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Income Tax Appellate Tribunal, DELHI BENCH, ‘D’: NEW DELHI
Before: SHRI SHAMIM YAHYA & SHRI ANUBHAV SHARMA
Date of Hearing 23.02.2023 Date of Pronouncement 02.03.2023 ORDER PER SHAMIM YAHYA, AM,
This appeal by the Revenue is directed against the order of the Ld.
CIT(A)-37, New Delhi, dated 25.07.2019 and pertains to Assessment Year 2009-10.
The grounds of appeal reads as under:-
1. Whether on fact and in circumstances of the case Ld. CIT(A) is legally justified in deleting the disallowance of Rs. 16,94,51,775/- on account of non-deduction of TDS, u/s 40(a) (i) of the Income Tax Act 1961 (the Act) by ignoring finding of facts recorded by the Assessing Officer (the AO) that the AO of Mitsui Japan attributed 50% of the gross profit i.e. Rs. 28,56,46,263/- (50% of Rs. 57,12,92,527 /-) as income attributable to India PE.
2. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting the disallowance of Rs. 16,94,51,775/- on account of non-deduction of TDS, u/s 40(a) (i) of the Income Tax Act 1961 (the Act) by ignoring findings of the fact recorded by the AO that Mitsui Japan being a non-resident, tax is payable by it in India on income attributable to India PE. Mitsui India should have deducted an amount of Rs.
11,42,58,505/- (40% of Rs. 28,56,46,263/-) as final tax payment of non-resident by way of TDS on its receipts, out of the payments of Rs. 16,94,51,775/- it made to Mitsui Japan? 3. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting the disallowance of Rs. 16,94,51,775/- on account of non-deduction of TDS, u/s 40(a) (i) of the Act by ignoring the fact that Mitsui India is a Dependent Agent PE of Mitsui Japan, the same was also held by the AO of Mitsui Japan in the his order dated 22.02.2012. This fact has also been confirmed by the CIT(A) in his order dated 29.05.2015 wherein it is stated that "Respectfully following the order of my predecessor CIT(A) for immediate preceding year 2008-09, I hold that the action of the AO to the extent of holding Mitsui India Pvt. Ltd. as DAPE is upheld? 3. Brief facts of the case are that the assessee company is a subsidiary company of its parent company in Japan namely Mitsui & Co. Ltd. (Japan). During the year under consideration the parent company has made supplies worth Rs.37,33,93,80,834/ - to the Indian customers which included purchases by the appellant company of Rs. 16,94,51,775/-. The AO in the assessment order has observed that the assessee company is a dependent agent PE of its parent company in Japan based on the assessment completed in the case of parent company vide order u/s.143(3) dated 22.02.2012 for the year under consideration i.e. AY. 2009-10. Based on the derivation that the assessee company is dependent PE agent of the parent company, the AO observed that profit element in the purchases made by the appellant company from the parent company is directly attributable to the PE and the profit element in the purchases made by the other Indian customers is indirectly' attributable to the Indian PE of the Mitsui Japan i.e. assessee company. Accordingly, the AO based on the observations of the AO of the Mitsui Japan that 50% of its gross profit is attributable to the Indian operations, has drawn a conclusion that 50% of the gross profit of the Mitsui Japan i.e. Rs.28,56,46,263/- is the income attributable to Indian PE i.e. assessee company. Further on said basis the AO concluded that the income of Mitsui Japan is attributable to Indian PE (assessee company) and there are payment of Rs.16,94,51,775/-.
