2020 (8) TMI 35 - AT - Income Tax

Tribunal partially allows appeal, deletes tax addition under Section 40(a)(i). Decision issued on July 17, 2020.

The Tribunal allowed the appeal partly, deleting the addition under Section 40(a)(i) for non-deduction of tax at source. The Tribunal determined certain ... TDS u/s 195 - Addition u/s 40(a)(i) - payments made for purchase of raw material, components, etc. from non-resident Indian - DTAA between India and Japan - HELD THAT:- As far as the payment to Honda motor Japan is concerned, the issue in dispute is squarely covered by the decision of the Tribunal in assessment year 2009- 10 [2017 (8) TMI 1535 - ITAT DELHI] wherein the Tribunal has followed the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Herbalife [2016 (5) TMI 697 - DELHI HIGH COURT]. We note that Hon’ble High Court in the case of Herbalife (supra) has also considered the amendment in provisions of section 40(a)(i) of the Act by way of insertion of sub-clause(ia) w.e.f. 01/04/2005. Accordingly, we delete the disallowance in respect of payment to Honda motor Japan. Regarding payment to Honda Asia Thailand in the year under consideration, the assessee contended that no PE has been held by the DRP in the case of non-resident company in assessment year 2010-11 and this fact 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. Issues Involved:1. Validity of reassessment proceedings under Section 147.2. Addition under Section 40(a)(i) for non-deduction of tax at source.3. Existence of Permanent Establishment (PE) or business connection in India.4. Applicability of non-discrimination clause under the Indo-Japan Double Tax Treaty.5. Attribution of income to Associated Enterprises (AEs) in India.6. Remand of issues by CIT(A).7. Charging of interest under sections 234B, 234C, and 234D.8. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Validity of Reassessment Proceedings under Section 147:The appellant challenged the reassessment proceedings initiated under Section 147 of the Act, arguing that the necessary requisites were not satisfied, and there was no reason to believe that any income chargeable to tax had escaped assessment. The reassessment was initiated beyond four years without any allegation of non-disclosure of material facts by the appellant. The Tribunal dismissed Grounds No.1 and 2 as infructuous since the reassessment proceedings were quashed by the Supreme Court in Assistant Director of Income-tax, Noida vs. Honda Motors Co. Ltd., Japan (2019) 108 taxmann.com 300 (SC).2. Addition under Section 40(a)(i) for Non-Deduction of Tax at Source:The AO made an addition of Rs. 13,09,82,982 under Section 40(a)(i) for non-deduction of tax at source on payments made for the purchase of raw materials, components, etc., from non-residents. The Tribunal noted that the arm’s length principle had been followed, and there could be no further profit attributable to a person even if it had a PE in India, as held by the Supreme Court in Assistant Director of Income-tax, Noida vs. Honda Motors Co. Ltd., Japan (2019) 108 taxmann.com 300 (SC). The Tribunal also referred to its own decisions in the assessee's case for AYs 2009-10 and 2010-11, where similar additions were deleted. Consequently, the Tribunal ordered the deletion of the addition, determining Grounds No.3 and 8 in favor of the assessee.3. Existence of Permanent Establishment (PE) or Business Connection in India:The AO concluded that the recipient companies had a business connection and a PE in India, making the assessee liable to deduct tax on payments under Section 195. The Tribunal noted that the Transfer Pricing Officer had determined the transactions between the assessee and its AE (including Honda Motor, Japan) were at arm’s length. The Tribunal reiterated that once the arm’s length principle is followed, no further profit can be attributed, even if there is a PE in India. The Tribunal followed its previous orders and the Supreme Court’s ruling, concluding that the addition under Section 40(a)(i) was not sustainable.4. Applicability of Non-Discrimination Clause under the Indo-Japan Double Tax Treaty:The Tribunal referred to the non-discrimination clause in Article 24(3) of the Indo-Japan Double Tax Treaty, which prevents disallowance in the hands of the appellant due to non-deduction of tax on purchases. The Tribunal cited the Delhi High Court’s decision in CIT vs. Herbalife International India Private Limited, which interpreted the non-discrimination clause broadly to include payments for purchases. The Tribunal upheld that the provisions of Section 40(a)(i) were discriminatory and not applicable in terms of the DTAA.5. Attribution of Income to Associated Enterprises (AEs) in India:The Tribunal noted that the Transfer Pricing Officer had determined the transactions between the assessee and its AE were at arm’s length. The Tribunal rejected the Revenue’s argument that the transactions were not at arm’s length for the limited purpose of denying the benefit of the non-discrimination article. The Tribunal emphasized that the Transfer Pricing Officer’s findings were consistent and supported by the Tribunal’s previous orders.6. Remand of Issues by CIT(A):The assessee argued that the CIT(A) erred in remanding the issue of allowability of TDS credit, as the CIT(A) should have verified and allowed the claim himself. The Tribunal did not provide specific findings on this ground, as it was not pressed during the course of arguments.7. Charging of Interest under Sections 234B, 234C, and 234D:The assessee contended that the AO erred in charging interest under sections 234B, 234C, and 234D. The Tribunal did not provide specific findings on this ground, as it was not pressed during the course of arguments.8. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee argued that the AO erred in initiating penalty proceedings under section 271(1)(c). The Tribunal did not provide specific findings on this ground, as it was not pressed during the course of arguments.Conclusion:The Tribunal allowed the appeal partly, deleting the addition of Rs. 13,09,82,982 under Section 40(a)(i) and determining Grounds No.3 and 8 in favor of the assessee. Grounds No.1, 2, 4 to 7, and 9 to 15 were dismissed as infructuous or not pressed during the arguments. Ground No.16 was deemed premature and required no specific findings. The Tribunal’s decision was pronounced on July 17, 2020.