Honda Motor Co. Ltd., Noida V. DCIT, Noida

ITA 6019/DEL/2015

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9655 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 05-11-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: PRASHANT TAHILIANI
• Keywords: Transfer pricing; Double taxation relief; International transaction; Permanent establishment; Wholly owned subsidiary; Reason to believe; Reassessment proceedings
• Section: 271(1)(c); 5(2); 133A; 234B; 147; 148

Judgement Text

ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I-1, NEW DELHI BEFORE SHRI N.K. SAINI, VICE PRESIDENT AND SHRI SMT. BEENA A PILLAI, JUDICIAL MEMBER ITA NOS. 6018 & 6019/DEL/2015 AYS: 2005-06 & 2006-07 HONDA MOTOR CO. LTD. SRBC & ASSOCIATES, 4 TH & 5 TH FLOOR, PLOT NO. 2B, TOWER 2, SECTOR-126, NOIDA. PAN NO. AACCH3050J VS . DCIT CIRCLE-NOIDA, ROOM NO. 312, 3 RD FLOOR, AAYAKAR BHAWAN, A-2D, SECTOR-24, NOIDA. (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI TARUN GULATI, ADV. & PRASHANT TAHILIANI, ADV. DEPARTMENT BY : SH. SANJAY I. BARA, CIT DR DATE OF HEARING : 12/12/2018 DATE OF PRONOUNCEMENT : 13/12/2018 ORDER PER BENCH PRESENT APPEALS HAVE BEEN FILED BY ASSESSEE AGAINS T THE FINAL ASSESSMENT ORDER DATED 31/08/15 PASSED BY DCIT, INT ERNATIONAL TAXATION, CIRCLE NOIDA, UNDER SECTION 147 READ WITH 143(3)/144C(5) OF THE ACT. 2. BRIEF FACTS OF THE CASE ARE AS UNDER: ASSESSEE IS A COMPANY INCORPORATED UNDER LAWS OF JA PAN AND IS ENGAGED IN BUSINESS OF MANUFACTURING OF CARS, ITS S PARE PARTS AND ACCESSORIES. ASSESSEE HAS WHOLLY OWNED SUBSIDIARY C OMPANY IN ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 2 INDIA KNOWN AS HONDA SIEL CARS PVT. LTD., WHICH HAS ENTERED INTO SEVERAL TRANSACTIONS RELATING TO SALE OF RAW MATERI ALS, FINISHED GOODS, CAPITAL GOODS AND HAS RECEIVED ROYALTY INCOM E, FEES FOR TECHNICAL SERVICES ETC. IT HAS BEEN OBSERVED BY AUT HORITIES BELOW THAT TRANSACTIONS HAVE BEEN CARRIED OUT BETWEEN TWO COMPANIES EVER SINCE ITS INCEPTION. 2.1 ON 24/06/10 A SURVEY WAS CARRIED OUT AT PREMISE S OF INDIAN SUBSIDIARY UNDER SECTION 133A OF THE ACT. DU RING SURVEY STATEMENTS OF EXPATRIATES EMPLOYEES OF INDIAN SUBSI DIARY WERE RECORDED, ON BASIS OF WHICH LD.AO FORMED A BELIEF T HAT INCOME WHICH WAS CHARGEABLE TO TAX, HAS ESCAPED ASSESSMENT . LD.AO ACCORDINGLY ISSUED NOTICE UNDER SECTION 148 OF THE ACT ON 30/03/11, BY RECORDING THE REASONS TO BELIEVE THAT THE INCOME HAVING ESCAPED ASSESSMENT. THE MAIN REASON FOR REOP ENING WAS THAT THE MATERIALS COLLECTED/IMPOUNDED DURING SURVE Y OPERATION ESTABLISHED BUSINESS CONNECTION OF ASSESSEE WITH IT S INDIAN SUBSIDIARY AS PER PROVISIONS OF SECTION 9(1)(I) OF THE ACT, AND EXISTENCE OF PERMANENT ESTABLISHMENT OF ASSESSEE TH ROUGH ITS INDIAN SUBSIDIARY. ACCORDINGLY LD.AO/ LD. DRP WAS OF OPINION THAT INCOME ATTRIBUTABLE TO PERMANENT ESTABLISHMENT IN INDIA, HAS ESCAPED