Upon assessee’s appeal, the Ld. CIT(A) noted that the assessee has claimed that the disallowance made by the Assessing Officer is based on the assessment completed in the case of Mitusi & Co. Ltd. Japan for the year under consideration i.e. AY 2009-10 wherein the Assessing Officer of the said company has relied upon the finding of the Assessing Officer of that company in the AY 2005-06, wherein it was observed that the assessee company i.e. Mitusi India is the dependent agent PE of the Mitusi & Co. Ltd. Japan. It was further stated before the Ld. CIT(A) that the said issue has now been adjudicated in favour of Mitusi & Co. Ltd. Japan holding that Mitusi India (assessee company) is not the dependent agent PE of Mitusi & Co. Ltd. Japan. The Ld. CIT(A) quoted the relevant finding of ITAT in the case of Mitusi & Co. Japan for Assessment Year 2005-06 as under:-
"4. The Second ground is regarding finding of the learned CIT (Appeals) holding that no income is liable to be attributed in India even if MIPL is considered to be Dependent Agent PE in India. On this issue the learned CIT-DR though stated that though in view of the TPO order under Section 92CA (3) holding the transactions between the assessee and the MIPL at arm's length, addition may not be sustainable, yet argued that MIPL be considered as Dependent Agent PE In India in terms of Article 5(7) of DTAA between India and Japan. It was contended by the learned CIT-DR on the basis of the allegation levied by the Assessing Officer in the assessment order that MIPL habitually secures order for the assessee in India and MIL is economically dependent on the assessee as major revenue of MIPL is from the assessee company. Accordingly, it has to be examined whether MIPL can be considered to be a Dependent Agent of the assessee company. In this regard it may be relevant to refer to Article 5(7) of DTAA between India and Japan, which reads as under :-
Notwithstanding the provisions of paragraphs 1 and 2) where a person--other than an agent of an independent status to whom paragraph 8 applies--is acting in a Contracting State on behalf of an enterprise of the other Contracting State; that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State) if (a) he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterprise} unless his activities are limited to those mentioned in paragraph 6 which; if exercised through a fixed place of business} would not make this fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority, but habitually maintains in the first mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned Contracting State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise.
An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that Contracting State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
The fact that a company which is resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. 4.1 As per above clause (7) a person other than an independent agent is treated as PE if he fulfills any of the three conditions, (a), (b) or (c). It is not the case of the Assessing Officer that MIL habitually exercised authority to conclude contracts. It is also not the case of the Assessing Officer that MIPL habitually maintains a stock of goods or merchandise. Thus, the condition of (a) and (b) are not fulfilled. The third condition in (c) is habitually securing orders for the assessee. In this regard we note that the Assessing Officer has made this allegation on the basis that commission has been paid by the assessee company to the MIPL. On this basis it has been assumed that MIPL is securing orders. This contention of the Assessing Officer does not appear to be correct. As per the agreement which has been quoted by the Assessing Officer in the assessment order, MIPL is supposed to put best effort to collect information with regard to Instant Noodle project etc. to make the best effort to find the best candidate, to attend/take care of the visitor from Japan, to make the best effort to analyze the feasibility report. None of these clauses can be interpreted to mean that MIPL is securing orders. On the basis of this clause the Assessing Officer was wrong in assuming that MIL is securing orders. The Assessing Officer has not brought any other material to substantiate his allegation that may demonstrate that MIL has secured orders for the assessee. It is to be noted that this clause (c) uses the word 'habitually secures orders. Thus, there has to be procurement of orders habitually. As against this the assessee's contention has been that MIPL is only providing support services and it is not securing order on behalf of assessee company. It may be relevant to further mention that the expression 'has' shall mean a legal existence. Whereas 'habitually secures orders' shall mean a systematic conduct on the part of the agent. Thus it is not only a legal right to secure order but also it is to be found, as a matter of fact that agent has habitually secured order. 