Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: form 3cd :: ACCOUNTING STANDARD :: ARTICLES ON INPUT TAX CREDIT IN VAT :: TAX RATES - GOODS TAXABLE @ 4% :: ACCOUNTING STANDARDS :: cpt :: due date for vat payment :: articles on VAT and GST in India :: Central Excise rule to resale the machines to a new company :: list of goods taxed at 4% :: empanelment :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: TDS :: VAT RATES :: VAT Audit
 
 
From the Courts »
  Vatsala Shenoy vs. JCIT (Supreme Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 M.K.Overseas Pvt. Ltd. Vs. Pr.Commissioner Of Income Tax-06
 Arshia Ahmed Qureshi Vs. Pr. Commissioner Of Income Tax-21
 CHAUDHARY SKIN TRADING COMPANY Vs. PR. COMMISSIONER OF INCOME TAX-21
  Sushila Devi vs. CIT (Delhi High Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 Deputy Director Of Income Tax Vs. Virage Logic International
 Commissioner Of Income Tax-3 International Taxation Vs. Virage Logic International India
 Pr. Commissioner Of Income Tax-06 Vs. Moderate Leasing And Capital Services Pvt. Ltd.
 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Mitsubishi Corporation India, Private Limited, Birla Tower, 5th Floor, Barakhamba Road, New Delhi 110 001. Vs. DCIT, Circle 16 (2), New Delhi.
May, 27th 2015
   IN THE INCOME TAX APPELLATE TRIBUNAL
        DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, AM & SHRI C.M. GARG, JM
                     ITA No.945/Del/2915
                   Assessment Year : 2010-11

Mitsubishi Corporation India,    vs.   DCIT, Circle 16 (2),
Private Limited,                       New Delhi.
Birla Tower, 5th Floor,
Barakhamba Road,
New Delhi ­ 110 001.

     (PAN : AAACM4764G)

     (APPELLANT)                             (RESPONDENT)

         Assessee By     :   Shri M.S. Syali, Sr. Advocate
                             Shri Tarandeep Singh, Advocate
                             Shri Harkunal Singh, Advocate
        Department By :      Shri Sanjay Prasad, CIT DR

           Date of Hearing             : 22.05.2015
           Date of Pronouncement       : 26.05.2015

                                 ORDER

PER R.S. SYAL, AM :


     This appeal by the assessee is directed against the order

passed by the Assessing Officer under Section 143 (3) read with

Section 144C of the Income-tax Act, 1961 (hereinafter also called

"the Act") in relation to the assessment year 2010-11.
                                 2            ITA No.945/Del./2015


2.   First ground of the appeal is against the addition on account

of transfer pricing adjustment amounting to Rs.9,62,59,809/-.

3.   Succinctly, the assessee, an Indian company, is a wholly

owned subsidiary of Mitsubishi Corporation, Japan (MCJ), a

general trading company headquartered in Tokyo. MCJ is one of

Japanese leading sogo shosha, engaged in linking buyers and

sellers of various products across the globe.        The assessee

reported certain international transactions in Form 3CEB. The

only international transaction in dispute is "Service fee received"

amounting to Rs.2,66,29,622/-. In order to demonstrate that its

international transactions were at Arm's Length Price (ALP), the

assessee employed the Transactional Net Margin Method

(TNMM) as the most appropriate method. Certain comparables

were chosen.       By using the multiple-year data of the

comparables, the assessee tried to show that its international

transactions were at ALP. The TPO rejected the assessee's use of

multiple-year data and restricted it to the current year alone.

While scrutinizing the international transaction of `Service fee'
                                3            ITA No.945/Del./2015




received amounting to Rs.2.66 crores, the assessee was called

upon to state the cost of goods in the hands of the associated

enterprises (AEs) on which such service fee was received. The

assessee submitted the cost of such goods at Rs.6,65,58,05,980/-

in the hands of its AE, on which it had earned the above referred

Service fee. The TPO proposed to treat the `Service commission'

segment as equivalent to the Trading segment.     The assessee's

cost base of Service Fee segment was accordingly worked out at

Rs.6,82,08,06,478/-, by clubbing the cost of goods amounting to

Rs.665.58 crore incurred by the AEs and expenses of Rs.16.50

crore incurred by the assessee in India under the Service fee

segment.    The TPO chose some comparable companies and

determined the average of their OP/TC at 3.00%, which was

proposed to the assessee for comments. After entertaining

objections raised by the assessee as regards the selection of

comparables etc., the TPO reduced the mean OP/TC of

comparables and determined the arm's length margin at 2.16%.

