Delhi HC Upholds Exception u/s 40A of Income Tax Act in favour of Mitsubishi Corporation [Read Order]

The Delhi High Court upheld the exception under section 40A of the Income Tax Act, 1961, in favour of Mitsubishi Corporation (India) Pvt Ltd. As the proposed substantial questions of law do not arise for consideration in this appeal and are dismissed , the appeal is dismissed by ruling against the Revenue.

The appeal is filed under Section 260A of The Income Tax Act, 1961 (the Act) lays a challenge to the order dated passed by Income Tax Appellate Tribunal (the Tribunal). The issue is relatable to Section 40A(i) of the Act for the Assessment Years (AY) 2016-17.

Counsel for appellant states that the issue in hand is covered by the majority view in the case of The Commissioner of Income Tax II vs. Mitsubishi Corporation (India) Pvt. Ltd. for the Assessment Year 2006-07 being ITA 180/2014.

In the said order, the AO had ordered disallowances qua payments made by the respondent/assessee concerning purchases from its seven (07) group companies. The disallowance of the expenditure incurred for purchases made was triggered as TAS had not been deducted by the respondent/assessee. The AO took recourse to the provisions of Section 40(a)(i) of the Act.

It was neither the stand of the appellant/revenue nor was any finding of fact arrived at by the AO that the transactions entered into between the respondent/assessee and its seven (07) group companies were “composite transactions”. In other words, the suggestion that an element of taxable income was embedded in the transactions executed between the respondent/assessee and its seven (07) group companies does not emerge from the record.

The AO ordered disallowance under Section 40(a)(i) of the Act concerning payments made by the respondent/assessee to its group companies on the ground that they were chargeable to tax in India. The conclusion reached by the AO about the taxability of the payments made by the respondent/assessee in India was based on the rationale that since MC Japan had acquiesced to the jurisdiction of the appellant/revenue [as it had a LO located in India, which was treated as its PE], the business model of the remaining group companies being identical, they would stand on the same footing. In other words, the AO concluded that all seven (07) group companies had PE in India.

The respondent/assessee insofar as the following entities are concerned, i.e., MC (Japan); Metal One Corporation (Japan); Tubular (USA); Petro (Japan) and Miteni (Japan), has assailed the disallowance ordered by the AO, not on the ground that the payments made are not chargeable to tax in India, but on the basis that equal treatment was not accorded, as envisaged in Articles 24(3) and 26(3) of DTAAs entered into by India with Japan and USA.

Before 01.04.2005, payments specified in Clause (i) of Section 40(a) made outside India or to a non-resident could not be deducted while computing the income chargeable to tax under the head “profits and gains from business and profession” unless TAS was deducted or after the deduction the amount was made over, i.e., paid. Inter alia, the payments specified in Clause (i) of Section 40(a) concern interest [not being interest on a loan issued for public subscription before the 1st day of April, 1938], royalty, fees for technical services or other sums chargeable under the Act.

The rigour of the said provision, as it obtained prior to 01.04.2005, did not apply to the aforementioned specified payments made to residents. FA 2004 brought about an amendment in Section 40(a), whereby the resident was also brought within its sway, albeit with respect to payments specified in Clause (ia).

It was evident upon perusal of Clause (ia) of Section 40(a), it did not bring payments made towards purchases to residentvendors within its net. Therefore, the respondent/assessee argued that even after the amendment in Section 40(a) w.e.f. 01.04.2005, unequal treatment, i.e., discrimination, obtained with regard to payments made against purchases to residentvendors. The expenditure incurred on payments made to resident-vendors against purchases could thus, be taken into account while computing income chargeable under the head “profits and gains of business or profession”.

This disparity was removed by FA 2014, albeit w.e.f. from 01.04.2015, when the ambit of disallowance was enlarged by bringing any sum payable to a resident within the four corners of Clause (ia) of Section 40(a). In view of the above position, the issue(s) which arises for consideration in this appeal is covered by the majority view in the case of The Commissioner of Income Tax II vs. Mitsubishi Corporation (India) Pvt. Ltd. ITA 180/2014.

A division bench of Justice V. Kameswar Rao and Justice Vinod Kumar observed that the proposed substantial questions of law do not arise for consideration in this appeal and dismissed the appeals by ruling against the revenue and in favour of the assessee.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates