MITSUBISHI CORPORATION INDIA PVT. LTD., NEW DELHI V. DCIT, CIRCLE- 16(2), NEW DELHI

ITA 5184/DEL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4377 (ITAT-DELHI)
• Duration Of Justice: 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2013-2014
• Appeal Filed On: 09-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Double taxation relief; Permanent establishment; Advance ruling; Wholly owned subsidiary
• Section: 5(2); 144; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.5184/DEL./2017 (ASSESSMENT YEAR : 2013-14) M/S. MITSUBISHI CORPORATION INDIA PVT. LTD., VS. DC IT, BIRLA TOWER, 5 TH FLOOR, CIRCLE 16 (2), 25, BARAKHAMBA ROAD, NEW DELHI. NEW DELHI 110 001. (PAN : AAACM4764G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI TARANDEEP SINGH, ADVOCATE REVENUE BY : SHRI H.K. CHOUDHARY, CIT DR DATE OF HEARING : 12.09.2017 DATE OF ORDER : 22.09.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. MITSUBISHI CORPORATION INDIA P VT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 11.07.2017, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2013-14 ON THE GROUNDS INTER ALIA THAT :- ITA NO5184/DEL/2017 2 1. THAT ON FACTS AND IN LAW THE AO [HEREINAFTER REFERRED TO AS THE 'AO'] ERRED IN ASSESSING THE TOT AL INCOME OF THE APPELLANT AT RS.69,79,31,940/- AS AGAINST A RETURNED TOTAL INCOME OF RS.27,96,96,718/ -. 1.1 THAT ON FACTS AND IN LAW THE AO / DISPUTE RESOLUTION PANEL [HEREINAFTER REFERRED AS THE 'DRP'] ERRED IN IGNORING / GLOATING THE FOLLOWING BINDING PRECEDENTS: (A) ORDERS OF HON'BLE ITAT IN THE APPELLANT'S OWN CASE FOR THE A YS 2006-07, 2007-08, 2008- 09,2009-10,2010-11 AND A Y 2012-13. (B) ORDER PASSED BY DRP IN APPELLANT'S OWN CASE FOR AY 2011-12. (C) ORDER PASSED BY HON'BLE DELHI HIGH COURT IN CASE OF M/S HERBALIFE INTERNATIONAL INDIA LIMITED REPORTED IN 384 ITR 276 (DEL). I 2. THAT ON FACTS AND IN LAW THE AO/DRP ERRED IN MAKING A DISALLOWANCE OF RS.41,82,35,222/- UNDER SECTION 40(A)(I) OF THE ACT. 2.1 THAT ON FACTS AND IN LAW THE AO/DRP ERRED IN HOLDING/UPHOLDING THAT THE BENEFIT OF NON- DISCRIMINATION AS PER ARTICLE 24(3) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT ('DTAA') BETWEEN INDIA AND JAPAN IS NOT APPLICABLE AND AS SUCH DISALLOWANCE U/S 40(A)(I) IS WARRANTED. 3. WITHOUT PREJUDICE, ON FACTS AND IN LAW THE AO/DRP ERRED IN NOT CONSIDERING AND ADJUDICATING UPON THE CLAIM, THAT, PROVISIONS OF SECTION 40(A)(I ) ARE IN-APPLICABLE WHERE THE PAYMENTS ARE MADE FOR PURCHASE OF GOODS FROM NON-RESIDENTS, AS INCOME THEREFROM IS NOT CHARGEABLE TO TAX IN INDIA. 4. THAT ON FACTS AND IN LAW THE AO/DRP WITHOUT ANY COGENT, ACCEPTABLE MATERIAL ON RECORD ERRED IN HOLDING/UPHOLDING: ITA NO5184/DEL/2017 3 I. THAT THE SALE TO THE APPELLANT BY MITSUBISHI CORPORATION, JAPAN (MCJ) IS TAXABLE IN INDIA WHEN THE MCJ'S AO HAS CLEARLY HELD THAT SALE TO APPELLAN T IS NOT TAXABLE IN INDIA IN THE ASSESSMENT ORDER FOR AY 2009-10 AND 2010-11. II. THAT THE BRANCH OFFICE ('BO') COULD HAVE HELPED IN SALES TO APPELLANT AND NOT CONSIDERING TH E FACTUAL FINDING OF THE TPO OF MC] WHICH HAVE CLEARLY HELD THAT BO IS HELPING ONLY EPC BUSINESS O F MCJ'S MACHINERY GROUP AND ALSO IGNORING THE FACT THAT THE PURCHASE OF THE APPELLANT ARE NOT FROM THE MACHINERY GROUP OF MCJ. III. THAT THE APPELLANT HAS NOT FILED ANY DOCUMENTARY THAT AO OF MCJ HAS HELD THAT THERE IS NO PE IN CASE OF SALE TO THE APPELLANT WHEREAS NECESSARY EVIDENCES WAS DULY FILED WITH THE AO. IV. THAT THE BO OF MCJ IS A PE FOR THE PURPOSE OF MAKING SALE TO THE APPELLANT. V. THAT THE APPELLANT HAS NOT FILED ANY DOCUMENTARY EVIDENCES RELATING TO CLOSURE OF LO (ERRONEOUSLY MENTIONED AS 'BO' IN PAGE 49 OF THE ASSESSMENT ORDER), WHEREAS NECESSARY EVIDENCES RELATING TO CLOSURE OF LO WERE DULY FILED WITH THE AO. 5. THAT ON FACTS AND IN LAW THE AO/DRP HAS ERRED IN HOLDING THAT OTHER GROUP COMPANIES I.E. AS IA MODIFIED STARCH CO. LTD, THAILAND, MC ENERGY, INC, JAPAN, MITSUBISHI CORPORATION (TAIWAN) LTD, TAIPEI, MITSUBISHI SHOJI CHEMICALS CORPORATION, JAPAN, AND SPDC LTD, JAPAN HAVE A PE IN INDIA. 6. WITHOUT PREJUDICE AND IN ALTERNATIVE THE DISALLOWANCE MADE U/S 40(A)(I) IS EXCESSIVE AND NOT IN ACCORDANCE WITH LAW. 7. THAT ON FACTS AND IN LAW THE ORDERS PASSED BY AO AND DRP (TO THE EXTENT PREJUDICIAL TO THE INTERE ST OF APPELLANT) ARE BAD IN LAW AND VOID AB-INITIO. ITA NO5184/DEL/2017 4 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : THE TAXPAYER IS A PART OF SOGO SOSHA GROUP WHICH PLAY AN IMPORTANT ROLE IN LINKING BUYERS AND SELLERS FOR PRODUCTS RANGING FROM BULK COMMODITIES TO SPECIALIZ ED EQUIPMENTS. MITSUBISHI CORPORATION INDIA PRIVATE L IMITED (MCIPL) IS A WHOLLY OWNED SUBSIDIARY OF MITSUBISHI CORPORATION (MC) AND WAS INCORPORATED IN 1996. THE COMPANY IS A PART OF SOGO SHOSHA FUNCTION PERFORMED BY MC AS A WHOLE. I TS EQUITY SHARE CAPITAL IS HELD BY MC AND MITSUBISHI AUSTRALI A LIMITED. ACCORDINGLY, MC GROUP ENTITLES CONSTITUTED MCIPLS AES BY VIRTUE OF COMMON CONTROL AND CAPITAL. MAJOR BUSINE SS GROUPS THAT MCIPL DEALS IN ARE CHEMICAL, ENERGY, METAL MACHINER Y LIVING ESSENTIALS AND INDUSTRIAL FINANCE, LOGISTICS & DEVE LOPMENT GROUP. WITHIN THESE GROUPS, MITSUBISHI INDIA DEALS IN VARI OUS COMMODITIES. HOWEVER, MAJORITY OF OPERATIONS OF TH E COMPANY ARE FROM CHEMICALS GROUP. 