M/S. HONDA CARS INDIA LTD.,UTTAR PRADESH vs. DCIT (LTU), NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : A : NEW DELHI BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER

ITA No.2056/Del/2014 Assessment Year : 2009-10

Honda Cars India Ltd., Vs. DCIT (LTU), A-1, Sector-40/41, New Delhi. Surajpur-Kasna Road, Greater Noida, Uttar Pradesh. PAN: AAACH1765Q ITA No.3229/Del/2014 Assessment Year : 2009-10 DCIT (LTU), Vs. Honda Cars India Ltd., New Delhi A-1, Sector-40/41, Surajpur-Kasna Road, Greater Noida, Uttar Pradesh. PAN: AAACH1765Q (Appellant) (Respondent)

Assessee By : Shri Deepak Chopra, Shri Amit Srivastava and Ms Manasvini Bajpai, Advocates : Shri Anuj Arora, CIT, DR Department By

Date of Hearing : 25.05.2016 Date of Pronouncement : .06.2016

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. ORDER PER J. SUDHAKAR REDDY, A.M. These are cross appeals directed against the order of the CIT(A)-LTU, New Delhi, dated 31.03.2014 for assessment year 2009-10. 2. The assessee, Honda Cars India Ltd., (HCIL) was formerly known as Honda Siel Cars India Ltd. It is a subsidiary of M/s Honda Motor Company Ltd. (HMCL). It is engaged in the manufacturing of cars and sales thereof. HCIL and HMCL entered into an agreement on 21st May, 1996. HMCL Ltd., Japan was the licensor and HCIL was the licencee. For the relevant assessment year, the assessee company filed a e-return declaring nil income on 26.9.2009. The AO passed an order u/s 143(3) read with section 144C of the Act determining the total income of the assessee at Rs. 1665,09,05,642/-, inter alia, making the following additions:- S.No. Particulars Amount (Rs.) Amount (Rs.) A. Total Profit as per Profit & Loss (-) 328,11,76,662 Account B. Additions i. Royalty & Lumpsum fee 156,32,14,000 ii. Airfare Fare under Technical 4,61,29,639 Guidance fee iii. Entry Tax 6,04,047 iv. Software Exp. 1,07,12,063 v. Disallowance u/s 40(a)(i) 1831,14,22,555 1993,20,82,304 Total Income 1665,09,05,642

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 4. We have heard Shri Deepak Chopra, the ld. counsel for the assesseeand Shri Anuj Arora, the ld.CIT, DR on behalf of the revenue. Paper books and written submissions were filed by both the sides. On a careful consideration of these submissions and after perusal of the paper books filed, the orders of the authorities below and the case laws cited, we hold as follows. 5. We first take up the assessee’s appeal in ITA No.2056/Del/2014. The grounds of appeal read as follows:- “1 That the order passed by the Commissioner of Income Tax (appeals) [CIT(A)] to the extent prejudicial to the appellant, is bad in law and against the settled principles of law. 2 That the AO/CIT(A) erred in making/sustaining an addition of Rs. 1175,97,03,668 under section 40(a)(i) of the Act while holding that Appellant was required to deduct tax at source of payments made for purchase of raw materials, components etc. from non-residents. 3 That the AO/CIT(A) erred in making/sustaining the addition under section 40(a)(i) of the Act while holding that the provisions of chapter XVIIB of the Act were applicable on such payments. 4 That the AO/CIT(A) erred in law in concluding that there existed a Permanent Establishment (PE)/business connection of Honda Motors, Japan and Asian Honda Thailand, being non-resident companies from whom the Appellant had purchased raw materials, components etc. 5 That the AO/CIT(A) grossly erred in law in relying on statements of expatriate employees recorded during the course of survey proceedings on the Appellant, such statements having been selectively reproduced and relied upon by the lower authorities. 6 That the AO/CIT(A) erred in not correctly appreciating that in view of the non-discrimination clause [Article24(3) of the Indo- Japan Double Tax Treaty] no disallowance could be made in the hands of the Appellant owing to non-deduction of tax on purchase of raw materials, components etc.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 7 That the AO/CIT(A) grossly erred in not appreciating that all transactions between the Appellant and the non-resident associated enterprises (AE's) had been determined at arm's length basis and in view of the Article 9 of the Double Tax Treaties no further income could be attributed to the non-resident in Indian, irrespective of the existence of a PE. 8 That the CIT(A) grossly erred in law in confirming the applicability of the provisions of section 40(a)(i) of the Act on reimbursements which did not have any element of income embedded in the same. 9 That without prejudice the provisions of section 40(a)(i) of the Act could have been applied on to the amounts which remained payable at the end of the year and could not be applied to all the transactions conducted during the period under consideration. 10 That without prejudice since the provisions of section 40(a)(i) of the Act are applicable only in respect of 'income chargeable to tax' the disallowance of gross amounts of transactions could not have been made in view of CBDT circular no. 02/2014. The above grounds of appeal are without prejudice to each other. The Appellant reserves the right to add, alter, amend and or vary the grounds of appeal at the time or before the hearing of the appeal.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. S.No. Payment made to Nature of payment as per Amount (in Rs.) 3CEB 1. Honda Motor, Japan Purchase of raw materials 5,02,34,98,712 2. Honda Trading, Japan Purchase of raw materials 12,96,57,971 3. Asian Honda, Thailand Purchase of raw materials 4,87,66,61,843 4. Honda Cars, Philippines Purchase of raw materials 40,640 5. Honda Automobiles, Purchase of raw materials 3,47,70,392 Thailand 6. American Honda, USA Purchase of raw materials 54,63,684 7. Honda Auto Parts, Malaysia Purchase of raw materials 30,335 8. Honda Trading, Thailand Purchase of raw materials 28,18,79,799 9. Honda Access, Thailand Purchase of raw materials 8,46,73,965 10. PT Honda Precision Purchase of raw materials 3,06,545 Indonesia 11. Honda Parts Manufacturing Purchase of raw materials 17,51,219 Corp., Philippines 12. Honda Malaysia SDN BHD, Purchase of raw materials 2,85,353 Malaysia 13. PT Honda Prospect Motor, Purchase of raw materials 15,56,209 Indonesia 14. Honda Trading (China) Co. Purchase of raw materials 6,89,62,819 Ltd., China 15. Honda Trading America Purchase of raw materials 10,15,823 Corp., USA 16. Honda Trading South China Purchase of raw materials 9,77,04,435 17. Honda Motor China Purchase of raw materials 77,69,227 18. Honda Motor, Japan Purchase of spare parts 70,71,234 19. Asian Honda, Thailand Purchase of spare parts 8,88,552 20. Honda cars, Philippines Purchase of spare parts 29,363 21. Honda Motor, Japan Purchase of cars 1,61,74,28,776 22. Honda Trading, Thailand Purchase of capital goods 1,23,87,02,622 23. Honda Trading, Japan Purchase of capital goods 2,51,45,05,486 24. Honda Motor, Japan Purchase of capital goods 96,30,987 25. Honda Automobile Thailand Purchase of capital goods 95,27,823 26. Honda Trading Europe Purchase of capital goods 2,90,131 27. Honda Trading South China Purchase of capital goods 2,89,780 28. Honda Motor Japan Payment of Royalty 1,01,45,19,188 29. Honda Motor Japan Payment of model fees 54,86,95,000 30. Honda Motor Japan Payment for technical services 34,20,58,287 31. Honda Trading Japan Payment for technical services 11,65,21,623 32. Honda Trading Thailand Payment for technical services 5,41,06,472 33. Honda Motor Japan Reimbursement of 16,69,31,571 miscellaneous expenses 34. Asian Honda Thailand Reimbursement of 80,91,699 miscellaneous expenses

