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.
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