Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 12.08.2022 passed by the Income Tax Appellate Tribunal in ITA No. 9364/Del/2019 for Assessment Year 2016–17. The issue pertained to disallowance of expenditure of ₹11,85,35,823 under Section 40(a)(i) in respect of purchases made by the assessee, Mitsubishi Corporation (India) Pvt. Ltd., from its foreign Associated Enterprises. The Assessing Officer had disallowed the expenditure on the ground that tax was not deducted at source under Section 195, alleging that the foreign AEs had a Permanent Establishment in India and that the payments were chargeable to tax.

The Tribunal deleted the disallowance by following its own orders in the assessee’s earlier years and the judgment of the Delhi High Court in CIT vs. Herbalife International India (P.) Ltd., holding that Section 40(a)(i) was inapplicable due to the non-discrimination clause under the applicable DTAAs and absence of a PE in India for the concerned AEs.

Issues Involved

Whether disallowance under Section 40(a)(i) could be sustained in respect of purchase payments made to foreign AEs in view of the non-discrimination clause under the DTAA, whether the assessee was obliged to deduct tax at source under Section 195 where the payments were not chargeable to tax in India, whether the foreign AEs had a Permanent Establishment in India, and whether any substantial question of law arose for consideration.

Petitioner’s Arguments

The Revenue proposed substantial questions of law contending that the Tribunal erred in deleting the disallowance under Section 40(a)(i) by relying on DTAA provisions, failed to appreciate the mandate of Section 195 in light of Transmission Corporation of A.P. Ltd., wrongly reversed the findings regarding existence of Permanent Establishment of foreign AEs in India, and erroneously applied decisions rendered in the context of the unamended Section 40(a)(i).

Respondent’s Arguments

The assessee submitted that the issues raised were fully covered by binding precedents in its own case, particularly the majority judgment of the Delhi High Court in Commissioner of Income Tax-II vs. Mitsubishi Corporation (India) Pvt. Ltd. for AY 2006–07. It was argued that payments for purchases were not chargeable to tax in India in absence of a PE, that Section 195 applies only to sums chargeable to tax, and that the non-discrimination clauses under the India–Japan and India–USA DTAAs barred disallowance under Section 40(a)(i). Reliance was also placed on GE India Technology Centre and Herbalife International India Pvt. Ltd.

Court Order / Findings

The Delhi High Court noted that the very issues raised in the present appeal stood conclusively covered by the majority view of this Court in Commissioner of Income Tax-II vs. Mitsubishi Corporation (India) Pvt. Ltd., ITA 180/2014, rendered in the assessee’s own case. The Court reiterated that where DTAA provisions containing non-discrimination clauses are more beneficial, they override the Act by virtue of Section 90(2). It was further reiterated that obligation to deduct tax at source under Section 195 arises only when the payment is chargeable to tax in India, and that in absence of a PE of the foreign AEs, purchase payments are not taxable.

The Court also reaffirmed that reliance on Transmission Corporation of A.P. Ltd. is misplaced in cases where payments are not chargeable to tax at all, as clarified by the Supreme Court in GE India Technology Centre. In view of the binding precedent, the Court held that no substantial question of law arose for consideration.

Important Clarification

The Court clarified that the non-discrimination clauses under DTAAs prevent differential tax treatment between residents and non-residents in respect of deductibility of business expenditure, and that Section 195 cannot be invoked in absence of chargeability to tax. Where issues are squarely covered by binding judgments in the assessee’s own case, re-agitation of the same questions is impermissible.

Final Outcome

The appeal filed by the Revenue was dismissed. The order of the Income Tax Appellate Tribunal deleting the disallowance under Section 40(a)(i) for Assessment Year 2016–17 was upheld. It was held that no substantial question of law arose for consideration, and the decision was rendered in favour of the assessee and against the Revenue.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769681560_PRINCIPALCOMMISSIONEROFINCOMETAX04DELHIVsMITSUBISHICORPORATIONINDIAPVTLTD.pdf

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