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 35. Honda Automobile, Thailand Reimbursement of 2,18,44,421 miscellaneous expenses 36. Honda Trading Japan Reimbursement of 10,98,326 miscellaneous expenses 37. Honda R&D Japan Reimbursement of 26,05,415 miscellaneous expenses 38. Honda Auto Parts Manf. SDN Reimbursement of 1,09,128 miscellaneous expenses 39. Honda Mfg. of Albama LLC Reimbursement of 9,62,737 miscellaneous expenses

a) Out of 17 associated enterprises (AEs), permanent establishment is not established in respect of 16 AEs of the assessee company; b) Merely because these companies were also subsidiaries of HMCJ, it does not imply that, even in the absence of relevant facts required for proving existence of PE, it can be held that these companies have PE in India.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. c) There is no business connection between the assessee and these companies, which exists in India. d) Thus, he held that the 16 AEs other than Asian Honda Thailand were not chargeable to tax in India, being foreign companies having non-resident status and having no business connection or a PE in India. He held that provisions of section 195 does not apply to these 16 companies and consequently, the provisions of section 40(a)(i) are not attracted. In the case of Honda Motors, Japan, and M/s Asian Honda Thailand, he held that both have PEs in India. Therefore, the aggregate amount paid to these two companies for supply of raw materials, spare parts and purchase of capital goods were in the nature of ‘sum chargeable to tax’ on which TDS was deductible u/s 195 of the Act. e) Similarly, payments embedded in the reimbursements amounting to Rs.17,34,83,255/- were also held as not in the nature of sums chargeable to tax on which TDS was to be deducted. f) On non-discrimination clause, he referred to Article 24(3) of the Indo-Japan Double Taxation Avoidance Agreement and held that: “In my humble submissions, the positions of the Hon’ble Delhi High Court in the case of Mitsubishi Corporation Ltd., does not lay down law in this regard in view of the discussion, as also UN MC commentary and other decisions of ITAT in

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. this regard.” The term ‘Other disbursements’ used in Article 24(3) is in the nature of ejusdem generisor within the concept of noscitur a sociis and could not be materially of different genre other than interest, royalty or fee for technical services. In view of the decision of the Pune Bench of the ITAT in the case of Automated Securities Clearance Inc. vs. Income Tax Officer (2008) 118 TTJ 619 (Pune) and other Tribunal decisions come to the conclusion that the non-discrimination clause does not apply in the case on hand.”

a) Honda Motors Company, Japan and Asian Honda, Thailand, do not have a PE in India; b) All other associated non-resident companies, from which, the assessee has purchased raw material, spare parts and components do not have PE in India and this fact was accepted by the DRP and the Revenue has not gone in appeal and hence the issue has attained finality. c) That in the case of Asian Honda, Thailand, the DRP for assessment year 2009-10 has held that no PE exist in India and the Revenue has not preferred any appeal on this decision. Hence, no portion of the income of Asian Honda Thailand, arising from supply of parts, was liable for taxation in India and

