TaxTMI 
TaxTMI 
2017 (8) TMI 1535
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..../CIT(A) erred in making/sustaining an addition of Rs. 1259,88,03,232 under section 40(a)(i) of the Act while holding that Appellant was required to deduct tax at source of payments made for purchase of raw materials, components etc. from non-residents. 3. That the AO/CIT(A) erred in making/sustaining the addition under section 40(a)(i) of the Act while holding that the provisions of chapter XVIIB of the Act were applicable on such payments. 4. That the AO/CIT(A) erred in law in concluding that there existed a Permanent Establishment (PE)/business connection of Honda Motors, Japan and Asian Honda Thailand, being non-resident companies from whom the Appellant had purchased raw materials, components etc. 5. 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 reproduced and relied upon by the lower authorities. 6. That the AO/CIT(A) erred in not correctly appreciating that in view of the non-discrimination clause [Article24(3) of the Indo- Japan Double Tax Treaty] no disallowance could be made in the hands of....
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....e addition of Rs. 97,32,768/- made by AO treating the expenditure incurred on software expenses as capital, instead of revenue claimed by assessee. 5. On the facts and circumstances of the case and in law the Ld. CIT(A) has deleting the addition of Rs. 31,80,007/- made by AO u/s 14A. 6. The appellant craves leave to, add to, alter, amend or vary from the above grounds of appeal at or before the time of hearing. 4. Facts in brief of the case are that the assessee company i.e. Honda Cars India Limited (HCIL) is a public limited company registered under the companies Act, 1956 and was incorporated on 05/12/1995. The assessee is a subsidiary of Honda Motors Car Company Ltd., Japan (HMCL). The assessee is engaged in business of manufacture and sale of various passenger cars vehicle in India and outside India. For the relevant year, the assessee filed return of income electronically on 25/09/2010 declaring nil income. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short "the Act") was issued and complied with. The assessment under section 143(3) of the Act was completed on 28/03/2014 at total income of Rs. 1683,05,3....
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..... Honda Access Asia Oceania Co. Ltd. Purchase of raw materials 4,55,03,300 Purchase of Spare parts 1,07,383 7. Honda Cars Philippines Inc. Purchase of Spare parts 17,295 8. Honda Parts Manufacturing Corp. Purchase of raw materials 193,771 Purchase of Spare parts 22,901 9. American Honda Motor, Co. Inc. Purchase of raw materials 77,60,284 10. Honda Trading Asia Co. Ltd. Purchase of raw materials 35,71,68,651 Purchase of Spare parts 90,47,457 11. Honda Malaysia Sdn Bhd. Malaysia Purchase of raw materials 53,223 12. Honda Trading (South China) Co. Ltd Purchase of raw materials 21,68,55,944 13 Honda Autoparts Manufacturing (M) Sdn. Bhd Purchase of raw materials 3 1,162 Total 1290,26,14,576/- 14. Honda Motor Co. Ltd. Japan Purchase of Cars (CRV) 44,33,42,920 Total 44,33,42,920/- 15. Honda Motor Co. Ltd. Japan Purchase of fixed assets 21,82,996 16. Honda Trading Corp. Purchase of fixed assets 2,79,19,292 17. Honda Trading (Thailand) Co. Ltd. Purchase of fixed assets....
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....at tax was already deducted on payments worth Rs. 181,35,00,642/-. The Ld. CIT(A) accepted the submission of the assessee and, accordingly deleted the said amount of disallowance. The assessee also submitted that certain payments were reimbursement of salary, on which no TDS was to be deducted. After considering submission of the assessee, out of the total reimbursement of Rs. 11,85,92,186/-, disallowance of Rs. 2,50,17,129/- was upheld and balance was deleted. The assessee is not in appeal against the amount of Rs. 2,50,17,129/- before the Tribunal. In this manner, the Ld. CIT-(A) reduced the amount in dispute related to disallowance u/s 40(a)(i) to Rs. 1341,70,50,197/-. 6.3 Further, after considering the submission of the assessee and the finding of the Assessing Officer based on two survey operations u/s 133A of the Act, the Ld. CIT-(A) in para 9.4 to para 19 of the impugned order, concluded that out of the total 15 AEs, permanent establishment was not established in respect of the 13 AEs , except two entities namely M/s Honda Motors Japan and M/s Asian Honda Thailand. The Ld. CIT- (A) held that those 13 AEs were not chargeable to tax in India being foreign companies having n....
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....red the statement of the expatriate employees recorded during the course of survey proceedings. On the issue of permanent establishment of Honda motor Co Ltd, Japan, he submitted that the Tribunal directed that the issue should be adjudicated by the Assessing Officer in assessment of that company. He submitted that the Tribunal in the case of the assessee for assessment year 2009-10, adjudicated the issue invoking the non discrimination clause in terms of article 24(3) of the Double Tax Avoidance Agreement (DTAA) between India and Japan, following the decision of the jurisdictional High Court in the case of CIT versus Herbalife International India Private Limited, 384 ITR 276 and deleted the disallowance under section 40(a)(i) of the Act. He submitted that in the year under consideration the disallowance has been made on similar grounds and therefore the disallowance of Rs. 630,85,67,113/- for payment to Honda Motor Co. Japan, also needs to be deleted. He submitted that in the case of Asian Honda, Thailand for assessment year 2010-11, the DRP has held that there did not exist any PE of said non-resident company in India and the Revenue has accepted that finding by not filing an app....
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....(TDS), respectively. Otherwise, the applicability of article 9 would depend on whether any adjustment to ALP is made, even though the transaction are made every year with the same AEs, which would not be a rational interpretation. (d)without prejudice to the above, the 40 elements captured by the AO go far beyond the FAR analysis of the assessee and as the matter should be set-aside to the AO/TPO with appropriate direction. (e)that the disallowance should not be deleted on the ground of inadequate Inquiry or defects, non-consideration of the facts and that the issue should be set-aside to the file of the AO for ascertaining the correct facts. For this proposition reliance was placed on the judgment of the Hon'ble High Court in the case of CIT Vs. Jansampark Advertising and Marketing(P) Ltd., (2015) 56 taxmann.com 285(Delhi). (f) that under section 40(a)(i) of the Act, all the payers whether residents or nonresidents are subjected to the disallowance for non-deduction of the tax and therefore, there was no discrimination qua the payer. (g)that the assessee in current proceedings, is a domestic company and resident of India, whereas the clause of n....
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....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 Rs. 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 the coordinate bench of this Tribunal in assessee's own case for assessment year 2009-10 in ITA No. 2056 and 3229/Del/2014. The disallowance under section 40(a)(i) in assessment year 2009-10 has been deleted by the Tribunal in paras 13 to 20 of the order. The Tribunal held that in case of Asia Honda Thailand, the dispute resolution panel (DRP) held that the non-resident company had no PE in India and accordingly, the Tribunal reversed the finding of the Ld. CIT-(A) that Asia Honda Thailand had a PE in India, and held that sect....
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....ssue 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 more res integra. The jurisdictional High Court in the case of CIT vs. Herbalife International India Pvt. Ltd., judgment dated 13th May, 2016, has, after considering the argument of the intervener, Mitsubishi Corporation, and the provisions of the Indo-Japanese DTAA has on the issue ....
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....nternational 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's income chargeable under the head 'profits and gains of business'. 47. Article 26(3) of the DTAA calls for an enquiry into whether the above condition imposed as far....
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....her 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 nonresident, 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 taxable profits of the payer. No such consequence was envisaged in terms of Section 40 (a) (i) of the ....
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....ations 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 nontax 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 justification of a classification under a treaty like the DTAA, ....
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....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 specifically intended to enable an....
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....estion (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 lengt....
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....al 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 the payer. However, we find 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, wherein the Tribunal has followed the decision of the Hon'ble Delhi High Court in the case of CIT Vs. ....
