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2018 (4) TMI 180 - AT - Income TaxTDS u/s 195 - Disallowance u/s 40(a)(i) - payment to its associated enterprise towards lease line charges without deduction of tax - whether payment was in the nature of royalty and also in the nature of Fees for Technical Services (FTS), because of amendment to section 9(1)(v) of the Act? - DTAA with USA - reimbursement of charges not subject to tax in India - Held that:- Though definition of ‘Royalty’ under the Act had been amended, but the term ‘Royalty’ under the DTAA between India and USA is not amended. In the absence of the same, we hold that in view of the definition of ‘royalty’ under DTAA, the assessee is not liable to withhold tax on the payments made to its associated enterprise on account of lease line charges. Applying the principle laid down by the Hon’ble High Court of Delhi in DIT Vs. New Skies Satellite BV (2016 (2) TMI 415 - DELHI HIGH COURT), we hold that where the provisions of DTAA overrides the provisions of Income-tax Act and the definition of ‘royalty’ having not been undergone any amendment in DTAA, the assessee was not liable to withhold tax on the lease line charges paid by it. The amended provisions of section 9(1)(vi) of the Act brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term has been defined originally and not amended. We have already decided this issue in the paras hereinabove that under the provisions of DTAA, the term ‘royalty’ is defined and it does not cover any such services availed and payment made and hence, there is no merit in the stand of Revenue in this regard and the same is dismissed. In any case, the privity of contract is between Qwest Communications Inc, the service provider and T-3, USA, who in turn had received bandwidth and passed on the services to various entities of group on cost to cast basis. The assessee as recipient of services had reimbursed the same and in the absence of profit / income element, there is no liability to deduct tax at source. Hence, the assessee cannot be held to be in default. Acceptance of international transactions to be at arm's length price by the TPO in its order passed under section 92CA(3) - Once the nature of expenses has been so accepted by the TPO, the Assessing Officer cannot sit in judgment of the TPO order since under the provisions of the Act, the order passed by the TPO is binding upon the Assessing Officer. The Assessing Officer at best could have invoked the provisions of Income Tax Act perse and not question the nature of expenditure i.e. after the TPO accepted to be reimbursement of expenses, the Assessing Officer challenged the same and held it to be ‘royalty’. We find no merit in the order of Assessing Officer in this regard and hence, the assessee succeeds on the alternate plea also. Accordingly, we hold that there is no merit in the disallowance of ₹ 20,47,432/- being payment to associated enterprise towards reimbursement of lease line charges by invoking provisions of section 40(a)(i) of the Act. Payment which relates to the preceding year - Admittedly, the said expenditure was booked in the preceding year and has been allowed in the hands of assessee. Once the same has been so allowed, there is no merit in making the disallowance again in the year under appeal. The said expenditure was reported in TP study report being reimbursement of lease line charges relating to the preceding year, but the same was paid in the year under consideration. The provisions of section 40(a)(i) of the Act are attracted at the first stage i.e. when booked on account of accrual basis or paid, whichever is earlier. If the said provisions had to be applied, then the same at best could be applied in the preceding year and not in the year under consideration. Accordingly, we reverse the order of Assessing Officer in this regard - Assessee appeal allowed
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