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. hence, the provisions of section 195(2) read with section 40(a)(i) would not apply; d) In the case of Honda Motors, Japan, the ld.CIT(A) had held that it has a PE in India, while disposing of the assessee’s case and whereas no such finding was till date given by the Revenue authorities in the case of non-resident company, Honda Motors, Japan; e) That a notice issued u/s 148 dated 17.3.2016 to Honda Motors, Japan, has not culminated into an order till date; f) That the determination of the issue, as to whether Honda Motors Japan, has a PE in India or not, can be made in any proceedings in the case of Honda Motors, Japan and not in the present proceedings; g) In view of the above situation, the assessee submits that the issue in question can be determined by applying the non discrimination clause in Article 24(3) of DTAA between India and Japan and that the issue now stands covered in favour of the assessee by the judgment of the jurisdictional High court in the case of CIT vs. Herbalife International India Pvt. Ltd. in ITA 7/2007, Order dated 13.5.2016; h) The provisions of Indo-Japan DTAA were also considered by the court in the caseof Herbalife (supra) since Mitsubishi Corporation had been an intervenor in the said matter. The Hon’ble court had considered the

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. provisions of section 40(a)(i) as it stood originally as well as after the amendment w.e.f. 1.4.2005; i) That the transactions between the assessee and its associated enterprises were benchmarked by the Transfer Pricing Officer and a finding was given that the transactions are at arm’s length price. The TPO’s order was passed on 29th January, 2013 whereas the surveys were carried out on 24th June, 2010 and 19th December, 2012, which is prior to the date of passing of the order by the T.P.O.; j) That even for assessment year 2010-11, the TPO has given a finding that all the transactions by the assessee with the non-resident companies, are at arm’s length; k) That the decision of the Automated Securities Clearance Inc. (supra) relied upon by the ld.CIT was reversed by a larger Bench of the ITAT in the case of Rajeev Sureshbhai Gajwani vs. ACIT (2011) 129 ITD 0145.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. (a) The assessee should have relied on Instruction No.2/2014 dated 26.4.2014 and Circular No.3/2015 dated 12.2.2015 and requested the AO to follow these binding Circulars, which would have reduced the quantum of disallowance in this case.

(b) Orders of the Allahabad High Court in the case of the assessee on proceedings u/s 201 dated 30.5.2011 is submitted for perusal. (c) As regards the status of determination of the issue whether the non-resident associated companies, other than Honda Motor, Japan, having PE in India or not, the claim by the assessee that the Revenue had adjudicated that these 16 entities do not have PE in India and the Revenue has not filed an appeal against such finding was forwarded to the AO/Addl. CIT and their reply, which does not controvert this claim of the assessee, is filed before the Bench.

(d) On the assessee’s reliance on Article 24(3) of DTAA i.e. the non- discrimination clause, he made the following alternative and without prejudice, submissions: (i) Article 24(3) mentions three exceptions and that provisions of Article 9(1) apply to the facts of this case and consequently the assessee cannot invoke Article 24(3); (ii) That in the case of Herbalife International India Pvt. Ltd. (supra), the Hon’ble High Court at para 34 has recorded that it is not the case of the Revenue that Article 9(1) or Article 11(7) applies in that case and hence this case is distinguishable; (iii) That in para 30, the High Court considered the submissions that Article 9 contemplates an AE and once the status is that of an AE, the entire Article 26(3) is ruled out and whereas in the case on hand Article 9(1) clearly applies;

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. (iv) The contention of the assessee that TPO has found all the transactions to be at arm’s length and hence the conditions laid down in Article 9(1) are not satisfied, the ld. DR submits that:

(a) The TPO’s order has been constrained by the disclosures made before him by the assessee; (b) The orders of the TPO does not capture more than forty elements which clearly constitute ‘the conditions in terms of Article 9(1)’ from the FAR analysis presented before him; (c ) The AO vividly captured these forty elements which was brought on record due to two surveys carried out by the AO and ITO (TDS), respectively; (d) Otherwise, the applicability or otherwise of Article 9 would depend on whether any adjustment to ALP is made, even though the transactions are made every year with the same with AEs, which would not be a rational interpretation; (e) Without prejudice to the above, the forty elements captured by the AO go far beyond the FAR analysis of the assessee and hence the matter should be set aside to the AO or TPO with appropriate directions. The TPO will have the benefit of FAR analysis of Honda Motors, Japan for the same year, which is before the TPO. (f) That the disallowance should not be deleted on the ground of inadequate enquiry or defects or non-consideration of the facts and that the issue should be set aside to the file of the A.O. for ascertaining the correct facts. For this proposition reliance was placed on the judgment of the Delhi High Court in the case of CIT vs. Jansampark Advertising & Marketing (P) Ltd. (2015) 56 taxmann.com 285 (Delhi);

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. (g) The concept of non-discrimination is well founded in Indian legal system under Article 14, 15 and 16 of the Constitution. Reliance is placed on the following judgments:- 1) Kedar Nath Bojoria vs. State of West Bengal, AIR 1953 (SC) 404, 406; and 2) State of West Bengal vs. Anwar All Sarkar, AIR 1952 (SC) 75. (h) To establish discrimination, the tax payer has to demonstrate that ‘the treatment is unreasonable, arbitrary or irrelevant.’ (i) The payment to non-resident does not offend the principle of non-discrimination and that section 40(a)(i) is a deterrent provision which prompts compliance on the part of the resident tax payers. Section 40(a)(i) creates a distinction between non- resident payers and resident payers which has a rational nexus with the object of Sec.40(a)(i).