3. THE TAXPAYER OPERATES IN TWO MAJOR SEGMENTS. IN THE TRADING SEGMENT, THE TAXPAYER UNDERTAKES HIGH SEA SALES T RANSACTIONS OR PRINCIPAL FORM OF TRANSACTIONS AND IN SERVICE SEGME NT, THE TAXPAYER IS A FRONT-END CONTACT IN INDIA FOR CUSTOMERS TO UN DERTAKE POTENTIAL SUPPLIER/CUSTOMER IDENTIFICATION AND BACKGROUND RES EARCH ON THE ITA NO5184/DEL/2017 5 PROSPECTIVE SUPPLIERS/CUSTOMERS APART FROM COLLATIN G INFORMATION SUCH AS MARKET DATA AND FINANCIAL CONDITIONS OF SUC H ENTITIES FOR ASSOCIATED ENTERPRISES (AES). 4. ASSESSING OFFICER NOTICED FROM THE FINANCIALS OF THE ASSESSEE THAT THE ASSESSEE HAS MADE PURCHASES FROM AES WITHO UT DEDUCTING TAX AT SOURCE IN COMPLIANCE TO THE PROVISIONS CONTA INED U/S 195 OF THE ACT. DETAILS OF PURCHASES MADE BY THE ASSESSEE FROM ITS AES ARE AS UNDER :- S. NO. NAME AND ADDRESS OF THE AE DESCRIPTION OF TRANSACTION AMOUNT OF PURCHASES 1 ASIA MODIFIED STARCH CO. LTD., 130-132 SINDHORN BUILDING, 2 ND FLOOR, TOWER 1, WIRELESS ROAD, LUMPINI PATHUMWAN, BANGKOK- 10330, THAILAND IMPORT OF GOODS 1,70,77,479 2 MITSUBISHI CORPORATION, JAPAN (INCLUDING OVERSEAS BRANCHES) HEAD OFFICE, 301, MARUNOUCHI 2- CHOME, CHIYODA-KU, TOKYO 100- 0005 IMPORT OF GOODS 27,34,31,66,430 3 MC ENERGY, INC 4 TH FLOOR, MITSUBISHI CORP. BUILDING, 6-3, MARUNOUCHI 2- CHOME, CHIYODA-KU, TOKYO 100- 0005 IMPORT OF GOODS 17,21,207 4 MITSUBISHI SHOJI CHEMICAL CORPORATION 6-1, KYOBASHI, 1- CHOME, CHUO- KU, TOKYO 104-0031 IMPORT OF GOODS 2,51,01,437 5 MITSUBISHI CORPORATION (TAIWAN) LTD. EMPIRE BLDG., 14 TH FL., 87 SUNG CHIANG ROAD, TAPEI, TAIWAN IMPORT OF GOODS 17,21,207 6 SPDC LTD., 2-3-10 NAGATA-CHO, CHIYODAKU TOKYO, 100 - 0014, JAPAN IMPORT OF GOODS 2,10,89,32,071 TOTAL 30,41,71,07,047 ITA NO5184/DEL/2017 6 5. ASSESSEE FILED COMPREHENSIVE SUBMISSIONS. AO, B EING DIS- SATISFIED WITH THE SUBMISSIONS MADE BY THE ASSESSEE , PROCEEDED TO CONCLUDE THAT THE ASSESSEE WAS REQUIRED TO DEDUCT T DS ON THE BUSINESS PROFIT ON THE PURCHASES MADE FROM ITS AES AS PER PROVISIONS CONTAINED U/S 195 OF THE ACT AND DETERMI NE THE GROSS PROFIT ON THE SALES TO THE ASSESSEE AT 2.75% AND CO MPUTED THE INCOME AT RS.83,64,70,444/- (RS.30,41,71,07,047/- X 2.75%) 50% OF THE ABOVE PROFIT IS ATTRIBUTABLE TO THE BUSINESS OPERATIONS OF THE ABOVE COMPANIES AND THE ASSESSEE WAS FOUND LIABLE T O DEDUCT THE TDS ON AN AMOUNT OF RS.41,82,35,222/- AND ACCORDING LY PASSED DRAFT ASSESSMENT ORDER DATED 21.12.2016. 6. ASSESSEE CARRIED THE MATTER BEFORE THE LD. DRP B Y WAY OF FILING OBJECTIONS WHO HAS DISMISSED THE OBJECTIONS AND DIRECTED THE AO TO COMPLETE THE ASSESSMENT. FEELING AGGRIEVED, THE ASSESSEE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING TH E PRESENT APPEAL. 7. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 8. LD. AR FOR THE ASSESSEE CHALLENGING THE IMPUGNED ORDER PASSED BY THE AO/DRP CONTENDED THAT THE ISSUE RAISE D IN THE ITA NO5184/DEL/2017 7 PRESENT APPEAL VIDE GROUNDS NO.2, 2.1 & 3 IS COVERE D IN ASSESSEES OWN CASE IN AY 2010-11 VIDE ORDER DATED 26.05.2015, AVAILABLE AT PAGES 596 TO 626 OF THE PAPER BOOK. LD. AR FOR THE ASSESSEE FURTHER CONTENDED THAT IN AYS 2010-11 AND 2012-13, ORDER PASSED BY THE TRIBUNAL HAS BEEN FOLLOWED BY THE REVENUE IT SELF. LD. AR ALSO RELIED UPON DECISION RENDERED BY HONBLE DELHI HIGH COURT CITED AS CIT VS. HERBALIFE INTERNATIONAL INDIA (P.) LTD. 3 84 ITR 276 (DEL.) WHEREIN THE ASSESSEE WAS AN INTERVENER AND THE IDEN TICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVENUE RELIED UPON THE ORDER PASSED BY AO/DRP. 9. FROM THE FACTS AND CIRCUMSTANCES OF THE CASE, GR OUNDS RAISED, ORDERS PASSED BY THE LOWER AUTHORITIES AND ARGUMENT S ADDRESSED BY THE AUTHORIZED REPRESENTATIVES OF THE PARTIES TO TH E PRESENT APPEAL, THE SOLITARY ISSUE ARISES FOR DETERMINATION IN THIS CASE IS :- AS TO WHETHER DISALLOWANCE OF RS.30,41,71,07,047 MADE BY THE AO/DRP UNDER SECTION 40A(I) OF THE ACT PERTAINING TO THE PURCHASES MADE FROM ITS AES WITHOUT DEDUCTING TAX AT SOURCE U/S 195 OF THE ACT IS NOT SUSTAINABLE, AS THIS ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE COMPANY? 10. THE LD. AR FOR THE ASSESSEE CHALLENGING THE IMP UGNED ORDER CONTENDED THAT THE DISALLOWANCE MADE BY THE AO/DRP IS NOT SUSTAINABLE AS THE ISSUE IS COVERED IN ASSESSEES O WN CASE FOR AY ITA NO5184/DEL/2017 8 2010-11. THIS CONTENTION IS NOT CONTROVERTED BY TH E LD. DR FOR THE REVENUE THAT THE IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN AY 2010-11. 