In a ruling in favour of Mitsubishi Corporation India P Ltd, the Delhi High Court ruled that disallowance under section 40(a)(i) of the Income Tax Act, 1961 does not apply concerning the provision of Double Taxation Avoidance Agreements (DTAAs) entered into by India with Japan and the USA.
The order passed by the ITAT is been contested by the appellant/revenue which was ruled in Favour of Mitsubishi Corp India, the taxpayer. The query was that if the ITAT (Income Tax Appellate Tribunal) slipped into error in holding that Section 40(a)(i) of the Income Tax Act, 1961 cannot be applied given the provisions of the Double Tax Avoidance Agreement between the Indian (sic) and Japan and India and the US.
As there was a distinction of opinion between the judges who constituted the division bench concerning the answers to the questions of law formulated dated 29.04.2014, the case was referred to a third bench.
The division bench expressed the points of law where they had differed while generating their respective decisions dated 17.11.2017.
The respondent/assessee in the AY in the case entered into transactions with specific group companies, reference to whom is made subsequently. Qua the transactions performed between the respondent/assessee and its group companies, remittances were made.
The respondent/assessee made remittances without deducting tax at source. The Assessing Officer (AO) took offence and disallowed the deductions availed via the respondent/assessee. Under Section 40(a)(i) of the Income Tax Act, 1961, AO ordered the disallowance.
In effect, on disallowances incurred via the AO under Section 40(a)(i) of the Act, Rs.97,89,54,176/- was added to the income of the respondent/assessee. The addition was made based on an adjustment of Arm’s Length Price (ALP) by the Transfer Pricing Officer (TPO), an aspect which, concededly, does not comprise the subject matter of the instant appeal. As per the record, the Tribunal remitted the case to the AO for reconsideration concerning the ALP issue.
The AO had called disallowances qua payments furnished through the respondent/assessee for the purchases from its seven (07) group companies. The disallowance of the expenditure made towards the purchases made was triggered as TAS had not been deducted by the respondent/assessee. The AO opts for an alternative to the provisions of under section 40(a)(i) of the Act.
To such an extent as the income that the taxpayer obtained against the services furnished through it for serving as an intermediary between the ultimate customer and the group companies was concerned, that was subjected to transfer pricing adjustment. It is not the subject matter of the instant appeal. The Tribunal has remitted this problem to the TPO/AO for new consideration.
Equality had been carried for the power of the AO to reject deductions where TAS was not deducted against payments made outside India or to non-residents and residents, it was restricted to specific payments.
As is evident upon perusal of Clause (ia) of Section 40(a), it does not carry payments incurred for the purchases to resident vendors within its net. The respondent/taxpayer claimed that even after the revision in Section 40(a) from 01.04.2005, unequal treatment, i.e., discrimination, was received concerning payments made against purchases to resident vendors.
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On payments made the expenditure incurred to resident-vendors against purchases can therefore be considered while computing income chargeable under the head “profits and gains of business or profession”.
This distinction was removed by FA 2014, albeit. from 01.04.2015, when the ambit of disallowance was widened via drawing any sum liable to get paid to a resident within the four corners of Clause (ia) of Section 40(a).
As the issuing duration is AY 2006-07, the revision brought about in Section 40(a) by FA 2014 would have no applicability. The similar treatment or the non-discrimination Clause brought in Articles 24(3) and 26(3) of the India-Japan/India-USA DTAAs would apply concerning the payment for purchases made by the respondent/assessee regarding the stated 5 companies: MC (Japan); Metal One Corporation (Japan); Tubular (USA); Petro (Japan) and Miteni (Japan).
It was not obliged to deduct TAS from payments made to MC Metal (Thailand) and Metal One (Singapore). Chargeability to tax is the paramount condition for triggering the obligation to deduct TAS. The plain language of sub-section (1) of section 195 brings this aspect of the matter to the fore, the court noted.
Justice Rajiv Shakdher noted that “A person paying interest or any other sum to a nonresident is not liable to deduct tax if such sum is not chargeable to tax under the Income-tax Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the Income-tax Act.”
| Case Title | Mitsubishi Corporation India P. Ltd. |
| Case No. | ITA 180/2014 |
| Date | 16.02.2024 |
| Counsel For Appellant | Mr Ruchir Bhatia, Sr. Standing Counsel with Ms Deeksha Gupta, Adv. |
| Counsel For Respondent | Mr M.S. Syali, Sr. Advocate with Mr Mayank Nagi, Ms Husnal Syali Nagi, Mr Tarun Singh and Mr Sandeep Yadav, Advs. |
| Delhi High Court | Read Order |