(j) Reliance is placed on extracts from the technical explanation of UN MC and it is submitted that section 40(a)(i) read with Instruction 2/2014 and Circular No.3 of 2015 is a reasonable method for collection of tax from persons who are not resident in India and the treatment cannot be said to be unreasonable, arbitrary or irrelevant. (k) The claim of the assessee that the payments in question fall under the phrase ‘other disbursements of either Article 24(3) is not correct or justified.’ Reliance is placed on OECD MC commentary. (l) Benefit of DTAA is available to a non-resident and as the assessee is a resident company, it cannot claim the benefit of DTAA.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. (m) The DTAA benefit can be availed only where the specific provision overrides the modes provided in the Act. As no corresponding provision exists in the DTAA, section 40(a)(i) needed to be given full effect to. (n) Section 40 of the Act is not a deductibility provision and hence outside the purview of Article 24(3) of DTAA. That the definition of section 40(a)(i) is ‘of citus of payment’ which was not a prohibited distinction under DTAA. Thus, it cannot be covered by Article 26(3) of the DTAA. 11. The ld.CIT, D.R. listed certain findings of the AO, which, as per him are crucial for coming to the conclusion that Honda Motor, Japan has a PE in India, by way of a table. Written submissions were filed and the matter argued at length by both parties. 12. In reply, the ld. counsel for the assessee drew the attention of the Bench to the orders of the Agra bench of the Tribunal in the case DCIT vs. Gupta Overseas 160 TTJ 257. On a query from the Bench, he submitted that a Miscellaneous Application was filed in the case of Gupta Overseas (supra) on one legal issue relating to section 9(1)(vii), post the amendment, on the ground that the same had not been adjudicated upon by the ITAT. He submitted that vide order dated 28.2.2014, the Tribunal had partly recalled its order in the case of Gupta Overseas for this limited purpose vide MA No.2/Agra/2014. 13. We have heard the rival contentions. On a careful consideration of the facts and circumstances of the case and perusal of the papers on record and the orders of the authorities below, as well as the case law cited, we hold as follows. The sole issue for our consideration is whether the disallowance made u/s 40(a)(i) of the Act read with section 195 of the Act, of payments made to non-resident companies is correct in law.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 13.1. There is no dispute of the fact that out of 18 non-resident associate companies to whom payments have been made, it was held that 16 associated enterprises do not have a P.E. in India. The D.R.P. in the case of Asia Honda Thailand for the A.Y. 2009-10 has held that the Non-resident company had no P.E. in India. Revenue has not filed an appeal on this finding of the D.R.P. Hence we have to reverse the finding of the Ld.CIT(A) that Asia Honda Thailand has a P.E. in India in this A.Y. Thus we have to hold that, except in the case of Honda Motors Japan, payments made to all other 17 non-resident associate companies do not attract the provisions of S.195 and consequently 40(a)(i) of the Act, as no portion of the income of these companies arising from the supply of parts etc. was liable for tax in India. 14. This leaves us with the issue of applicability of the provisions of S.195 r.w.s. 40(a)(i) to Honda Motor Company Ltd. 15. The issue whether Honda Motor Company Ltd. has a PE in India or not should be preferably adjudicated by the AO in the assessment of that company. It is not advisable to determine this issue in collateral proceedings, as is in the case of the assessee. Thus, we adjudicate the issue by considering the arguments of the assessee without prejudice, invoking the non-discrimination clause in terms of Article 24(3) of the DTAA, between India and Japan. The AO in this case has denied the benefit of the non-discrimination clause to the assessee by holding that the provisions of the Income-tax Act are different from the provisions of the DTAA and hence no benefit could be given to the assessee. When the matter came up before the ld.CIT(A), he held that the term used in Article 24(3) related only to royalties, fee for technical services, interest and the term ‘other disbursements’ necessarily related to payments in the same generic and thus the

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. payments for purchases are not covered by Article 24(3) and hence the benefit of DTAA cannot be given. 16. We find that this issue is no more res integra. The jurisdictional High Court in the case of CIT vs. Herbalife International India Pvt. Ltd., judgment dated 13th May, 2016, has, after considering the argument of the intervener, Mitsubishi Corporation, and the provisions of the Indo-Japanese DTAA has on the issue of ‘other disbursements’ in para 38 to 42, held as follows:-

“38. The question that next arises is whether the payment by the Assessee to HIAI qualifies as 'other disbursements' for the purpose of Article 26 (3) DTAA? 39. To recapitulate, the case of the Revenue is that the expression ‘other disbursements' should take colour from the context and would apply only to income which is of passive character just like interest and royalties. The Revenue invokes the doctrines of ‘noscitur-a-sociis' and 'ejusdem generis'. It is submitted that FTS does not qualify as ‘other disbursements' since it is not a passive character like royalties and interest. 40. The Court is unable to agree with the above submissions of the Revenue. In the context of which the expression ‘other disbursement' occurs in Article 26 (3), it connotes something other than ‘interest and royalties'. If the intention was that ‘other disbursements' should also be in the nature of interest and royalties then the word 'other' should have been followed by ‘such' or ‘such like'. There is no warrant, therefore, to proceed on the basis that the expression ‘other disbursements' should take the colour of ‘interest and royalties'. 41. The expression ‘other disbursements' occurring in Article 26 (3) of the DTAA is wide enough to encompass the administrative fee paid by the Assessee to HIAI which the Revenue has chosen to