This resulted into a transfer pricing adjustment to the tune of

Rs.9,62,59,809/-. The assessee objected to the addition made by
                                 4             ITA No.945/Del./2015

the AO in the draft order on account of this transfer pricing

adjustment before the Dispute Resolution Panel (DRP). Vide its

Direction dated 16.12.2014, the DRP approved the action of the

TPO/AO. The assessee is contesting this addition amounting to

Rs.9.62 crore made by the AO.


4.   We have heard the rival submissions and perused the

relevant material on record.         It can be observed from the

international transactions reported by the assessee that apart from

earning Service fee amounting to Rs. 2.66 crore, being the

commission income for co-ordinating between the buyers and

sellers in the capacity of an agent, it also indulged into trading

activity by directly making purchases and sale of goods on

principal to principal basis. Segment-wise results of the assessee

from trading and service/commission segments are available at

page 592 of the paper book. Thus, it is evident that the assessee

did direct purchase and sale transactions with its AEs and also

acted as a service provider in the sale of their goods. There is no

dispute as regards the transactions undertaken by the assessee

under the `Trading segment' on which operating profit was
                                5            ITA No.945/Del./2015

determined by reducing purchase and other operating costs from

the sale value. The TPO has accepted such trading transactions at

ALP. The controversy is only qua the agency segment, under

which `Service fee' was received without making purchase or

sale of goods as an owner. In such circumstances, the question

arises as to whether the cost of goods, for which the assessee

simply provided services by acting as an agent, can be considered

in the hands of the assessee and the transaction of receipt of

`Service fee' be treated as that of a trading nature?     In our

considered opinion, the answer to this question can not be in

affirmative. The fact that the assessee did not purchase and sell

the goods under the `Service fee' segment, has not been disputed

by the TPO. There is no finding given by the Officer that the

assessee actually undertook trading but wrongly gave it a colour

of agency in its books of account. Once the position is that the

assessee sold the goods as an agent of its AEs and simply earned

commission, how the cost of such goods in the hands of the AE

can be taken into consideration and the entire transaction be

considered as that of sale and purchase, is anybody's guess. We
                                 6             ITA No.945/Del./2015

do not subscribe to the view canvassed by the TPO in this regard.

By equating commission business with the trading business, the

TPO has ventured to recharacterize the commission transaction as

a trading transaction, which is patently unacceptable. The

Hon'ble jurisdictional High Court in CIT VS. EKL Appliances

Ltd. (2012) 345 ITR 241 (Delhi) has held that the authorities

should not disregard the actual transaction or substitute other

transactions for them. Examination of a controlled transaction

should ordinarily be based on the transaction as it has been

actually undertaken. Further, their Lordships have carved out two

exceptions to the aforesaid principle, viz., (i) where the economic

substance of a transaction differs from its form; and (ii) where the

form and substance of the transaction are the same but

arrangements made in relation to the transaction, viewed in their

totality, differ from those which would have been adopted by

independent enterprises behaving in a commercially rational

manner. Neither the TPO has taken recourse to any of these

exceptions nor there is any material on record to justify the

bringing of the instant case within their sweep. Ex consequenti, it
                                 7             ITA No.945/Del./2015

is manifest that the authorities below erred in recharacterizing a

commission transaction into a trading transaction.


5.   One of the fundamental conditions for making a transfer

pricing analysis is that the international transaction must broadly

match with a comparable uncontrolled transaction.            If the

character of the original international transaction is tinkered with

certain permutations and combinations so as to make it fit for

making a comparison with an adjusted uncontrolled transactions,

it will lead to incongruous results, thereby rendering the entire

exercise of determining ALP, a futility. By combining the cost

of goods incurred by the AE with the expenses incurred by the

assessee, the TPO has embarked upon treating the foreign AE as

well as the assessee as tested parties to one transaction. Such an

approach has no sanction of law. The Hon'ble Delhi High Court

in Li & Fung (India) P. Ltd. Vs. CIT (2014) 361 ITR 85 (Del) has

repelled an approach similar to the one adopted in the instant

case. The Mumbai bench of the tribunal in Onward Technologies

Ltd. Vs. DCIT (2013) 36 CCH 46 (Mum) has also held that the
                                   8          ITA No.945/Del./2015

tested party in an international transaction can only be the

assessee and not its foreign AE.


