Mitsubishi Corporation India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 945/DEL/2015

• Counselvise Citation: 94520114 RSA 2015
• Duration Of Justice: 3 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-05-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 29-05-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 16-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY PRASAD
• Keywords: Transfer pricing; Double taxation relief; International transaction; Earning of tax free income; Permanent establishment; Wholly owned subsidiary
• Section: 5(2); 14A

Judgement Text

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. AD VOCATE 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 O R D E R PER R.S. SYAL, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143 ( 3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFT ER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2010- 11. ITA NO.945/DEL./2015 2 2. FIRST GROUND OF THE APPEAL IS AGAINST THE ADDITI ON 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. M CJ IS ONE OF JAPANESE LEADING SOGO SHOSHA, ENGAGED IN LINKING BU YERS AND SELLERS OF VARIOUS PRODUCTS ACROSS THE GLOBE. THE ASSESSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS IN FORM 3CEB. THE ONLY INTERNATIONAL TRANSACTION IN DISPUTE IS SERVI CE FEE RECEIVED AMOUNTING TO RS.2,66,29,622/-. IN ORDER TO DEMONST RATE THAT ITS INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH PRI CE (ALP), THE ASSESSEE EMPLOYED THE TRANSACTIONAL NET MARGIN METH OD (TNMM) AS THE MOST APPROPRIATE METHOD. CERTAIN COM PARABLES WERE CHOSEN. BY USING THE MULTIPLE-YEAR DATA OF TH E COMPARABLES, THE ASSESSEE TRIED TO SHOW THAT ITS IN TERNATIONAL TRANSACTIONS WERE AT ALP. THE TPO REJECTED THE ASS ESSEES USE OF MULTIPLE-YEAR DATA AND RESTRICTED IT TO THE CURRENT YEAR ALONE. WHILE SCRUTINIZING THE INTERNATIONAL TRANSACTION OF `SERVICE FEE ITA NO.945/DEL./2015 3 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 REC EIVED. THE ASSESSEE SUBMITTED THE COST OF SUCH GOODS AT RS.6,6 5,58,05,980/- IN THE HANDS OF ITS AE, ON WHICH IT HAD EARNED THE ABOVE REFERRED SERVICE FEE. THE TPO PROPOSED TO TREAT THE `SERVIC E COMMISSION SEGMENT AS EQUIVALENT TO THE TRADING SEGMENT. THE ASSESSEES COST BASE OF SERVICE FEE SEGMENT WAS ACCORDINGLY WO RKED 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 S ERVICE FEE SEGMENT. THE TPO CHOSE SOME COMPARABLE COMPANIES AND DETERMINED THE AVERAGE OF THEIR OP/TC AT 3.00%, WHI CH WAS PROPOSED TO THE ASSESSEE FOR COMMENTS. AFTER ENTERT AINING OBJECTIONS RAISED BY THE ASSESSEE AS REGARDS THE SE LECTION OF COMPARABLES ETC., THE TPO REDUCED THE MEAN OP/TC OF COMPARABLES AND DETERMINED THE ARMS 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 ADD ITION MADE BY ITA NO.945/DEL./2015 4 THE AO IN THE DRAFT ORDER ON ACCOUNT OF THIS TRANSF ER PRICING ADJUSTMENT BEFORE THE DISPUTE RESOLUTION PANEL (DRP ). VIDE ITS DIRECTION DATED 16.12.2014, THE DRP APPROVED THE AC TION OF THE TPO/AO. THE ASSESSEE IS CONTESTING THIS ADDITION A MOUNTING 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 FR OM THE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE THAT APART FROM EARNING SERVICE FEE AMOUNTING TO RS. 2.66 CRORE, BE ING THE COMMISSION INCOME FOR CO-ORDINATING BETWEEN THE BUY ERS AND SELLERS IN THE CAPACITY OF AN AGENT, IT ALSO INDUL GED INTO TRADING ACTIVITY BY DIRECTLY MAKING PURCHASES AND SALE OF G OODS ON PRINCIPAL TO PRINCIPAL BASIS. SEGMENT-WISE RESULTS OF THE ASSESSEE FROM TRADING AND SERVICE/COMMISSION SEGMENTS ARE AV AILABLE AT PAGE 592 OF THE PAPER BOOK. THUS, IT IS EVIDENT TH AT THE ASSESSEE DID DIRECT PURCHASE AND SALE TRANSACTIONS WITH ITS AES AND ALSO ACTED AS A SERVICE PROVIDER IN THE SALE OF THEIR GO ODS. THERE IS NO DISPUTE AS REGARDS THE TRANSACTIONS UNDERTAKEN BY T HE ASSESSEE UNDER THE `TRADING SEGMENT ON WHICH OPERATING PROF IT WAS ITA NO.945/DEL./2015 5 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 PUR CHASE OR SALE OF GOODS AS AN OWNER. IN SUCH CIRCUMSTANCES, THE QUESTION ARISES AS TO WHETHER THE COST OF GOODS, FOR WHICH T HE 