11. THE LD. AR CHALLENGED THE IMPUGNED ORDER ON TWO GROUNDS : ONE, THAT IN RESPECT OF FIRST CATEGORY OF PURCHASES MADE BY THE ASSESSEE FROM ITS AES, SINCE THE SIX FOREIGN AES FR OM WHOM THE ASSESSEE HAD MADE PURCHASES ARE NOT HAVING THEIR PE IN INDIA AND MADE OFFSHORE SALES TO THE ASSESSEE AND NO INCOME C HARGEABLE TO TAX HAS BEEN GENERATED / CHARGEABLE TO TAX, SECTION 40A(I) OF THE ACT IS NOT ATTRACTED TO THAT; AND THAT IN CASE OF S ECOND CATEGORY OF PURCHASES MADE FROM MCJ, THE ASSESSEE IS ENTITLED T O CLAIM BENEFIT OF NON-DISCRIMINATION CLAUSE OF DTAA AND IN THAT CA SE ALSO, PROVISO TO SECTION 40A(I) IS NOT ATTRACTED. 12. UNDISPUTEDLY, THIS ISSUE HAS ALREADY BEEN DEALT WITH BY THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN AY 2010-11 AND HAS BEEN DETERMINED IN FAVOUR OF THE AS SESSEE. FOR READY PERUSAL, OPERATIVE PART OF THE FINDINGS RETUR NED BY THE COORDINATE BENCH OF THE TRIBUNAL IS REPRODUCED AS U NDER :- 7. THE NEXT GROUND OF THE APPEAL IS AGAINST THE DI SALLOWANCE OF RS.70,37,18,502/- MADE UNDER SECTION 40(A)(I) OF THE ACT. 8. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSES SEE MADE PURCHASES FROM ITS AES AS UNDER : - ITA NO5184/DEL/2017 9 S.NO. NAME AND ADDRESS OF THE AE DESCRIPTION OF TRANSACTION AMOUNT OF PURCHASES (RS.) 1 ASIA MODIFIED STARCH CO. LTD. 130-132 SINDHORN BUILDING, 2 ND FLOOR, TOWER 1, WIRELESS ROAD, LUMPINI PATHUMWAN, BANGKOK- 10330, THAILAND IMPORT OF GOODS 3,506,647 2 MITSUBISHI CORPORATION UNIMETALS, (JAPAN) 8-1, AKASHICHO, CHUO- KU, TOKYO-104-6591, JAPAN IMPORT OF GOODS 29,926,820 3 MITSUBISHI CORPORATION UNIMETALS, (JAPAN) HEAD OFFICE, 3-1, MARUNOUCHI 2 CHOME, CHIYODA-KU, TOKYO, JAPAN IMPORT OF GOODS 14,758,916,057 4 MITSUBISHI CORPORATION, SINGAPORE 1 TEMASEK AVENUE, #19- 00 MILLENIA TOWER, SINGAPORE 0391921 IMPORT OF GOODS 6,658,981,033 5 MITSUBISHI INTERNATIONAL GMBH, GERMANY HAMBURG BRANCH, MAATTENWIETE 5, HAMBURG IMPORT OF GOODS 17,610,327 6 MITSUBISHI SHOJI CHEMICAL CORPORATION, 6- 1, KYOBASHI, 1-CHOME, CHUO-KU, TOKYO 104- 0031 IMPORT OF GOODS 16,669,779 7 PETRO DIAMOND JAPAN CORPORATION 4 TH FLOOR, MITSUBISHI CORP. BUILDING, 6-3, MARUNOUCHI 2-CHOME, CHIYODA-KU, TOKYO 100-0005 IMPORT OF GOODS 2,566,470 8 THAI MC COMPANY LIMITED IMPORT OF GOODS 32,266,358 ITA NO5184/DEL/2017 10 THAILAND 968, 24 TH FLOOR, U-CHULIANG, FOUNDATION RAMA 4 ROAD SILON, BANGRAK, BANGKOK, THAILAND 9 TOTAL 21,520,443,490 9. THE ASSESSING OFFICER OBSERVED THAT THE ASSES SEE PAID/CREDITED THE ACCOUNTS OF ITS AE SUPPLIERS WITH OUT DEDUCTION OF TAX AT SOURCE IN TERMS OF SECTION 195 OF THE ACT . ON BEING SHOW-CAUSED AS TO WHY DISALLOWANCE BE NOT MADE UNDE R SECTION 40(A)(I) OF THE ACT TOWARDS SUCH PURCHASES MADE FRO M NON- RESIDENT GROUP COMPANIES, THE ASSESSEE STATED THAT THE TRIBUNAL HAS DELETED SUCH DISALLOWANCE FOR THE ASSESSMENT Y EAR 2006-07 BY OBSERVING THAT IN SOME CASES, THE GROUP ENTITIES DID NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA, WHILE IN OTHERS, THE ASSESSEE WAS ENTITLED TO THE BENEFIT OF NON-DISCRIMINATION C LAUSE IN THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA A ND 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 ASSESSEES ENT ITLEMENT FOR MAKING THE PAYMENT OF PURCHASE PRICE WITHOUT DEDUCT ION OF TAX AT SOURCE. NOT CONVINCED, THE ASSESSING OFFICER HELD THAT THE ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE ON TH E 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 4 0(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 P URCHASE TRANSACTIONS OF RS.2152.04 CRORE AND ATTRIBUTING 50 % OF THE SAME TO THE BUSINESS OPERATIONS OF SUCH COMPANIES IN IND IA. THIS RESULTED INTO AN ADDITION OF RS.70.37 CRORE, AGAINS T WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE US. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE AO HAS MADE DISALL OWANCE 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 WITHO UT DEDUCTION OF TAX AT SOURCE. FIRST CATEGORY CONSIST S OF PURCHASE TRANSACTIONS ENTERED WITH ITS SIX RELATED PARTIES S ITUATED IN JAPAN, THAILAND AND GERMANY. THE CASE OF THE ASSESSEE IS THAT THESE NON-RESIDENT AES DID NOT HAVE ANY PERMANENT ESTABLI SHMENT DURING THE YEAR IN INDIA AND, HENCE, INCOME ARISING FROM SALE OF ITA NO5184/DEL/2017 11 GOODS TO INDIA COULD NOT BE CHARGED TO TAX UNDER TH E ACT IN THEIR HANDS. SECOND CATEGORY COMPRISES OF ITEMS AT SERIAL NOS. 3 AND 4 OF THE ABOVE TABLE WHICH ARE, IN FACT, PURCHASES MA DE BY THE ASSESSEE FROM MCJ INCLUDING ITS BRANCH OFFICE. THE LD. AR CONTENDED THAT THE AO WRONGLY RECORDED THE MITSUBIS HI CORPORATION, SINGAPORE, AT SERIAL NO. 4 AS A SEPAR ATE ENTITY, WHICH IS ONLY A BRANCH OF MCJ, INDICATED AT SERIAL NO. 3. THIS CONTENTION WAS NOT CONTROVERTED BY THE LD. DR WITH ANY MATERIA L/EVIDENCE TO THE CONTRARY. THE LD. AR ARGUED THAT NO DEDUCTION O F TAX AT SOURCE WAS WARRANTED FROM THE PAYMENTS MADE TO MCJ IN VIEW OF NON- DISCRIMINATION CLAUSE IN THE DTAA. WE WILL DEAL WIT H THESE TWO CATEGORIES OF TRANSACTIONS, ONE BY ONE. 11. FIRST WE ESPOUSE THE CATEGORY OF PURCHASES MA DE 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 ASS ESSEE, NOT LEADING TO GENERATION OF ANY INCOME CHARGEABLE TO T AX UNDER THE ACT IN THEIR HANDS. 