6.   Adverting to the facts of the instant case, we find it as an

admitted position that the assessee simply rendered agency

services under this segment by co-ordinating between customers

and its AEs. By no standard, the assessee can be said to have

dealt with the goods of its AEs as an absolute owner. Once

position is such, we fail to comprehend as to how financial results

of the commission segment can be adjusted for making a

comparison with trading segment. The ld. AR has drawn our

attention towards the Tribunal orders passed in assessee's own

case for the earlier years reversing similar stand of the Revenue

authorities on the international transaction of receipt of Service

fee. As such, we set aside the impugned order on this score and

remit the matter to the TPO/AO for a fresh determination of ALP

of the international transaction of receipt of `Service fee' as per

law after allowing a reasonable opportunity of being heard to the

assessee.   In doing so, the assessee will initially propose

comparable instances having undertaken activity similar to it
                                        9                 ITA No.945/Del./2015

under this segment. Then it will be for the TPO to decide on

their comparability or otherwise and determine the ALP of this

transaction as per law. We further add that in doing so, the TPO

will consider the figures of the comparables for the current year

alone and not the multiple-year data as has been held by the

Hon'ble jurisdictional High Court in ChrysCapital Investment

Advisors (India) P. Ltd. VS. DCIT (Del) vide its judgment dated

27.4.2015.

7.      The next ground of the appeal is against the disallowance of

Rs.70,37,18,502/- made under section 40(a)(i) of the Act.

8.      The facts apropos this ground are that the assessee made

purchases from its AEs as under : -

S.No.   Name and Address of the AE          Description      of Amount          of
                                            transaction         purchases (Rs.)

1       Asia Modified Starch Co. Ltd.     Import of goods               3,506,647
                                       nd
        130-132 Sindhorn Building, 2
        Floor,
        Tower 1, Wireless Road, Lumpini
        Pathumwan,       Bangkok-10330,
        Thailand
2       Mitsubishi           Corporation Import of goods               29,926,820
        Unimetals, (Japan)
        8-1,    Akashicho,     Chuo-Ku,
        Tokyo-104-6591, Japan
3       Mitsubishi           Corporation Import of goods          14,758,916,057
        Unimetals, (Japan)
        Head Office, 3-1, Marunouchi 2 ­
        Chome, Chiyoda-Ku, Tokyo,
        Japan
                                      10                ITA No.945/Del./2015

4     Mitsubishi           Corporation,   Import of goods        6,658,981,033
      Singapore
      1 Temasek Avenue, #19-00
      Millenia     Tower,    Singapore
      0391921
5     Mitsubishi International GmbH,      Import of goods          17,610,327
      Germany      Hamburg     Brnach,
      Maattenwiete 5, Hamburg
6     Mitsubishi     Shoji   Chemical     Import of goods          16,669,779
      Corporation, 6-1, Kyobashi, 1-
      Chome, Chuo-Ku, Tokyo 104-
      0031
7     Petro Diamond Japan Corporation     Import of goods            2,566,470
      4th Floor, Mitsubishi Corp.
      Building, 6-3, Marunouchi
      2-Chome, Chiyoda-Ku, Tokyo
      100-0005
8     Thai MC Company Limited             Import of goods          32,266,358
      Thailand 968, 24th Floor, U-
      Chuliang, Foundation Rama 4
      Road Silon, Bangrak, Bangkok,
      Thailand
9     Total                                                     21,520,443,490




9.       The Assessing Officer observed that the assessee

paid/credited the accounts of its AE suppliers without deduction

of tax at source in terms of section 195 of the Act. On being

show-caused as to why disallowance be not made under section

40(a)(i) of the Act towards such purchases made from non-

resident group companies, the assessee stated that the Tribunal

has deleted such disallowance for the assessment year 2006-07

by observing that in some cases, the group entities did not have a

permanent establishment in India, while in others, the assessee
                                11            ITA No.945/Del./2015

