Toyota Tsusho Corporation vs DCIT (Int. Tax.) Circle – 3(1)(1)

Assessment Year 2013-14: Involves the CIT(A) order dated 14.12.2017, which emanates from the assessment order dated 27.01.2017 passed by the AO under section 143(3) read with section 144C(13) of the Act.

Assessment Year 2015-16: Involves the CIT(A) order dated 18.02.2020, arising from the assessment order dated 05.02.2019 passed by the AO under section 143(3) read with section 144C(13) of the Act.

Assessment Year 2016-17: Involves the CIT(A) order dated 18.02.2020, arising from the assessment order dated 24.01.2019 passed by the AO under section 143(3) read with section 144C(13) of the Act.

The assessee has filed an application for admission of additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. The additional evidence is with regard to the fact that the expatriate i.e., Yuji Kuroki and Kensuke Yamada were seconded to Toyota Lakozy Auto Pvt. Ltd and working under the control and supervision of Toyota Lakozy Auto Pvt. Ltd.

During assessment proceedings, the Assessing Officer ("AO") held that assessee constituted a Supervisory Permanent Establishment ("PE") in India under Article 5(4) of the DTAA read with the provisions of section 9(1) of the Act and consequently, attributed various receipts, including FTS income, offshore supply profits and loan guarantee fees, to the PE in view of section 44DA of the Act read with Article 7 of the DTAA as follows:

The AO held that 75% of the revenue declared as FTS (Rs. 33,85,28,093) is attributed to the PE in India which comes to Rs. 25,38,96,070/- and treated the same as FTS connected with the PE of the assessee in India and is taxed accordingly.

ii) The AO further computed the profit on offshore supply of Rs. 286,12,89,930/-, under Rule 10 of IT Rules, 1962 @ 10% which comes to Rs. 28,61,28,993/-. The AO then attributed the 35% of the said profit to the PE of the assessee company in India. The said profit of Rs. 10,01,45,148/- is treated as the income of the PE of the assessee in India, taxable @ 40% (plus applicable surcharge and education cess).

Article 5(4) of the India-Japan DTAA provides that a Supervisory PE can arise only where supervisory activities are carried on in India for more than six months and in connection with a building site, construction, installation or assembly project. Thus, both conditions are cumulative and mandatory.

ii) Consequently, mere presence of employees in India does not create a Supervisory PE unless the supervisory activities are linked with a qualifying installation, construction or assembly project and continue beyond the prescribed threshold period.

iii) The AO, for the subject assessment year, issued notices under section 133(6) of the Act to various Indian parties, to whom the Assessee provided services during the relevant year, and prepared the following list of Japanese expatriates who were allegedly present in India for providing services to its customers in India (refer page 114 of the paper book):

iv) The AO contended that the Assessee has a Supervisory PE under Article 5(4) of the India-Japan DTAA on account of presence of its employees in India for almost entire year for providing supervisory services (refer pages 115 to 117 of the paper book).

The CIT(A), relying on the decision of the jurisdictional High Court in the case of CIT vs Sumitomo Corporation: [2016] 382 ITR 75 (Delhi), held that the number of days of presence of employees cannot be aggregated but requires to be seen from the date of first arrival to the date of last departure or the period of installation activity. Consequently, the CIT(A) held that

the Assessee does not have supervisory PE in respect of Toyota Kirloskar Auto Parts ("TKAP"), ТТ Assembly India Private Limited, Mitsubishi Electric Automotive India Private Limited and AT India Auto Parts Limited (refer para 4.2.3 of the CIT(A) order at page 90 of the paper book read with rectification order passed by the CIT(A) at pages 9-10 of the paper book).

vi) It is reiterated that the AO erroneously aggregated the stay of all employees and treated the cumulative employee-days as the duration of the project.

vi) The project in relation to TKAP commenced on 28 October 2012 and concluded on 08 April 2013. Even considering the project from commencement to completion, the duration does not exceed the threshold under Article 5(4). Further, after removing overlapping periods, the actual presence in India works out to only 154 days. In relation to other projects as tabulated above, it is self-explanatory that the threshold under Article 5(4) is not breached.

viii) It is settled law that the duration test must be applied project-wise and not employee-wise. Common days cannot be counted multiple times merely because several employees were present simultaneously.

