TMI Blog2016 (5) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... e period 1st January 2000 to 31st March 2000 accrued as a liability to the Assessee only during the previous year and that the said expenditure was rightly allowed as deduction during the AY in question - Decided in favour of the Assessee Payment of administrative fee - Held that:- The Court concurs with the view expressed by the ITAT that in respect of the fee paid for the period relating to the period 1st January 2001 to 31st March 2001, the liability should be held as accrued and arisen during the previous year relevant to the AY 2001-02 and therefore, is rightly allowed by the ITAT. - Decided in favour of the Assessee - ITA No. 7/2007 - - - Dated:- 13-5-2016 - S. MURALIDHAR VIBHU BAKHRU JJ. For the Appellant: Mr. Ashok K. Manchanda, Senior Standing counsel with Mr. Raghvendra Singh, Ms. Vibhooti Malhotra, Junior standing counsel and Mr. Aamir Aziz, Advocate. For the Respondent: Mr. Ajay Vohra, Senior Advocate with Mr. Mukesh Butani, Mr. Vishal Kalra and Ms. Khyati Dadhwal, Advocates. Mr. M. S. Syali, Senior Advocate with Mr. Mayank Nagi, Ms. Husnal Syali and Mr. Tarun Singh, Advocates for Interveners. 1. This appeal by the Revenue is directed against the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure, HII permitted the Assessee, as a licensee, to manufacture the products. 6. For the AY in question, in the returns filed by it, the Assessee claimed an expenditure of ₹ 5.83 crores as administrative fee paid to HIAI as consideration for the various services provided to the Assessee under the ASA. The breakup of the said sum on the basis of the period it relates to is as follows: 1st January 2000 to 31st December 2000 10,00,000 US$ 1st January 2001 to 31st March 2001 2,50,000 US$ 12,50,000 US$ 12,50,000 US$ is equivalent to ₹ 5.83 crores. 7. It is stated that HIAI followed the calendar year and the annual charges payable for the calendar year 2000 was 10,00,000 US$. The case of the Revenue was that since the administrative fee claimed as deduction by the Assessee for the period 1st January 2000 to 31st March 2000 related to the previous year relevant to AY 2000-01, it could not be claimed as a deduction in AY 2001-02. On the other hand the plea of the Assessee was that the payment by the Assessee to HIAI required the prior permission of the Reserve Bank of India ( RBI ) under the Foreign Exchange Regulation Act, 1973 ( FERA ). Though the Assessee had a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permission. On account of both factors it was contended that the sum payable by the Assessee to HIAI could be ascertained, and had accrued and arisen to the Assessee and was, therefore, allowable as deduction during the AY in question. Assessment order 10. The AO, in the assessment order dated 10th March 2004, held that since the services were rendered in the previous year 1999-2000, the liability had to be accounted for in the accounts for the year ending on 31st March 2000. The AO held that the approval from the RBI was only for the purposes for remittance. The said administrative expenses were, therefore, disallowed. As regards the fees in relation to the present year 2000-01, the AO observed that under Section 9 (1) (vii) of the Act, the income by way of fees for technical services ( FTS ) payable by a person who is a resident in India would be deemed to accrue or arise in India because the services have been utilized in India. Therefore, under Section 195 of the Act, the Assessee was liable to deduct tax at source ( TDS ) on the said amount. The case of the Assessee was that this was only a cost sharing arrangement and was not in the nature of a fee being remitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Section 40 (a) (i) of the Act could not be invoked by the AO to disallow the claim for deduction as the payment in question was not taxable at the hands of the payee, i.e., HIAI as business income. It was held that HIAI did not have a permanent establishment (PE) in India. Further, even if it was taxable, it had to be examined whether it was fees for included services (FIS) under Article 12 (4) of the Double Taxation Avoidance Agreement ( DTAA ) entered into between USA and India. Further in light of Article 26 (3) of the DTAA, Section 40 (a) (i) of the Act was discriminatory and could not be invoked to disallow the claim of the Assessee for deduction even if the sum in question was chargeable to tax in India. 