4.2. Further, in this case the TP study of MIPL was subject matter of examination by the TPO. The FAR (Function performed, Assets deployed and Risk assumed) analysis has been accepted by the TPO. These agreement on the basis of which Assessing Officer has levied the allegation were also before the TPO. Thus, there cannot be any allegation that MIPL has performed any function beyond what has been stated. Functional and economic analysis of the transactions entered into having been examined nothing further can be imputed. The services of MIL to assessee company were support services similar to the activities of a Liaison offices. This fact gets also supported from the finding recorded by the Assessing Officer himself in the assessment order on page 26 whereby it has been stated by the Assessing Officer that MIL is functioning in the same manner as the LOs of the assessee are functioning in India. It has already been held that Is do not constitutes PE in India. Thus, the functioning of MIL though a subsidiary and a company incorporated in India. but its activities vis-a-vis assessee company were akin to liaison office. It does not have authority to conclude contract, it was not maintaining any stocks of goods and merchandise nor it was securing order for the assessee company. In view of the above facts we reject the contention of the learned CIT-DR that MIPL habitually secures order for the assessee company. And accordingly, none of the condition prescribed in Article 5(7) are fulfilled. 4.3. The second contention of the learned DR was that MIL is economically dependent on assessee company as major revenue of MIPL is from assessee company. We are of the view that this per se cannot be ground to hold that MIPL is a Dependent Agent. For invoking this clause, first one of the three conditions needs to be fulfilled. As we have held hereinabove that MIL does not get covered Agent. The learned DR also made a reference to Conventions on Double Taxation by Klaus Vogel to support its contention that where a person works only for one principle such person is economically dependent on the principal. In these circumstances the agent though not legally but will be bound to obey his principal's instructions and be regarded as being Dependent Agent. This contention of the learned CIT-DR again ignores the basic requirement ie. fulfilling one of the three conditions. It is also important to note that the DTAA provide for treating a person as Dependent Agent. The DIA A has to be strictly interpreted. The DTAA having prescribed the conditions, no further conditions can be read. What learned CIT-DR is canvassing will mean adding new condition in the DTAA. Further, it may be relevant to note that as per Para 9 of this Article 5 in DTAA, it has been specifically provided that if a company in the contracting state is controlled by a company in the other contracting state that itself shall not itself constitute either of company a permanent establishment of the other. Thus, the fact that MIPL is controlled by the assessee company shall not mean that MIPL is a PE of the assessee company. 4.4 Our view gets supported by the judgment of Honorable Delhi High Court in the case of Director of Income Tax And Others Versus M/S E Funds IT Solutions and Others 364 ITR 256 Delhi 4.5 In view of the above, We hold that MIPL is not a Dependent Agent PE of the assessee.”
Accordingly, considering the above, the Ld. CIT(A) concluded as under:-
“5.2.3 On perusal of submissions of the appellant and observations of the AO in the assessment order, it is noticed that the whole premise of the AO in making disallowance under section 40(a) (i) was the assessment completed in the case of Mitusi & Co. Ltd (Japan) for the year under consideration where the AO of the said company has relied upon the observations of the AO in the assessment completed in the case of said company for the A.Y. 2005-06. It is further noticed that the assessment order for the AY. 2005-06 in the case of Mitusi & Co. Ltd (Japan) was challenged by the assessee in ITAT and the appeal before the ITAT now stands disposed off (relevant extract of the order of ITAT quoted above) wherein the observations of the AO that the Mitsui India Pvt. Ltd. (appellant company in the instant case) is a Dependent PE agent of Mitusi & Co. Ltd (Japan) have now been decided by the ITAT. The ITAT has already held that the appellant is not the PE of Mitusi & Co. Ltd (Japan), hence in view of said findings of the Honorable ITAT there is no question of attribution of any profit of Mitusi & Co. Ltd (Japan) to the appellant company. Accordingly, there is no question of deduction of tax on the same. In view of the same, the disallowance made by the AO under section 40(a)(i) of the Act, is directed to be deleted.”