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. characterize as FTS within the meaning of Explanation 2 to Section 9 (1) (vii) of the Act. 42. At one stage of the proceedings, the Assessee sought to contend that the payment was FIS covered under Article 12 (4) of the DTAA. The ITAT did not address this issue. It addressed the question whether, even assuming it was FIS, Section 40 (a) (i) of the Act cannot be applied and consequently, no disallowance can be made. Before this Court no question has been framed at the instance of the Assessee that the payment is covered by Article 12 (4) of the DTAA. Consequently, this question is not examined by the Court. 17. Thus, the findings of the ld.CIT(A) on this issue have to be necessarily reversed. Coming to the findings of the AO, we find that the Hon’ble High Court vide paras 46 to 62 of the order in the case of Herbalife International India (supra) has dealt with the issue as under, and when the proposition laid down in this judgement is applied to the facts of this case, the finding of the A.O. has to be reversed. “46. Section 40 is in the nature of a non-obstante provision and therefore, it overrides the other provisions as contained in Sections 30 to 38 of the Act. This means that the expenditure which is allowable under Sections 30 to 38 of the Act in computing business income would be subject to deductibility condition in Section 40 of the Act. The payment of FTS to HIAI would be allowable in terms of Section 37 (1) of the Act but before such payment can be allowed the condition imposed in Section 40 (a) (i) of the Act regarding deduction of TDS has to be complied with. In other words if no TDS is deducted from the payment of FTS made to HIAI by the Assessee, then in terms of Section 40 (a) (i) of the Act, it will not be allowed as a deduction under Section 37 (1) of the Act for computing the Assessee's income chargeable under the head 'profits and gains of business'. 47. Article 26(3) of the DTAA calls for an enquiry into whether the above condition imposed as far as the payment made to HIAI, i.e., payment made to a

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. non-resident, is any different as far as allowability of such payment as a deduction when it is made to a resident. 48. Section 40 (a) (i) of the Act, as it was during the AY in question i.e. 2001-02, did not provide for deduction in the TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of Section 40 (a) (ia) of the Act with effect from 1st April 2005. Then again as pointed out by Mr. M.S. Syali, learned Senior Advocate for the Intervener, Section 40 (a) (ia) refers only to payments of ―interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a ITA No. 7/2007 Page 27 of 35 contractor or sub-contractor‖ etc. It does not include an amount paid towards purchases. Correspondingly, there is no requirement of TDS having to be deducted while making such payment. 49. However, the element of discrimination arises not only because of the above requirement of having to deduct TDS. The OECD Expert Group which brought out a document titled ‗Application and Interpretation of Article 24(Non- Discrimination), Public discussion Draft, May 2007 did envisage deduction of tax while making payments to non-residents. It is viewed only as additional compliance of verification requirement which would not attract the non- discrimination rule. The OECD Expert Group noted that ―the non-discrimination obligation under tax conventions is restricted in scope when compared with equal treatment or nondiscrimination clauses in an investment agreement." Specifically, in relation to withholding taxes, the Expert Group in the note by its chairman titled ―Non-Discrimination in Bilateral Tax Conventions‖ noted as follows: ―

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 6. The more limited non-discrimination obligations in tax conventions reflect the practical problems of cross-border taxation. For example, countries frequently collect taxes from non-residents through a system of withholding at source. Withholding is most frequently imposed on passive income, such as dividends, interest, rents, and royalties. Because the recipient may have no connection with the country of source other than the investment generating the income, withholding at the time of payment is likely to be the only realistic opportunity for the source country to collect its tax. Withholding is often not required on payments to residents. However, the application of withholding tax systems is appropriate. Residents have substantial economic connections with their country of residence; so that country is likely to have ample opportunity to collect its tax later, when a tax return is filed. Non-residents may be beyond the collection jurisdiction of the taxing country.”(emphasis supplied) 50. While the above explanation provides the rationale for insisting on deduction of TDS from payments made to non-resident, the point here is not so much about the requirement of deduction of TDS per se but the consequence of the failure to make such deduction. As far as payment to a non-resident is concerned, Section 40 (a) (i) of the Act as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable profits of the payer. No such consequence was envisaged in terms of Section 40 (a) (i) of the Act as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under Article 26 (3) of the DTAA. 51. The arguments of counsel on both sides focussed on the expression ‗same conditions‘ in Article 26(3) of the DTAA. To recapitulate, a comparison was drawn by learned counsel for the Revenue with Article 26(1) which speaks of

