DCIT, NEW DELHI vs. M/S. MITSUBISHI CORPORATION INDIA PVT. LTD., NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘I-1’ : NEW DELHI) BEFORE SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER and SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.1558/Del./2016 (Assessment Year : 2011-12) DCIT vs. M/s. Mitsubishi Corporation Circle-16(2), India P. Ltd. 2nd Floor, Vijaya Building, Room No. 308, C.R.Building, 17, Barakhamba Road, New Delhi New Delhi (PAN : AAACM4764G) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Tarandeep Singh, CA REVENUE BY : Shri Sanjay I. Bara, CIT-DR Date of Hearing : 22.10.2019 Date of Order : 25.11.2019

O R D E R

PER KULDIP SINGH, JUDICIAL MEMBER

“Whether on the facts and circumstance of the case and 1. in law the Dispute Resolution Panel (DRP) is justified in disagreeing with the description of the activity carried out by the assessee as that of being akin to trading when issue was already decided by its coordinate Bench (Mitsubishi Corporation India Pvt. Ltd. Vs ACIT, Range-6, New Delhi on 23rd August 2013/ITA No. 5147/Del/2010) and also affirmed by the High Court and also when the functions as per assessee’s submission remain the same in all its business segments. Whether on the facts and circumstances of the case and 2. in law the DRP is justified in rejecting the functional analysis carried out by the TPO based on the TP study and submissions made in this case. Whether on the facts and circumstances of the case and 3. in law the DRP is justified in law in rejecting the primacy of functions carried out by the assessee and basing its decision on the ground that risks were minimal in the case of the assessee.

4. Whether on the facts and circumstances of the case and in law the DRP is justified in stating that no intangibles were created of the supply chain and human intangibles when these intangibles have been specifically acknowledged by their incorporation in the explanation (ii) to section 92B of the Income Tax Act.

5. Whether on the facts and circumstances of the case and in law the DRP is justified in rejecting the TPO’s analysis without going into the agreements the assessee has entered into with its AE being the final fact finding authority. Whether on the facts and circumstances of the case and 6. in law the DRP is justified in rejecting the use of FOB in the cost base when it is the relevant cost base for determining the ALP of the international transaction of the assessee with its AEs. Whether on the facts and circumstances of the case and 7. in law the DRP is justified in restoring the matter to the file of the TPO by already deciding that berry ratio be applied. Whether on the facts and circumstances of the case and 8. in law the DRP is justified in law in directing acceptance of a PLI that does not include cost of goods among expenses, when all the functions performed, assets utilized and risk undertaken were in that context only. Whether on the facts and circumstances of the case and 9. in law the DRP is justified in applying the ratio laid down by the decision of the Delhi High Court in the case of Li and Fung India Pvt. Ltd. Vs. Commissioner of Income Tax on 16 December, 2013/ITA 306/2012 to the facts of this case when the assessee is a sogo sosha company and Li & Fung is not. Whether on the facts and circumstances of the case and 10. in law the DRP is justified in accepting the functional analysis of the assessee when the assessee had not submitted the information regarding its agreements to the TPO.

Whether on the facts and circumstances of the case and 11. in law, the Ld. CIT(A) is justified in deleting the addition made by the AO for non deduction of TDS amounting to Rs. 42,78,87,278/- without appreciating the facts of the case. Whether on the facts and circumstances of the case and 12. in law, the Ld. CIT(A) is justified in not upholding disallowance of Rs. 1,01,049/- made by the Assessing Officer u/s 14A of the Income Tax Act, 1961 without considering provisions of section 14A of the Act which do not prescribe the main or dominant object of earning income as a condition for operation of section 14A of the Act? Whether on the facts and circumstances of the case and 13. in law, the Ld. CIT(A) is justified in ignoring the legislative intent of section 14A which allows only that expenditure which is relatable to earning of income and therefore follows that expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not? Whether, on facts and circumstances of the case and in 14. law, the ITAT is justified in not upholding disallowance of Rs. 1,01,049/- u/s 14A of Income Tax Act 1961 without considering legislative intend of introducing section 14A by the Finance Act 2001 as clarified by the CBDT Circular No. 5/2014 dated 10.02.2014? 15. Whether on facts and on circumstances of the case and in law, the ITAT is justified is not upholding disallowance of Rs. 1,01,049/- u/s 14A of the Act without consider a legal principles that allowability of expenditure under the Act is not conditional upon the earning of the income as upheld by Hon'ble Supreme Court in case of CIT Vs. Rajendra Prasad Moody [1978] 115 ITR 519? 16. That the order of the Ld. DRP is erroneous and is not tenable on facts and in law? That the appellant craves leave to add, alter, amend or 17. forgo any ground(s) of appeal either before or at the time of hearing of the appeal?”