was entitled to the benefit of non-discrimination clause in the

Double Taxation Avoidance Agreement between India and Japan

(DTAA). The facts of the instant year were claimed to be similar

to the said earlier year. Reliance was also placed on certain other

tribunal decisions in support of the assessee's entitlement for

making the payment of purchase price without deduction of tax at

source.   Not convinced, the Assessing Officer held that the

assessee was required to deduct tax at source on the business

profits of these companies as per the provisions of section 195 of

the Act. In holding so, he followed the view taken by him for the

immediately preceding year, that is, A.Y. 2009-10. He also relied

on Instruction dated 26.02.2014 issued by the CBDT and thus

computed the amount of disallowance under section 40(a)(i) at

Rs.70,37,18,502/- by applying gross profit rate of 6.54% (as

applied for the assessment year 2009-10) on total purchase

transactions of Rs.2152.04 crore and attributing 50% of the same

to the business operations of such companies in India.        This

resulted into an addition of Rs.70.37 crore, against which the

assessee has come up in appeal before us.
                                 12            ITA No.945/Del./2015




10. We have heard the rival submissions and perused the

relevant material on record. The AO has made disallowance u/s

40(a)(i) of the Act in respect of purchases made by the assessee

from its seven AEs to whom payments were made without

deduction of tax at source. First category consists of purchase

transactions entered with its six related parties situated in Japan,

Thailand and Germany. The case of the assessee is that these

non-resident AEs did not have any permanent establishment

during the year in India and, hence, income arising from sale of

goods to India could not be charged to tax under the Act in their

hands. Second category comprises of items at serial nos. 3 and 4

of the above Table which are, in fact, purchases made by the

assessee from MCJ including its branch office. The ld. AR

contended that the AO wrongly recorded the Mitsubishi

Corporation, Singapore, at serial no. 4 as a separate entity, which

is only a branch of MCJ, indicated at serial no. 3. This contention

was not controverted by the ld. DR with any material/evidence to

the contrary. The ld. AR argued that no deduction of tax at source

was warranted from the payments made to MCJ in view of non-
                                13           ITA No.945/Del./2015

discrimination clause in the DTAA. We will deal with these two

categories of transactions, one by one.

11.   First we espouse the category of purchases made from six

foreign AEs, for which the ld. AR claimed that they did not have

any PE in India and made off shore sales to the assessee, not

leading to generation of any income chargeable to tax under the

Act in their hands.

12. Section 40 of the Act begins with a non-obstante clause qua

sections 30 to 38 of the Act and provides that no deduction shall

be allowed in computing the income chargeable under the head

`Profits and gains of business or profession' in respect of the

items set out in the provision.      Clause (a)(i) of section 40

provides that no deduction shall be allowed in case of any

assessee, inter alia, on `other sum chargeable under this Act'

which is payable outside India or in India to a non-resident, not

being a company or to a foreign company on which tax is

deductible at source under Chapter XVII-B and such tax has not

been deducted or after deduction, has not been paid during the

previous year, or in the subsequent year before the expiry of the
                                 14            ITA No.945/Del./2015

time prescribed under sub-section (1) of section 200. Thus, in

order to invoke the provisions of section 40(a)(i), it is essential

that the amount payable by the assessee to a foreign company etc.

should be chargeable to tax under this Act in the hands of such

foreign company etc. The AO has pressed into service the

provisions of section 195 of the Act for treating the failure of the

assessee in making deduction of tax at source from the payments

made to the non-residents AEs. Sub-section (1) of section 195

states that any person responsible for paying to a non-resident,

not being a company, or to a foreign company, any payments

specified in the provision `or any other sum chargeable under the

provisions of this Act' shall, at the time of credit of such income

to the account of the payee or at the time of payment thereof in

cash or by the issue of a cheque or draft or by any other mode,

whichever is earlier, deduct income-tax thereon at the rates in

force. Thus deductibility of tax at source pre-supposes the

chargeability of income under the Act and disallowance u/s

40(a)(i) follows from non-deduction/payment of tax at source by

the person responsible on such payments. In other words, unless
                                 15            ITA No.945/Del./2015

income from the transaction is chargeable to tax under the Act in

the hands of non-resident etc., there can be no question of

deduction of tax at source and the consequential disallowance u/s

40(a)(i) of the Act cannot follow.

