Honda Cars India Ltd Vs DCIT (ITAT Delhi)
The issue under consideration is whether the provisions of deduction of tax at source (TDS) would be applicable in case of payments made to non-resident Indian (NRI) for the purchase of raw materials?
In the present case, TPO held that transaction of sale and purchase transaction of spare parts, raw material, capital goods, and export commission of the assessee with its AE (including Honda Motor, Japan) are at arm’s length and the assessee was required to deduct tax at source of payments made for the purchase of raw materials, components, etc. from non-residents.
ITAT states that regarding payment to Honda Asia Thailand in the year under consideration, the assessee contended that no PE has been held by the DRP in the case of non-resident company in assessment year 2010-11 and this fact was not controverted by the Ld. CIT-(DR), thus, following the decision of the Tribunal in assessment year 2009-10, ITAT hold no disallowance could be made under section 40(a)(i) of the Act for payment made to Honda Asia Thailand without deduction of tax at source. Hence, the addition made/sustained by the AO/CIT(A) u/s 40(a)(i) of the Act for not deducting the tax at source of payments made for purchase of raw material, components, etc. from non-resident Indian is not sustainable in the eyes of law, hence ordered to be deleted.
FULL TEXT OF THE ITAT JUDGEMENT
Appellant, M/s. Honda Cars India Limited (hereinafter referred to as ‘the assessee’) by filing the present appeal sought to set aside the impugned order dated 06.11.2015 passed by the Commissioner of Income-tax (Appeals)-22, New Delhi in an appeal challenging the orders passed by the ld. TPO/AO qua the assessment year 2006-07 on the grounds inter alia that :-
“1. That the order passed by the Commissioner of Income Tax (appeals) [CIT(A)] to the extent prejudicial to the appellant, is bad in law and against the settled principles of law.
2. That the CIT(A) erred in upholding the validity of the 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 escaped assessment.
2.1 That the reassessment proceeding was initiated beyond four years and in the absence of any allegation of the appellant not disclosing truly and fully material facts, reassessment were barred by limitation.
2.2 That the CIT(A) erred in sustaining the validity of reassessment proceedings in the absence of any reason to believe that any income of the appellant chargeable to tax has escaped assessment.
2.3 That the CIT(A) erred in sustaining the reassessment proceedings when the same were barred by limitation under the proviso to section 147 of the Act.
2.4 That the CIT(A) erred in sustaining the reassessment proceedings while not appreciating that the sole basis for initiating such proceedings was on account of reliance placed on the statements of expatriate employees of the appellant which were not admissible and could not form the basis of initiating such proceedings.
WITHOUT PREJUDICE
3. That the AO/CIT(A) erred in making/sustaining an addition of Rs.13,09,82,982 under section 40(a)(i) of the Act while holding that Appellant was required to deduct tax at source of payments made for purchase of raw materials, components etc. from non-residents.
4. That the AO/CIT(A) erred in making/sustaining the addition under section 40(a)(i) of the Act while holding that the provisions of chapter XVIIB of the Act were applicable on such payments.
5. That the AO/CIT(A) erred in law in concluding that there existed a Permanent Establishment (PE)/business connection of Honda Motors, Japan [HMJ] and Honda Trading Asia Co. Ltd. [HTAS], being non-resident companies from whom the Appellant had purchased raw materials, components etc.
5.1 That the CIT(A) erred in following the order of the Hon’ble Dispute Resolution Panel (‘DRP’) in coming to the conclusion that expatriate employees working in the Appellant company were working on behalf of the HMJ and as such controlled the day-to-day functioning of the Appellant in terms of technology, economic and other control.
5.2 That the CIT(A) grossly erred in law and facts in accepting the DRP direction that the HTAS has a business connection and PE in India, basis the alleged facts and relationship of the Appellant and HMJ.
5.3 That the CIT(A) erred in following the order of the Hon’ble Dispute Resolution Panel (‘DRP’) in concluding that the expatriate employees of HMJ constituted a PE of HTAS in India given complete absence of any expatriate employee of the HTAS in the Appellant company.
5.4 That the CIT(A) erred in following the order of the Hon’ble Dispute Resolution Panel CDRP’) in coming to the conclusion that the Appellant is dependent upon HTAS for employees, technology and economically when no employee has been seconded by the HTAS to Appellant, no technology has been provided by the HTAS to Appellant and Appellant has no economic dependence on HTAS.