ASSESSMENT. LD. AO, THUS, PASSED FINAL ASSESSMENT ORDER AFTER DRP DIRECTIONS AND ATTRIBUTED 25% OF TH E GLOBAL INCOME AMOUNTING TO RS.12,01,49,055/- TO THE PE. 3. AGGRIEVED BY ORDER OF LD.AO ASSESSEE IS IN APPEA L BEFORE US NOW ON FOLLOWING GROUNDS OF APPEAL: 1. THAT ON THE FACTS & IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ORDERS PASSED BY THE ASSESSING OFFICER (AO ) /DISPUTE RESOLUTION PANEL (DRP) TO THE EXTENT PREJU DICIAL TO ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 3 THE INTEREST OF THE APPELLANT, ARE BAD IN LAW AND V OID AB- INITIO. 2. THATTHE AO/DRP ERRED IN UPHOLDING THE VALIDITY OF T HE RE- ASSESSMENT PROCEEDINGS UNDER SECTION 147 OF THE ACT WHEN INITIATION OF PROCEEDINGS DID NOT SATISFY NECESSARY REQUISITES CONTAINED IN SECTION 147 OF THE ACT AND THERE BEING NO REASON TO BELIEVE THAT ANY INCOME CHARGEABLE TO TAX HAD ES CAPED ASSESSMENT. WITHOUT PREJUDICE 3. THAT THE AO/DRP ERRED IN CONCLUDING THAT THE APPELL ANT HAD A PERMANENT ESTABLISHMENT (PE) UNDER ARTICLE 5 OF T HE INDO- JAPAN DTAA GIVEN THE FACT THAT NECESSARY REQUISITES OF CREATING A PE UNDER ARTICLE 5 OF DTAA WERE LACKING IN THE PRESENT CASE. 3.1 THAT THE AO/DRP ERRED IN COMING TO THE CONCLUSI ON THAT THEIR EXISTED A PE OF THE APPELLANT IN INDIA W HILE RELYING ON THE STATEMENTS OF EXPATRIATE EMPLOYEES OF HONDA CARS INDIA LTD. (HCIL) WHICH WERE INADMISSIBLE EVIDENCE IN TERMS OF THE JUDGMENT OF THE HON'BLE SUPREME COURT IN S. QADAR KHAN & SONS (254 CTR 228) 3.2 THAT THE AO/DRP ERRED IN COMING TO THE CONCLUSI ON THAT EXPATRIATE EMPLOYEES WORKING IN HONDA CARS INDIA LT D WERE WORKING ON BEHALF OF THE APPELLANT AND AS SUCH CONT ROLLED THE DAY-TO-DAY FUNCTIONING OF HCIL IN TERMS OF TECHNOLO GY, ECONOMIC AND OTHER CONTROL. 3.3 THAT THE AO/DRP COMPLETELY FAILED TO APPRECIATE THAT IN TERMS OF ARTICLE 5(9) OF THE DOUBLE TAX AVOIDANCE A GREEMENT BETWEEN INDIA AND JAPAN (DTAA) CONTROL OF HOLDING C OMPANY OVER SUBSIDIARY DOES NOT IN ITSELF CREATE A PERMANE NT ESTABLISHMENT OF THE NON-RESIDENT. 3.4 THAT THE AO/DRP ERRED IN LAW IN SELECTIVELY REL YING ON THE STATEMENT OF EXPATRIATE EMPLOYEES AND FAILED TO APPRECIATE THE TRUE INTENTION OF THE STATEMENTS WHI CH EVIDENCED THAT THE EXPATRIATES WERE WORKING ONLY FO R HCIL IN INDIA. 4. THAT THE AO/DRP ERRED IN BRINGING TO TAX THE OFF -SHORE SUPPLIES MADE BY THE APPELLANT TO HCIL WITHOUT APPR ECIATING THAT TITLE AND RISK OF THESE GOODS WAS TRANSFERRED OUTSIDE INDIA TO HCIL AND HENCE NO PORTION OF THE PROFIT AR ISING THEREFROM COULD BE BROUGHT TO TAX IN INDIA. ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 4 4.1 THAT THE AO/DRP COMPLETELY FAILED TO APPRECIATE THA T THE INTERNATIONAL TRANSACTIONS RELATING TO PURCHASE OF RAW- MATERIALS OF HCIL FROM THE APPELLANT HAD BEEN SUBJE CTED TO TRANSFER PRICING ASSESSMENT WHEREIN THE VALUE OF SA ID INTERNATIONAL TRANSACTIONS WERE FOUND TO BE ON ARM' S LENGTH BASIS. 