LI Network
Published on: February 20, 2024 at 14:50 IST
The Delhi High Court has determined that Mitsubishi Corporation, the assessee, is not obligated to deduct Tax Deducted at Source (TDS) under Section 195(1) of the Income Tax Act if the sum paid was not subject to taxation in India.
The bench, presided over by Justice Rajiv Shakdher, observed that Mitsubishi Corporation (MC) could have sought recourse to Double Tax Avoidance Agreements (DTAAs) for more favorable provisions once it was established that certain entities did not have a Permanent Establishment (PE) in India.
The relevance of the business connection test diminished in such circumstances.
The case involved the assessee making remittances for purchases to its group companies in various countries without deducting tax at source.
The department disallowed Rs. 98 crore under Section 40(a)(i) of the Income Tax Act, claiming that all the companies had a PE in India. While the AO’s decision was initially upheld by the DRP, the ITAT later overturned it.
In the subsequent appeal, the Division Bench, consisting of Justice S. Muralidhar and Justice Prathiba Singh, disagreed on the disallowance under Section 40(a)(i). This disagreement led to the reference to a third judge.
The department argued that the AO correctly invoked Section 40(a)(i) since tax was not deducted at source for payments made outside India, which were chargeable to tax in India. The failure to comply with Section 195(1) resulted in the disallowance under Section 40(a)(i), according to the department.
The Court noted that the appellant did not present arguments based on the provisions of Article 9 of the DTAAs with Japan and the USA.
The judges’ difference of opinion did not stem from the provisions of Article 9. The Court also addressed the argument on discrimination in treatment and the impact of transactions between Associated Enterprises (AEs) on transfer pricing principles.
The assessee contended that Section 195 applies once income falls under the ambit of Sections 4/5/90 of the Act, and the tax burden is on the payee, not the payer. The court held that the non-discrimination clause in Articles 24(3) and 26(3) of the India-Japan/India-USA DTAAs applied to payments for purchases made by the assessee to group companies in Japan and the USA.
The Court ultimately ruled in favor of Mitsubishi Corporation, determining that TDS was not required for sums not chargeable to tax in India.
Case Title: The Commissioner Of Income Tax Versus Mitsubishi Corporation India P. Ltd.