Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2016 (5) TMI 697 - DELHI HIGH COURT

2016 (5) TMI 697 - DELHI HIGH COURT - [2016] 384 ITR 276 - Taxability of administrative fee paid - Indo-US DTAA - applicability of Section 40 (a) (i)- Held that:- 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 con .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X


Allowance of prior expenses - Held that:- The Court concurs with the view expressed by the ITAT in the present case, that the expenses for the 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nsel 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 impugned order dated 28th February 2006 passed by the Income Tax Appellate Tribunal ( ITAT ) in ITA No. 1771/Del/2005 for the Assessment Year ( AY ) 2001-02. Backg .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ry of Industry, Government of India. The approval was obtained by HII. In terms of the approval, the Assessee was to manufacture herbal products on contract basis in India and should not import these items. 3. It is stated that HII developed significant expertise over the years. It provided data processing services, record keeping, distributor/supervisor information and order and shipment processing etc. HII also provided financial and marketing services. Apart from the direct services, HII also .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

services, marketing services, long term financial planning for the Assessee, analysis of prospects etc., for the purpose of obtaining approval for the products from government and regulatory bodies and if necessary to assist in protecting the trademark, trade name logo of the products. The Assessee was to pay an administrative fee to HIAI in terms of the ASA. 5. For the purpose of manufacturing the products in India on a contract basis, the Assessee entered into Licence and Technical Assistance .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ssessee 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 Asses .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

2000. The RBI directed the Assessee to remit only 10,00,000 US$ as reimbursement of head office expenses. The RBI further directed that income tax should be paid on the remittances in terms of the Income Tax Act, 1961 ( Act ). The case of the Assessee was that the expenditure in question cannot be deemed to have accrued to the Assessee in accordance with law without the RBI approval. The Assessee accordingly treated the expenditure as having accrued only during the previous year relevant to AY .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Assessee stated that an interim invoice was received on 30th June 2000 for US$ 333,333. The second interim invoice for the same sum was raised on 30th September 2000 and the final invoice on the same amount on 31st December 2000. The last invoice duly supported with cost allocation sheets was received on 31st January 2001 and the total amount payable to HIAI towards administrative fee worked out to US$ 1,015,240. In terms of the approval granted by the RBI only an amount of US$ 1 million was rem .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he second plea was that with the Foreign Exchange Management Act, 1999 ( FEMA ) becoming effective from 1st June 2000, the payment could be made on current account transactions. In terms of Section 5 of FEMA foreign exchange could be drawn from an authorized dealer without RBI's prior 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 d .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 overseas and therefore .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

id expenses. 12. The AO has also disallowed the claim of ₹ 53,63,731 on account of lease hold improvements made by the Assessee during the AY in question although the amount had been capitalized in its books. The AO observed that the details filed by the Assessee showed that the expenditure was on account of fixing of new aluminium sliding windows, new interior work including aluminium partition, cupboards, counters, storage, tables, chairs, electrical fittings etc. This was treated as cap .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rder of the CIT (A)) 14. Aggrieved by the aforementioned assessment order, the Assessee filed an appeal before the Commissioner of Income Tax (Appeals) [ CIT (A) ]. By an order dated 25th February 2005, the CIT (A) disposed of the Assessee s appeal by holding that the administrative expense was in the nature of FTS rendered and was taxable in India in the hands of HIAI and therefore, Section 40 (a) (i) stood attracted. CIT (A) did not discuss the allowability of the expenses for the quarters end .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s 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 d .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

st March 2001, the ITAT observed that though the approval from the RBI was not required and though the Assessee had not received any bill for the this period from HIAI, it was still allowable as deduction since the Assessee had estimated it on a reasonable basis i.e. on the basis of the bill received for the period from 1st January 2000 to 31st December 2000. Reference was made by the ITAT in the impugned order to the decision of the Supreme Court in Bharat Earthmovers v. Commissioner of Income .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

[ITAT(Del)], the ITAT allowed a sum of ₹ 5,97,184 towards loss on account of FE fluctuation. Questions of law 18. At the time of admission of the appeal, on 21st October 2009 the following questions of law were framed by the Court: (a) Whether the ITAT was correct in law in allowing the sum of ₹ 5.83 crores being administrative fee paid by the Assessee to M/s. Herbalife International of America Inc.? (b) Whether the ITAT was correct in holding that the sum of ₹ 5.83 crores was .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t it was for a prior period expense and liability to pay the same was not accrued during the year? (e) Whether the ITAT was correct in law in holding that the liability to pay the amount relating to the period from 1st January 2000 to 31st March 2000 accrued during the year as RBI had accorded its approval during the year? (f) 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 Ass .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sions 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