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....se bearing serial Appeal No. 4918 of 2017 dated 09/06/2017 for assessment year 1999-2000 to 2005-06, wherein it is held that payment of royalty and lump sum fee under the agreement in question was for manufacturing of vehicles would be in the nature of capital expenditure and not revenue expenditure. Accordingly, submitted that given the decision of the Apex Court, the issue was settled in favour of Revenue. 21. On the contrary, the Ld. counsel for the assessee submitted that said case is distinguishable on facts since the assessment years before the Apex court were the formative years and this fact played on the court to hold that lump sum fee for acquisition of know-how was for the purpose of setting up the manufacturing facility. He submitted that the Hon'ble Supreme Court had not given any opinion on the issue of allowability of the running royalty as was the payment in the present assessment year. In the said case the assessment year involved were initial assessment years and in those facts it was held that payments are made for setting up of the plant project for manufacturing of cars and thus the expenditure was in the nature of capital expenditure and not revenue expendi....
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....hat the issue of allowability and nature of expenditure on running royalty on sales was not a subject matter of consideration before the Apex Court. He further submitted that the Hon'ble Supreme Court in the said case took note of the order of Delhi High Court in the case of group company in CIT vs. Hero Honda Motors [(2015) 327 ITR 481 (Delhi)] wherein it has been held that payment of technical know-how fee and royalty was in the nature of revenue expenditure and opined as under- "Coming to the judgment of the Delhi High Court in the case of this very assessee, it would be noticed that in that case, technical knowhow was obtained for improvising scooter segment, which unit was already in existence. On the contrary, in present case, the TCA was for setting up of new plant for the first time to manufacture cars. The Delhi High Court specifically noted this fact in para 14 of the judgment. While analysing the agreement in that case which was for providing technical know-how in relation to the product i.e. two wheelers and three wheelers and the purpose was to introduce 'new models' of the said product developed by the Japanese Company, the High Court noted that the agree....
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.... the LICENSOR and LICENSEE ii) The second instalment of JP¥ 250 Million (Japanese Yen Two Hundred and Fifty Million) shall be payable within 60 days after receipt of the Technical Information necessary for mass production of the Model by the LICENSEE as per Article 4, and iii) The final instalment of JP¥ 300 Million (Japanese Yen Three Hundred Million) shall be payable within 60 days after commencement of Commercial Production of the specific New or FMC model of the Products. b) For each MMC Model The amount of Model fee payable for each MMC of the Products, as detailed under Exhibit I, by the LICENSEE to the LICENSOR shall be JP¥ 400 Million (Japanese Yen Four Hundred Million). This fee shall be payable in two equal instalments as under: i) The first of such instalments of JP¥ 200 Million (Japanese Yen 200 Million) shall be payable within 60 days after signing of Model Agreement and receipt of the Technical Information necessary for mass production of the Model by the LICENSEE, as per Article 4, and ii) The second and final instalment of JP¥ 200 Million (Japanese Yen Two Hundred Million) shall be payable wit....
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....of the Supreme Court was not applicable on the facts of the present case. 29. The Ld. Counsel submitted that the facts before Hon'ble Delhi High Court in the case of Hero Honda Motors (supra) were identical to the facts and circumstances of the present case. The jurisdictional High Court while holding the payment for technical know-how and royalty to be in the nature of revenue expenditure has held as under: "16. Reading the aforesaid terms and conditions and applying the tests expounded, it has to be held that the payments in question were for right to use or rather for access to technical knowhow and information. The ownership and the intellectual property rights in the knowhow or technical information were never transferred or became an asset of the respondent assessee. The ownership rights were ardently and vigorously protected by Honda. The proprietorship in the intellectual property was not conveyed to the respondent assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to the responde....
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....nd objective to establish a unit for manufacture of automobiles and part thereof. As a result of this agreement, assessee company was incorporated which entered into TCA in question for technical collaboration. This technical collaboration included not only transfer of technical information, but, complete assistance, actual, factual and on the spot, for establishment of plant, machinery etc. so as to bring in existence manufacturing unit for the products. Thus, a new business was set up with the technical know-how provided by HMCL, Japan and lump-sum royalty, though in five installments, was paid therefor made under the issue are that payments. ........Since, it is found that the Agreement in question was crucial for setting up of the plant project in question for manufacturing of the goods, the expenditure in the form of royalty paid would be in the nature of capital expenditure and not revenue expenditure.... " 32. He submitted that it becomes clear that the judgment of the Hon'ble Supreme Court is distinguishable on facts and is applicable for the payments made at the time of setting up of plant and is not applicable in the present case. In the present case, there is....