16. As regards the fee attributable to the period from 1st January 2000 to 31st March 2000, the ITAT observed that the payment could not be made by the Assessee without seeking prior approval of the RBI which came about only on 30th June 2000. The liability accrued to the Assessee during the AY in question and was allowable as deduction during the year. Even as regards the fees payable for the period from 1st January 2001 to 31st March 2001, the ITAT observed that thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on account of administrative fee relating to the period from 1st January 2001 to 31st March 2001 to the Assessee as deduction despite the fact that the foreign company had not raised the bill for the same? 19. On 15th October 2015 the questions were reframed as under: (a) Whether the ITAT was correct in law in allowing the sum of ₹ 5.83 crores being the administrative fee paid by the Assessee to M/s. Herbalife International America Inc.? (b) Whether the ITAT was correct in holding that Section 40 (a) (i) of the Act is discriminatory and therefore, not applicable in the present case as per provisions of Article 26 (3) of the Indo-US DTAA? (c) Whether the ITAT was justified in law in allowing the payment relating to the period for 1st January 2000 to 31st March 2000 to the Assessee as deduction despite the fact that it was a prior period expense and liability to pay the same did not accrue during the year? (d) Whether the ITAT was correct in law in allowing the expenditure on account of administrative fee relating to the period from 1st January 2001 to 31st March 2001 to the Assessee as deduction despite the fact that the foreign company had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove exceptions. Further, in the course of the assessment proceeding, no objection was raised regarding the question of applicability of Article 26 (3) of the DTAA and, therefore, there was no determination whether the payment made by the Assessee to its US parent was excessive or not. 23. It is further submitted that the next step in application of the non-discrimination rule was to examine under the 'same conditions' deduction would have been allowed if the same payment had been made to a resident. It is pointed out that Article 26 (1) prohibits discrimination on the basis of nationality and uses the expression same circumstances . Article 26 (2) prohibits discrimination vis-a-vis computing tax liability of PEs and uses the expression same activities . It is submitted that while the expressions similar circumstances and same activities have been discussed in the OECD Commentaries there is little indication on what is implied by the expression same conditions found in Article 24 (4) of the OECD Model which is more or less similar to Article 26 (3) of the DTAA. 24. It is contended that Section 40 (a) (i) of the Act does not discriminate between a resident doi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment. It is further pointed out that the treaty benefit can be availed only where the specific provision overrides the modus provided in the Act. Since no such provision existed in the treaty, Section 40 (a) (i) needed to be given full effect to, unbridled by the treaty. Submissions on behalf of the Assessee 27. On behalf of the Assessee it is submitted as under: (a) Section 40 (a) (i) of the Act cannot be invoked in view of Article 26 (3) of the DTAA which mandates that the conditions for allowance or disallowance of expenses in case of payment made to residents and non-residents have to be the same. (b) Prior to its amendment by the Finance (No. 2) Act, 2004 Section 40 (a) (i) of the Act provided for disallowance of payments made to non-residents where tax is not deducted at source, whereas a similar payment to resident did not result in such disallowance. After its amendment in 2004, certain payments to residents without deduction of TDS was disallowed under Section 40 (a) (i) of the Act. (c) A Circular 5 of 2005 dated 15th July 2005 issued by the Central Board of Direct Taxes ( CBDT ) explained that the purpose of introduction of clause (1a) to Section 40 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of FTS liable to tax in India consistent with the stands of the Revenue before the AO as well as before the CIT (A). (h) Section 40 of the Act is in the nature of a non-obstante provision, which overrides other provisions including Sections 30 to 38 of the Act. The expenditure allowable under Sections 30 to 38 of the Act in computing business income is subject to the deductibility condition in Section 40 of the Act. (i) Section 40 (a) (i) of the Act imposes a condition precedent, i.e., deduction of TDS as regards taxability of payment to a non-resident including payment of FTS. However, the resident is not governed by the 'same condition' and to that extent Article 26 (3) of the DTAA stood attracted. Article 26 (3) of the DTAA was not concerned with discrimination in terms of nationality but with treatment of enterprises of a Contracting State under the domestic tax laws of other state . (j) The expression under the same conditions refers to the conditions for deductibility in relation to payments made under the domestic law and does not refer to discrimination on account of compliance requirements. This essentially meant that conditions for all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where similar questions are involved. Mr. M.S. Syali, learned Senior counsel for Mitsubishi Corporation India Limited was, therefore, permitted to address the Court. It is pointed out that the non-discrimination envisaged by Article 26 (3) of the DTAA is a sub-set of the discrimination based on nationality and need not be construed independently. The words other disbursement in Article 26 (3) of DTAA takes colour from context. They cannot be restricted to income of a passive character. The doctrines of noscitur-a-sociis and ejusdem generis would not apply. 