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. preventing discrimination on the basis of nationality and which provision employs the phrase ‗same circumstances‘. Article 26 (2) which talks of prevention of discrimination vis-a-vis computing tax liability of PEs and employs the expression ‗same activities‘. The expression used in Article 26 (3) is ‗same conditions‘. Learned counsel for the Revenue sought to justify the difference in the treatment of payments made to non-residents by referring to Article 14 of the Constitution of India and contended that the line of enquiry envisaged examining whether (a) the classification was based on an intelligible differentia and (b) whether the classification had a rational nexus with the object of the statute. 52. Section 40 (a) (i), in providing for disallowance of a payment made to a non- resident if TDS is not deducted, is no doubt meant to be a deterrent ITA No. 7/2007 Page 29 of 35 in order to compel the resident payer to deduct TDS while making the payment. However, that does not answer the requirement of Article 26 (3) of the DTAA that the payment to both residents and non-residents should be under the ‗same conditions‘ not only as regards deduction of TDS but even as regards the allowability of such payment as deduction. It has to be seen that in those ‗same conditions‘ whether the consequences are different for the failure to deduct TDS. 53. It is argued by the Revenue that since in the present case no condition of deduction of TDS was attracted, in terms of Section 40 (a) (i) of the Act as it then stood, to payments made to a resident, but only to payments made to non-residents, the two payments could not be said to be under the ‗same condition‘. The further submission is that if they are not made under the same condition', the non- discrimination rule under Article 26 (3) of the DTAA is not attracted.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 54. In the first place it requires to be noticed that DTAA is as a result of the negotiations between the countries as to the extent to which special concessional tax provisions can be made notwithstanding that there might be a loss of revenue. In Union of India v. Azadi Bachao Andolan (supra) the Supreme Court noted that treaty negotiations are largely ―a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.‖ The Court acknowledged that developing countries allow 'treaty shopping‘ to encourage capital and technology inflows which developed countries are keen to provide to them. It was further noted that the corresponding loss of tax revenues could be insignificant compared to the other non-tax benefits to the economies of developing countries which need foreign investment. The Court felt that this was a matter best left to the discretion of the executive as it is ―dependent upon several economic and political considerations. 55. Consequently, while deploying the ‗nexus‘ test to examine the justification of a classification under a treaty like the DTAA, the line of enquiry cannot possibly be whether the classification has nexus to the object of the ‗statute‘ for the purposes of Article 14 of the Constitution of India, but whether the classification brought about by Section 40 (a) (i) of the Act defeats the object of the DTAA. 56. The argument of the Revenue also overlooks the fact that the condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from that when made to a resident. Under Section 40 (a) (i), as it then stood, the allowability of the deduction of the payment to a non-resident mandatorily required deduction of TDS at the time of payment. On the other hand, payments to residents were neither subject to the condition of deduction of TDS nor, naturally, to the further consequence of disallowance of the payment as

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. deduction. The expression ‗under the same conditions‘ in Article 26 (3) of the DTAA clarifies the nature of the receipt and conditions of its deductibility. It is relatable not merely to the compliance requirement of deduction of TDS. The lack of parity in the allowing of the payment as deduction is what brings about the discrimination. The tested party is another resident Indian who transacts with a resident making payment and does not deduct TDS and therefore in whose case there would be no disallowance of the payment as deduction because TDS was not deducted. Therefore, the consequence of non-deduction of TDS when the payment is to a nonresident has an adverse consequence to the payer. Since it is mandatory in ITA No. 7/2007 Page 31 of 35 terms of Section 40 (a) (i) for the payer to deduct TDS from the payment to the non-resident, the latter receives the payment net of TDS. The object of Article 26 (3) DTAA was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimination brought about qua non-resident by requiring the TDS to be deducted while making payment of FTS in terms of Section 40 (a) (i) of the Act. 57. A plain reading of Section 90 (2) of the Act, makes it clear that the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the Assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision. In Union of India v. Azadi Bachao Andolan (supra) the Supreme Court took note of the Circular No. 333 dated 2nd April 1982 issued by the CBDT on the question as to what the assessing officers would have to do when they find that the provision of a DTAA treaty is not in conformity with the Act.: ―Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income,

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. the same should be followed, irrespective of the provision of the Income Tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e., Income Tax Act, that will govern the taxation of income." 58. Further in Union of India v. Azadi Bachao Andolan (supra), after taking note of the decisions of various high courts on the purpose of Double Taxation Avoidance Conventions qua Section 90 of the Act, the Supreme court observed as under: "A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections ‗subject to the provisions‖ of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. 59. Consequently, the Court negatives the plea of the Revenue that unless there are provisions similar to Section 40 (a) (i) of the Act in the DTAA, a comparison cannot be made as to which is more beneficial provision.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 60. The reliance by the Revenue on the decision of this Court in Hyosung Corporation v. AAR (2016) 382 ITR 371 (Del) is misplaced. There the Court negatived a challenge to the constitutionality of Section 245R (2)(i) of the Act on the ground that it was violative of Article 14 of the Constitution as well as Article 25 of the DTAA between India and South Korea. Section 245R (2) of the Act barred a non-resident applicant from approaching the Authority for Advance Ruling (AAR) where the matter was pending before any income tax authority. The matter, therefore, only pertained to the procedure of filing a petition before the AAR and not as regards any substantive right. The decision of the Pune Bench of the ITAT in Automated Securities Clearance Inc. v. Income Tax Officer (supra)is no assistance to the Revenue since the said decision is said to be overruled by the Special Bench of the ITAT in the case of Rajeev Sureshbhai Gajwani vs ACIT (2011) 8 ITR (Trib) 616 (Ahmedabad).