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....cally recorded that the respondent assessee was already engaged in the business of manufacturing, assembling, selling and otherwise dealing with two/three wheelers and their parts as a joint venture. It. referred to the earlier collaboration agreement dated January 24, 1984 and the subsequent amendment thereto which conferred and had granted to the respondent assessee a right and licence to manufacture, assemble, sell, distribute, repair and service two/three wheelers. The aforesaid distinction between the two Agreements has made all the difference in the results. As a consequence, we find no merit in these appeals which are dismissed with coast." 35. The Hon'ble Supreme Court has carved out the distinction between the payments at the time of setting up of the manufacturing facility and the payments made once the manufacturing process has already begun. We observe from the facts available on record that the assessee had commenced manufacturing activity in the year 1998 itself and by virtue of the new TCA dated 01/04/2005 the technical information provided to the assessee was in respect of addition of the existing product profile already been manufactured by the assessee. The Hon....
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....booked under technical guidance fee as capital instead of the revenue claimed by the assessee. The expenditure incurred on cost of air tickets and other travel expenses for foreign technician booked by the assessee and forming part of "technical guidance fee" was held by the Assessing Officer as capital in nature because according to him said expenditure would provide longlasting benefit to the assessee. The assessee contended that the technical guidance fee itself was already held as revenue by the Tribunal in the case of the assessee for assessment year 2003-04 and subsequent years and thus the air fare expenses being part of technical guidance fee, cannot be held as capital in nature. The learned CIT-(A) deleted the addition with following finding: "5.6 I have considered the submissions of the appellant, the findings of the AO and the facts on record. It is seen that the Hon'ble ITAT has decided this issue on identical facts in favour of the appellant for the assessment year tabulated above. Since in the year under consideration on this issue also there is no change in facts as were existing in assessment year 2005-06, 2006-07, 2007- 08 and 2008-09, in which ITAT has gi....
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....ew 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." 42. The Ld. CIT(DR) relied on the assessment order in support of the ground of the appeal. The Ld. CIT(DR) tried to distinguish the case from previous assessment year by arguing that in earlier years the issue pertained to allowance of entry tax while in the present case the payment under consideration pertains to sales-tax. 43. On the other hand, Ld. counsel of the assessee submitted that the department's appeal on the said issue has been dismissed by the Tribunal in assessee's own case for assessment year 2009-10. As regard the distinguished features pointed out by the ld CIT(DR) that in the year under consideration the issue is regarding payment of sales tax and the earlier years it was adding entry tax, the counsel submitted that the underlying principle with regard to the issue remained same i.e. allowability of taxes paid under protest as deductible expenditure under section 43B of the Act. According to him, the observation of the Tribunal made in assessment year 2009-10 are squ....
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....he order of the Hon'ble ITAT in the appellant's own case for AY 2007-08 and AY 2008- 09, referred to above, and also the first appellate order for AY 2009-10, the payment of expenditure incurred on the above softwares, which are materially similar to the- software acquired by the appellant in earlier years, is held to be an allowable revenue expenditure. The Ground No. 5 of the appeal is therefore, allowed in favour of the appellant." 48. Before us, the Ld. CIT(DR) relied on the assessment order and submitted that expenditure on procuring software was capital in nature and it resulted in enduring benefit to the assessee. 49. On the other hand, the Ld. counsel of the assessee submitted that expenditure of website tracking and website online statistics tools were used for the purpose of tracking or providing security to website and not for acquiring an asset. It was brought to our attention the departments appeal on the said issue has been dismissed by the Tribunal in assessee's own case for assessment year 2009-10. Further, the said issue is also been held in favour of the assessee by the Hon'ble Delhi High Court in assessee's own case in ITA No. 34 of 2016 dated 18/01....