12. SECTION 40 OF THE ACT BEGINS WITH A NON-OBSTA NTE CLAUSE QUA SECTIONS 30 TO 38 OF THE ACT AND PROVIDES THAT NO D EDUCTION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION IN RE SPECT OF THE ITEMS SET OUT IN THE PROVISION. CLAUSE (A)(I) OF S ECTION 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 TA X IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR AFTER DEDUCTION, HAS NOT BEEN PAI D DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 20 0. THUS, IN ORDER TO INVOKE THE PROVISIONS OF SECTION 40(A)(I), IT IS ESSENTIAL THAT THE AMOUNT PAYABLE BY THE ASSESSEE TO A FOREIG N COMPANY ETC. SHOULD BE CHARGEABLE TO TAX UNDER THIS ACT IN THE H ANDS OF SUCH FOREIGN COMPANY ETC. THE AO HAS PRESSED INTO SERVIC E THE PROVISIONS OF SECTION 195 OF THE ACT FOR TREATING T HE FAILURE OF THE ASSESSEE IN MAKING DEDUCTION OF TAX AT SOURCE FROM THE PAYMENTS MADE TO THE NON-RESIDENTS AES. SUB-SECTION (1) OF S ECTION 195 STATES THAT ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT, NOT BEING A COMPANY, OR TO A FOREIGN COMPANY, ANY P AYMENTS 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 PAYME NT 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 ITA NO5184/DEL/2017 12 FORCE. THUS DEDUCTIBILITY OF TAX AT SOURCE PRE-SUPP OSES THE CHARGEABILITY OF INCOME UNDER THE ACT AND DISALLOWA NCE 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 INCOME FROM THE TRANSACTION IS CHARGEABLE TO TAX UN DER THE ACT IN THE HANDS OF NON-RESIDENT ETC., THERE CAN BE NO QUE STION OF DEDUCTION OF TAX AT SOURCE AND THE CONSEQUENTIAL D ISALLOWANCE U/S 40(A)(I) OF THE ACT CANNOT FOLLOW. 13. IT, THEREFORE, BECOMES ESSENTIAL TO FIRST DE TERMINE 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 RESI DENT 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 R ESPECT OF INCOME FROM WHATEVER SOURCE DERIVED, WHICH IS RECEI VED 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, WHETH ER DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, ETC., SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. EXPLA NATION 1(A) TO THIS PROVISION STATES THAT IN THE CASE OF A BUSINES S 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 INDI A SHALL BE ONLY SUCH PART OF THE INCOME AS IS REASONABLY ATTRIBUTAB LE TO THE OPERATIONS CARRIED OUT IN INDIA. THE EFFECT OF THI S PROVISION IS THAT ALL INCOME ACCRUING OR ARISING TO A NON-RESIDENT FR OM ANY BUSINESS CONNECTION ETC. IN INDIA, TO THE EXTENT O F THE OPERATIONS OF SUCH BUSINESS CARRIED OUT IN INDIA, SHALL BE DE EMED 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 INCOM E 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. TH E HONBLE 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 ORD ERS WERE ACCEPTED BY NON-RESIDENT. PRICE WAS RECEIVED AND D ELIVERY WAS GIVEN OUTSIDE INDIA. NO OPERATIONS, SUCH AS, PROCU RING OF MATERIAL OR MANUFACTURE OF FINISHED GOODS, TOOK PLA CE 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 PROVISIO N ANALOGOUS TO SECTION 9(1)(I) OF THE ACT. SIMILAR VIEW HAS BEEN REITERATED BY THE HONBLE SUPREME COURT IN CIT VS. T.I & M SALES LTD. (1987) 166 ITR 93 (SC) AND MORE RECENTLY IN GVK INDUSTRIES LTD. AND ITA NO5184/DEL/2017 13 ANOTHER VS. ITO AND ANOTHER (2015) 371 ITR 453 (SC) . IT, THEREFORE, FOLLOWS THAT WHEN A NON-RESIDENT MAKES O FFSHORE SUPPLY OF GOODS TO AN INDIAN ENTERPRISE, WITHOUT PE RFORMING ANY ACTIVITY IN INDIA, NO INCOME ACCRUES OR ARISES TO H IM IN INDIA. IF, HOWEVER, SOME ACTIVITY IS DONE IN INDIA OR SOME OPE RATIONS ARE PERFORMED IN INDIA, THEN, THE INCOME ATTRIBUTABLE T O 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 OU T BY HIM IN INDIA. THE EXISTENCE OF A PE IN INDIA MAY REQUIRE E XAMINATION AS TO WHETHER SUCH PE WAS INVOLVED IN SPECIFIC TRANSAC TIONS BETWEEN NON-RESIDENT AND AN UNRELATED INDIAN ENTERPRISE. I N CASE THERE IS NO PE OF THE FOREIGN ENTERPRISE IN INDIA AND THE GO ODS ARE DIRECTLY SOLD OFFSHORE BY SUCH NON-RESIDENT ENTERPRISE WITHO UT PERFORMING ANY OPERATIONS IN INDIA, THEN, NO INCOME CAN ACCRUE OR ARISE OR DEEMED TO ACCRUE OR ARISE TO HIM IN TERMS OF SECTIO N 9(1)(I) OF THE ACT. 14. REVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT OUT OF THE ASSESSEES IMPORT TRANSACTIONS WITH SIX AES, THREE ARE WITH MITSUBISHI SHOJI LIGHT METAL, JAPAN, THAI MC COMPAN Y LTD., THAILAND AND PETRO DIAMOND CORPORATION, JAPAN. THE ASSESSEE MADE PURCHASES FROM THESE THREE AES IN THE IMMEDIAT ELY PRECEDING ASSESSMENT YEAR AND THE TRIBUNAL WAS PLEA SED TO HOLD THAT IN THE ABSENCE OF ANY PE OF THESE THREE ENTERP RISES IN INDIA, THE PROVISIONS OF SECTION 40(A)(I) WERE NOT ATTRACT ED. THE AO, WHILE FINALISING THE ASSESSMENT FOR THE CURRENT YEA R, HAS NOTICED ON PAGES 52 AND 54 OF HIS ORDER THAT THE ASSESSEE M ADE IDENTICAL REPLY WHICH WAS MADE DURING THE COURSE OF ASSESSMEN T PROCEEDINGS FOR THE ASSESSMENT YEAR 2009-10. IN RE JECTING THE ASSESSEES CONTENTION PUT FORTH FOR THE INSTANT YEA R 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 HA S BEEN OVERTURNED BY THE