The finding of the CIT(A) that a Supervisory PE existed in relation to Toyota Lakozy is contrary to Article 5(4) of the DTAA. Toyota Lakozy is merely an authorized dealer engaged in retail trading and sale of Toyota vehicles refer pages 1 to 3 of the compilation of papers volume-2. It is not engaged in any construction activity, installation project, assembly project or building site work. Form 3CEB and the supporting documents on record clearly establish that Toyota Lakozy is engaged in automobile dealership activities only (pages 589 to 596 of the paperbook).

ii) Neither the AO nor the CIT(A) has identified any installation or assembly project undertaken by Toyota Lakozy during the relevant year. In the absence of fulfilment of this foundational requirement, Article 5(4) of the DTAA cannot be invoked.

iii) Reliance is placed on the decision of the Delhi Tribunal in FCC Co. Ltd. v. ACIT: ITA Nos. 54 & 8960/Del/2019 placed at pages 60 to 69 of compilation of papers - volume 2. wherein it was held that where employees merely render technical services and there is no installation or assembly project in existence, no Supervisory PE can arise notwithstanding the duration of stay of employees in India. Similar principles have been recognized in National Petroleum Construction Co. vs DIT (International Taxation): [2016] 238 Taxman 40 (Del) and GFA Anlagenbau Gmbh vs ADIT: [2014] 34 ITR(T) 73 (Hyd).

Without prejudice to the above contention that the Assessee does not have a Supervisory PE in India, it is respectfully submitted that even if PE is said to exist in Assessee's case, then also no income can be attributed to the Assessee on account of the PE as the Transfer Pricing Officer ("TPO") had analysed the international transactions undertaken by the Assessee during the year and accepted them at arm's length by drawing no adverse inference (refer pages 121 to 123 of the paperbook).

ii) Reliance in this regard is placed on the decision of Hon'ble Supreme Court in the case of DIT (International Taxation) vs Morgan Stanley & Co.: [2007] 162 Taxman 165 (SC), wherein the apex Court has held that attribution should not be made to the permanent establishment when the transactions have been analysed by the TPO and the same are found at arm's length.

During the relevant year, the Assessee supplied goods aggregating approximately INR 286.12 crores to Indian entities.

ii) These supplies comprised traded goods, capital goods, raw materials and spares. The evidence on record, including invoices, bills of lading, bills of entry and import documentation, conclusively demonstrates that:

 The contracts for supply were concluded outside India;

 Property and title in goods passed outside India;

 The consideration was received outside India;

 Goods were imported by Indian buyers in their own capacity:

 Transactions were undertaken on a principal-to-principal basis.

Thus, no part of the operations relating to offshore supply was carried out in India.

iii) Under sections 5(2) and 9(1)(i) of the Act, income of a non-resident can be taxed only to the extent it accrues or arises in India or is attributable to operations carried out in India. Since the entire supply transaction stood completed outside India, no income therefrom can be said to accrue or arise in India.

iv) The AO proceeded on an erroneous assumption that offshore supply and supervisory services formed part of a composite arrangement. No material whatsoever has been brought on record to substantiate such conclusion.

In fact, substantial supplies consisted of raw materials, traded goods and spares in respect of which no supervisory services could possibly be rendered. Therefore, the allegation that offshore supplies depended upon supervisory activities is factually incorrect.

vi) Further, it is pertinent to note that the transaction pertaining to sale of raw materials/ goods has been scrutinized by the TPO and has been considered to be at arm's length and no adverse inference has been drawn by the TPO. The copy of order passed by the TPO is enclosed at pages 121-123 of the paper book.

vii) Reliance on Supreme Court decision in the case of Ishikawajima-Harima Heavy Industries Ltd.: (2007) 288 ITR 408 (SC), the Hon'ble Supreme Court held that offshore supply profits are not taxable in India where:

 Transfer of property occurs outside India;

 Payments are received outside India; and  Offshore supply activities are performed outside India.

The Court further held that existence of a PE does not automatically justify taxation of offshore supply profits. The said principle has subsequently been followed in:

 LG Cable Ltd.: (2007) 288 ITR 408 (SC)

 Linde AG 44 taxmann.com 244 (Del)

 Pirelli Cavi Sistemi Telecom S.P.A 46 taxmann.com 216 (Hyd)

 Ion Geophysical Corporation (TS-455-ITAT-2016 Delhi ITAT)

Accordingly, offshore supply profits cannot be subjected to tax in India.

viii) Even for the sake of argument, but not admitting, that Assessee has a PE in India; profits earned by the Assessee from offshore supply cannot be attributed to the alleged supervisory PE as no goods were sold/ supplied to TLAL (i.e. only party in which case supervisory PE was upheld by the CIT(A) and challenged by the Assessee vide the subject appeal before this Hon'ble Tribunal). This is because Para 6 of the Protocol to India-Japan DTAA clarifies the scope of the term 'directly or indirectly attributable to the PE', as referred in paragraph 1 of article 7 of the DTAA, state that only profits arising from transactions in which PE has been involved shall be regarded as attributable to the PE to the extent appropriate to the part played by the PE in those transactions.

ix) The said principle has also been upheld by the apex Court in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra), the relevant extracts from the decision are reproduced as under.