4.2 THAT THE AO/DRP COMPLETELY FAILED TO APPRECIATE THAT IN TERMS OF ARTICLE 9 OF DTAA ONCE THE INTERNATIONAL T RANSACTIONS BETWEEN THE APPELLANT AND HCIL HAD BEEN FOUND TO ME AN AT ARM'S LENGTH BASIS, THE REVENUE WAS PROHIBITED FROM ALLOCATING ANY FURTHER INCOME OF THE APPELLANT TO B E TAXED IN INDIA. 4.3 WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP HAS ERRED IN ATTRIBUTING 25% OF THE TOTAL INCOME TO THE ACTIVITIES OF THE APPELLANT IN INDIA ALLEGING THAT SELLING OF RAW MATERIAL, CONSUMABLE SPARE PARTS, ETC. HAS BEEN CARRIED IN IN DIA WHEN NONE OF THE SELLING OPERATION IS CARRIED IN INDIA. 4.4 WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE AO / DRP HAS GROSSLY ERRED IN LAW AND FACTS IN REJECTING THE ATTRIBUTION STUDY FILED BY THE APPELLANT. 5. THAT THE AO/DRP ERRED IN LAW AND FACTS IN TAXING EX PORT COMMISSION IGNORING THE CBDT CIRCULAR NO.23 DATED J ULY 23, 1969 AND CIRCULAR NO. 786 DATED FEBRUARY 7, 2000 WH EN IT IS A WELL SETTLED PRINCIPLE THAT CBDT INSTRUCTION/C IRCULAR IS BINDING ON REVENUE AUTHORITIES. 6. THAT THE AO/DRP ERRED IN LAW AND FACTS IN TAXING REIMBURSEMENT OF EXPENSES AS 'INCOME' UNDER THE INC OME TAX ACT. 7. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THAT AO / D RP HAS GROSSLY ERRED IN LAW AND FACTS IN APPLYING THE ADJU STED GLOBAL PROFIT RATIO OF 10.59% AFTER MAKING DISALLOW ANCE OF RESEARCH AND DEVELOPMENT (R&D), WHEN AS PER GLOBAL BALANCE SHEET OPERATING PROFIT RATIO IS 4.23%. 7.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/ DRP HAS ERRED IN INCREASING THE GLOBAL OPERATING PROFIT RATIO BY 5.34% (ON THE BASIS OF CO NSOLIDATED GLOBAL ACCOUNTS) STATING THAT R&D EXPENSE DOES NOT RELATE TO APPELLANT'S PE IN INDIA. 7.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/ DRP FAILED TO APPRECIATE THAT ONCE THE PROFITS ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 5 ARE CALCULATED ON THE BASIS OF PROFIT RATIO, NO FUR THER EXPENSE CAN BE DISALLOWED FROM THE PROFIT RATIO. 8. THAT THE AO/DRP HAS GROSSLY ERRED IN LAW AND FACTS IN DIRECTING THE LEVY OF INTEREST UNDER SECTIONS 234B AND 234C OF THE ACT WITHOUT APPRECIATING THAT THE APPELLANT IS A NON- RESIDENT AND TAX IS DEDUCTIBLE FROM THE INCOME OF T HE APPELLANT. 9. THAT THE AO/DRP HAS GROSSLY ERRED IN LAW AND FACTS IN LEVYING INTEREST UNDER SECTION 234A OF THE ACT. 10. THAT THE AO/DRP HAS GROSSLY ERRED IN LAW AND FACTS IN DIRECTING THE LEVY OF INTEREST UNDER SECTION 234D O F THE ACT WITHOUT APPRECIATING THAT NO REFUND WAS GRANTED TO THE APPELLANT. 11. THAT THE AO/DRP HAS GROSSLY ERRED IN LAW AND FACTS IN INITIATING THE PENALTY U/S 271(1)(C) OF THE ACT AND ALLEGING THAT THE APPELLANT HAS CONCEALED THE TRUE AND CORRE CT PARTICULARS OF ITS TAXABLE INCOME AND FURNISHED INA CCURATE PARTICULARS OF ITS INCOME. THAT THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EAC H OTHER. THE APPELLANT ALSO RESERVES ITS RIGHT TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL EITHER BEFORE OR AT THE TIME OF HE ARING OF THIS APPEAL. 