TRIBUNAL ON THIS ISSUE BY HOLDING THAT THERE WAS NO EVIDENCE OF SUCH ENTERPRISES HAVING ANY PE IN IN DIA 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 MITSUBISH I INTERNATIONAL, GMBH, GERMANY, WE FIND THAT THE AO H AS DEALT WITH THE PURCHASE TRANSACTIONS WITH ALL THE SIX AES IN A COMMON MANNER WITHOUT SEPARATELY ADJUDICATING UPON THESE T HREE PARTIES WHICH WERE NOT INVOLVED IN THE PRECEDING YEAR. THI S SHOWS THAT THE FACTS AND CIRCUMSTANCES IN RESPECT OF THESE AES ARE SIMILAR TO ITA NO5184/DEL/2017 14 THOSE OF THE THREE AES FROM WHOM THE ASSESSEE PURCH ASED GOODS IN THE PRECEDING YEAR AS WELL. APART FROM RELYING O N HIS ORDER FOR THE AY 2009-10, THE AO ALSO NOTICED THAT THE TRIBUN AL ORDER IN THE CASE OF METALONE CORPORATION, IN FAVOUR OF THE ASSESSEE, HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND APPEAL IS P ENDING AGAINST IT BEFORE THE HIGH COURT. THE CASE OF META LONE CORPORATION WAS ORIGINALLY TAKEN COGNIZANCE OF BY H IM IN AN EARLIER YEAR FOR HOLDING THAT ALL THE FOREIGN AES W OULD BE DEEMED 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 CAN NOT BE INFERRED IN SUCH CIRCUMSTANCES. IN VIEW OF THE FAC T THAT THE AO HAS NOT DRAWN ANY LINE OF DISTINCTION BETWEEN THE T HREE NEW AES FROM WHICH THE ASSESSEE MADE PURCHASES IN THE CURRE NT YEAR ALONE VIS-A-VIS THE REMAINING THREE FROM WHICH IMPORTS WERE MADE IN EARLIER YEARS AS WELL, AND, FURTHER, ON THE FAILUR E OF THE LD. DR TO POINT OUT ANY DIFFERENCE IN THE FACTUAL OR LEGAL PO SITION EXISTING IN RESPECT OF THESE THREE NEW ENTITIES, WE ARE INCLINE D TO FOLLOW THE SAME CONCLUSION AS GIVEN FOR THE THREE PARTIES COMI NG FROM THE EARLIER YEAR FOR WHICH THE TRIBUNAL HAS HELD THAT T HEY DID NOT HAVE ANY PE IN INDIA. THE CRUX OF THE MATTER IS THAT SIN CE THESE SIX AES DID NOT HAVE ANY PE IN INDIA, THE OFF-SHORE SALES M ADE BY THEM TO THE ASSESSEE IN INDIA WOULD NOT GENERATE ANY INCOME CHARGEABLE UNDER THE ACT TO THE AES FROM SUCH SALE TRANSACTION S. 15. NOW WE TAKE UP THE SECOND CATEGORY OF PURCHA SES MADE FROM MCJ, FOR WHICH THE LD. AR CLAIMED THE BENEFIT OF NON- DISCRIMINATION CLAUSE OF THE DTAA TO BOLSTER HIS S UBMISSION OF NON-APPLICABILITY OF THE PROVISIONS OF SECTION 40(A )(I) OF THE ACT. THE SUM AND SUBSTANCE OF HIS ARGUMENTS IS THAT TOTA L PURCHASES AMOUNTING TO RS.2141.78 CRORE WERE MADE BY THE ASSE SSEE FROM MCJ INCLUDING ITS OVERSEAS BRANCH OFFICE AND NON-DI SCRIMINATION CLAUSE UNDER ARTICLE 24 OF THE DTAA APPLIES WARRANT ING 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 CONTEN TIONS, 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 S HALL BE SUBJECTED IN THE OTHER CONTRACTING STATE TO ANY TAX ATION OR ANY REQUIREMENT CONNECTED THEREWITH WHICH IS OTHER OR M ORE BURDENSOME THAN THE TAXATION AND CONNECTED REQUIREM ENTS TO WHICH NATIONALS OF THAT OTHER CONTRACTING STATE IN THE SAME ITA NO5184/DEL/2017 15 CIRCUMSTANCES ARE OR MAY BE SUBJECTED. THIS PROVISI ON SHALL, NOTWITHSTANDING THE PROVISIONS OF ARTICLE 1, ALSO A PPLY TO PERSONS WHO ARE NOT RESIDENTS OF ONE OR BOTH OF THE CONTRAC TING STATES. 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 CONTRA CTING STATE CARRYING ON THE SAME ACTIVITIES. THIS PROVISION SHALL NOT BE CONSTRUED AS OBLIGING A CONTRACTING STATE TO GRANT TO RESIDENTS OF THE OTHER CONTRACTIN G STATE ANY PERSONAL ALLOWANCES, RELIEFS AND REDUCTIONS FOR TAX ATION PURPOSES ON ACCOUNT OF CIVIL STATUS OR FAMILY RESPONSIBILITI ES 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 CONTRACTIN G 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 PRESCRIP TION OF ARTICLE 9, THE RELEVANT PART OF WHICH RUNS AS UNDER :- `ARTICLE 9 - 1. WHERE : (A) AN ENTERPRISE OF A CONTRACTING STATE PARTICIPA TES 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 INDIR ECTLY 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 BETWE EN THE TWO ENTERPRISES IN THEIR COMMERCIAL OR FINANCIAL RE LATIONS WHICH DIFFER FROM THOSE WHICH WOULD BE MADE BETWEEN INDEP ENDENT 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 IN CLUDED IN THE PROFITS OF THAT ENTERPRISE AND TAXED ACCORDINGLY... ... ITA NO5184/DEL/2017 16 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 PERUS AL OF THIS PARA TRANSPIRES THAT EXCEPT WHERE THE PROVISIONS OF ARTI CLE 9 ETC. APPLY, INTEREST, ROYALTIES AND OTHER DISBURSEMENTS PAID BY AN INDIAN ENTERPRISE TO A JAPANESE ENTERPRISE, SHALL, BE DEDU CTIBLE IN DETERMINING THE TAXABLE PROFITS OF THE INDIAN ENTER PRISE UNDER THE SAME CONDITIONS AS IF THEY HAD BEEN PAID TO AN INDI AN RESIDENT. SIMPLY STATED, PARA 3 OF ARTICLE 24 PROVIDES THAT A NY PAYMENT MADE BY AN INDIAN ENTERPRISE TO A JAPANESE ENTERPRI SE SHALL, FOR THE PURPOSES OF DETERMINING THE TAXABLE PROFIT OF A N INDIAN ENTERPRISE, BE TAKEN UP UNDER THE SAME CONDITIONS A S IF THE PAYMENT HAD BEEN MADE TO AN INDIAN RESIDENT AND NOT TO A NON- RESIDENT. IN SIMPLE WORDS, FOR THE PURPOSE OF COMPU TING THE TAXABLE PROFIT OF AN INDIAN ENTERPRISE, THE PROVISI ONS OF THE ACT SHALL APPLY ON A