The conventional function of the sogo shosha companies has been to operate as a trade intermediary by providing services and not assuming the significant risk of the products. The main function performed by MCI is also related to these conventional trade intermediaries and is to provide coordination support to MC Japan by gathering information of the Indian Market and keeping contacts with buyers or sellers of products in India. MCI also undertakes business activity with third parties.

S. No. Nature of transaction Value of transaction 1. Import of goods 31,119,074,777 2. Export of goods 50,536,099 3. Service Fee Received 57,302,008 4. Commission paid 32,365,508 5. Market Research Fee 117,369,312 Received 6. Professional services 12,281,555 related with HR, IT, Accounting and other administrative services Administrative & Professional Fee Received 7. Administration support 1,982,477 services to project office 8. Miscellaneous Income 8,514,247 9. Reimbursement of 2,451,167 expenses by AEs 10. Reimbursement of 22,841,461 expenses to AEs

GROUND NOs. 1 TO 10 8. At the very outset, The Ld. AR for the taxpayer brought to notice of the Bench that identical issue has been decided by the Tribunal in favour of the taxpayer vide orders dated 21.10.2014 passed by Co-ordinate Bench of Tribunal in A.Y. 2007-08 in in A.Y. 2008-09 in ITA No. 5885/Del/2012, in A.Y. 2009-10 in ITA no. 803/Del/2014 , in A.Y. 2010-11 in ITA no. 945/Del/2015 which have been upheld by the Hon’ble High Court.

……..This Court is of opinion that to apply the TNMM, the assessee's net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and within the bounds of the text must the AO/TPO operate, Rule 10B(l)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee’s net profit margin for application of the TNMM. Rule 10B(l)(e) recognizes that "the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise ..." (emphasis supplied). It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear.

GROUND NO. 11

14. The Assessing Officer noticed from the accounts of the taxpayer that the taxpayer has made purchases from its associated enterprises without deduction of tax at source in accordance with provisions contained u/s 195 of the Act which are as under :-

S. Name and Address Description Amount of No of the AE of purchases transaction Import of goods 2,55,94,266 1. Asia Modified Starch Co. Ltd. 130-132 Sindhorn Building, 2nd Floor, Tower 1, Wireless Road, Lumpini Pathumwan, Bangkok-10330, Thailand Import of goods 30,76,87,72,124 2. Mitsubishi Corporation, Japan (including overseas branches) Head Office, 3-1, Marunouchi 2- Chome, Chiyoda- Ku, Tokyo, Japan 3. Petro Diamond Import of goods 10,83,16,915 Japan Corporation 4th Floor, Mitsubishi Corp. Building, 6-3, Marunouchi 2- Chome, Chiyoda- Ku, Tokyo 100- 0005 MC Energy, Inc 4th 4. Import of goods 18,67,08,783 Floor, Mitsubishi Corp. Building, 6- 3, Marunouchi 2- Chome, Chiyoda- Ku, Tokyo 100- 0005 5. Mitsubishi Import of goods 19,82,951 International

GmbH, Germany Hamburg Branch, Maattenwiete 5, Hamburg 6. Mitsubishi Shoji Import of goods 2,53,72,689 Chemical Corporation 6-1, Kyobashi, 1- Chome, Chuo-Ku, Tokyo 104-0031 7. Mitsubishi Import of goods 23,27,050 Australia Ltd. Level 36,120 Collins Street, Melborune, Victoria 3000, Australia Total 31,11,90,74778