29. A reference is made to several passages of the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan (supra). It is pointed out that the treaty embodies a well thought out modus of bringing about equality in treatment of a resident and the non-resident in determining profits, and, giving deduction of the specified items. It is submitted that the inconvenience of collecting tax from the payee who is not resident, but within reach, as compared to deduction at source by the payer at the time of payment is not a factor that can negate the intent of Article 26 (3) of the DTAA. 30. It is further submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that fees for included services (FIS) is different from FTS. It is not even the Revenue s case that the payment made by the Assessee to HIAI which is sought to be allowed as a deduction, is in the nature of FIS. It is also not the case of the Revenue that Article 9 (1) or Article 11 (7) applies in the instant case. 35. Article 9 (1) provides for adjustment and reason the transfer price mechanism. This provision is not invoked in the present case in the context of the present deduction. Likewise, it is not the Revenue s case that Article 11 (7) or 12 (8) of the DTAA is attracted. Throughout, the case of the Revenue has been that the payment is in the nature of FTS. There is a specific finding of the AO as well as CIT (A) to this effect. It is not therefore open to the Revenue to now contend that the ITAT erroneously and hastily applied Article 26 (3) without first returning a finding on the nature and character of the payment made by the Assessee to HIAI. 36. Consequently, the Court proceeds on the basis that the exceptions mentioned in the Article 26 (3) do not apply in the facts and circumstances of the case. 37. At this juncture, it has to be noticed that Bangalore B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re this Court no question has been framed at the instance of the Assessee that the payment is covered by Article 12 (4) of the DTAA. Consequently, this question is not examined by the Court. Section 40 (a) (i) of the Act 43. Once it is held that the FTS is covered within the expression other disbursements , the question that next arises is whether for the purpose of determining the taxable profits of the Assessee, the payment made by it to HIAI is deductable under the same conditions as would apply if it had been paid to resident in India. 44. In order to determine what is non-deductible, Section 40 (a) of the Act as it stood at the relevant time reads as under: Section 40 Amounts not deductible Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession- (a) in the case of any assessee- (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofession- (a) in the case of any assessee- (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200: Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.-For the purposes of this sub-clause,- (A) royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as a deduction in computing the amount with reference to which such tax is charged, but does not include any tax chargeable with reference to the value of any particular asset of the business or profession; (iii) any payment which is chargeable under the head Salaries , if it is payable- (A) outside India; or (B) to a non-resident, and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B; (iv) any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head Salaries ; (v) any tax actually paid by an employer referred to in clause (10CC) of section 10; 46. Section 40 is in the nature of a non-obstante provision and therefore, it overrides the other provisions as contained in Sections 30 to 38 of the Act. This means that the expenditure which is allowable under Sections 30 to 38 of the Act in computing business income would be subject to deductibility condition in Section 40 of the Act. The payment of FTS to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-Discrimination in Bilateral Tax Conventions noted as follows: 6. The more limited non-discrimination obligations in tax conventions reflect the practical problems of cross-border taxation. For example, countries frequently collect taxes from non-residents through a system of withholding at source. Withholding is most frequently imposed on passive income, such as dividends, interest, rents, and royalties. Because the recipient may have no connection