Mitsubishi Corporation India Pvt. Ltd vs. DCIT (ITAT Delhi)

(i) It can be observed from the international transactions reported by the assessee that apart from earning Service fee amounting to Rs. 2.66 crore, being the commission income for co-ordinating between the buyers and sellers in the capacity of an agent, it also indulged into trading activity by directly making purchases and sale of goods on principal to principal basis. Segment-wise results of the assessee from trading and service/commission segments are available. Thus, it is evident that the assessee did direct purchase and sale transactions with its AEs and also acted as a service provider in the sale of their goods. There is no dispute as regards the transactions undertaken by the assessee under the `Trading segment’ on which operating profit was determined by reducing purchase and other operating costs from the sale value. The TPO has accepted such trading transactions at ALP. The controversy is only qua the agency segment, under which `Service fee’ was received without making purchase or sale of goods as an owner. In such circumstances, the question arises as to whether the cost of goods, for which the assessee simply provided services by acting as an agent, can be considered in the hands of the assessee and the transaction of receipt of `Service fee’ be treated as that of a trading nature? In our considered opinion, the answer to this question can not be in affirmative. The fact that the assessee did not purchase and sell the goods under the `Service fee’ segment, has not been disputed by the TPO. There is no finding given by the Officer that the assessee actually undertook trading but wrongly gave it a colour of agency in its books of account. Once the position is that the assessee sold the goods as an agent of its AEs and simply earned commission, how the cost of such goods in the hands of the AE can be taken into consideration and the entire transaction be considered as that of sale and purchase, is anybody’s guess. We do not subscribe to the view canvassed by the TPO in this regard. By equating commission business with the trading business, the TPO has ventured to recharacterize the commission transaction as a trading transaction, which is patently unacceptable. The Hon’ble jurisdictional High Court in CIT VS. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi) has held that the authorities should not disregard the actual transaction or substitute other transactions for them. Examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken. Further, their Lordships have carved out two exceptions to the aforesaid principle, viz., (i) where the economic substance of a transaction differs from its form; and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. Neither the TPO has taken recourse to any of these exceptions nor there is any material on record to justify the bringing of the instant case within their sweep. Ex consequenti, it is manifest that the authorities below erred in recharacterizing a commission transaction into a trading transaction.

(ii) One of the fundamental conditions for making a transfer pricing analysis is that the international transaction must broadly match with a comparable uncontrolled transaction. If the character of the original international transaction is tinkered with certain permutations and combinations so as to make it fit for making a comparison with an adjusted uncontrolled transactions, it will lead to incongruous results, thereby rendering the entire exercise of determining ALP, a futility. By combining the cost of goods incurred by the AE with the expenses incurred by the assessee, the TPO has embarked upon treating the foreign AE as well as the assessee as tested parties to one transaction. Such an approach has no sanction of law. The Hon’ble Delhi High Court in Li & Fung (India) P. Ltd. Vs. CIT (2014) 361 ITR 85 (Del) has repelled an approach similar to the one adopted in the instant case. The Mumbai bench of the tribunal in Onward Technologies Ltd. vs. DCIT (2013) 36 CCH 46 (Mum) has also held that the tested party in an international transaction can only be the assessee and not its foreign AE.

(iii) Adverting to the facts of the instant case, we find it as an admitted position that the assessee simply rendered agency services under this segment by co-ordinating between customers and its AEs. By no standard, the assessee can be said to have dealt with the goods of its AEs as an absolute owner. Once position is such, we fail to comprehend as to how financial results of the commission segment can be adjusted for making a comparison with trading segment.

(iv) The deductibility of tax at source pre-supposes the chargeability of income under the Act and disallowance u/s 40(a)(i) follows from non-deduction/payment of tax at source by the person responsible on such payments. In other words, unless income from the transaction is chargeable to tax under the Act in the hands of non-resident etc., there can be no question of deduction of tax at source and the consequential disallowance u/s 40(a)(i) of the Act cannot follow.

(v) The absence of a Permanent Establishment of a non-resident in India ordinarily implies that no business operations were carried out by him in India. The existence of a PE in India may require examination as to whether such PE was involved in specific transactions between non-resident and an unrelated Indian enterprise. In case there is no PE of the foreign enterprise in India and the goods are directly sold offshore by such non-resident enterprise without performing any operations in India, then, no income can accrue or arise or deemed to accrue or arise to him in terms of section 9(1)(i) of the Act;

(vi) Para 3 of Article 24 of the DTAA provides that any payment made by an Indian enterprise to a Japanese enterprise shall, for the purposes of determining the taxable profit of an Indian enterprise, be taken up under the same conditions as if the payment had been made to an Indian resident and not to a nonresident. In simple words, for the purpose of computing the taxable profit of an Indian enterprise, the provisions of the Act shall apply on a transaction with a Japanese enterprise as if it is a transaction with an Indian enterprise. If the transaction with a Japanese enterprise entails some adverse consequences in comparison with if such transaction had been made with an Indian enterprise, then such adverse consequences will be remedied under this clause by presuming, for computing the total income of an Indian enterprise, as if it was a transaction with an Indian enterprise and not a Japanese enterprise. Thus, Article 24 provides in unequivocal terms that for the purposes of determining the taxable profits of an Indian enterprise, any disbursements made to a Japanese enterprise shall be deductible in the same manner as if it had been made to an Indian resident. When we examine the TDS provisions, it is noticed that no provision under the Chapter XVII of the Act stipulates for deduction of tax at source from payment made for the purchases made from an Indian resident. This position when contrasted with purchases made from a non-resident, imposes liability on the purchaser for deducting tax at source under section 195, subject to the fulfilment of other conditions. When we compare an Indian enterprise purchasing goods from an Indian party vis-a-vis from a Japanese party, there is possibility of an obvious discrimination in terms of disallowance of purchase consideration under section 40(a)(i) in so far as the purchases from a Japanese enterprise are concerned. It is this discrimination which is sought to be remedied by para 3 of Article 24. The effect of this Article is that in determining the taxable profits of an Indian enterprise, the provisions of the Act, including disallowance u/s 40(a)(i), shall apply as if the purchases made from a Japanese enterprise are made from an Indian enterprise. Once purchases are construed to have been made by an Indian enterprise from another Indian enterprise, not requiring any deduction of tax at source from the purchase consideration and consequently ousting the application of section 40(a)(i), the non-discrimination clause shall operate to stop the making of disallowance in case of purchases actually made from a Japanese enterprise, which would have otherwise attracted the disallowance. Thus, it is evident that para 3 of Article 24, without considering the effect of Article 9 and other Articles referred to in the beginning of this para, rules out the making of disallowance u/s 40(a)(i) of the Act;

(vii) The contention of the ld. DR that once Article 9 applies, then the application of Article 24(3) is thrown out, is not wholly correct. The writ of Article 9 does not stop the application of Article 24(3) in entirety. The overriding effect of Article 9 over para 3 of Article 24 is limited to its content alone. In other words, the mandate of Article 24 applies save and except as provided in Article 9 etc. It does not render Article 24(3) redundant in totality. A conjoint reading of these two Articles brings out that if there is some discrimination in computing the taxable income as regards the substance of Article 9, then such discrimination will continue as such. But, in so far as rest of the discriminations covered under para 3 of Article 24 are concerned, those will be removed to the extent as provided.