“The Hon'ble Delhi ITAT in assessee's own case for AY 2006-07 to AY 2009-10 has deleted the disallowance on account of non- deduction of taxes at source on payments made to non-resident suppliers. The relevant findings of the Hon'ble Delhi ITAT in its various orders are summarized below:- a) Non-discrimination clause: The Hon'ble ITAT deleted the disallowance by upholding the assessee's contention concerning the non-discrimination argument in relation to India-Japan DTAA and other similar DTAA (Para 9.3 & 9.4 at page 15-18 of ITAT Order for AY 2006-07). This position was not disputed in subsequent years' ITAT order from AY 2007-08 to 2009-10. In fact, relief was granted on another similar .argument; b) No-PE of the related entities other than MCJ: The Hon'ble ITAT further held that since the group entities (other than MG) did not have a Permanent Establishment (PE) in India, the provisions of section 195 of the Act were not applicable and consequently disallowance u/s 40(a)(i) was bad in law (Para 9.7 at page 20 of ITAT order for AY 2006-07).This position was not disputed in subsequent years ITAT order from AY 2007-08 to 2009-10.

While disposing off the similar objection for AY 2010-11, the DRP relying on the order of A.Y. 2008-09 held as under:- The above grounds of objections are interrelated and taken up together for consideration. The facts of the present case are similar to the facts as in A. Y, 2008-09. In A. Y. 2008-09, the DRP has held as under : The DRP has examined the matter of disallowance of purchases made from non resident group companies u/ s 40(a)(ia) in the draft order. Perusal of the case history and the DR P's order for A Y 2006-07 and A Y 2007-08 indicate that this issue is a matter of dispute between the assessee and the Department in the past and that the appeals are now before the ITAT". The objections of the assessee in this year are similar to the one it had made in the past years. As the issues are identical, the DRP's view will remain the same for the purposes of consistency. Therefore, the AO's order is upheld.

Thus, in DRP placing reliance on its own order for A.Y, 2008-09 upheld the disallowance made by the AO, However, during the course of hearing, the assessee relied on the ITAT's orders of AY

2006-07 to AY 2010-11 wherein the Hon'ble HAT had deleted the said disallowance made u/s 40(a)(i) of the IT Act, 1961. However, the Panel upon an examination and deliberation of the evidence filed by the A' during the current proceedings in the form of the orders of the Hon'ble ITAT no. for AY 2007- 08, 5885/Del/12 for AY 2008-09, 803/Del/14 for AY 2009-10 dated 21st Oct 2014 and 945/Del/2915 for AY 2010-11 dated 26th May 2015 noticed thafthe decision formed by the erstwhile DRP in respect of this litigated issue was flawed. The matter now being res-integra provides us no room to divagate from the judgment pronounced by the Hon'ble courts on the above issues specifically. Judicial discipline demands that the aecisions of superior courts be honoured where there are instances of stare-decisis especially. Therefore in view of principle laid down by the eeaforementioned ITAT ruling for AY 2006-07 to AY2009-10 in assessee's own case, purchases made from above mentioned group entities should not be subjected to disallowance under section 40(a)(i) of the Act as per the facts and legal position discussed below:-

In relation to Mitsubishi Corporation, Japan (MCJ): It is an admitted position now that in the assessment order of MG for AY 2009-10 and AY 2010-11, it was held by the AO that sales to MCI were not taxable in the hands of MG.

Asia Modified Starch Co., Ltd. (AMS): It is an undisputed fact that it is a company incorporated in Thailand which did not have any presence jp India. The assessee purchased goods directly from AMS from outside India MC Energy Inc, Japan (MEI) (Formerly known as Petro Diamond Corporation, Japan (PDC)):

It is an undisputed fact that it is a company incorporated in Japan which did not have any presence in India. The assessee purchased goods directly from MEI from outside India.

Mitsubishi Australia Ltd (MALV It is an undisputed fact that it is a company incorporated in Australia which did not have any presence in India. The assessee purchased goods directly from MAL from outside India.

Mitsubishi International GmbH, Germany (MIG): It is an admitted fact that it is a company incorporated in Germany which did not have any presence in India. The assessee purchased goods directly from MIG from outside India.

