Facts of the Case

The Revenue filed two appeals under Section 260A of the Income-tax Act, 1961 being ITA Nos. 329/2025 and 332/2025, challenging the common order dated 14.07.2022 passed by the Income Tax Appellate Tribunal for Assessment Years 2014–15 and 2015–16.

The assessee, Mitsubishi Corporation (India) Pvt. Ltd., made payments towards purchases from its associated enterprises located in Japan, Thailand, Singapore and other jurisdictions. The Assessing Officer disallowed such purchase expenditure under Section 40(a)(i) on the ground that tax was not deducted at source under Section 195, alleging that the foreign group entities had a Permanent Establishment in India and that the payments were chargeable to tax.

The Dispute Resolution Panel upheld the disallowance. However, the ITAT deleted the disallowance by following earlier decisions rendered in the assessee’s own case and binding High Court precedent.

Issues Involved

Whether disallowance under Section 40(a)(i) could be sustained for non-deduction of tax at source on purchase payments made to foreign group entities, whether such payments were chargeable to tax in India so as to trigger Section 195, and whether the DTAA non-discrimination clause barred the impugned disallowance.

Appellant’s Arguments

The Revenue contended that the ITAT erred in deleting the disallowance under Section 40(a)(i) and failed to appreciate the mandate of Section 195, relying on the Supreme Court judgment in Transmission Corporation of A.P. Ltd. It was argued that the assessee’s foreign associated enterprises had a Permanent Establishment or business connection in India and that the payments were chargeable to tax.

The Revenue further contended that the decision in Herbalife International India Pvt. Ltd. was rendered in the context of the unamended Section 40(a)(i) and therefore was not applicable for the relevant assessment years.

Respondent’s Arguments

The assessee submitted that the issue was squarely covered by the majority judgment of the Delhi High Court in its own case for Assessment Year 2006–07 in Commissioner of Income Tax-II vs. Mitsubishi Corporation (India) Pvt. Ltd. It was argued that purchase payments to non-residents are not chargeable to tax in India in the absence of a Permanent Establishment and that the DTAA non-discrimination clauses under Article 24(3) and Article 26(3) override domestic law by virtue of Section 90(2).

It was further contended that Section 195 applies only where the sum paid is chargeable to tax, as laid down by the Supreme Court in GE India Technology Centre Pvt. Ltd., and that the reliance on Transmission Corporation was misplaced.

Court Order / Findings

The Delhi High Court examined the earlier majority decision rendered in Commissioner of Income Tax-II vs. Mitsubishi Corporation (India) Pvt. Ltd., which dealt extensively with disallowance under Section 40(a)(i), DTAA non-discrimination clauses, and the scope of Section 195. The Court noted that the majority view had conclusively held that payments towards purchases made from foreign group entities could not be disallowed under Section 40(a)(i) where similar payments to resident vendors were allowable, as such differential treatment violated DTAA non-discrimination provisions.

The Court further observed that chargeability to tax is a sine qua non for invoking Section 195, as settled by the Supreme Court in GE India Technology Centre Pvt. Ltd., and that payments which are not chargeable to tax in India do not attract any obligation to deduct tax at source.

The Court held that the issues raised in the present appeals were fully covered by the majority judgment in the assessee’s own case and that the Revenue’s reliance on Transmission Corporation was misplaced as it applied only to composite payments containing an income element. Accordingly, the Court concluded that no substantial question of law arose for consideration.

Important Clarification

The Court clarified that DTAA non-discrimination clauses override domestic disallowance provisions under Section 40(a)(i) where payments to non-residents are treated less favourably than payments to residents. It further reaffirmed that the obligation to deduct tax under Section 195 arises only when the sum paid is chargeable to tax in India.

Final Outcome

Both appeals filed by the Revenue were dismissed. The Delhi High Court upheld the order of the Income Tax Appellate Tribunal deleting the disallowance under Section 40(a)(i), held that no TDS obligation arose under Section 195 in the absence of chargeable income, and decided the matter in favour of Mitsubishi Corporation (India) Pvt. Ltd. and against the Revenue.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769678853_PRINCIPALCOMMISSIONEROFINCOMETAX4DELHIVsMITSUBISHICORPORATIONINDIAPVTLTD.pdf

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