TaxTMI 
TaxTMI 
2026 (8) TMI 695
X X X X Extracts X X X X
X X X X Extracts X X X X
....16-17 as lead case wherein the assessee has raised the following grounds of appeal :- "Based on the facts and circumstances of the case, Honda Trading Asia Co. Ltd. [hereinafter referred to as the "Appellant"] respectfully craves leave to prefer an appeal against the order dated 30 March 2021 passed by Deputy Director / Assistant Director / Deputy Commissioner of Income Tax (International Taxation), Noida (hereinafter referred to as "the Learned AO") under Section 144C r.w.s. Section 143(3) of the Income Tax Act, 1961 ("Act") (hereinafter referred to as the "impugned order"). The following grounds of appeal are mutually exclusive and without prejudice to each another. 1. That, on the facts and in law, the impugned assessment order is passed without following the prescribed process in section 143(3) of the Act as no tax payable was determined in the assessment order, hence liable to be set aside. 2. That on the facts and in law, the Learned AO erred in assessing the income of the Appellant for the relevant assessment year at INR 9,50,77,000 (including transfer pricing adjustment amounting to INR 8,30,68,090) as against the NIL returned income. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....een seconded to India during relevant year, thus, there arises no question of carrying out the business of the Appellant in India. Thus, there is no question of PE at all in India. The findings of the Assessing Officer/ DRP that the expatriates were carrying out the business of the Parent and all the AEs including the Appellant is without any basis and contrary to the records of the present case. 10. That, the Hon'ble DRP / Learned AO erred in facts and in law in concluding that the Appellant has a fixed place PE under Article 5 of India- Thailand DTAA, even where no expatriates have been deputed by the Appellant to HCIL in India during relevant year. The Hon'ble DRP / Learned AO in this regard has completely ignored the decision of the Hon'ble Supreme Court in the case of ADIT vs E-Funds IT Solution Inc., 251 TaxmanZdf is squarely applicable to the present case. 11. That, the Hon'ble DRP / Learned AO erred in facts and in law and further in terms of the final order of Hon'ble Supreme Court in assessee's own case reported as Honda Motor Company Limited, Japan and Ors. vs. ADIT, 301 CTR 601, in the absence of seconded employee of the Appella....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sis) which was consistent with the Indian transfer pricing regulations prescribed under the Act read with the Income Tax Rules, 1962 ("Rules") and modifying the same for the purpose of making the impugned adjustment. 17. That, the Hon'ble DRP / Learned AO / Learned TPO erred in law in redetermining the price of the impugned international transactions undertaken by the Appellant and making transfer pricing adjustment amounting to INR 8,30,68,090 as the circumstances necessitating the re-determination of price by the Learned TPO as mentioned in sub-section (3) of section 92C did not exist in case of the Appellant. 18. That, the Hon'ble DRP / Learned AO / Learned TPO erred on facts and in law, in placing incorrect reliance on the orders passed in preceding years and holding that the Appellant has a permanent establishment ("PE") in India, when the Appellant does not have any presence in the form of office, employees, etc. 19. That, the Hon'ble DRP / Learned AO / Learned TPO erred on facts and in law, in not comprehending that there should be no additional attribution in India since Honda Cars India Limited ('HCIL') (which is being alleged....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... provision of support services. 25. That, the Hon'ble DRP / Learned AO / Learned TPO have grossly failed to undertake appropriate functional, asset and risk analysis of comparable, thereby selecting the inappropriate companies in the final set of comparables for the purpose of re-determination of arm's length price of the export / offshore supply transaction, solely for the purpose of making impugned adjustment amounting to INR 6,39,70,138 in relation to offshore supply transaction. 26. That, the Hon'ble DRP / Learned AO / Learned TPO have grossly erred in concluding that Appellant's assumed NIL profit in relation to offshore supply transaction is not within the arm's length range. 27. That, without prejudice to the Appellant's contention that it does not have a PE in India and no further profits are attributable to the alleged PE, the profit attribution made by the Hon'ble DRP / Learned AO / Learned TPO is excessive and should be limited to the Appellant's proportion out of the total profit computed to be attributable for all the Honda Group entities which according to the Learned AO have an alleged PE (in the form of HCIL....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ness of the foreign entities including the assessee. When the issue was raised to the assessee to explain the above findings and why the assessee should not be treated as having PE in India. In this regard, assessee has objected to the information found during surveys were applied in the case of the assessee and also it was objected as held in the case of CIT vs. S. Khader Khan and Sons (2008) 300 ITR 157 (Mad.) wherein it was laid down the principle that Statements recorded during survey statements have no evidentiary values. The above submissions were rejected by the Revenue. Further, he submitted that query raised by the AO with regard to PE in India and the assessee has submitted before that authorities below that the HCIL places the order for goods and other materials and the assessee supplies the same against the purchase order raised by the Indian entity. No services of the expatriates deputed in HCIL by the HCJ in India were utilized. Assessee has supplied the raw material and finished goods as per the requirements of the assessee and in this regard, it was submitted that HCIL manufactures on its own, HCIL sells on its own and HCIL discharges warranty claims after sales on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company's role is limited only to supply of material