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 18. Coming to the argument of the ld. DR that the conditions stated in Article 24(3) are not satisfied, as provisions of Article 9(1) applies, as the transactions are between AEs and the profits which would, but for those conditions would have accrued to one of the enterprises, but by reason of those conditions have not so accrued, we find that the Transfer Pricing Officer in all these cases has come to the conclusion that the transactions between the Associated Enterprises are at arm’s length price. The ld. DR made strenuous and elaborate submissions bringing out certain issues raised by the AO, to persuade us that TPO was wrong in coming to the conclusion that the transactions between the AEs and the assessee are at arm’s length. We find that the TPO has passed the order after the surveys were conducted on the assessee. If the AO had certain additional material facts, he could have brought it to the notice of the TPO and asked for a fresh report. In our view, this argument of the Ld.D.R. is erroneous, as the revenue wants to take a stand that the transactions between the assessee and its AE are not at arm’s length for the limited purpose of denying the benefit of the non-discrimination article in the DTAA to the assessee and not for making any additions under the transfer pricing provisions. Year after year, the transfer pricing officer has given a finding that the transactions between the assessee and the AE are at arm’s length. The ld. DR, without specifically pointing out as to what is the difference between the arm’s length price and the price at which the transactions have taken place between the assessee and the AE and without quantifying the excess/shortage in the price, seeks to invoke Article 9(1). In our view, such an argument is devoid of merit and hence we dismiss the same. 19. The ld. DR relies on the judgment of the jurisdictional Delhi High Court in the case of Jansampark Advertising & Marketing (P) Ltd. (supra) and pleads that the Tribunal should set aside the matter to the AO/TPO to re-adjudicate the issue

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. as to whether the transactions between the A.E. and the assessee are at arm’s length or not. We do not think that the facts and circumstances of the case warrants such an action by the Tribunal. The Transfer Pricing Officer passed his order on 29th January, 2013, whereas the surveys were carried out on 24.2.2010 and 19th December, 2012. No specific defects are pointed out, either in the TP report or in the order of the Transfer Pricing Officer and only general submissions are made before us in this regard. Hence, this contention is also dismissed as devoid of merits. On the submissions made by the Ld.D.R. on Article 14, 15 and 16 of the Constitution, technical expression in the UN Model Convention, etc., we find that the Jurisdictional High Court has considered all these issues in the case of Herbalife International India (supra). Respectfully following the same, these arguments are rejected. 20. In view of the above discussion, we allow this ground of the assessee and delete the disallowance made u/s 40(a)(i) of the Act, by applying the propositions of law laid down by the Jurisdictional High Court regarding interpretation of the non-discrimination article in the Double Taxation Avoidance Agreement between India and Japan. We do not adjudicate the other issues argued before us for the reasons already discussed. 21. In the result, the appeal of the assessee is allowed. 22. We now come to the Revenue’s appeal in ITA No.3229/2014. The grounds of appeal read as follows:- “1. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 1,56,32,14,000/- made by AO treating the amount of royalty and lump sum fee paid by assessee as capital instead of revenue claimed by assessee.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 2. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 4,61,29,639/- made by AO treating the amount of expenditure on airfare booked under technical guidance fee as capital instead of revenue claimed by assessee. 3. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 6,04,047/- made on account of disallowance of entry tax, which was claimed as a deduction u/s 43B. 4. On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs.10,71,206/- made by AO treating the expenditure incurred on software expenses as capital instead of revenue. 5. On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in granting relief of Rs. 6,55,17,18,887/- by reducing the addition from Rs. 18,31,14,22,555/- to Rs.11,75,97,03,668/- made by AO u/s 40(a)(i) of the IT Act. 5 (a) On the facts and circumstances of the case and in law the CIT(A) has erred in reducing the addition from Rs. 209,53,84,934/- to Rs.5,57,70,260/- made by AO u/s 40(a)(i) of the IT Act, thereby allowing ground No.8(i) of assesee's appeal, ignoring the facts narrated in assessment order and remand report dated 14.02.2014. 5 (b) On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in reducing the addition from Rs. 20,16,43,297/- to Rs.16,87,53,304/- made by AO u/s 40(a)(i) of the IT Act thereby allowing ground No.9 of assesee's appeal, ignoring the facts narrated in assessment order and remand report dated 14.02.2014. 5(c) On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in reducing the addition from Rs. 16,23,90,27,016/- to Rs.11,53,51,80,104/- made by AO u/s 40(a)(i) of the IT Act, thereby allowing ground NO.6&7 of assesee's appeal, ignoring the facts narrated in assessment order and remand report dated 14.02.2014. 5 (c)(i) On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in reducing the addition from Rs. 16,23,90,27,016/- to Rs.11,53,51,80,104/- made by AO u/s 40(a)(i) of the IT Act, thereby allowing ground No.6&7 of assessee's appeal by holding that

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. there is no Permanent Establishment (PE) of 18 parties ignoring the fact that sale of goods by these 18 parties has been made in India to the assessee and therefore income arising as a result of the sale of taxable in India. 6. The appellant craves leave to add to, alter, amend or vary from the above grounds of appeal at or before the time of hearing.”