TRANSACTION WITH A JAPANESE ENTERP RISE AS IF IT IS A TRANSACTION WITH AN INDIAN ENTERPRISE. IF THE TRANS ACTION WITH A JAPANESE ENTERPRISE ENTAILS SOME ADVERSE CONSEQUENC ES IN COMPARISON WITH IF SUCH TRANSACTION HAD BEEN MADE W ITH AN INDIAN ENTERPRISE, THEN SUCH ADVERSE CONSEQUENCES W ILL BE REMEDIED UNDER THIS CLAUSE BY PRESUMING, FOR COMPUT ING THE TOTAL INCOME OF AN INDIAN ENTERPRISE, AS IF IT WAS A TRAN SACTION WITH AN INDIAN ENTERPRISE AND NOT A JAPANESE ENTERPRISE. T HUS, ARTICLE 24 PROVIDES IN UNEQUIVOCAL TERMS THAT FOR THE PURPOSES OF DETERMINING THE TAXABLE PROFITS OF AN INDIAN ENTERP RISE, ANY DISBURSEMENTS MADE TO A JAPANESE ENTERPRISE SHALL B E DEDUCTIBLE IN THE SAME MANNER AS IF IT HAD BEEN MADE TO AN IND IAN RESIDENT. WHEN WE EXAMINE THE TDS PROVISIONS, IT IS NOTICED T HAT NO PROVISION UNDER THE CHAPTER XVII OF THE ACT STIPULA TES FOR DEDUCTION OF TAX AT SOURCE FROM PAYMENT MADE FOR TH E PURCHASES MADE FROM AN INDIAN RESIDENT. THIS POSITION WHEN C ONTRASTED WITH PURCHASES MADE FROM A NON-RESIDENT, IMPOSES LI ABILITY ON THE PURCHASER FOR DEDUCTING TAX AT SOURCE UNDER SECTION 195, SUBJECT TO THE FULFILMENT OF OTHER CONDITIONS. WHEN WE COMP ARE AN INDIAN ENTERPRISE PURCHASING GOODS FROM AN INDIAN PARTY VIS-A-VIS FROM A JAPANESE PARTY, THERE IS POSSIBILITY OF AN OBVIOUS DISCRIMINATION 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 SOUG HT TO BE REMEDIED BY PARA 3 OF ARTICLE 24. THE EFFECT OF TH IS ARTICLE IS THAT IN DETERMINING THE TAXABLE PROFITS OF AN INDIAN ENT ERPRISE, THE PROVISIONS OF THE ACT, INCLUDING DISALLOWANCE U/S 4 0(A)(I), SHALL APPLY AS IF THE PURCHASES MADE FROM A JAPANESE ENTE RPRISE 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 S OURCE FROM THE ITA NO5184/DEL/2017 17 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 PURCHAS ES ACTUALLY MADE FROM A JAPANESE ENTERPRISE, WHICH WOULD HAVE O THERWISE ATTRACTED THE DISALLOWANCE. THUS, IT IS EVIDENT TH AT PARA 3 OF ARTICLE 24, WITHOUT CONSIDERING THE EFFECT OF ARTIC LE 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. 19. NOW LET US EXAMINE ARTICLE 9 OF THE DTAA A ND ITS SETTING IN ARTICLE 24(3), WHICH IN THE OPINION OF THE LD. D R, COMES TO THE RESCUE OF THE REVENUE IN MAKING INOPERATIVE THE OTH ERWISE 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-DISCRIMI NATION 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 MA NDATE OF ARTICLE 24(3). THE CONTENTION OF THE LD. DR THAT ON CE ARTICLE 9 APPLIES, THEN THE APPLICATION OF ARTICLE 24(3) IS T HROWN OUT, IS NOT WHOLLY CORRECT. THE WRIT OF ARTICLE 9 DOES NOT STO P THE APPLICATION OF ARTICLE 24(3) IN ENTIRETY. THE OVER RIDING EFFECT OF ARTICLE 9 OVER PARA 3 OF ARTICLE 24 IS LIMITED TO I TS CONTENT ALONE. IN OTHER WORDS, THE MANDATE OF ARTICLE 24 APPLIES S AVE AND EXCEPT AS PROVIDED IN ARTICLE 9 ETC. IT DOES NOT RENDER AR TICLE 24(3) REDUNDANT IN TOTALITY. A CONJOINT READING OF THESE TWO ARTICLES BRINGS OUT THAT IF THERE IS SOME DISCRIMINATION IN COMPUTING THE TAXABLE INCOME AS REGARDS THE SUBSTANCE OF ARTICLE 9, THEN SUCH DISCRIMINATION WILL CONTINUE AS SUCH. BUT, IN SO FA R 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 O F THIS ARTICLE CAN BE VIEWED IN TWO PARTS, VIZ., CLAUSE (A) OR CLA USE (B) AS ONE PART AND THE PORTION STARTING WITH `AND AS THE SEC OND PART. SUCH FIRST PART SETS OUT THE BASIC CONDITION FOR THE APP LICABILITY OF THE SECOND PART. THE FIRST PART PROVIDES FOR THE ONE E NTERPRISE DIRECTLY OR INDIRECTLY CONTROLLING OR CONTRIBUTING TO THE CA PITAL OF THE OTHER OR THE EXISTENCE OF COMMON PERSONS MANAGING OR CONT RIBUTING TO THE CAPITAL OF BOTH THE ENTERPRISES. THE EXISTENCE OF THE CONDITIONS SET OUT IN THE FIRST PART IN THE CASE OF THE ASSESS EE HAS NOT BEEN DISPUTED BY THE LD. AR. THE SECOND PART OF PARA 1 O F ARTICLE 9 PROVIDES THAT WHEN THE STIPULATIONS OF THE FIRST PA RT OF PARA 1 OF ARTICLE 9 ARE SATISFIED AND THE CONDITIONS BETWEEN THE TWO ITA NO5184/DEL/2017 18 ENTERPRISES IN THEIR COMMERCIAL OR FINANCIAL RELATI ONS DIFFER FROM THOSE WHICH WOULD HAVE BEEN BETWEEN TWO INDEPENDENT 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 EFFE CT OF THE SECOND PART IS THAT THE TRANSACTIONS BETWEEN THE TWO ENTER PRISES SHOULD BE VIEWED AT ARMS LENGTH NOTWITHSTANDING THEIR COMMER CIAL OR FINANCIAL RELATIONS. AND IF THE PROFIT ACCRUING TO AN ENTERPRISE HAS BEEN UNDERSTATED DUE TO SUCH COMMERCIAL OR FINANCIA L RELATIONS, THEN, SUCH UNDERSTATED PROFITS SHOULD ALSO BE TAXED . ON CIRCUMSPECTION OF ARTICLE 9 READ WITH ARTICLE 24, T HE POSITION WHICH EMERGES IS THAT THE ENHANCEMENT OF INCOME MAD E BY VIRTUE OF ARTICLE 9 IN TREATING THE INHIBITED TRANSACTIONS BETWEEN TWO ENTERPRISES AS AT ARMS LENGTH PRICE, CANNOT BE NEU TRALISED BY THE APPLICATION OF ARTICLE 24. IN OTHER WORDS, ARTICLE 24 APPLIES ON ALL DISCRIMINATIONS AS SET OUT IN IT EXCEPT THOSE SPECI FICALLY EXCLUDED INCLUDING ARTICLE 9. REVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSEE IS SEEKING THE BENEFIT OF AR TICLE 