13.   It, therefore, becomes essential to first determine if the non-

resident AE sellers were liable to tax in India for the goods sold

by them to the assessee in India. As against a resident chargeable

under the Act in respect of his world income, a non-resident as

per section 5(2) of the Act is chargeable only in respect of

income from whatever source derived, which is received or is

deemed to be received in India or accrues or arises or is deemed

to accrue or arise to him in India. Section 9(1) of the Act provides

that all income accruing or arising, whether directly or indirectly,

through or from any business connection in India, etc., shall be

deemed to accrue or arise in India. Explanation 1(a) to this

provision states that in the case of a business of which all the

operations are not carried out in India, the income of the business

deemed under clause (i) to accrue or arise in India shall be only

such part of the income as is reasonably attributable to the
                                 16            ITA No.945/Del./2015

operations carried out in India. The effect of this provision is that

all income accruing or arising to a non-resident from any

business connection etc. in India, to the extent of the operations

of such business carried out in India, shall be deemed to accrue

or arise in India and the provisions of section 5(2) shall be

magnetized. Per contra, if the business operations are not carried

out in India, but, still a non-resident earns income from any

business connection in India, that income shall not be deemed to

accrue or arise to him in India in terms of section 9(1)(i) of the

Act and will get immunity from Indian taxation. The Hon'ble

Supreme Court in CIT vs. R.D. Aggarwal & Co. and Another

(1965) 56 ITR 20 (SC) considered a case in which the assessee

obtained orders from dealers in Amritsar.        Such orders were

accepted by non-resident. Price was received and delivery was

given outside India.      No operations, such as, procuring of

material or manufacture of finished goods, took place within

India. It was held that no business connection was there and, in

the absence of the non-resident having any place of business in

India, the case was not covered within the provision analogous to
                                17            ITA No.945/Del./2015

section 9(1)(i) of the Act. Similar view has been reiterated by the

Hon'ble Supreme Court in CIT vs. T.I & M Sales Ltd. (1987) 166

ITR 93 (SC) and more recently in GVK Industries Ltd. And

Another vs. ITO and Another (2015) 371 ITR 453 (SC). It,

therefore, follows that when a non-resident makes offshore

supply of goods to an Indian enterprise, without performing any

activity in India, no income accrues or arises to him in India. If,

however, some activity is done in India or some operations are

performed in India, then, the income attributable to such

operations is chargeable to tax under the Act. The absence of a

Permanent Establishment of a non-resident in India ordinarily

implies that no business operations were carried out by him in

India. The existence of a PE in India may require examination as

to whether such PE was involved in specific transactions between

non-resident and an unrelated Indian enterprise. In case there is

no PE of the foreign enterprise in India and the goods are directly

sold offshore by such non-resident enterprise without performing

any operations in India, then, no income can accrue or arise or
                                18            ITA No.945/Del./2015

deemed to accrue or arise to him in terms of section 9(1)(i) of the

Act.

14. Reverting to the facts of the instant case, we find that out of

the assessee's import transactions with six AEs, three are with

Mitsubishi Shoji Light Metal, Japan, Thai MC Company Ltd.,

Thailand and Petro Diamond Corporation, Japan. The assessee

made purchases from these three AEs in the immediately

preceding assessment year and the Tribunal was pleased to hold

that in the absence of any PE of these three enterprises in India,

the provisions of section 40(a)(i) were not attracted. The AO,

while finalising the assessment for the current year, has noticed

on pages 52 and 54 of his order that the assessee made identical

reply which was made during the course of assessment

proceedings for the assessment year 2009-10. In rejecting the

assessee's contention put forth for the instant year and making

disallowance u/s 40(a)(i) of the Act, he relied on the view taken

by him for the said assessment year 2009-10. Since the

assessment order for the assessment year 2009-10 has been

overturned by the Tribunal on this issue by holding that there was
                                19           ITA No.945/Del./2015

no evidence of such enterprises having any PE in India and as

such no disallowance was called for, we are unable to

countenance the contrary view canvassed by the ld. DR on this

count. In so far as the purchase transactions with the other three

AEs are concerned, namely, Mitsubishi Corporation, Unimetals,

Japan,   Asia   Modified    Strach,   Thailand   and   Mitsubishi

International, GmbH, Germany, we find that the AO has dealt

with the purchase transactions with all the six AEs in a common

manner without separately adjudicating upon these three parties

which were not involved in the preceding year. This shows that

the facts and circumstances in respect of these AEs are similar to

those of the three AEs from whom the assessee purchased goods

in the preceding year as well. Apart from relying on his order for

the AY 2009-10, the AO also noticed that the Tribunal order in

the case of Metalone Corporation, in favour of the assessee, has

not been accepted by the Department and appeal is pending

against it before the High Court.        The case of Metalone

Corporation was originally taken cognizance of by him in an

earlier year for holding that all the foreign AEs would be deemed
                                 20            ITA No.945/Del./2015

