TaxTMI 
TaxTMI 
2016 (9) TMI 439
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....f the assessee at Rs. 1665,09,05,642/-, inter alia, making the following additions:- S.No. Particulars Amount (Rs.) Amount (Rs.) A. Total Profit as per Profit & Loss Account (-) 328,11,76,662 B. Additions i. Royalty & Lumpsum fee 156,32,14,000 ii. Airfare Fare under Technical Guidance fee 4,61,29,639 iii. Entry Tax 6,04,047 iv. Software Exp. 1,07,12,063 v. Disallowance u/s 40(a)(i) 1831,14,22,555 1993,20,82,304 Total Income 1665,09,05,642 3. Aggrieved, the assessee carried the matter in appeal. The first appellate authority granted part relief. Both the revenue and the assessee have filed these appeals on the issues they are aggrieved by the findings of the first appellate authority. 4. We have heard Shri Deepak Chopra, the ld. counsel for the assesseeand Shri Anuj Arora, the ld.CIT, DR on behalf of the revenue. Paper books and written submissions were filed by both the sides. On a careful consideration of these submissions and after perusal of the paper books filed, the orders of the authorities b....
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....ns conducted during the period under consideration. 10 That without prejudice since the provisions of section 40(a)(i) of the Act are applicable only in respect of 'income chargeable to tax' the disallowance of gross amounts of transactions could not have been made in view of CBDT circular no. 02/2014. The above grounds of appeal are without prejudice to each other. The Appellant reserves the right to add, alter, amend and or vary the grounds of appeal at the time or before the hearing of the appeal. 6. Though a number of grounds have been taken, the sole issue is the disallowance made u/s 40(a)(i) of the Act. The facts leading to this issue are as follows. During the course of assessment proceedings, the AO noticed that the assessee company had made certain payments to non-resident companies without deducting tax at source u/s 195 of the Act. The list is given at pages 14, 15 and 16 of the assessment order in paragraph 6. This is extracted for ready reference. S.No. Payment made to Nature of payment as per 3CEB Amount (in Rs.) 1. Honda Motor, Japan Purchase of raw materials 5,02,34,98,712 2. Honda Trading, Japan Purchase of raw materi....
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....neous expenses 16,69,31,571 34. 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 at source u/s 195 of the Act. The assessee submitted that neither the parent company nor the other affiliated company referred to, have a PE in India. It was argued that the non-discrimination clause in the Double Taxation Avoidance Agreements apply and hence, a disallowance u/s 40(....
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....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.CIT(A) had held that it has a PE in India, while disposing of the assessee's case and whereas no such finding was till date given by the Revenue authorities in the case of non-resident company, Honda Motors, Japan; e) That a notice issued u/s 148 dated 17.3.2016 to Honda Motors, Japan, has not....
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....ahabad 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 invoke Article 24(3); (ii) That in the case of Herbalife International India Pvt. Ltd. (supra), the Hon'ble High Court at para 34 has recorded that it is not the case of the Revenue that Article 9(1) or Article 11(7) applies in that case and hence this case is distinguishable; (iii) Th....
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....crimination 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 the benefit of DTAA. (m) The DTAA benefit can be availed only where the specific provision overrides the modes provided in the Act. As no corresponding provision exists in the DTAA, section 40(a)(i) needed to be given full effect to. (n) Section 40 of the Act is n....
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....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' necessarily related to payments in the same generic and thus the payments for purchases are not covered by Article 24(3) and hence the benefit of DTAA cannot be given. 16. We find that this issue is no mor....
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....he 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 regarding deduction of TDS has to be complied with. In other words if no TDS is deducted from the payment of FTS made to HIAI by the Assessee, then in terms of Section 40 (a) (i) of the Act, it will not be allowed as a deduction under Section 37 (1) of the Act for computing the Assessee'....
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....nterest, 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 consequence of the failure to make such deduction. As far as payment to a non-resident is concerned, Section 40 (a) (i) of the Act as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the ta....
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....res 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 developing countries which need foreign investment. The Court felt that this was a matter best left to the discretion of the executive as it is ―dependent upon several economic and political considerations. 55. Consequently, while deploying the ‗nexus' test to examine the justificatio....
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....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 taking note of the decisions of various high courts on the purpose of Double Taxation Avoidance Conventions qua Section 90 of the Act, the Supreme court observed as under: "A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifical....
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....on, 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 Rs. 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 those conditions would have accrued to one of the enterprises, but by reason of those conditions have not so accrued, we find that the Transfer Pricing Officer in all these cases has come to the conclusion that the transactions between the Associated Enterprises are at arm's length price. The ld....
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....ctfully 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 Rs. 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 claimed by assessee. 2. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 4,61,29,639/- made by AO treating the amount of expenditure on airfare booked under technical guidance fee as capital instead of revenue claimed by assessee. 3. On the fact....
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....ssee is engaged in manufacturing of cars and sales thereof. Return was filed at nil income. The AO assessed the income of the assessee at Rs. 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 Rs. 4,61,29,639/- (iii) Entry tax Rs. 6,04,047/- (iv) Software expenses Rs. 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, deleted the additions made by the AO. We now dispose of the issue item wise. a) Royalty & lump sum fee The AO had made the additions on the basis that the payment made by assessee had resulted into a benefit of enduring nature and that the expenditure was capital in nature. The Ld. CIT(A) following the order of the Tribunal for assessment year 2003-04 in ITA No.3173/Del/2007, wherein the identical issue was involved and deleted the addition holding as under:- "I have carefully considered the submissions of the appellant and perused the order of the AO and....
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....r:- "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, this ground is decided in favour of the appellant." We find no infirmity in this order of the Ld.CIT(A). Hence we dismiss this ground of Revenue. d) Software Expenses With regard to the last addition of software expenses, the Ld. AR submitted before Ld. CIT(A) that, website tracking and website online statistic tools was used, for the purpose of tracking or providing security to website and not to acquire an asset and that it was to promote business. Reliance was placed on the judgement of Hon'ble Delhi High Court in CIT vs Indian Visit Com Pvt. Ltd. reported in 2008-TOIL-448-HC-DEL-IT in which it was held that, mere....