24 QUA THE DISALLOWANCE U/S 40(A)(I) AND NOT IN RESPECT OF ANY TRANSFER PRICING ADJUSTMENT MADE BY BRINGING TRANSACTIONS BE TWEEN TWO AES AT ARMS LENGTH PRICE. DISALLOWANCE U/S 40(A)( I) IS AN INDEPENDENT COMPONENT OF THE COMPUTATION OF TOTAL I NCOME WHICH IS DISTINCT FROM ANY TRANSFER PRICING ADJUSTMENT. ARTICLE 24 READ WITH ARTICLE 9 ALBEIT PROHIBITS THE DELETION OF ENH ANCEMENT OF INCOME DUE TO THE MAKING OF TRANSACTIONS AT ALP, BU T PERMITS THE DELETION OF ENHANCEMENT OF INCOME DUE TO DISALLOWAN CE U/S 40(A)(I) OF THE ACT. BE THAT AS IT MAY, WE FIND THA T THE TPO HAS NOT PROPOSED ANY TRANSFER PRICING ADJUSTMENT IN RES PECT OF `TRADING SEGMENT OF THE ASSESSEE UNDER WHICH THE P URCHASES 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 PURCH ASES MADE FROM THE AES, WHICH IS IN NO MANNER CONNECTED WITH THE C OMMISSION SEGMENT, WE HOLD THAT THE ASSESSEE IS ENTITLED TO T HE BENEFIT PROVIDED BY ARTICLE 24 OF THE DTAA AND CANNOT BE VI SITED WITH THE DISALLOWANCE U/S 40(A)(I) OF THE ACT. 21. THE FOREGOING DISCUSSION DIVULGES THAT THERE EX ISTED NO LIABILITY ON THE ASSESSEE TO DEDUCT TAX AT SOURCE F ROM THE PAYMENTS MADE BY IT TO THE ABOVE LISTED SEVEN FOREI GN AES, EITHER BECAUSE OF NON-CHARGEABILITY OF INCOME UNDER THE AC T FROM SALE OF SUCH GOODS TO THE ASSESSEE OR BECAUSE OF THE APP LICATION OF NON-DISCRIMINATION CLAUSE. THE NATURAL COROLLARY W HICH FOLLOWS IS THAT THE PROVISION OF SECTION 195 CANNOT APPLY AND, RESULTANTLY, THERE CAN BE NO DISALLOWANCE U/S 40(A)(I) OF THE AC T. WE, ITA NO5184/DEL/2017 19 THEREFORE, ORDER FOR THE DELETION OF THIS DISALLOWA NCE. THIS GROUND IS ALLOWED. 13. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT SINCE THERE IS NO CHANGE OF FA CTS AND CIRCUMSTANCES OF THIS CASE NOR THERE IS A CHANGE IN THE BUSINESS MODEL OF THE TAXPAYER DURING THE YEAR UNDER ASSESSM ENT, IT IS PROVED ON RECORD THAT THE AES VIZ SITUATED IN JAPAN , THAILAND FROM WHOM THE TAXPAYER HAS MADE PURCHASES DURING THE YEA R UNDER ASSESSMENT ARE HAVING NO PE IN INDIA AND AS SUCH, I NCOME ARISING FROM SALE OF GOODS TO INDIA CANNOT BE CHARGED TO TA X IN THEIR HANDS. IT IS ALSO BEYOND DOUBT THAT IN CASE OF SECOND CATE GORY OF THE AES FROM WHOM THE ASSESSEE HAS MADE PURCHASES ARE COVER ED UNDER NON-DISCRIMINATION CLAUSE OF DTAA AND THIS ISSUE AL SO HAS COME UP FOR DETERMINATION BEFORE THE HONBLE DELHI HIGH COURT IN CASE OF CIT VS. HERBALIFE INTERNATIONAL INDIA (P.) LTD. - 3 84 ITR 276 WHEREIN THE ASSESSEE WAS AN INTERVENER AND HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. 14. IN THE CASE OF CIT VS. HERBALIFE INTERNATIONAL INDIA (P.) LTD. , HONBLE HIGH COURT FRAMED THE QUESTION TO BE DETE RMINED AS UNDER:- (B) WHETHER THE ITAT WAS CORRECT IN HOLDING THAT SECTION 40(A)(I) OF THE ACT IS DISCRIMINATORY AND THEREFORE NOT APPLICABLE IN THE PRESENT CASE AS PER PROVISIONS OF ARTICLE 26 (3) OF THE INDO-US DTAA? ITA NO5184/DEL/2017 20 15. THE AFORESAID QUESTION HAS BEEN DETERMINED BY T HE HONBLE HIGH COURT IN FAVOUR OF THE ASSESSEE BY RETURNING F OLLOWING FINDINGS :- 56. THE ARGUMENT OF THE REVENUE ALSO OVERLOOKS THE FACT THAT THE CONDITION UNDER WHICH DEDUCTIBILI TY IS DISALLOWED IN RESPECT OF PAYMENTS TO NON-RESIDEN TS, IS PLAINLY DIFFERENT FROM THAT WHEN MADE TO A RESIDENT. UNDER SECTION 40 (A) (I), AS IT THEN STOO D, THE ALLOWABILITY OF THE DEDUCTION OF THE PAYMENT TO A NON-RESIDENT MANDATORILY REQUIRED DEDUCTION OF TDS AT THE TIME OF PAYMENT. ON THE OTHER HAND, PAYMENTS TO RESIDENTS WERE NEITHER SUBJECT TO THE CONDITION OF DEDUCTION OF TDS NOR, NATURALLY, TO THE FURTHER CONSEQUENCE OF DISALLOWANCE OF THE PAYMENT AS DEDUCTION. THE EXPRESSION UNDER THE SAME CONDITIONS IN ARTICLE 26 (3) OF THE DTAA CLARIFIES THE NATURE OF THE RECEIPT AND CONDITIONS OF ITS DEDUCTIBILITY. IT IS RELATABLE NOT MERELY TO THE COMPLIANCE REQUIREMENT OF DEDUCTION OF TDS. THE LACK OF PARITY IN THE ALLOWING OF THE PAYMENT AS DEDUCTION IS WHAT BRINGS ABOUT THE DISCRIMINATION. THE TESTED PARTY IS ANOTHER RESIDENT INDIAN WHO TRANSACTS WITH A RESIDENT MAKING PAYMENT AND DOES NOT DEDUCT TDS AND THEREFORE IN WHOSE CASE THERE WOULD BE NO DISALLOWANCE OF THE PAYMENT AS DEDUCTION BECAUSE TDS WAS NOT DEDUCTED. THEREFORE, THE CONSEQUENCE OF NON-DEDUCTION OF TDS WHEN THE PAYMENT IS TO A NON-RESIDENT HAS AN ADVERSE CONSEQUENCE TO THE PAYER. SINCE IT IS MANDATORY IN TERMS OF SECTION 40 (A) (I) FOR THE PA YER TO DEDUCT TDS FROM THE PAYMENT TO THE NON-RESIDENT, THE LATTER RECEIVES THE PAYMENT NET OF TDS. THE OBJECT OF ARTICLE 26 (3) DTAA WAS TO ENSURE NON- DISCRIMINATION IN THE CONDITION OF DEDUCTIBILITY OF THE PAYMENT IN THE HANDS OF THE PAYER WHERE THE PAYEE I S EITHER A RESIDENT OR A NON-RESIDENT. THAT OBJECT WOULD GET DEFEATED AS A RESULT OF THE DISCRIMINATIO N BROUGHT ABOUT QUA NON-RESIDENT BY REQUIRING THE ITA NO5184/DEL/2017 21 TDS TO BE DEDUCTED WHILE MAKING PAYMENT OF FTS IN TERMS OF SECTION 40 (A) (I) OF THE ACT. 57. A PLAIN READING OF SECTION 90 (2) OF THE ACT, MAKES IT CLEAR