to have PE in India because of some common activity carried out

in India on behalf of all of them. This contention of the Revenue

came to be turned down by the Tribunal in its order of Metalone

Corporation by holding that the existence of PE cannot be

inferred in such circumstances. In view of the fact that the AO

has not drawn any line of distinction between the three new AEs

from which the assessee made purchases in the current year alone

vis-a-vis the remaining three from which imports were made in

earlier years as well, and, further, on the failure of the ld. DR to

point out any difference in the factual or legal position existing in

respect of these three new entities, we are inclined to follow the

same conclusion as given for the three parties coming from the

earlier year for which the Tribunal has held that they did not have

any PE in India. The crux of the matter is that since these six AEs

did not have any PE in India, the off-shore sales made by them to

the assessee in India would not generate any income chargeable

under the Act to the AEs from such sale transactions.
                                 21            ITA No.945/Del./2015

15.    Now we take up the second category of purchases made

from MCJ, for which the ld. AR claimed the benefit of non-

discrimination clause of the DTAA to bolster his submission of

non-applicability of the provisions of section 40(a)(i) of the Act.

The sum and substance of his arguments is that total purchases

amounting to Rs.2141.78 crore were made by the assessee from

MCJ including its overseas branch office and non-discrimination

clause under Article 24 of the DTAA applies warranting non-

deduction of tax at source. Au contraire, the ld. DR put forth that

the case of the assessee is covered under Article 9 of the DTAA

and for that reason, the application of Article 24 is ousted.


16. In order to appreciate the above rival contentions, it would

be apposite to consider the mandate of Article 24, the relevant

part of which, is as under:-

      `ARTICLE 24 - 1. Nationals of a Contracting State shall be
      subjected in the other Contracting State to any taxation or any
      requirement connected therewith which is other or more
      burdensome than the taxation and connected requirements to
      which nationals of that other Contracting State in the same
      circumstances are or may be subjected. This provision shall,
      notwithstanding the provisions of article 1, also apply to
      persons who are not residents of one or both of the Contracting
      States.
                                  22             ITA No.945/Del./2015

     2. The taxation on a permanent establishment which an
     enterprise of a Contracting State has in the other Contracting
     State shall not be less favourably levied in that other
     Contracting State than the taxation levied on enterprises of that
     other Contracting State carrying on the same activities.
     This provision shall not be construed as obliging a Contracting
     State to grant to residents of the other Contracting State any
     personal allowances, reliefs and reductions for taxation
     purposes on account of civil status or family responsibilities
     which it grants to its own residents.
     3. Except where the provisions of article 9, paragraph 8 of
     article 11, or paragraph 7 of article 12 apply, interest, royalties
     and other disbursements paid by an enterprise of a Contracting
     State to a resident of the other Contracting State shall, for the
     purpose of determining the taxable profits of such enterprise, be
     deductible under the same conditions as if they had been paid to
     a resident of the first mentioned Contracting State.........'.

17   It is equally important to consider the prescription of Article

9, the relevant part of which runs as under :-


     `ARTICLE 9 - 1. Where :
     (a) an enterprise of a Contracting State participates directly or
     indirectly in the management, control or capital of an enterprise
     of the other Contracting State, or
     (b) the same persons participate directly or indirectly in the
     management, control or capital of an enterprise of
     a Contracting State and       an     enterprise       of      the
     other Contracting State,

     and in either case conditions are made or imposed between the
     two enterprises in their commercial or financial relations which
     differ from those which would be made between independent
     enterprises, then any profits which would, but for those
     conditions, have accrued to one of the enterprises, but, by
     reason of those conditions, have not so accrued, may be
                                 23            ITA No.945/Del./2015

     included in the profits of that enterprise and taxed
     accordingly.....'.





18. The case of the ld. AR is that the assessee is entitled to the

benefit of Article 24 in terms of para 3. A perusal of this para

transpires that except where the provisions of Article 9 etc. apply,

interest, royalties and other disbursements paid by an Indian

enterprise to a Japanese enterprise, shall, be deductible in

determining the taxable profits of the Indian enterprise under the

same conditions as if they had been paid to an Indian resident.

Simply stated, para 3 of Article 24 provides that any payment

made by an Indian enterprise to a Japanese enterprise shall, for

the purposes of determining the taxable profit of an Indian

enterprise, be taken up under the same conditions as if the

payment had been made to an Indian resident and not to a non-

resident. In simple words, for the purpose of computing the

taxable profit of an Indian enterprise, the provisions of the Act

shall apply on a transaction with a Japanese enterprise as if it is a

transaction with an Indian enterprise. If the transaction with a
                                24           ITA No.945/Del./2015

Japanese enterprise entails some adverse consequences in

comparison with if such transaction had been made with an

Indian enterprise, then such adverse consequences will be

remedied under this clause by presuming, for computing the total

income of an Indian enterprise, as if it was a transaction with an

Indian enterprise and not a Japanese enterprise. Thus, Article 24

provides in unequivocal terms that for the purposes of

determining the taxable profits of an Indian enterprise, any

disbursements made to a Japanese enterprise shall be deductible

in the same manner as if it had been made to an Indian resident.

When we examine the TDS provisions, it is noticed that no

provision under the Chapter XVII of the Act stipulates for

deduction of tax at source from payment made for the purchases

made from an Indian resident. This position when contrasted

with purchases made from a non-resident, imposes liability on the

purchaser for deducting tax at source under section 195, subject

to the fulfilment of other conditions. When we compare an Indian

enterprise purchasing goods from an Indian party vis-a-vis from a

Japanese party, there is possibility of an obvious discrimination
                                 25            ITA No.945/Del./2015

in terms of disallowance of purchase consideration under section

40(a)(i) in so far as the purchases from a Japanese enterprise are

concerned.    It is this discrimination which is sought to be

remedied by para 3 of Article 24. The effect of this Article is that

in determining the taxable profits of an Indian enterprise, the

provisions of the Act, including disallowance u/s 40(a)(i), shall

apply as if the purchases made from a Japanese enterprise are

made from an Indian enterprise. Once purchases are construed to

have been made by an Indian enterprise from another Indian

enterprise, not requiring any deduction of tax at source from the

purchase consideration and consequently ousting the application

of section 40(a)(i), the non-discrimination clause shall operate to

stop the making of disallowance in case of purchases actually

made from a Japanese enterprise, which would have otherwise

attracted the disallowance. Thus, it is evident that para 3 of

Article 24, without considering the effect of Article 9 and other

Articles referred to in the beginning of this para, rules out the

making of disallowance u/s 40(a)(i) of the Act.
                                 26            ITA No.945/Del./2015

19.    Now let us examine Article 9 of the DTAA and its setting

in Article 24(3), which in the opinion of the ld. DR, comes to the

rescue of the Revenue in making inoperative the otherwise

applicability of para 3 of Article 24. The opening part of para 3

provides that `Except where the provisions of article 9 .... apply'.

Then it talks about the application of non-discrimination as

discussed above. This shows that the provisions of Article 24(3)

shall be restricted to the extent of applicability of Article 9. In

other words, whatever has been provided in Article 9 shall remain

intact and will have superseding effect over the mandate of

Article 24(3). The contention of the ld. DR that once Article 9

applies, then the application of Article 24(3) is thrown out, is not

wholly correct.     The writ of Article 9 does not stop the

application of Article 24(3) in entirety. The overriding effect of

Article 9 over para 3 of Article 24 is limited to its content alone.

In other words, the mandate of Article 24 applies save and except

as provided in Article 9 etc. It does not render Article 24(3)

redundant in totality. A conjoint reading of these two Articles

brings out that if there is some discrimination in computing the
                                 27            ITA No.945/Del./2015

taxable income as regards the substance of Article 9, then such

discrimination will continue as such. But, in so far as rest of the

discriminations covered under para 3 of Article 24 are concerned,

those will be removed to the extent as provided.

