The Delhi High Court recently reiterated that the business connection test has no relevance once it is established that the Associated Enterprises (AEs) does not have a Permanent Establishment (PE) in India. Reference was made to the provision of Section 90(2) of the Income Tax Act, which says that the taxpayer can take recourse to treaty provisions if they are more beneficial.
Accordingly, the Court held that purchases made by Mitsubishi Corporation (respondent-taxpayer) from its AEs cannot be disallowed under Section 40(A)(i) of the Income Tax Act for not deducting Tax at Source (TAS) under Section 195 of the Income Tax Act, since the AEs have no PE in India.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that Section 90(2) makes it abundantly clear that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India for granting relief of tax, or avoidance of double taxation, then, in relation to the taxpayer to whom such agreement applies, the provisions of the Income Tax Act shall apply to the extent they are more beneficial to that taxpayer.
The Bench also clarified that once it is held that the payments made for purchases from AEs are not taxable in India as these entities have no PE in India, then provisions of Section 195 are not attracted, and consequently, the disallowances made under Section 40(a)(ia) for not deducting TAS under Section 195 are bad in law. Thus, considering the majority view in the case of Commissioner of Income Tax II vs. Mitsubishi Corporation (India) Pvt. Ltd. [ITA No. 180/2014], the Bench dismissed the appeal in favour of the Revenue Department.
Briefly, in this case, the Revenue Department had challenged the action of the ITAT in holding that the Department had wrongly disallowed Rs. 3041.71 crores regarding purchases made by the respondent from its AEs under Section 40(A)(i), by observing that Section 40A(i) would not apply to the respondent due to non-discrimination clause under DTAA (Double Taxation Avoidance Agreement) and because AEs do not have a permanent PE in India.
Case Relied On:
The Commissioner of Income Tax II vs. Mitsubishi Corporation (India) Pvt. Ltd. ITA 180/2014
Appearances:
Advocates Abhishek Maratha, Apoorv Agarwal, Parth Samwal, Nupur Sharma, Gaurav Singh, Bhanukaran Singh Jodha, Muskaan Goel, Himanshu Gaur, and Nischay Purohit, for the Appellant/ Revenue
Advocate Mayank Nagi, for the Respondent/ Taxpayer
