Sum received by Honda-Japan for offshore supply of CR-V cars and components not taxable in India: AAR

  • Income Tax
  • High Court
  • Supreme Court
  • financeseva

Applicant Honda Motor Company Limited, was a company established under the laws of Japan. It was holding 97.4% shares in its Indian subsidiary (HSCI) which was incorporated to manufacture and sale assessee’s model cars in the Indian Market.  Applicant signed an agreement with its subsidiary on the supply of certain parts components that were renewed from time to time. As per reason, the contractor agreed to supply certain components and parts as required for the manufacture of certain car models in India. Such supply was agreed on cost & insurance basis (C&I), wherein the title and risk in goods get transferred at the port of delivery.  

Additionally, the subsidiary was also importing cars as a completely built-up unit from the applicant on principal-to-principal basis. Further, certain capital goods were also sold by the Applicant to HSCI on C&I basis. The petitioner filed a motion seeking an advance judgment concerning the taxability of consideration received from his subsidiary. 

Authority for Advance Ruling (AAR) held that the title to the Parts supplied by the applicant would be transferred outside India upon loading of the Parts on to the mode of transport to be used to convey the same from the country of origin and upon endorsement of despatch document in favour of the purchaser. 

These facts clearly show that the supply of Parts will be made outside India and thus the transfer of title to the Parts will also take place while the goods were outside India. The payment for the offshore supply of Parts is to be made abroad in foreign currency as per contract terms. 

As the seller did not retain control over the goods as per the terms of the Memorandum, the title to and property in the Parts shipped by the applicant at the foreign port would get transferred at the port of shipment itself.  

Since this event is held outside the territory of India, the revenue generated by such a sale transaction cannot be said to be accrued or arising in India. The applicant shall not reserve the right to dispose of goods during transit or otherwise. 

The principle of sharing income based on territorial nexus is now well accepted.  

Explanation 1(a) to section 9(1)(i) of the Act stipulates that where all the operations are not carried out in India, only that part of income which can be reasonably attributed to the operations in India would be deemed to accrue or arise in India.  

Therefore, no income arising in the hands of the claimant from the off-shore supply of Parts may be held to be taxable to tax in India since the sale would be completed outside India and there would be no accrual or considered accrual in India.