with the country of source other than the investment generating the income, withholding at the time of payment is likely to be the only realistic opportunity for the source country to collect its tax. Withholding is often not required on payments to residents. However, the application of withholding tax systems is appropriate. Residents have substantial economic connections with their country of residence; so that country is likely to have ample opportunity to collect its tax later, when a tax return is filed. Non-residents may be beyond the collection jurisdiction of the taxing country. (emphasis supplied) 50. While the above explanation provides the rationale for insisting on deduction of TDS from payments made to non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made to a resident, but only to payments made to non-residents, the two payments could not be said to be under the same condition . The further submission is that if they are not made under the same condition', the non-discrimination rule under Article 26 (3) of the DTAA is not attracted. 54. In the first place it requires to be noticed that DTAA is as a result of the negotiations between the countries as to the extent to which special concessional tax provisions can be made notwithstanding that there might be a loss of revenue. In Union of India v. Azadi Bachao Andolan (supra) the Supreme Court noted that treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides. The Court acknowledged that developing countries allow 'treaty shopping to encourage capital and technology inflows which developed countries are keen to provide to them. It was further noted that the corresponding loss of tax revenues could be insignificant compared to the other non-tax benefits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making payment of FTS in terms of Section 40 (a) (i) of the Act. 57. A plain reading of Section 90 (2) of the Act, makes it clear that the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the Assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision. In Union of India v. Azadi Bachao Andolan (supra) the Supreme Court took note of the Circular No. 333 dated 2nd April 1982 issued by the CBDT on the question as to what the assessing officers would have to do when they find that the provision of a DTAA treaty is not in conformity with the Act.: Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provision of the Income Tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e., Income Tax Act, that will govern the taxation of income. 58. Further in Union of India v. Azadi Bachao Andolan (supra), after taking note of the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nc. v. Income Tax Officer (supra)is no assistance to the Revenue since the said decision is said to be overruled by the Special Bench of the ITAT in the case of Rajeev Sureshbhai Gajwani vs ACIT (2011) 8 ITR (Trib) 616 (Ahmedabad). 61. In light of the above discussion, question (b) is answered in the affirmative, i.e., in favour of the Assessee and against the Revenue by holding that Section 40 (a) (i) of the Act is discriminatory and therefore, not applicable in terms of Article 26 (3) of the Indo-US DTAA. 62. Accordingly, question (a) is answered in the affirmative, i.e., in favour of the Assessee and against the Revenue by holding that the ITAT was correct in allowing a deduction of ₹ 5.83 crores being the administrative fee paid by the Assessee to HIAI. Questions (c) and (d) 63. Question (c) concerns the prior expenses for the period 1st January 2000 to 31st March 2000 which was allowed to the Assessee as deduction by the ITAT. 64. The case of the Revenue which was accepted by the AO as well as by the CIT (A) is that the expenses for the above period did not accrue in the previous year relevant to AY 2001-02 and therefore, could not be allowed. The ITAT accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough the Assessee did not receive any bill from HIAI for this period it had made an estimate on the basis of the bill that it had received from HIAI for the period 1st January 2000 to 31st December 2000. In terms of the law explained by the Supreme Court in Bharat Earthmovers v. Commissioner of Income Tax (supra) if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain in the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. 69. For the aforesaid reasons, the Court concurs with the view expressed by the ITAT that in respect of the fee paid for the period relating to the period 1st January 2001 to 31st March 2001, the liability should be held as accrued and arisen during the previous year relevant to the AY 2001-02 and therefore, is rightly allowed by the ITAT. Question (d) is answered in the affirmative, i.e., in favour of the Assessee and against the Revenue. Conclusion 70. The appeal is accordingly dismissed but, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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