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. assessment year 2003-04 in ITA No.3173/Del/2007, wherein the identical issue was involved and deleted the addition holding as under:- “I have carefully considered the submissions of the appellant and perused the order of the AO and have also considered the facts and the evidences placed on record which show that an identical issue was involved in assessment year 2003-04 wherein Hon’ble Tribunal, vide their order dated 16.05.2008 in ITA No.3173/del/2007, have decided this issue in favour of the appellant. Since the issue involved in the year under consideration is identical to the one decided by the Hon’ble ITAT in the Assessment Year 2003-04, which is being followed by the CIT(A) & ITAT in the subsequent Assessment Years on identical facts, hence, in view of the same, the payment of lumpsum fees of Rs54,86,95,000/- and royalty of Rs.101,45,19,188/- is held as allowable revenue expenditure. The addition made by the AO on this ground is therefore deleted. Ground No.2 is therefore, decided in favour of the appellant.” We find no infirmity in this order of the Ld.CIT(A). The finding of the Co- Ordinate Bench of the Tribunal are binding on him. Hence we uphold his order on this issue and dismiss this ground of Revenue.

b) Disallowance of airfare of technicians:- The AO made the addition on this account holding that, airfare borne by assessee related to Purchase & Works Department and in any case was an expenditure, the benefit of which is of ending nature. The Ld. CIT(A) held as under :- “I have considered the submissions of the appellant, the findings of the AO and the facts on record. It is seen that the Hon’ble ITAT has decided this issue on identical facts in favour of the appellant for the assessment year tabulated above. Since in the year under consideration on this issue also there are no change in facts as were existing in assessment year 2005-06, 2006-07 and 2007-08, in which

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. ITAT has given finding in appellant’s favour. Therefore respectfully following the ITAT’s order for the earlier year, on identical facts, it is held that the expenditure of Rs.4,61,29,639 claimed by the appellant on account of air fare and travel expenses is in nature of revenue expenditure and, therefore, the addition made by the AO on this ground is deleted. Accordingly, Ground No.3 is allowed in favour of the appellant.” We uphold this finding of the Ld.CIT(A) as he applied the decision of the ITAT and dismissed this ground of Revenue. c) Entry tax u/s 43B of Income Tax Act The AO made this addition of Entry Tax u/s 43B of the Act. Ld. CIT(A) deleted the addition holding as under:- “I have carefully considered the submissions of the appellant and perused order of the AO and have also considered the fact and the evidences placed on record. Since this issue has already been decided in appellant’s favour as mentioned above by the ITAT and also by the Delhi High Courtt vide their order dated 03.01.2012, which was followed by my Ld. Predecessor, while deciding the appeal for AY 2008-09. In view of this, respectfully the same. It is held that the appellant is entitled to deduct this amount in computing its total income. Accordingly, this ground is decided in favour of the appellant.” We find no infirmity in this order of the Ld.CIT(A). Hence we dismiss this ground of Revenue. d) Software Expenses With regard to the last addition of software expenses, the Ld. AR submitted before Ld. CIT(A) that, website tracking and website online statistic tools was used, for the purpose of tracking or providing security to website and not to acquire an asset and that it was to promote business. Reliance was placed on the judgement of Hon'ble Delhi High Court in CIT vs Indian Visit Com Pvt. Ltd.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. reported in 2008-TOIL-448-HC-DEL-IT in which it was held that, merely because expenditure may result in enduring benefits, it cannot be classified as expenditure of a capital nature. It was further held in that case that in case of expenditure on website, there is no change in fixed assets of the assessee. Reliance was also placed on the judgement of Hon'ble Delhi High Court in the case of CIT vs Asahi India Safety Glass Ltd. 245 CTR 529 wherein it was held that expenditure incurred on application software was allowable revenue deduction. The Ld. CIT(A) on the basis of above submissions held as under :- “I have carefully considered the submissions of the appellant and perused the order of the AO in the light of the evidences placed on record, which show that this issue was involved in the AY 2007-08 andAY 2008-09 also, where the Hon’ble ITAT, vide their orders dated 15.06.2012 and 08.02.2013 in ITA No-5674/Del/2011 and ITA No.3073/Del/12-13, respectively, have decided this issue in favour of the appellant. As the issue involved in the year under consideration is identical to that in assessment year 2007-08 and 2008-09, hence, following the order of the Hon’ble ITAT in the appellant’s own case for AY 2007-08 and AY 2008-09, referred to above, the payment of expenditure incurred on the above softwares, which are materially similar to the software acquired by the appellant in earlier years, is held to be an allowable revenue expenditure. The ground No.5 of the appeal is therefore, allowed in favour of the appellant.” We find no infirmity in this order of the Ld.CIT(A). Hence we dismiss this ground of Revenue. 25. On ground nos. 1 to 4 of the Revenue’s appeal which are covered by the order of the Tribunal for the Assessment Year 2008-09 (ITA no. 5073/Del/2012) in the assessee’s own case are held in favour of the assessee by the Hon’ble High Court in its order dated 18.4.2015. 26. In view of the above discussion, we dismiss ground nos. 1 to 4 of Revenue’s appeal.

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd. 27. Ground No.5 is against the disallowance u/s 40(a)(i) to the extent deleted by the CIT(A). In view of our finding in the assessee’s appeal, we dismiss this ground for the same reasons cited therein. 28. In the result, the appeal of the Revenue is dismissed. 29. In the result the appeal of the Assessee is allowed and the appeal of the Revenue is dismissed. The order pronounced in the open court on 29.06.2016.

Sd/- Sd/-

[I.C. SUDHIR] [J. SUDHAKAR REDDY] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: the 29th June, 2016.

*dk

ITA Nos.2056 & 3229/Del/2014 A.Y. 2009-10 Honda Cars India Ltd.