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 NATUR E? IN OUR CONSIDERED OPINION, THE ANSWER TO THIS QUESTION CAN NOT BE IN AFFIRMATIVE. THE FACT THAT THE ASSESSEE DID NOT PU RCHASE AND SELL THE GOODS UNDER THE `SERVICE FEE SEGMENT, HAS NOT BEEN DISPUTED BY THE TPO. THERE IS NO FINDING GIVEN BY THE OFFIC ER THAT THE ASSESSEE ACTUALLY UNDERTOOK TRADING BUT WRONGLY GAV E IT A COLOUR OF AGENCY IN ITS BOOKS OF ACCOUNT. ONCE THE POSITI ON 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 TRAN SACTION BE CONSIDERED AS THAT OF SALE AND PURCHASE, IS ANYBOD YS GUESS. WE ITA NO.945/DEL./2015 6 DO NOT SUBSCRIBE TO THE VIEW CANVASSED BY THE TPO I N THIS REGARD. BY EQUATING COMMISSION BUSINESS WITH THE TRADING BU SINESS, THE TPO HAS VENTURED TO RECHARACTERIZE THE COMMISSION T RANSACTION AS A TRADING TRANSACTION, WHICH IS PATENTLY UNACCEPTAB LE. THE HONBLE 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 SUBS TITUTE 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) WH ERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM; A ND (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, V IEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN A DOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER. NEITHER THE TPO HAS TAKEN RECOURSE TO ANY O F THESE EXCEPTIONS NOR THERE IS ANY MATERIAL ON RECORD TO J USTIFY THE BRINGING OF THE INSTANT CASE WITHIN THEIR SWEEP. EX CONSEQUENTI, IT ITA NO.945/DEL./2015 7 IS MANIFEST THAT THE AUTHORITIES BELOW ERRED IN REC HARACTERIZING A COMMISSION TRANSACTION INTO A TRADING TRANSACTION. 5. ONE OF THE FUNDAMENTAL CONDITIONS FOR MAKING A TRANSFER PRICING ANALYSIS IS THAT THE INTERNATIONAL TRANSACT ION 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 T RANSACTIONS, IT WILL LEAD TO INCONGRUOUS RESULTS, THEREBY RENDE RING THE ENTIRE EXERCISE OF DETERMINING ALP, A FUTILITY. BY COMB INING THE COST OF GOODS INCURRED BY THE AE WITH THE EXPENSES INCUR RED BY THE ASSESSEE, THE TPO HAS EMBARKED UPON TREATING THE FO REIGN AE AS WELL AS THE ASSESSEE AS TESTED PARTIES TO ONE TRANS ACTION. SUCH AN APPROACH HAS NO SANCTION OF LAW. THE HONBLE 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 ITA NO.945/DEL./2015 8 TESTED PARTY IN AN INTERNATIONAL TRANSACTION CAN ON LY BE THE ASSESSEE AND NOT ITS FOREIGN AE. 6. ADVERTING TO THE FACTS OF THE INSTANT CASE, W E FIND IT AS AN ADMITTED POSITION THAT THE ASSESSEE SIMPLY RENDERED AGENCY SERVICES UNDER THIS SEGMENT BY CO-ORDINATING BETWEE N CUSTOMERS AND ITS AES. BY NO STANDARD, THE ASSESSEE CAN BE SA ID TO HAVE DEALT WITH THE GOODS OF ITS AES AS AN ABSOLUTE OWNE R. ONCE POSITION IS SUCH, WE FAIL TO COMPREHEND AS TO HOW F INANCIAL RESULTS OF THE COMMISSION SEGMENT CAN BE ADJUSTED FOR MAKIN G A COMPARISON WITH TRADING SEGMENT. THE LD. AR HAS DRA WN OUR ATTENTION TOWARDS THE TRIBUNAL ORDERS PASSED IN ASS ESSEES OWN CASE FOR THE EARLIER YEARS REVERSING SIMILAR STAND OF THE REVENUE AUTHORITIES ON THE INTERNATIONAL TRANSACTION OF REC EIPT OF SERVICE FEE. AS SUCH, WE SET ASIDE THE IMPUGNED ORDER ON TH IS SCORE AND REMIT THE MATTER TO THE TPO/AO FOR A FRESH DETERMIN ATION OF ALP OF THE INTERNATIONAL TRANSACTION OF RECEIPT OF `SER VICE FEE AS PER LAW AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEIN G HEARD TO THE ASSESSEE. IN DOING SO, THE ASSESSEE WILL INITIALLY PROPOSE COMPARABLE INSTANCES HAVING UNDERTAKEN ACTIVITY SIM ILAR TO IT ITA NO.945/DEL./2015 9 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 DOI NG SO, THE TPO WILL CONSIDER THE FIGURES OF THE COMPARABLES FOR TH E CURRENT YEAR ALONE AND NOT THE MULTIPLE-YEAR DATA AS HAS BEEN HE LD BY THE HONBLE 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 DIS ALLOWANCE OF RS.70,37,18,502/- MADE UNDER SECTION 40(A)(I) OF TH E ACT. 8. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSES SEE MADE PURCHASES FROM ITS AES AS UNDER : - 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 ITA NO.945/DEL./2015 10 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 BRNACH, 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 THAILAND 968, 24 TH FLOOR, U- CHULIANG, FOUNDATION RAMA 4 ROAD SILON, BANGRAK, BANGKOK, THAILAND IMPORT OF GOODS 32,266,358 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 ITA NO.945/DEL./2015 11 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. ITA NO.945/DEL./2015 12 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 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- ITA NO.945/DEL./2015 13 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 ITA NO.945/DEL./2015 14 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 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 ITA NO.945/DEL./2015 15 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, WHETHER DIRECT LY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, E TC., 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 INDI A SHALL BE ONLY SUCH PART OF THE INCOME AS IS REASONABLY ATTRIBUTAB LE TO THE ITA NO.945/DEL./2015 16 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 ITA NO.945/DEL./2015 17 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 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 ITA NO.945/DEL./2015 18 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, TH REE 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 ITA NO.945/DEL./2015 19 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 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 ITA NO.945/DEL./2015 20 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. ITA NO.945/DEL./2015 21 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 SHALL 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 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 CONTRACTING STATES. ITA NO.945/DEL./2015 22 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 O THER CONTRACTING STATE THAN THE TAXATION LEVIED ON ENTER PRISES OF THAT OTHER CONTRACTING STATE CARRYING ON THE SAME ACTIVI TIES. 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 RESPO NSIBILITIES 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 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, MA Y BE ITA NO.945/DEL./2015 23 INCLUDED IN THE PROFITS OF THAT ENTERPRISE AND TAXE D 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 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 ITA NO.945/DEL./2015 24 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 ITA NO.945/DEL./2015 25 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 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. ITA NO.945/DEL./2015 26 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 ITA NO.945/DEL./2015 27 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 ENTERPRISES IN THEIR COMMERCIAL OR FINANCIAL RELATI ONS DIFFER FROM THOSE WHICH WOULD HAVE BEEN BETWEEN TWO INDEPENDENT ITA NO.945/DEL./2015 28 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 ITA NO.945/DEL./2015 29 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 ITA NO.945/DEL./2015 30 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 A ND, RESULTANTLY, THERE CAN BE NO DISALLOWANCE U/S 40(A)(I) OF THE AC T. WE, THEREFORE, ORDER FOR THE DELETION OF THIS DISALLOWA NCE. THIS GROUND IS ALLOWED. 22. THE ONLY OTHER GROUND IS AGAINST THE DISALLOWAN CE OF RS.1,38,410/- MADE BY THE AO U/S 14A OF THE ACT. T HE AO HAS RECORDED IN PARA 4 OF HIS ORDER THAT EVEN IF NO EXE MPT INCOME WAS EARNED BY THE ASSESSEE IN THE YEAR IN QUESTION, STI LL IT WAS LIABLE TO OFFER DISALLOWANCE U/S 14A OF THE ACT. HE, THEREFO RE, COMPUTED DISALLOWANCE UNDER THIS PROVISION AT RS.1,38,410/-. 23. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, WE FIND IT AS AN ADMIT TED POSITION THAT THE ASSESSEE DID NOT EARN ANY EXEMPT INCOME DURING THE YEAR. THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. HOLCIM INDIA ITA NO.945/DEL./2015 31 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 ADMIT TEDLY DID NOT EARN ANY EXEMPT INCOME DURING THE RELEVANT YEAR, RE SPECTFULLY FOLLOWING THE PRECEDENTS, WE HOLD THAT NO DISALLOWA NCE 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 26 TH DAY OF MAY, 2015. SD/- SD/- (C.M. GARG) (R.S. SYAL) JUDICIAL MEMBER ACCOUTNANT MEMBER DATED THE 26 TH 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.