6. That the AO/CIT(A) grossly erred in law in relying on statements of expatriate employees recorded during the course of survey proceedings on the Appellant, such statements having been selectively reproduced and relied upon by the lower authorities.
7. That the AO/CIT(A) erred in not correctly appreciating that in view of the non-discrimination clause Article24(3) of the Indo-Japan Double Tax Treaty] no disallowance could be made in the hands of the Appellant owing to non-deduction of tax on purchase of raw materials, components etc.
8. That the AO/CIT(A) grossly erred in not appreciating that all transactions between the Appellant and the non-resident associated enterprises (AE’s) had been determined at arm’s length basis and in view of the Article 9 of the Double Tax Treaties, no further income could be attributed to the AE.
9. Without prejudice to the above grounds, that on the facts and circumstances of the case and in law, the CIT(A) has erred in following the order of the Hon’ble Dispute Resolution Panel (‘DRP’) in attributing 25% of the total income to the activities of the AE’s in India alleging that selling of raw material, consumable spare parts, etc. has been carried in India when none of the selling operation is carried in India.
10. Without prejudice to the above grounds, that the CIT(A) has grossly erred in law and facts in applying the adjusted global profit ratio of the AE’s as considered by the Hon’ble DRP after making disallowance of research and development (R&O).
10.1 That on the facts and circumstances of the case and in law, the CIT(A) has erred in accepting increase in the global operating profit ratio by 5.34% (on the basis of global accounts) stating that R&D expense does not relate to HMJ’s PE in India.
10.2 That on the facts and circumstances of the case and in law, the CIT(A) has erred in accepting increase in the global operating profit ratio by 5.34% (on the basis of global accounts) when there is no R&D expense incurred by the HTAS.
11. Without prejudice to the above grounds, that the CIT(A) grossly erred in law and facts in rejecting the attribution study filed by the AE’s before the Hon’ble DRP.
12. That the CIT(A) grossly erred in law in confirming the applicability of the provisions of section 40(a)(i) of the Act on reimbursements of Rs. 95,75,221 which did not have any element of income embedded in the same.
13. That without prejudice the provisions of section 40(a)(i) of the Act could have been applied on to the amounts which remained payable at the end of the year and could not be applied to all the transactions conducted during the period under consideration.
14. That the CIT(A) grossly erred in remanding the issue relating to allowability of TDS credit in the absence of any power of remand whereas the CIT(A) should have verified and allowed the claim himself.
15. That the AO has grossly erred in law and facts in charging interest under sections 2348, 234C and 234D of the Act.
16. That the AO has erred in law in initiating penalty proceedings under section 271(1)(c) of the Act against the appellant.”
2. Briefly stated the facts necessary for adjudication of the issue at hand are : M/s. Honda Cars India Limited (formerly known as Honda Siel Cars India Limited) (hereinafter referred to as ‘the assessee’) is a subsidiary of M/s. Honda Motor Company Limited, Japan is into the business of manufacture and sale of premium segment passenger cars in India and outside India. During the year under assessment, initially assessment was completed under section 143(3) of the Income-tax Act, 1961 (for short ‘the Act’) on 23.12.2009 at an income of Rs.377,06,86,160/- by way of making various additions on account of model fees, royalty, provision of warranty, export commission and air-fare under the technical guidance fee. Thereafter, ld. CIT (A) decided the appeal filed by the assessee and computed the income at Rs.228,76,75,607/- and the appeal filed by the Department stood dismissed and cross objections filed by the assessee were allowed vide order dated 22.07.2011.
3. However, subsequently a survey was conducted by Income-tax Officer, International Taxation, Noida on 24.06.2010 and 19.12.2012 and during the survey proceedings, statements of the employees and expatriates recorded and intimation obtained during the survey proceedings that the non-resident parent company and other affiliate companies had a business connection and a Permanent Establishment (PE) in India as per the provisions of section 9(1)(i) of the Act and relevant tax treaties. It was also noticed from Form No.3CEB report that assessee had made various payments totaling Rs.1057,30,04,248/- to the Associate Enterprise (AE) during the Financial Year (FY) 2005-06 relevant to Assessment Year (AY) 2006-07. Detail of such payment is extracted as under :-