6. Against the above order, the Revenue is in appeal before us.
We have heard both the parties and perused the records. The Ld. Counsel for the assessee stated that this issue is squarely covered in favour of the assessee by a series of orders of ITAT and also the matter has travelled to Hon’ble Delhi High Court. The case laws relied upon by the assessee is as under:-
i. CIT (International Taxation)-2 vs M/s Mitsui and Co. (ITA No.38/2023)(Del. HC) ii. CIT (International Taxation)-2 vs M/s Mitsui and Co. (ITA No.321/2018)(Del. HC) iii. DCIT vs M/s Mitsui & Company India Pvt. Ltd. (ITA No.1608 & 1672 /Del/2016) iv. M/s Mitsui & Company Ltd. vs ADIT (ITA No.2335/Del/2011) v. DDIT vs Mitsui & Co. Ltd. (ITA Nos.2801, 4329 & 4367/Del/2011, & 795/Del/2012) vi. DCIT (International Taxation) vs M/s Mitsui & Co. (5106 & 5108/Del/2015 and CO Nos.296 & 297/Del/2016) vii. Mitsui & Co. Ltd. vs DDIT (ITA No.4377/Del/2016) viii. ACIT (International Taxation) vs Mitsui & Co. Ltd. (ITA No.4764/Del/2016 & CO No.363/Del/2016) ix. ACIT (International Taxation) vs Mitsui & Co. Ltd. (ITA No.5901/Del/2016 & CO No.28/Del/2017) 8. It may be gainful to refer the order of the Hon’ble Delhi High Court in vide order dated 31.01.2023 in this regard as under:-
“1. This appeal concerns Assessment Year (AY) 2009-2010, and is directed against the order dated 04.01.2022 passed by the Income Tax Appellate Tribunal [in short “Tribunal”].
2. The appellant/revenue has proposed the following questions of law. “A. Whether on the facts and circumstance of the case and in law, the Ld. ITAT erred in holding that the amount received to assessee on account of off-shore supplies in respect of Teesta and Purulia projects are not taxable under the provisions of Section 44BBB of the Act? B. Whether on the facts and circumstance of the case and in law, the Ld. ITAT erred in holding that the Liaison Office of the assessee did not constitute a Permanent Establishment, liable to tax in India when the said office was clearly a fixed place and the activities carried out could not be said to be preparatory or auxiliary in nature? C. Whether on the facts and circumstance of the case and in law, the Ld. ITAT erred in holding that Liaison Office of the assessee does not constitute a PE in India? D. Whether on the facts and circumstance of the case and in law, the Ld. ITAT has erred in holding that no income is liable to be attributed in India as Mitsui India Pvt. Ltd. (MIPL), the liaison office of the assessee, do not constitute a Dependent Agency Permanent Establishment (DAPE) of the assessee in India? E. Whether on the facts and circumstance of the case and in law, the Ld. ITAT erred in holding that the assessee's income from Teesta and Purulia Projects should be taxed on cash basis instead of Mercantile basis?”
To be noted, this appeal emerges out of the cross objections raised on behalf of the respondent/assessee. There is no dispute, that the only issue which arose for consideration before the Tribunal concerned the following aspect i.e., whether or not the respondent/assessee had a Dependent Agency Permanent Establishment (DAPE) in India. Therefore, the questions of law, as noticed above, have been proposed in the appeal. 4. Clearly, only questions shown as B, C and D arise for consideration in the present appeal. 5. Mr Sanjay Kumar, learned senior standing counsel, who appears on behalf of the appellant/revenue, does not dispute this position. Therefore, Mr Kumar says that he does not wish to press the proposed questions, shown as A and E in the instant appeal.
Insofar as the remaining questions are concerned i.e., those shown as B, C and D, they are covered, even according to Mr Sanjay Kumar, by the judgment of the coordinate bench dated 09.11.2022 passed in ITA 321/2018 titled The Commissioner of Income Tax-International Tax v. Mitsui & Company Ltd.
7. Accordingly, this appeal is closed, as no substantial questions of law arise for our consideration.” 9. Respectfully following the precedent as above, we do not find any infirmity in the order of the Ld. CIT(A). Accordingly, we uphold the same.
In the result, this appeal by the Revenue stands dismissed.
Order pronounced in the open court on 02nd March, 2023.