2024 (7) TMI 1329 - AT - Income Tax

Non-resident company exempt from TDS under section 195 without permanent establishment in India

The ITAT Delhi ruled in favor of the assessee, holding that without a PE in India, the non-resident company was not liable for TDS under section 195 on ... TDS u/s 195 - Taxability of income in India - PE in India - taxation of offshore supplies - Taxation of Fee for Technical Services (FTS) in the absence of FTS article under India-Thailand DTAA - HELD THAT:- In the case of HCIL for AY 2009-10, the issue under consideration was if HCIL, which is a subsidiary of M/s Honda Motors Company Ltd., was required to deduct tax at source for payments made for purchase of raw material, components, etc. from non-resident companies and those non-resident companies being associated enterprises numbering 17 were found to be not having a PE in India. In fact, the Tribunal in its order [2016 (9) TMI 439 - ITAT DELHI] dated 29.06.2016 observes that the fact that these associated enterprises which included assessee also do not have PE in India stands accepted by DRP and the Department has not gone in appeal and, thus, the issue stands finalized. In this order it was held that except for Honda Motors, Japan, payments made to all other 17 non-resident associated enterprises does not attract the provisions of section 195 and, consequently, section 40(a)(i) of the Act has no operation on the income of these companies arising from the supply of part, etc., and same was not liable for tax in India. This question was determined in favour of the assessee on the basis that the assessee was not having a PE in India. Taxation of offshore supplies - DRP after considering various contentions raised by the assessee, observed that since it has been held by DRP that the assessee has PE in India, profits need to be attributed to various operations carried out in such PE in India. Further, since the assessee is not maintaining India specific accounts, the AO is right in applying Rule 10. However, the panel directed that instead of adhoc profit rate of 25%, global profit rate of the assessee should be applied and 25% of such profits should be attributed to PE in India. Thus, where we have concluded that the assessee has no PE in India, the directions to attribute profits to various operations carried out in PE in India are not left with any substratum and, accordingly, the ground No.3 deserves to be allowed in favour of the assessee. FTS receipts are not liable to tax in the absence of FTS article in India-Thailand DTAA - Section 9 of the Act enumerates certain incomes to be deemed to accrue or arise in India and Section 9(1)(vii) of the Act provides under what conditions FTS income shall be considered to accrue or arise in India. Explanation 2 to Section 9(1)(vii) of the Act gives definition of FTS and which provides that any service falls within the definition of FTS are either be in the nature of managerial services, technical services or consultancy services. Thus FTS is a species of business income with specific definition and components and in DTAA, are made taxable specifically. If not, then they are brought to tax, as business income and in that case, again the existence of PE in India is necessary, but which is not established in case of assessee. Accordingly, this ground is decided against the Revenue. Interest under section 234A, 234B and 234C - HELD THAT:- As grounds challenging levy of interest are consequential and, accordingly, adjudicated in favour of the assessee. Issues Involved:1. General nature of the orders passed by AO/TPO/DRP.2. Allegation of Permanent Establishment (PE) in India.3. Erroneous taxation of offshore supplies.4. Taxation of Fee for Technical Services (FTS) in absence of FTS article under India-Thailand DTAA.5. Transfer pricing adjustments.6. Double taxation of FTS receipts.7. Attribution of income to activities in India.8. Application of incorrect profit ratio.9. Erroneous levy of interest under sections 234A, 234B, and 234C.10. Penalty under sections 271BA, 271AA, and 271G.11. Penalty under section 271(1)(c).Detailed Analysis:1. General Nature of Orders (Grounds 1 & 1.1):The grounds are general in nature and do not require specific adjudication.2. Allegation of Permanent Establishment (PE) in India (Grounds 2 & 2.1):The Tribunal referenced its order for AY 2009-10 in the case of Honda Cars India Limited (HCIL), where it was determined that the appellant did not have a PE in India. The Tribunal noted that the Revenue did not appeal against this finding, making it conclusive. The Tribunal found that the AO/DRP's reliance on survey statements was erroneous and unsupported by corroborative evidence. The Tribunal upheld that the appellant did not have a fixed place of business in India as per the India-Thailand DTAA. Consequently, the Tribunal allowed this ground in favor of the assessee.3. Erroneous Taxation of Offshore Supplies (Ground 3):The Tribunal agreed with the appellant that offshore supplies were not taxable in India since the title and risk were transferred outside India. Citing the Supreme Court judgment in Ishikawajma Harima Heavy Industries Ltd., the Tribunal held that income arising from offshore supplies, where all parts of the transaction occur outside India, cannot be taxed in India. Therefore, this ground was allowed in favor of the assessee.4. Taxation of Fee for Technical Services (FTS) (Ground 4):The Tribunal found that in the absence of an FTS clause in the India-Thailand DTAA, FTS receipts should be taxed only as business profits. Since the appellant did not have a PE in India, the FTS receipts were not taxable in India. The Tribunal cited various judgments to support this view and decided this ground against the Revenue.5. Transfer Pricing Adjustments (Grounds 5, 5.1, 5.2, 5.3, 6, 6.1, 6.2, 7, 8, 9, 10):The Tribunal noted that the TPO had already benchmarked the international transactions, including the FTS receipts, in the case of Honda Cars India Ltd., and the Transfer Pricing Study was accepted. Consequently, the Tribunal allowed these grounds in favor of the assessee.6. Double Taxation of FTS Receipts (Ground 9):The Tribunal found that the double taxation of FTS receipts was unwarranted since the appellant did not have a PE in India and the FTS receipts were not taxable under the India-Thailand DTAA. This ground was allowed in favor of the assessee.7. Attribution of Income to Activities in India (Grounds 10, 11):The Tribunal concluded that since the appellant did not have a PE in India, there was no basis for attributing income to activities in India. Therefore, these grounds were allowed in favor of the assessee.8. Application of Incorrect Profit Ratio (Grounds 5.3, 6.2):The Tribunal found that the DRP's direction to apply the global profit rate instead of an ad-hoc profit rate was correct. However, since the appellant did not have a PE in India, the issue of attributing profits did not arise. These grounds were allowed in favor of the assessee.9. Erroneous Levy of Interest (Ground 11):The Tribunal noted that the return of income was filed within the due date, making interest under section 234A inapplicable. For interest under section 234B, the Tribunal relied on the Supreme Court decision in Mitsubishi Corporation, holding that it was not leviable. Interest under section 234C was also found to be incorrectly levied. This ground was adjudicated in favor of the assessee.10. Penalty under Sections 271BA, 271AA, and 271G (Ground 12):The Tribunal found that the appellant had complied with the provisions of the respective sections and had made full and complete disclosures in the return of income. Therefore, the initiation of penalties was unwarranted. This ground was allowed in favor of the assessee.11. Penalty under Section 271(1)(c) (Ground 13):The Tribunal found that since the primary grounds were decided in favor of the assessee, the initiation of penalties under section 271(1)(c) was also unwarranted. This ground was allowed in favor of the assessee.Conclusion:The appeals were allowed in favor of the assessee, and the order was pronounced in the open court on 23.07.2024.