4. AT THE OUTSET, LD. COUNSEL SUBMITTED THAT BEFORE THIS TRIBUNAL, ASSESSEE IS CHALLENGING PRIMARILY LEGAL I SSUE PERTAINING TO INITIATION OF RE-ASSESSMENT PROCEEDINGS UNDER SE CTION 148 OF THE ACT. 4.1 HE SUBMITTED THAT, ASESSEE WENT BEFORE HONBLE ALLAHABAD HIGH COURT AGAINST REOPENING BY WAY OF WRIT PETITION NO. 1373 OF 2012 AND HONBLE ALLAHABAD HIGH COURT VIDE ORDER DATED 05/08/14 DISMISSED WRIT PETITION AGAINST INITIATION OF REASSESSMENT PROCEEDINGS PURSUANT TO IMPUGNED NOTIC E UNDER SECTION 148 OF THE ACT. 4.2 LD. COUNSEL SUBMITTED THAT ASSESSEE THEREAFTER FILED SLP BEFORE HONBLE SUPREME COURT AGAINST ORDER DATED 05/08/14, ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 6 PASSED BY HONBLE ALLAHABAD HIGH COURT. HONBLE SUPREME COURT ADMITTED SLP NOS.26826/14 AND 26803/14 IN RESPECT OF ASSESSMENT YEARS UNDER CONSIDERATION BEFORE US NOW, WHEREIN FOLLOWING SUBSTANTIAL QUESTIONS OF LAW WERE FORMULA TED: A) WHETHER THE REASONS RECORDED ARE CONTRARY TO THE PR OVISIONS OF ARTICLE 5(9) OF THE DTAA WHICH PROVIDES THAT THE FACT THAT A COMPANY WHICH IS A RESIDENT OF A CONTRACTING STATE CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS A RESIDENT O F THE OTHER CONTRACTING STATE OR WHICH CARRIES ON BUSINESS IN T HAT OTHER CONTRACTING STATE (WHETHER THROUGH A PERMANENT ESTABLISHMENT OR OTHERWISE), SHALL NOT OF ITSELF CO NSTITUTE EITHER COMPANY A PERMANENT ESTABLISHMENT OF THE OTH ER? B) WHETHER THE HONBLE HIGH COURT ERRED IN SUSTAINING THE INITIATION OF REASSESSMENT PROCEEDINGS U/S 147 OF T HE ACT IN THE ABSENCE OF ANY LIVE LINK OR NEXUS BETWEEN THE INFORMATION AND THE FORMATION OF THE BELIEF THAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT? C) WHETHER STATEMENTS RECORDED DURING A SURVEY CAN CON STITUTE INFORMATION SO AS TO INITIATE REASSESSMENT PROCEE DINGS U/S 147 OF THE ACT IN THE ABSENCE OF ANY CONCLUSION OF ANY AUTHORITY OF SUCH EXISTENCE OF THE ALLEGED PE? D) WHETHER THE HIGH COURT ERRED IN NOT ACCEPTING THE O RDER OF THE TPO AS CONCLUSIVE ON THE GROUNDS THAT SUCH ORDER WA S PASSED PRIOR TO THE CONDUCT OF THE SURVEY WHEN EVEN AFTER SUCH SURVEY THE TPO HAD CONSISTENTLY FOUND SUCH TRANSACTIONS TO HAVE MET THE ARMS LENGTH PRINCIPLE AND AS SUCH RENDERING THE ORDER OF THE HIGH COURT PERVERSE ? ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 7 E) WHETHER ARTICLE 9 OF THE DTAA PREVENTS ANY FURTHER ALLOCATION OF PROFITS WHERE THE TRANSACTIONS BETWEEN THE RELAT ED ENTERPRISES HAVING MET THE ARMS LENGTH TEST IN THE FORM OF AN ORDER OF THE TPO AND CONSEQUENTLY THERE COULD NOT E XIST ANY REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT. F) WHETHER THE HIGH COURT FELL IN ERROR IN CONCLUDING THAT THE ORDER OF THE TPO WAS NOT BINDING ON THE AO AT THE S TAGE OF