HONDA TRADING ASIA CO. LTD.,NEW DELHI vs. DCIT, NOIDA

The facts of the case are that Honda Trading Asia Co. Ltd. (herein referred to as ‘HTAS’ or ‘the Appellant’ or ‘assessee’) was established in Bangkok on March 18, 1991. The Appellant is a Honda Group Company and is engaged in supplying parts for motorcycle, automobile, power equipment, automotive equipment and machinery, non-ferrous metals, steel, plastics and warehouse operations.

The draft assessment order under section 144C(1) of the Act was passed by AO by making following adjustment; Particulars Adjustments as per draft order passed by Ld. AO (Amout in INR) Offshore supplies and receipts of 40,81,59,614 technical services (‘FTS’) as undertaken between Indian entities and HTAS Attribution Ratio 100% Global Profit Ratio 25% A. Corporate Tax Adjustment 10,20,39,903 [i.e., 40,81,59,614*100%*25%] B. Transfer Pricing Adjustment (a) On account of FTS receipts of 73,56,736 HTAS (b) On account of Offshore 4,64,02,851 supplies made by HTAS Total Adjustments / Additions 15,57,99,490

Aggrieved, the Appellant had filed objections to the draft assessment order before Dispute Resolution Panel, New Delhi (‘DRP’) under section 144C of the Act.

The DRP disposed-off the objections filed by the Appellant by partly confirming the adjustments made by the AO in its draft assessment order. Consequently, following the DRP instructions, the assessment of the Appellant was completed under section 143(3) read with section 144C of the Act at a total income of Rs. 98,36,306 with following adjustments;

The assessee is in appeal raising following grounds:-

Accordingly, it was submitted that the same view has been upheld by Tribunal in case of HCIL while passing the order for AY 2010-11 [copy of for AY 2010-11 is relied enclosed as Annexure 2 to Paper-book 4.]

Then Ld. AR has submitted that the AO/ DRP’s reliance on survey statements is erroneous and bad in law. It is submitted that that despite two surveys carried out by the tax office, there is no corroborative evidence & Other 3 appeals of the assessee 10 available with the AO to demonstrate that expatriates are carrying out business of the Appellant. It was submitted that any order based on survey statements only, is bad, in law as per the Hon’ble Supreme Court judgment in case of CIT v. Khader Khan Son (254 CTR 228)(SC) and CBDT Circular No. 286/2/2003-IT (Inv) dated 10 March 2003. It was also submitted by Ld. Sr. Counsel that even the survey statements on which AO has heavily relied does not have any whisper that these employees of HCIL were carrying out the business of the Appellant. It was further submitted by Ld. Sr. Counsel that the evidence of Appellant that expatriates are carrying out the work of Honda Cars India Limited (‘HCIL’) only, given to controvert the allegation has not been duly considered. Ld. Sr. Counsel relied decisions in CIT vs. Sunrise Trolling Systems (P) Limited (ITA 399 of 2013) (Delhi HC) and CIT vs. Shardaben K. Modi (217 Taxman 289) (Gujarat HC) to press that survey statements have no evidentiary value.

It is submitted by Ld. Sr. Counsel that as per India-Thailand Double Taxation Avoidance Agreement (‘DTAA’), a foreign entity can constitute a PE in India, only if it has a fixed place of business in India, through which the business activities of such foreign company are carried out in India. It is submitted that the Appellant does not have any fixed place of business in India. Reliance in this regard is placed on the decision of Hon’ble AAR in the case of the Appellant’s parent company i.e., HMJ, wherein it has been held by & Other 3 appeals of the assessee 11 the AAR that the presence of expatriates of HMJ does not constitute a PE in India in the form of HCIL as they are carrying the business of HCIL only. The following relevant extract of the AAR order (F.No. AAR/1100/2011/973) is relied by Ld. AR:

It was submitted that during the course of assessment proceedings, detail of supervisors who visited India during AY 2010-11 were filed before the Ld. AO, which are also relied here as Annexure 2 of Paper-book 2. It is submitted that the total supervisory visits to India (i.e., visits to HCIL) during AY 2010-11 is less than the threshold prescribed under Article 5(3)(a) of India-Thailand DTAA. Further, the above supervisors were not the employees of the Appellant and there were no employee visits to India during the subject year.

