TaxTMI 
TaxTMI 
2020 (8) TMI 35
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....roceedings did not satisfy necessary requisites contained in Section 147 of the Act and there being no reason to believe that any income chargeable to tax had escaped assessment. 2.1 That the reassessment proceeding was initiated beyond four years and in the absence of any allegation of the appellant not disclosing truly and fully material facts, reassessment were barred by limitation. 2.2 That the CIT(A) erred in sustaining the validity of reassessment proceedings in the absence of any reason to believe that any income of the appellant chargeable to tax has escaped assessment. 2.3 That the CIT(A) erred in sustaining the reassessment proceedings when the same were barred by limitation under the proviso to section 147 of the Act. 2.4 That the CIT(A) erred in sustaining the reassessment proceedings while not appreciating that the sole basis for initiating such proceedings was on account of reliance placed on the statements of expatriate employees of the appellant which were not admissible and could not form the basis of initiating such proceedings. WITHOUT PREJUDICE 3. That the AO/CIT(A) erred in making/sustaining an addition of R....
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....the hands of the Appellant owing to non-deduction of tax on purchase of raw materials, components etc. 8 That the AO/CIT(A) grossly erred in not appreciating that all transactions between the Appellant and the non-resident associated enterprises (AE's) had been determined at arm's length basis and in view of the Article 9 of the Double Tax Treaties, no further income could be attributed to the AE. 9 Without prejudice to the above grounds, that on the facts and circumstances of the case and in law, the CIT(A) has erred in following the order of the Hon'ble Dispute Resolution Panel ('DRP') in attributing 25% of the total income to the activities of the AE's in India alleging that selling of raw material, consumable spare parts, etc. has been carried in India when none of the selling operation is carried in India. 10 Without prejudice to the above grounds, that the CIT(A) has grossly erred in law and facts in applying the adjusted global profit ratio of the AE's as considered by the Hon'ble DRP after making disallowance of research and development (R&O). 10.1 That on the facts and circumstances of the case and in law, the....
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....at Rs. 228,76,75,607/- and the appeal filed by the Department stood dismissed and cross objections filed by the assessee were allowed vide order dated 22.07.2011. 3. However, subsequently a survey was conducted by Incometax Officer, International Taxation, Noida on 24.06.2010 and 19.12.2012 and during the survey proceedings, statements of the employees and expatriates recorded and intimation obtained during the survey proceedings that the non-resident parent company and other affiliate companies had a business connection and a Permanent Establishment (PE) in India as per the provisions of section 9(1)(i) of the Act and relevant tax treaties. It was also noticed from Form No.3CEB report that assessee had made various payments totaling Rs. 1057,30,04,248/- to the Associate Enterprise (AE) during the Financial Year (FY) 2005-06 relevant to Assessment Year (AY) 2006-07. Detail of such payment is extracted as under :- S. No. Payment made to Nature of payment as per 3CEB Amount 1 Honda Motor, Japan Purchase of raw materials 3,83,29,63,108 2 Honda Trading, Japan Purchase of raw materials 4,81,26,038 3 Asian Honda, Thailand Purchase of raw ma....
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....ompanies had a business connection and a PE in India and the assessee company is liable to deduct tax on these payments u/s 195 of the Act which the assessee company had failed to deduct and consequently, provisions contained u/s 40(a)(i) of the Act are attracted and the amount of Rs. 1057,30,04,248/- was liable to be disallowed u/s 40(a)(i) of the Act. AO finding these reasons sufficient to believe that due to the failure on the part of the assessee to disclose all material facts truly and fully, income of Rs. 1057,30,04,248/- had escaped assessment and consequently initiated the proceedings u/s 147 of the Act. 5. AO noticed that the assessee has made payments to various non-resident companies without deduction of tax u/s 195 of the Act, detailed as under :- S. No. Payment made to Nature of payment as per 3CEB Amount (in Rs.) 1 Honda Motor Co. Ltd., Japan Purchase of raw materials 5,86,07,09,109 Purchase of spare parts 23,32,089 2 Asian Honda Motor Co. Ltd. Purchase of raw materials 628,97,48,438 Purchase of spare parts 4,87,681 3 Honda Trading (Thailand) Co. Ltd. Purchase of raw materials 7,04,84,068 Purchase of co....
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....able) 2,81,042 28 Asian Honda Motor Co. Ltd. Interest on delayed payment/ 3,10,96,574 Total 14,96,88,760 Grand Total 1525,83,26,392 6. Consequently, AO assessed the total income u/s 143 (3)/147 of the Act at Rs. 12,86,00,74,220/- on account of disallowance u/s 40(a)(i) of the Act. 7. Assessee carried the matter by way of an appeal before the ld. CIT (A) who has sustained the addition of Rs. 13,09,82,982/- made u/s 40(a)(i) of the Act by partly allowing the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1 & 2 9. Grounds No.1 & 2 are dismissed having become infructuous as the reassessment proceedings have been quashed by the Hon'ble Supreme Court in the case of Assistant Director of Income-tax, Noida vs. Honda Motors Co. Ltd., Japan in case cited as (2019) 108 taxmann.com 300 (SC), copy available at page 17....
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....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 paras13 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 section 195 and consequently 40(a)(i) were not applicable related to the payment to Asia Honda Thailand. Regarding the payment to Honda Motor Co. Ltd Japan, the Tribunal observed that this issue of PE was not adjudicated by the Assessing Officer of that company and therefore disallowance u/s 40(....
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....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 of 'other disbursements' in para 38 to 42, held as follows:- "38. The question that next arises is whether the payment by the Assessee to HIAI qualifies as 'other disbursements' for the purpose of Article 26 (3)DTAA? 39. To recapitulate, the case of the R....
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.... it overrides the other provisions as contained in Sections 30to38of the Act. This means that the expenditure which is allowable under Sections 30to38of the Act in computing business income would be subject to deductibility condition in Section 40of 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 as the payment made to HIAI, i.e., payment made to anon-resident, is any different as far as allowability of such payment as a deduction when it is made to a resident. 48. Section 40(a) (i) of the Act, as it was during the AY in question i.e. 2001-02, did not provide for deduction i....
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....tems 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 taxable profits of the payer. No such consequence was envisaged in terms of Section 40(a) (i) of the Act as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under Article 26 (3)of the DTAA. 51. The arguments of counsel on both sides focussed on the expression ̳same conditions' in Article 26(3)of the D....
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.... 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 justification of a classification under a treaty like the DTAA, the line of enquiry cannot possibly be whether the classification has nexus to the object of the ̳statute' for the purposes ofArticle14of the Constitution of India, but whether the classification brought about by Section 40(a) (i) of the Act defeats the object of the DT....
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....o. 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 and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if ....
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....(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. DR made strenuous and elaborate submissions bringing out certain issues raised by the AO, to persuade us that TPO was wrong in coming to the conclusion that the transactions between the AEs and the assessee are at arm's length. We find that the TPO has pas....
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.... 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 year2009- 10, wherein the Tribunal has followed the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Herbalife (supra). 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, respectfully following the decision....