20.    Now let us decipher the instruction of the relevant part of

Article 9 of the DTAA as extracted above. Para 1 of this Article

can be viewed in two parts, viz., clause (a) or clause (b) as one

part and the portion starting with `and' as the second part. Such

first part sets out the basic condition for the applicability of the

second part. The first part provides for the one enterprise directly

or indirectly controlling or contributing to the capital of the other

or the existence of common persons managing or contributing to

the capital of both the enterprises. The existence of the conditions

set out in the first part in the case of the assessee has not been

disputed by the ld. AR. The second part of para 1 of Article 9

provides that when the stipulations of the first part of para 1 of

Article 9 are satisfied AND the conditions between the two

enterprises in their commercial or financial relations differ from

those which would have been between two independent
                                 28            ITA No.945/Del./2015

enterprises, then, any profit which has not accrued to one of the

enterprises due to such conditions, may be included in the profits

of that enterprise and taxed accordingly. The effect of the second

part is that the transactions between the two enterprises should be

viewed at arm's length notwithstanding their commercial or

financial relations. And if the profit accruing to an enterprise has

been understated due to such commercial or financial relations,

then, such understated profits should also be taxed. On

circumspection of Article 9 read with Article 24, the position

which emerges is that the enhancement of income made by virtue

of Article 9 in treating the inhibited transactions between two

enterprises as at arm's length price, cannot be neutralised by the

application of Article 24. In other words, Article 24 applies on all

discriminations as set out in it except those specifically excluded

including Article 9. Reverting to the facts of the instant case, we

find that the assessee is seeking the benefit of article 24 qua the

disallowance u/s 40(a)(i) and not in respect of any transfer

pricing adjustment made by bringing transactions between two

AEs at arm's length price.       Disallowance u/s 40(a)(i) is an
                                 29          ITA No.945/Del./2015

independent component of the computation of total income which

is distinct from any transfer pricing adjustment. Article 24 read

with Article 9 albeit prohibits the deletion of enhancement of

income due to the making of transactions at ALP, but permits the

deletion of enhancement of income due to disallowance u/s

40(a)(i) of the Act. Be that as it may, we find that the TPO has

not proposed any transfer pricing adjustment in respect of

`Trading segment' of the assessee under which the purchases in

question were made. The addition on account of TP adjustment

is in respect of `Service fee received', which was earned by the

assessee without making purchases of the goods from its AEs.

As disallowance u/s 40(a)(i) is in respect of purchases made from

the AEs, which is in no manner connected with the Commission

segment, we hold that the assessee is entitled to the benefit

provided by article 24 of the DTAA and cannot be visited with

the disallowance u/s 40(a)(i) of the Act.


21. The foregoing discussion divulges that there existed no

liability on the assessee to deduct tax at source from        the
                                  30            ITA No.945/Del./2015

payments made by it to the above listed seven foreign AEs, either

because of non-chargeability of income under the Act from sale

of such goods to the assessee or because of the application of

non-discrimination clause. The natural corollary which follows

is that the provision of section 195 cannot apply and, resultantly,

there can be no disallowance u/s 40(a)(i) of the Act.            We,

therefore, order for the deletion of this disallowance. This ground

is allowed.


22. The only other ground is against the disallowance of

Rs.1,38,410/- made by the AO u/s 14A of the Act. The AO has

recorded in para 4 of his order that even if no exempt income was

earned by the assessee in the year in question, still it was liable to

offer disallowance u/s 14A of the Act. He, therefore, computed

disallowance under this provision at Rs.1,38,410/-.


23. After considering the rival submissions and perusing the

relevant material on record, we find it as an admitted position that

the assessee did not earn any exempt income during the year.

The Hon'ble jurisdictional High Court in CIT vs. Holcim India
                                31            ITA No.945/Del./2015

Pvt. Ltd. (2014) 90 CCH 081 Del-HC, has held that no

disallowance u/s 14A can be made in the absence of any exempt

income. In Joint Investments Pvt. Ltd. Vs. CIT (2015) 372 ITR

694 (Del), it has been held that disallowance u/s 14A cannot

exceed the exempt income. Since the assessee admittedly did not

earn any exempt income during the relevant year, respectfully

following the precedents, we hold that no disallowance u/s 14A

can be made. This ground is allowed.


24. In the result, the appeal is partly allowed.

     Order pronounced in open court on this 26th day of May,
2015.

           Sd/-                                    Sd/-
  (C.M. GARG)                            (R.S. SYAL)
JUDICIAL MEMBER                      ACCOUTNANT MEMBER

Dated the 26th May, 2015
dk

Copy forwarded to:
    1.Appellant
    2.Respondent
    3.CIT
    4.CIT(A)-III, New Delhi.
    5.CIT(ITAT), New Delhi.
                                        AR, ITAT, NEW DELHI.

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Team

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions