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        Tribunal directs fresh Arm's Length Price determination, deletes disallowance for Mitsubishi purchases, rules out section 14A disallowance.

        Mitsubishi Corporation India Private Limited Versus DCIT, Circle 16 (2), New Delhi

        Mitsubishi Corporation India Private Limited Versus DCIT, Circle 16 (2), New Delhi - TMI Issues Involved:
        1. Transfer Pricing Adjustment
        2. Disallowance under Section 40(a)(i)
        3. Disallowance under Section 14A

        Issue-wise Detailed Analysis:

        1. Transfer Pricing Adjustment:
        The primary issue concerns the addition of Rs. 9,62,59,809/- due to transfer pricing adjustment. The assessee, an Indian subsidiary of Mitsubishi Corporation, Japan, reported an international transaction of 'Service fee received' amounting to Rs. 2,66,29,622/-. The assessee used the Transactional Net Margin Method (TNMM) to demonstrate that its transactions were at Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) rejected the use of multiple-year data and restricted it to the current year alone. The TPO proposed to treat the 'Service commission' segment as equivalent to the Trading segment, leading to a transfer pricing adjustment. The Dispute Resolution Panel (DRP) approved the TPO/AO's actions.

        The tribunal found that the assessee did not purchase and sell goods under the 'Service fee' segment, acting merely as an agent. The TPO's attempt to recharacterize the commission transaction as a trading transaction was deemed unacceptable. The tribunal cited the Hon'ble jurisdictional High Court in CIT VS. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi), emphasizing that the authorities should not disregard the actual transaction or substitute other transactions. The tribunal set aside the impugned order and remitted the matter to the TPO/AO for fresh determination of ALP, instructing the use of current year data alone.

        2. Disallowance under Section 40(a)(i):
        The second issue involves the disallowance of Rs. 70,37,18,502/- under section 40(a)(i) of the Income-tax Act. The assessee made purchases from its AEs without deducting tax at source. The AO held that the assessee was required to deduct tax under section 195, leading to disallowance. The tribunal examined whether the non-resident AE sellers were liable to tax in India. It was found that the assessee's transactions with six AEs did not attract tax as these AEs did not have a Permanent Establishment (PE) in India. The tribunal referenced previous decisions, including CIT vs. R.D. Aggarwal & Co. and Another (1965) 56 ITR 20 (SC), concluding that offshore sales by non-residents without operations in India do not generate taxable income in India.

        For purchases from Mitsubishi Corporation, Japan (MCJ), the tribunal considered the non-discrimination clause under Article 24 of the DTAA between India and Japan. It was held that the disallowance under section 40(a)(i) could not be applied due to the non-discrimination clause, which mandates that transactions with a Japanese enterprise should be treated as if they were with an Indian enterprise. The tribunal ordered the deletion of the disallowance.

        3. Disallowance under Section 14A:
        The final issue pertains to the disallowance of Rs. 1,38,410/- under section 14A of the Act. The AO made this disallowance despite the assessee not earning any exempt income during the year. The tribunal referenced the Hon'ble jurisdictional High Court in CIT vs. Holcim India Pvt. Ltd. (2014) 90 CCH 081 Del-HC, which held that no disallowance under section 14A can be made in the absence of exempt income. Consequently, the tribunal allowed this ground, ruling that no disallowance under section 14A was warranted.

        Conclusion:
        The appeal was partly allowed, with the tribunal directing a fresh determination of ALP for the transfer pricing issue, deleting the disallowance under section 40(a)(i), and ruling out the disallowance under section 14A.

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        ActsIncome Tax
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