., Japan Royalty Payment 159,74,53,887 Total 159,74,53,887 20 Honda Motor Cor. Ltd., Japan Technical Guidance Fees 7,87,76,635 21 Honda Trading Co. Technical Guidance Fees 6,47,341 22 Honda Trading Asia Co. Ltd. Technical Guidance Fees 3,97,27,101 Total 11,91,51,077 23 Honda Motor Co. Ltd. Expenses Reimbursed (Paid)/Payable) 7,93,41,475 24 Honda Automobile (Thailand) Co. Ltd. Expenses Reimbursed (Paid)/Payable) 1,45,84,939 25 Asian Hodna Motors Co. Ltd. Expenses Reimbursed (Paid)/Payable) 2,31,56,315 26 Honda R & D Co. Ltd. Expenses Reimbursed (Paid)/Payable) 12,28,414 27 Honda R&D Asia Pacific Co. Ltd. Expenses Reimbursed (Paid)/Payable) 2,81,042 28 Asian Honda Motor Co. Ltd. Interest on delayed payment/ 3,10,96,574 Total 14,96,88,760 Grand Total 1525,83,26,392 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ib) & order dated 18.08.2017 in ITA No.s.4491/Del/2014 7 5483/Del/2014, copy available at pages 76 to 96 & 97 to 140 of the paper book respectively. 13. We have perused the orders passed by the coordinate Bench of the Tribunal in assessee's own case in AY 2010-11 decided vide order dated 18.08.2017 (supra) wherein the identical issue has been determined in favour of the assessee by following the order passed in assessee's own case for AY 2009-10 (supra) by returning following findings :- "12. We have heard the rival submission and perused the relevant material on record. We find that the Assessing Officer made disallowance in terms of section 40(a)(i) of the Act amounting to ₹ 1525,83,26,392/-for non-deduction of tax on payments made to HMJ and other AEs under section 195 of the Act holding that such amounts were chargeable to tax in the hands of HMJ /AEs as these entities had permanent establishment and business connection in India. The CIT(A) allowed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 royalties, fee for technical services, interest and the term 'other disbursements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, no disallowance can be made. Before this Court no question has been framed at the instance of the Assessee that the payment is covered byArticle12 (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 40is in the nature of a non-obstante provision and therefore, it overrides the other provisions as contained in Sections 30to38of the Act. This means that the expenditure which is allowable under Sections 30to38of the Act in computing business 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The more limited non-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sident, but only to payments made 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 non-discrimination 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out qua non-resident by requiring the TDS 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench of the ITAT in Automated 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer and only general submissions are made before us in this regard. Hence, this contention is also dismissed as devoid of merits. On the submissions made by the Ld.D.R. on Article 14, 15and16of 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." 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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