from outside India and HCIL is carrying on independent business on its own risks and for its own benefits. Further, it is submitted that no expatriate has been deputed by the assessee company. Hence, there is no question of PE of HTAS in India. * We would like to further submit that Article 5(1) of the India-Thailand DTAA which deals with fixed place PE defines fixed place PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The essential characteristics of a fixed place PE for Article 5(1) as provided under the International commentaries and Indian judicial precedents are as follows: * There must be a 'place of business' i.e. a facility such as premises or in certain cases, machinery or equipment ("place of business test'). * This place of business must be * 'fixed', i.e. it must be established at a distinct place with a certain degree of permanence ("permanence test"); and * There must be certain right of use of the place of business i.e. place should be at disposal of foreign enterprise ("right of use/ disposal te....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s affiliates including assessee. In this regard, reference may be made Article 5(6) of the India-Thailand DTAA which provides that: ".......The fact that a company, which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise), shall not, of itself, constitute either company or a permanent establishment of the other ..... " Thus, the Article clearly provides that mere presence of a subsidiary of a foreign entity in India shall not by itself constitute such subsidiary as a PE of the foreign entity. The aforesaid clause is a beneficial clause and it's a mistake in law to conclude a PE under Article 5(6). This clause rather supports the case of the assessee only. * Also, we wish to submit that there is no single evidence with the department to prove that employees of assessee visited India and are carrying out the business of assessee in India. Thus, the entire order is based on presumptions and manipulation of expatriate statements of HCIL. Further, the premises of HCIL are f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enure of about 2-4 years. The lien over these expatriates was still with the parent company. Moreover, the salaries received by them in India is more in the nature of allowances and their salary between from Honda Motor Company Limited, Japan, which is evident from the statement of expatriates employees as reproduced below: "Statement of Director (Marketing) Shri Tatsuya Natsume: Qn. Details of salary drawn in India and abroad? Ans. The salary in India is Rs. 7 lacs per annum (approx) and salary in Japan Rs. 40 lacs (approx). The salary in Japan is paid by Honda Motor Co. Ltd. Japan. Statement of K Harada, Director Purchase: Q. At present how much salary getting in India and Japan? Ans. I am getting approximately 60000 in India and getting salary of Japanese Yen 5 to 6 lacs Japanese Yen approx. from Honda Motor Co. Japan. Statement of Hideyoshi Takarada, Director (Finance): Q. How much salary you are getting in India as well as in abroad? Ans. I get salary of '66000/- PM in India and 835000 Japanese Yen. Thus, it is quite apparent that the employees are seconded to India by mainly reimburs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts being used to define "establishment". "A place of business", therefore, means all the tangible asset used for carrying on the business, in marginal cases, one such tangible asset would be sufficient. The term covers both premises and other tangible assets used by the enterprise'. Both premises and other tangible assets, therefore, constitute permanent establishment. Place of business covers premises, facilities and installations Place of business, place of operations taking place through territorial situs machinery, equipment or personnel - The term "place of business" covers any premises, facility or installation used for carrying on the business of the enterprise whether or not it is used exclusively for the purpose. The place of business is the place of operations of business activities from which profits arise, which may take place from the territorial situs or may be performed through machinery or equipment or an agent. Thus a fixed place would mean both physical resources as well as personnel who assists in the use or implementation of those resources. Any tangible property whether building, facilities, industrial, commercial or scientific eq....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld be said to have a PE, even if he does not have a defined physical location from which it carries his operations. Thus the bare reading of the above extract, it is quite apparent that there is no requirement for having an ear marked space in the office for having Permanent Establishment. The long-term and short-term expatriates visit India in connection with the business assignment without a pre planned schedule as all of them know in advance that they are having fixed place available for their working in the office of Hell for which no specific permission is required to be taken in advance. Merely change of the room or the use of visitors place or meeting rooms does not in any manner show that the expatriates are not having a fixed place available for their business activities in HCIL. Hence, the office premises of Hell is that fixed place which is available to expatriates coming from HMJ and other AEs including the assessee. As far as the short-term expatriates are concerned, the assessee was repeatedly requested to furnish the details of short-term expatriates and the purposes of their frequent visits to India which has not been furnished in spite of repeate....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Article 5(1) and 5(2) of the India-Thailand Double Taxation Avoidance Agreement. Transfer Pricing Order and Morgan Stanley's Case: The assessee has submitted the transactions between Honda Motor Company Limited, Japan and its subsidiary were referred to the Transfer Pricing Authority (TPO) under Section 92CA and that the TPO by his order held that the prices at which the said transactions took place between Honda Motor Company Limited, Japan, other foreign AEs and its subsidiary in India were at arm's length prices and, therefore, no transfer pricing adjustment was required to be made under Chapter X of the Act. The assessee has submitted that the order of the TPO was binding on the Assessing Officer under Section 92CA(4). The assessee has submitted that the Assessing Officer had no jurisdiction or authority in law to raise any contention, which was contrary to or inconsistent with the order of TPO passed under Section 92CA. The assessee has submitted that the transactions relating to sale of raw materials, finished good, capital goods, etc. between Honda Motor Company Limited, Japan, other foreign AEs and Indian Company stood already disclosed b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t had disclosed all the transactions with the petitioner relating to purchase of raw materials, finished goods, commission and reimbursements and further, in terms of Section 92CA of the Act, the TPO of the Indian subsidiary had already examined the said transaction and by its order dated 20th December, 2006 found the same to be meeting the arm's length principle, consequently, the Assessing Officer was precluded from drawing any inference that any further income of the petitioner from the same transactions was chargeable to tax had escaped assessment is erroneous and cannot be accepted. In Morgan Stanley's case (supra), the Supreme Court held: "The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) nor all profits of MSCo would be taxable in India but only those which have economic nexus with P.E. In India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the P.E. in India. The quantum of taxable income is to be determined in accordance with the provisions of the Income-tax Act. All provisions of the Income-tax Act are applic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the P.E. for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provided (MSAS in this case) fully represent the value of the profit attributable to his service. " It is further emphasized that once permanent establishment is established and function performed by the permanent establishment are identified, the income accruing to the assessee due to such function performed by permanent establishment needs to be attributed to the permanent establishment and taxed in the hand of the assessee. As TPO had not analysed functions performed by the permanent establishment as the same was not part of the TP analysis submitted by the subsidiary company, it cannot be said that nothing was attributable to the permanent establishment. It is also in line of the decision of Hon'ble Supreme Court in the case of Morgan Stanley. The assessee was required to subm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee and observed that assessee was required to furnish the details of function performed by the PE in India but the assessee has denied every function carried out by it as a PE in India. Afterconsidering the detailed submissions, the AOwere of the view that all the functions performed, assets employed and risk assumed by the assessee in India, it proposed that 75% of the profit is attributable out of India for various functions, such as, vendor development, procurements, quality inspection, etc. and other related functions and the remaining 25% is considered to be reasonable attributable to functions performed by the PE in India. 9. Ld AR submitted that aggrieved with the above order, assessee filed objections before the ld. DRP. Ld. AR brought to our notice that ld. DRP has rejected the detailed submissions of the assessee and held that the assessee has PE in India based on the sole findings from survey proceedings conducted in India. 10. Ld. AR further brought to our notice page 19 of the paper book which is the decision of coordinate Bench in the case of HCIL in AY 2009-10 order dated 29.06.2016. He submitted that in AY 2009-10, the coordinate Bench held in relation to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on and global experience for deputation with HSCI. Amongst ex-patriate employees some are holding senior management positions in HSCI, including the Managing Director (MD) of HSCI and also some Division Heads. The MD of HSCI is also an operating officer of Honda and visits Japan in this capacity to attend the meeting of Directors of Honda Group Companies. It was clarified that the role of the Managing Director as an operating officer of Honda does not have any relation to supply of goods by the applicant to HSCI and does not have any implication on taxability of the applicant in India. HSCI withholds tax on the entire salary payment made to ex-patriate employees. However, the applicant does not cross charge to HSCI the salary cost of such expatriate employees which has been paid overseas." 14. He also brought to our notice submissions of the ld. Revenue which reads as under :- "9. The Revenue, represented by Mr. G C Srivastava, Special Counsel, submitted that while a subsidiary cannot be regarded as a P.E. of the parent under normal circumstances, in this case the survey conducted at the premises or the subsidiary HSCI has thrown ample proof that the subsidiary and the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in Japan or Thailand. They were paid bulk of their salary by Honda, Japan and the Indian company was called upon to bear only lodging, transport and other local expenses apart from a small amount per month which was just adequate to sustain these employees with their day to day expenses in India. The Indian subsidiary did not reimburse such payments and the major part of salary was not only paid but borne by the parent company. The argument that the parent company was not charging back major part of the salary in order to provide financial support to the Indian Company was highly fallacious. It was submitted that the Parent can support the subsidiary either through equity or debt. However, if no distinction is kept between the financial liabilities of the parent entity and that of the subsidiary, it impinges upon the corporate veil which separates the subsidiary from its parent. Further, all the employees of Honda, Japan had lien over their employment with Honda, Japan and they were