After considering the submissions and the material before us, it is established that in the case of HCIL for AY 2009-10, the issue under consideration was if HCIL, which is a subsidiary of M/s Honda Motors Company Ltd., was required to deduct tax at source for payments made for & Other 3 appeals of the assessee 12 purchase of raw material, components, etc. from non-resident companies and those non-resident companies being associated enterprises numbering 17 were found to be not having a PE in India. In fact, the Tribunal in its order dated 29.06.2016 observes that the fact that these associated enterprises which included assessee also do not have PE in India stands accepted by DRP and the Department has not gone in appeal and, thus, the issue stands finalized. In this order dated 29th June, 2016, it was held that except for Honda Motors, Japan, payments made to all other 17 non-resident associated enterprises does not attract the provisions of section 195 and, consequently, section 40(a)(i) of the Act has no operation on the income of these companies arising from the supply of part, etc., and same was not liable for tax in India. This question was determined in favour of the assessee on the basis that the assessee was not having a PE in India. Thus, the issue findings being conclusive, do not require any further indulgence of this Bench and, accordingly, we are inclined to allow this ground No.2 in favour of the assessee.

Ground 3: In relation to alleged erroneous taxation of offshore supplies Ld. Sr. Counsel relied Section 5 of the Act and submitted that this provision provides that total income of a non-resident (which is taxable under the Act) includes income which is received in India or accrues or arises in India. So, if income accrues or arises outside India and is also received & Other 3 appeals of the assessee 13 outside India, then, the same shall be outside the scope of total income and may not be liable to tax in India. It was submitted that in the present case, the Appellant is making sales to HCIL outside India and HCIL is making sale subsequently in India in its own account without any control from its suppliers. Thus, supplies made by the Appellant are not taxable in India. In this context it was also submitted that it is now well settled law that receipts arising from offshore parts supplied are not taxable in India. In this regard, reliance is placed on the judgement in Ishikawajma Harima Heavy Industries Ltd. v. Director of Income-tax, Mumbai (288 ITR 408) wherein the Hon’ble Supreme Court has held that only such part of the income as is attributable to operations carried out in India is taxable in India. It was submitted that Hon’ble Apex Court further held that where all parts of transaction i.e., the transfer of property in goods as well as payments thereof, are carried on outside the Indian soil, such transactions cannot be taxed in India. Ld. Sr. Counsel submitted that in the case of asseesee appellant meets the tests laid down by the Hon’ble Apex Court and hence, the receipts attributable to supply of parts from outside India are not chargeable to tax in India in the hands of the Appellant.

The Ld. Sr. Counsel submitted that without prejudice to the above contention of the assessee that HTAS is not having a PE in India, since the TPO has made, adjustment on the offshore supplies citing it to be arm's length, further addition by the Ld AO on similar offshore supplies lead to double taxation which is against the principle of taxation laws. Ld. Sr. Counsel further submitted that, even otherwise, offshore supplies are not taxable in India, for the purpose of attribution, reliance was placed on the judgment of Hon'ble Madras High Court in case of Annamalais Timber Trust (41 ITR 781), wherein it was held that profits exceeding 10% cannot be attributed in case of conclusion of trading operations.

We find that the DRP after considering various contentions raised by the assessee, observed that since it has been held by DRP that the assessee has PE in India, profits need to be attributed to various operations carried out in such PE in India. Further, since the assessee is not maintaining India specific accounts, the AO is right in applying Rule 10. However, the panel directed that instead of adhoc profit rate of 25%, global profit rate of the assessee should be applied and 25% of such profits should be attributed to PE in India. Thus, where we have concluded that the assessee has no PE in India, the directions to attribute profits to various operations carried out in PE in India are not left with any substratum and, accordingly, the ground No.3 deserves & Other 3 appeals of the assessee 15 to be allowed in favour of the assessee.