THAT THE PROVISIONS OF THE DTAA WOULD PREVAIL OVER THE ACT UNLESS THE ACT IS MORE BENEFICIAL TO THE ASSESSEE. THEREFORE, EXCEPT TO TH E EXTENT A PROVISION OF THE ACT IS MORE BENEFICIAL TO THE ASSESSEE, THE DTAA WILL OVERRIDE THE ACT. THIS IS IRRESPECTIVE OF WHETHER THE ACT CONTAINS A PROVISIO N THAT CORRESPONDS TO THE TREATY PROVISION. IN UNION OF INDIA V. AZADI BACHAO ANDOLAN (SUPRA) THE SUPREME COURT TOOK NOTE OF THE CIRCULAR NO. 333 DATED 2 ND APRIL 1982 ISSUED BY THE CBDT ON THE QUESTION AS TO WHAT THE ASSESSING OFFICERS WOULD HAVE TO DO WHEN THEY FIND THAT THE PROVISION OF A DTAA TREATY IS NO T IN CONFORMITY WITH THE ACT : THUS, WHERE A DOUBLE TAXATION AVOIDANCE AGREEMENT PROVIDED FOR A PARTICULAR MODE OF COMPUTATION OF INCOME, THE SAME SHOULD BE FOLLOWED, IRRESPECTIVE OF THE PROVISION OF THE INCOME TAX ACT. WHERE THERE IS NO SPECIFIC PROVISION IN THE AGREEMENT, IT IS THE BASIC LAW, I.E., INCOME TAX ACT, THAT WILL GOVERN THE TAXATION OF INCOME. 58. FURTHER IN UNION OF INDIA V. AZADI BACHAO ANDOLAN (SUPRA), AFTER TAKING NOTE OF THE DECISIONS OF VARIOUS HIGH COURTS ON THE PURPOSE OF DOUBLE TAXATION AVOIDANCE CONVENTIONS QUA SECTION 90 OF THE ACT, THE SUPREME COURT OBSERVED AS UNDER: 'A SURVEY OF THE AFORESAID CASES MAKES IT CLEAR THAT THE JUDICIAL CONSENSUS IN INDIA HAS BEEN THAT SECTION 90 IS SPECIFICALLY INTENDED TO ENABLE AND EMPOWER THE CENTRAL GOVERNMENT TO ISSUE A NOTIFICATION FOR IMPLEMENTATION OF THE TERMS OF A DOUBLE TAXATION AVOIDANCE AGREEMENT. WHEN THAT HAPPENS, THE PROVISIONS OF SUCH AN AGREEMENT, WITH RESPECT TO CASES TO WHICH WHERE THEY APPLY, WOULD OPERATE EVEN IF INCONSISTENT WITH THE PROVISIONS OF THE INCOME ITA NO5184/DEL/2017 22 TAX ACT. WE APPROVE OF THE REASONING IN THE DECISIONS WHICH WE HAVE NOTICED. IF IT WAS NOT THE INTENTION OF THE LEGISLATURE TO MAKE A DEPARTURE FROM THE GENERAL PRINCIPLE OF CHARGEABILITY TO TAX UNDER SECTION 4 AND THE GENERAL PRINCIPLE OF ASCERTAINMENT OF TOTAL INCOME UNDER SECTION 5 OF THE ACT, THEN THERE WAS NO PURPOSE IN MAKING THOSE SECTIONS SUBJECT TO THE PROVISIONS OF THE ACT. THE VERY OBJECT OF GRAFTING THE SAID TWO SECTIONS WITH THE SAID CLAUSE IS TO ENABLE THE CENTRAL GOVERNMENT TO ISSUE A NOTIFICATION UNDER SECTION 90 TOWARDS IMPLEMENTATION OF THE TERMS OF THE DTAS WHICH WOULD AUTOMATICALLY OVERRIDE THE PROVISIONS OF THE INCOME TAX ACT IN THE MATTER OF ASCERTAINMENT OF CHARGEABILITY TO INCOME TAX AND ASCERTAINMENT OF TOTAL INCOME, TO THE EXTENT OF INCONSISTENCY WITH THE TERMS OF THE DTAC. 59. CONSEQUENTLY, THE COURT NEGATIVES THE PLEA OF THE REVENUE THAT UNLESS THERE ARE PROVISIONS SIMILA R TO SECTION 40 (A) (I) OF THE ACT IN THE DTAA, A COMPARISON CANNOT BE MADE AS TO WHICH IS MORE BENEFICIAL PROVISION. 60. THE RELIANCE BY THE REVENUE ON THE DECISION OF THIS COURT IN HYOSUNG CORPORATION V. AAR (2016) 382 ITR 371 (DEL) IS MISPLACED. THERE THE COURT NEGATIVED A CHALLENGE TO THE CONSTITUTIONALITY OF SECTION 245R (2)(I) OF THE ACT ON THE GROUND THAT I T WAS VIOLATIVE OF ARTICLE 14 OF THE CONSTITUTION AS WELL AS ARTICLE 25 OF THE DTAA BETWEEN INDIA AND SOUTH KOREA. SECTION 245R (2) OF THE ACT BARRED A NON- RESIDENT APPLICANT FROM APPROACHING THE AUTHORITY FOR ADVANCE RULING (AAR) WHERE THE MATTER WAS PENDING BEFORE ANY INCOME TAX AUTHORITY. THE MATTER, THEREFORE, ONLY PERTAINED TO THE PROCEDURE OF FILING A PETITION BEFORE THE AAR AND NOT AS REGARDS ANY SUBSTANTIVE RIGHT. THE DECISION OF THE PUNE BENCH OF THE ITAT IN AUTOMATED SECURITIES CLEARANCE INC. V. INCOME TAX OFFICER(SUPRA) IS NO ASSISTANCE TO THE REVENUE SINCE THE SAID DECISION I S ITA NO5184/DEL/2017 23 SAID TO BE OVERRULED BY THE SPECIAL BENCH OF THE ITAT IN THE CASE OF RAJEEV SURESHBHAI GAJWANI VS ACIT (2011) 8 ITR (TRIB) 616 (AHMEDABAD). 61. IN LIGHT OF THE ABOVE DISCUSSION, QUESTION (B) IS ANSWERED IN THE AFFIRMATIVE, I.E., IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY HOLDING THAT SECTION 40 (A) (I) OF THE ACT IS DISCRIMINATORY AND THEREFORE, NOT APPLICABLE IN TERMS OF ARTICLE 26 (3 ) OF THE INDO-US DTAA. 16. FOLLOWING THE DECISION RENDERED BY COORDINATE B ENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN AY 2010-11 AND T HE DECISION RENDERED BY HONBLE HIGH COURT IN CIT VS. HERBALIFE INTERNATIONAL INDIA (P.) LTD. , WHEREIN THE ASSESSEE WAS AN INTERVENER, WE ARE OF THE CONSIDERED VIEW THAT AO/D RP HAVE ERRED IN DISALLOWING OF RS.30,41,71,07,047 REGARDING PURCHASES MADE BY THE ASSESSEE FROM ITS AES U/S 40A(I) AS SECTION 40A (I) IS NOT APPLICABLE TO THE ASSESSEE DUE TO NON-DISCRIMINATIO N CLAUSE UNDER DTAA AND DUE TO THE FACT THAT AES DO NOT HAVE A PER MANENT PE IN INDIA. SO, THE ISSUE IS DETERMINED IN FAVOUR OF TH E ASSESSEE. CONSEQUENTLY, THE APPEAL FILED BY THE ASSESSEE IS H EREBY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 22 ND DAY OF SEPTEMBER, 2017. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF SEPTEMBER, 2017 TS ITA NO5184/DEL/2017 24 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.