(emphasis supplied)

Without prejudice, even if any attribution exercise were permissible, the approach adopted by the AO is entirely arbitrary. The AO has:

 Assumed a global profit ratio of 10%; and  Attributed 35% thereof to the alleged PE.

xi) No FAR analysis, economic study, comparable data, factual material or reasoning supports either of these figures. Therefore, even on an alternative basis, no attribution as made by the AO can survive.

xii) Without prejudice to the contention that the Assessee does not constitute any PE under Article 5 of the Tax Treaty, even if it is held that the Assessee has a PE in India then also the attribution of profits should be restricted only in relation to activities carried out in India. In this regard, reliance is placed Clifford Chance vs. DCIT: [2009] 318 ITR 237 (Bom):

The Assessee received ₹2,08,41,050 from Toyotsu Rare Earths India Pvt. Ltd. ("TREI") towards reimbursement of expatriate salary (refer page 456 of the paperbook). The expatriates were seconded to TREI and worked for TREI. Salary was initially paid by TTC merely as a matter of administrative convenience and was subsequently recovered from TREI on a cost-to-cost basis without any markup.

ii) The Transfer Pricing Officer himself accepted that such reimbursement was made on a cost-to-cost basis and satisfied the arm's length standard (refer page 261 of the paperbook).

iii) It is respectfully submitted that Toyota group is following similar arrangement in case there is secondment of employees. In Toyota Boshoku's case for assessment years 2013-14, 2015-16 and 2016-17, the Hon'ble Bangalore Bench of the Tribunal, held that employees seconded to Indian entity were regarded as its employees and reimbursement to non-resident AE by Indian entity would not be in the nature of FTS, but would be in the nature of 'salary', and therefore, reimbursements would not be chargeable to tax in the hands of the AE. Relevant citations are as under:

 Toyota Boshoku Automotive India (P.) Ltd. vs DCIT: [2022] 138 taxmann.com 166 (Bangalore)

 Toyota Boshoku Automotive India (P.) Ltd. vs DCIT: [2022] 145 taxmann.com 141 (Bangalore)

iv) Numerous judicial precedents including Tekmark Global Solutions LLC: [2010] 38 SOT 7 (Mum), Abbey Business Services: [2020] 122 taxmann.com 174 (Kar), Burt Hill Design: [2017] 79 taxmann.com 459 (Ahm) and Faurecia Automotive Holding: ITA No. 784/PUN/2015 have held that reimbursement of salary costs of seconded employees does not constitute taxable income in the hands of the foreign entity.

Further, salary income has already suffered tax deduction under section 192 in the hands of the concerned expatriates. The same amount cannot simultaneously be taxed again as FTS in the hands of TTC.

No estoppel against law vi) The CIT(A) rejected the claim merely on the ground that the Assessee had originally offered the amount to tax in its return. It is settled law that there can be no estoppel against statute. A receipt which is not taxable in law cannot become taxable because of an erroneous admission made by an assessee. Reliance is placed on:

 Balmukund Acharya: [2010] 310 ITR 310 (Bom)

 CIT vs Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 (Del)

 SR Koshti vs CIT (2005) 276 ITR 165 (Guj)

 Mrs. Shamshun Mukhtar Shaikh vs ACIT (ITA No. 18/Pnj/2013)

 ITO vs Khandelwal Laboratories Pvt. Ltd. (ITA No.

3721/Mum/2009)

Therefore, the reimbursement of expatriate salary deserves to be excluded from taxable income.

The loan guarantee fee of INR 88,310 received from TREI was attributed by the AO to the alleged Supervisory PE. The attribution is ex facie unsustainable. The alleged PE itself pertains to supervision services, whereas loan guarantee fees arise from entirely separate financing arrangements. The Revenue has not identified any nexus whatsoever between the alleged PE and the earning of loan guarantee fee. Accordingly, the CIT(A) rightly deleted the addition and the same deserves to be sustained.