Delhi High Court: Mitsubishi Corporation Exempted From TDS Deduction for Non-Taxable Payments in India

Delhi High Court: Mitsubishi Corporation Exempted From TDS Deduction for Non-Taxable Payments in India

The Delhi High Court ruled that Mitsubishi Corporation is not obligated to deduct TDS under Section 195(1) of the Income Tax Act if the payment made is not taxable in India.

Justice Rajiv Shakdher's noted that the assessee had the option to resort to the Double Taxation Avoidance Agreements (DTAAs) concerning the reformulated question, as the provisions within were more advantageous. Consequently, the business connection test became irrelevant once it was determined that MC Metal (Thailand) and Metal One (Singapore) did not possess a Permanent Establishment (PE) in India.

The assessee executed certain remittances for purchases to its seven group companies in Japan, USA, Singapore, and Thailand without deducting tax at source. The department disallowed Rs. 98 crore under Section 40(a)(i) of the Income Tax Act, asserting that all the companies had a Permanent Establishment (PE) in India. The AO's decision was affirmed by the DRP but overturned by the ITAT.

The department appealed before the High Court, where the judges in the Division Bench, Justices S. Muralidhar and Prathiba Singh, disagreed on the disallowance under Section 40(a)(i) due to the non-deduction of tax at source under Section 195 and the applicability of the non-discrimination clause. This disagreement led to the matter being referred to a third judge.

The department argued that the AO appropriately invoked the provisions of Section 40(a)(i) and disallowed the deduction claimed by the assessee for payments made outside India as Tax Deducted at Source (TDS) had not been deducted, despite these payments being taxable in India. Therefore, the respondent cannot claim these payments as deductions while computing income under the heading of profits and gains of business or profession. The failure to adhere to the provisions of Section 195(1) rightfully led to the disallowance made by the AO under Section 40(a)(i).

The department contended that the appellant/revenue did not present any arguments based on the provisions of Article 9 of the Double Taxation Avoidance Agreements (DTAAs) entered into by India with Japan and USA. The division bench's order stated that the judge’s difference of opinion did not arise from the provisions of Article 9 of the relevant DTAA. The contention raised by the assessee regarding discrimination in treatment would not be affected because the transactions were conducted between Associated Enterprises (AEs). However, the only consequence of such transactions would be that the purchase price would need to be evaluated against transfer pricing principles. The validity of the argument that unequal treatment is given to payments made outside India or to non-residents compared to residents would remain subject to examination. the AO adopted this approach by separately considering transfer pricing (TP) adjustments and disallowances made under Section 40.

The assessee argued that the provisions of Section 195 become relevant once income falls within the purview of Sections 4, 5, or 90 of the Income Tax Act. According to the assessee, the tax liability lies with the recipient of the income, not the payer; the payer's sole responsibility is to deduct tax at source. Mere chargeability to tax under the Act only forecloses some issues. The judgment by Justice Singh fails to consider the implications of Section 90 and the relevant Double Taxation Avoidance Agreements (DTAAs).

The court determined that the equal treatment or non-discrimination clause stipulated in Articles 24(3) and 26(3) of the India-Japan and India-USA Double Taxation Avoidance Agreements (DTAAs) would be applicable concerning the payments for purchases made by the assessee involving group companies in Japan and USA.