Ground 4: In regard to the claim of assessee that FTS receipts are not liable to tax in the absence of FTS article in India-Thailand DTAA. It is submitted that the India- Thailand DTAA does not contain any provisions about the taxability of fees paid for technical services and that it is a well settled law that in absence of any specific clause of the DTAA, the payments made can be taxed only under the head of Business Profits. Reliance in this regard is placed on the following decisions: • Tekniskil (Sendirian) Berhard v. CIT [1996] 222 ITR 551 (AAR) • Bangkok Glass Industry Co. Ltd. v. ACIT [2013] (34 taxmann.com 77) (Madras HC) • DCIT v. Michelin ROH Co. Ltd. [2022] 138 taxmann.com 497 (Delhi - Trib.) • ACIT v Paradigm Geophysical Pty Ltd [2008] (25 SOT 94) (Delhi ITAT)

The Ld. Sr. Counsel for assessee submitted that the assessee vide its Income Tax Return for the subject assessment year, offered to tax the receipts in the nature of fee for technical services (FTS) amounting to Rs.4,74,73,450 subject to tax @ 10%. Accordingly, the tax amounting Rs. 50,36,458 was paid by the Assessee on such receipts. In the given case, since there is no FTS clause in the India-Thailand DTAA, therefore, as HTAS does not have a PE in India, the subject FTS receipts should not be taxable in India. & Other 3 appeals of the assessee 16 22. DRP has considered the contentions raised by the assessee and found no force in contention of the assessee that FTS is not taxable when there is no FTS clause in DTAA. DRP observed, “It is a matter of common understanding that fee for technical services is sub set of broader set of business income. When contracting states do not want to give separate treatment to FTS, these receipts become taxable as business receipts only.”

We find substance in the observations of the DRP, but is relevant is that Section 9 of the Act enumerates certain incomes to be deemed to accrue or arise in India and Section 9(1)(vii) of the Act provides under what conditions FTS income shall be considered to accrue or arise in India. Explanation 2 to Section 9(1)(vii) of the Act gives definition of FTS and which provides that any service falls within the definition of FTS are either be in the nature of managerial services, technical services or consultancy services. Thus FTS is a species of business income with specific definition and components and in DTAA, are made taxable specifically. If not, then they are brought to tax, as business income and in that case, again the existence of PE in India is necessary, but which is not established in case of assessee. Accordingly, this ground is decided against the Revenue.

Ground 11: Interest under section 234A. 234B and 234C of the Act. It is submitted that the return of income for subject AY was filed within due date prescribed under section 139(1) of the Act, accordingly, interest under section & Other 3 appeals of the assessee 17 234A is not applicable. As with regard to interest under section 234B of the Act it was submitted that same is not leviable in the instant case and reliance in this regard was placed on the decision of Hon’ble supreme Court in case of Director of Income-tax, New Delhi vs. Mitsubishi Corporation [2021] 130 taxmann.com 276 (SC). As for interest under section 234C it was submitted that interest is applicable on returned income, accordingly, AO has erred in levying interest under section 234C. Even otherwise, grounds challenging levy of interest are consequential and, accordingly, adjudicated in favour of the assessee.

Thus, when we have concluded and sustain the key contention that the impugned international transaction involving FTS receipts are not taxable in the absence of FTS clause in India-Thailand DTAA and as the appellant does not have a PE in India. The grounds arising out of the challenge of the order of the TPO vide Grounds No. 6 to 10 have to be sustained also for reason that international transactions including impugned international transaction involving FTS receipts have already been benchmarked in Honda Cars India Ltd. and Transfer Pricing Study stands accepted by TPO. Thus grounds No.6 to 10 also deserve to be allowed. & Other 3 appeals of the assessee 18 26. As a consequence of the above discussion, the appeals in hand are allowed.