ISSUE OF A NOTICE U/S 147/148 OF THE ACT GIVEN THE EXPRESS PROVISIONS OF SECTION 92CA(4) OF THE ACT. 4.3 LD. COUNSEL THEREAFTER REFERRING TO PAGES 41 & 42 OF PAPER BOOK, WHEREIN, CIVIL APPEAL BEING 2837-2838 OF 2018 ARISING OUT OF SLP (C)NO.26826/2014 AND 26803/2014 (SUPRA) HAS BEEN ALLOWED BY HONBLE SUPREME COURT VIDE ORDER DATED 14/03/2018, BY OBSERVING AS UNDER: IN THE JUDGMENT OF THIS COURT DATED 24.10.2017 IN ASSISTANT DIRECTOR OF INCOME TAX-1, NEW DELHI VS. M/S E- FUNDS IT INC., CIVIL APPEAL NO. 6082 OF 2015 AND CONNECTED MATTERS, IT HAS BEEN HELD THAT ONCE ARMS LENGTH PRINCIPLE HAS BEEN SATISFIED, THERE CAN BE NO FURTH ER PROFIT ATTRIBUTABLE TO A PERSON EVEN IF IT HAS A PERMANENT ESTABLISHMENT IN INDIA. SINCE THE IMPUGNED NOTICE FOR THE REASSESSMENT IS BASED ONLY ON THE ALLEGATION THAT THE APPELLANT(S) HAS PERMANENT ESTABLISHMENT IN INDIA, THE NOTICE CANNOT BE SUSTAINED ONCE ARMS LENGTH PRICE PROCEDURE HAS BEE N FOLLOWED. ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 8 4.4 HONBLE SUPREME COURT, THUS, OBSERVED THAT NOTICE ISSUED UNDER SECTION 148 COULD NOT BE SUSTAINED, ONCE ARM S LENGTH PRICE PROCEDURE HAS BEEN FOLLOWED. 5. GROUND NO. 2 RAISED BY ASSESSEE, PERTAINS TO VAL IDITY OF NOTICE UNDER SECTION 148 OF THE ACT WAS ISSUED TO A SSESSEE FOR ASSESSMENT YEARS UNDER CONSIDERATION, WHEREIN, LD.A O IN DRAFT ASSESSMENT ORDER HELD THAT ASSESSEE HAD FIXED PLACE OF BUSINESS PE IN INDIA IN TERMS OF ARTICLE 5(1) AND 5(2) OF DT AA BETWEEN INDIA AND JAPAN, WHICH WAS BEING USED BY ITS EMPLOY EES- EXPATRIATES, AS PREMISES (AT THEIR DISPOSAL) FOR BU SINESS OF ASSESSEE. AS HONBLE SUPREME COURT IN ASSESSEES OWN CASE FOR YEARS UNDER CONSIDERATION (SUPRA) HAS QUASHED AND SET-ASIDE NOT ICE OF REASSESSMENT U/S 148 OF THE ACT, GROUND NO.2 RAISED BY ASSESSEE STANDS AUTOMATICALLY ALLOWED. AS THE NOTICE HAS BE EN QUASHED BY HONBLE SUPREME COURT, REASSESSMENT PROCEEDINGS, PU RSUANT TO THE SAID NOTICE AND THE IMPUGNED ORDERS PASSED BY T HE AO STAND AUTOMATICALLY CANCELLED. 6. IN THE RESULT, APPEALS FILED BY ASSESSEE FOR YEARS UNDER CONSIDERATION STAND ALLOWED ON LEGAL QUESTION RAISE D. ORDER PRONOUNCED IN THE OPEN COURT ON13/12/2018 SD/- SD/- (N.K. SAINI) (BEENA A PILLAI) VICE PRESIDENT JUDICI AL MEMBER DT. 13/12/2018 *KAVITA ARORA ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 9 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT - TRUE COPY - BY ORDER, ASSISTANT REGISTRAR ITAT DELHI BENCHES ITA NOS. 6018 & 6019/DEL/2015 A.YS. 2005-06 & 2006-07 HONDA MOTOR CO. LTD. 10 DATE 1. DRAFT DICTATED ON 12/12/2018 13/12 2. DRAFT PLACED BEFORE AUTHOR 12/12 13/12 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 5. APPROVED DRAFT COMES TO THE SR.PS/PS 13/12 6. KEPT FOR PRONOUNCEMENT ON 13/13 DATE OF UPLOADING OF ORDER 14/12 7. FILE SENT TO THE BENCH CLERK 14/12 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.