assigned the jobs in India for a specific period by either the Head Office or the Regional Offices of Honda. The Parent company or the Regional Headquarter Office decided as to how 'long au expatri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, he submitted that Ld AAR held as under :- "27. We have carefully considered the submissions of the revenue and the materials and evidences brought on record. There is no evidence found in the course of survey that HSCI had conducted any market survey on behalf of the parent Honda. As both parent and the subsidiary were dealing in the same range of products, it is imperative that the market survey will be conducted by the subsidiary as it had exclusive right for the Indian market. When asked about launch of models by HSCI, Mr. Takashi Nagai, President & CEO of HSCI had categorically stated in the course of his statement that "We have not launched any model which is not an existing model of Honda Motor Co. Limited. Japan. For existing models like JAZZ and Accord, we conduct surveys whether customers will buy these models or not and we share this information with Honda Motor Company Limited, Japan." It is thus found that the market surveys were conducted by HSCI in order to launch the models in Indian market and that such market surveys were not conducted on behalf of the parent company. It is imperative that the result or the market survey will be shared with the parent c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is to accept the contention of the revenue that the expatriate employees were functioning in dual roles. 30. The revenue has pointed that these expatriate employees carried out sale functions in respect of CR-V cars and the warranty claims were accepted by them on behalf of HM Japan. Further, these warrant claims were not always paid/reimbursed by HM Japan and that such business arrangement between the parent and subsidiary was possible only when the decision making authority of both the entities rests with the single person. The applicant has explained that the imported CR-V cars were sold to the customers by HSCI and not by the applicant. All the import of CR-V cars and spares was made by HSCI and, therefore, the warranty claims were in favour of HSCI only. As explained the warranty claims in respect of the defective parts were settled by HSCI and then got reimbursed from the applicant. In case certain warranty claim made by HSCI was not reimbursed by the applicant, it does not mean that HSCI was carrying on the business on behalf of the applicant. Similarly, regarding post sale functions of CR-V cars, as those cars were first imported by HSCI and then sold to the custom....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 dated 29th June, 2016, 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. Thus, the issue findings being conclusive, do not require any further indulgence of this Bench and, accordingly, we are inclined to allow this ground No.2 in favour ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Sr. Counsel further submitted that, even otherwise, offshore supplies are not taxable in India, for the purpose of attribution, reliance was placed on the judgment of Hon'ble Madras High Court in case of Annamalais Timber Trust (41 ITR 781), wherein it was held that profits exceeding 10% cannot be attributed in case of conclusion of trading operations. 19. We find that the 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. 20. Gro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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. 24. Ground 11: Interest under section 234A. 234B and 234C of the Act. It is submitted that the return of income for subject AY was filed within due date prescribed under section 139(1) of the Act, accordingly, interest under section 234A is not applicable. As with regard to interest under section 234B of the Act it was submitted that same is not leviable in the instant case and reliance in this regard was placed on the decision of Hon'ble supreme Court in case of Director of Income-tax, New Delhi vs. Mitsubishi Corporation [2021] 130 taxmann.com 276 (SC). As for interest under section 234C it was submitted that interest is applicable on returned income, accordingly, AO has erred in levying interest under section 234C. Even otherwise, grounds challenging levy of interest are consequential and, accordingly, adjudicated in favour of the assessee. 25. Thus, when we have concluded and s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndian entity, assessee being an AE of the Japan entity and both assessee and Japan entity have provided services to the assessee through their employees. Therefore, there is a direct nexus of involvement of the assessee. Therefore, he brought to our notice detailed findings of the lower authorities, accordingly, he relied on the same. Further, he also submitted that the decision relied upon by the ld. AR are relating to pre-survey period. He also brought to our notice findings of the coordinate Bench in the AY 2009-10 which are not relevant for the proceedings under consideration. Further, he submitted that about reliance on the decision of Hon'ble Delhi High Court decision, he submitted that which was delivered on different context. In this regard, he brought to our notice page 40 of the assessment order which is the detailed findings of the AO that legal and economic dependence of the Indian entity on Honda Motor Company Japan and the assessee. He brought to our notice detailed findings of AO in relation to relevance of survey proceedings, particularly relates to salary drawn by the expatriates from the Indian entity and parent entity. He brought to our notice detailed findings a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... merely on the above basis. 22. After considering the detailed findings given by the coordinate Bench in assessee's own case from AYs 2010-11, 2013-14, 2014-15 and 2015-16, it was held as under:- 19. We find that the 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. 23. Respectfully following the above decision and the facts in the present case are exactly similar to the facts in the above assessments years, the findings of the coordinate....