Mitsubishi Shoji Chemical Corporation, Japan (MSCC): It is admitted position that it is a company incorporated in Japan which did not have any presence in India. The assessee purchased goods directly from MSCC from outside India. The above entities were non-resident of India under the Act and as per DTAA between respective countries and except MCJ, none of the entities had presence in India during the year. Further, the assessee purchased goods from these entities directly from outside India and these entities did not perform any function in India in connection with sale to the assessee,

From the above, it was clear that all purchases made by the assessee were directly outside from India from MO (without involvement of its offices in India) and other group entities, and accordingly, not liable to tax in India,

Hence, no part of purchase amount paid to non-resident suppliers was taxable in India. Further, it was informed to the AO that the assessee was dealing directly with all the non-resident suppliers and their Indian offices, if any, were not involved in purchase of goods, which were patent from the details filed with Paper book 1 and Form 35A.

Therefore, no tax is deductible from the payments made for purchase of goods from these non-residents in the light of provisions of section 40(a)(i) (held to be read with section 195 and applicable DTAA). While holding as above, The Panel considers it pertinent to refer to the relevant findings recorded by the Hon'bie ITAT on identical facts. While deleting the additions made in latest order for AY 2010-11, the Hontile ITAT by bifurcating the non-resident suppliers into two categories i.e. entities having a PE in India i.e. MG and entities not having a PE in India i.e. non-MG entities. In respect of the said categories of companies as under:-

"11. First we espouse the category of purchases made from six foreign AEs, for which the id. AR claimed that they did not have a PE in India and made offshore sales to the assessee, not leading to generation of any income chargeable to tax under the Act in their hands.

made purchases from these three AEs in the immediately preceding assessment year and the Tribunal was pleased to hold that in the absence of any PE of these three enterprises in India, the provisions of section 40(a)(i) were not attracted. The AO, while finalizing the assessment for the current year, has noticed on pages 52 and 54 of his order that the assessee made identical reply which was made during the course of assessment proceedings for the assessment year 2009-10...... ... The crux of the matter is that since these six AEs did not have any PE in India, the offshore sales made by them to the assessee in India would not generate any income chargeable under the Act to the AEs from such sale transactions.

15. Now we take up the second category of purchases made from MO, for which the id. AR ciaimea the benefit of non-discrimination clause of the DTAA to bolster his submission of non-applicability of the provisions of section 40(a)(i) of the Act. The sum and substance of his argument is that total purchases amounting to Rs. 214.78 crore were made by the assessee from MO including its overseas branch office and non-discrimination clause under Article 24 of the DTAA applies warranting non-deduction of tax at source. On contrary, the Ld. DR put forth that the case of the assessee is covered under Article 9 of the DTAA and for that reason, the application of Article 24 is outset. 20...., Reverting to the facts of the instant case, we find that the assessee is seeking benefit of article 24 qua the disallowance u/s 40(a)(i) and not in respect of any transfer pricing adjustment made by bringing transactions between two AEs at arms' length price. Disallowance u/s 40(a)(i) is an independent component of the computation which is distinct from any transfer pricing adjustment... As disallowance u/s 40(a)(i) is in respect of purchases made from the AEs, which is in no manner connected with the Commissioner segment, we hold that the assessee is entitled to the benefit provided by article 24 of the DTAA and cannot be visited with disallowance u/s 40(a)(i) of the Act, 21. The foregoing discussion divuiges that there existed no liability of the assessee to deduct tax at source from the payments made by it to the above listed seven foreign AEs, either because of non- chargeability of income under the Act from sale of such goods to the assessee or because of the application of non-discrimination clause. The natural corollary which follows is that the provision of section 195 cannot apply, and resultantly, there can be no disallowance u/s 40(a)(1) of the Act. We, therefore, order for deletion of this disallowance. This ground is allowed.

Respectfully following the consistent Hon'ble ITAT order upto AY 2010-11, we are of the view that no disallowance is called for under section 40(a)(i). Accordingly ground & sub grounds are allowed.”

GROUND NOS. 12 TO 15 18. The Assessing Officer by invoking the provisions contained u/s 14A read with rule 8D made disallowance of Rs. 1,01,049/- on the ground that the taxpayer has made investment of Rs. 20,00,00,000/- but has not made any disallowance u/s 14A read with rule 8D.