844 (Bang.)/2007 [M/s. Herbalife International India Private Limited v. The Income Tax Officer] that 25% of the income on account of administrative fees is taxable in India. The Bangalore Bench of the ITAT had also directed that TDS under Section 195 of the Act ought to be deducted at 25% of the administrative expenses amount. 21. The first submission made by Ms. Vibhooti Malhotra, learned counsel also appearing on behalf of the Revenue in the present appeal, is that without determining the cha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n question has to be made to a resident, and where the exceptions mentioned in Article 26 (3) are not applicable. It is submitted that in the absence of a determination of the character of administrative fees, the first step of enquiry for applying the non-discrimination rule fails. 22. It is further submitted that if the exceptions mentioned in Article 26 (3) of the DTAA can be broadly classified as situations where excessive payments have been made due to the special relationship between the p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ding, 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 di .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e 26 (3) of the DTAA. 24. It is contended that Section 40 (a) (i) of the Act does not discriminate between a resident doing business with a non-resident and resident doing business with a resident under similar conditions . Accordingly, is submitted that Section 40 (a) (i) cannot be covered by Article 26 (3) of the DTAA. It is submitted that requirement of withholding taxes while making payments to non-residents does not offend the principle of non-discrimination. It is submitted that the onus i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ents, they will not be entitled to deduction for the said expenditure. The distinction in Section 40 (a) (i) is situs of payment which was not a prohibited differentia under the DTAA. 25. It is further submitted that Section 40 (a) (i) of the Act did not create any classification between resident payments and non-resident payments. It deals with disallowance of expenditure where TDS has not been deducted. Secondly, assuming that Section 40 (a) (i) creates a distinction between resident payments .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Securities Clearance Inc. v. Income Tax Officer (2008) 118 TTJ 619 [ITAT(Pune)]. It is submitted that the impugned order of the ITAT has been passed on the basis of a very superficial and prima facie reading of provisions of Article 26 (3) of the DTAA. 26. It is contended that Section 40 of the Act is not a deductibility provision and hence outside the purview of Article 23 of the DTAA. In terms thereof the plea of non-discrimination can be raised only by the non-resident and not by a resident .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ions 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

discrimination as envisaged under Article 26 (3) of the DTAA. (d) A resident left with a choice of dealing with a resident or a non-resident would opt to deal with a resident rather than a non-resident owing to Section 40 (a) (i) of the Act and to this extent the non-resident is discriminated against. (e) Reference is made to Article 24 of the OECD Model Convention which is pari materia with Article 26 (3) of the DTAA. The OECD Commentary on Article 24 explains that the above article was designe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Heavy Industries Ltd. v. DIT (2007)288 ITR 408 (SC), DIT v. Morgan Stanley & Co. (2007) 292 ITR 416 (SC), Asia Satellite Tel. Co. Ltd. v. DIT (2011) 332 ITR 340 (Del) and CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del) it is submitted that international commentaries can be relied upon on the interpreting the provisions of DTAA. Reference is also made to the book The International Tax Primer authored by Brain J. Arnold and Michael J. Mcintyre as well as Double Taxation Conventions and Int .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e ITAT had correctly proceeded on the basis that the payment was in the 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. ( .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ession 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 allowance or disallowance of expenses in case of payments made to residents and non-residents had to be same. Under Section 90 of the Act, where the DTAA is more beneficial to the Assessee taxpayer, it would prevail over the Act. (k) The disallowance of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

1st April 2000 onwards, did not require the prior approval of the RBI. As regards the period up to 31st March 2000, the RBI approval was received on 30th June 2000 for remittance of amount up to US$ 1 million. The said expenditure cannot be said to have accrued under law without approval having being so accorded by the RBI. (m) Reliance is placed on the decisions in Nonsuch Tea Estate Ltd. v. CIT (1975) 98 ITR 189 (SC), Dorr-Oliver (India) Ltd. v. CIT (1998) 234 ITR 723 (Bom), and Pfizer Corpor .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

I would fall in the category of current account transaction. Therefore, such payments did not call for any permission from the RBI. As per the mercantile system of accounting, the Assessee claimed the expenditure accrued for the relevant financial year. The mere non-payment of the said expenses by the Assessee to HIAI during the AY in question will postpone the accrual of the liability. Therefore, the disallowance made by the AO was not in accordance with law. Submissions of the intervener 28. T .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ticle 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

payment (as in the present case) does not fall under Section 40 (a) (ia) of the Act then the discrimination shall ensue. It is further submitted that the expression under same conditions qualifies deductibility and not its being subject to deduction of tax at source. It is further submitted that since Article 9 contemplates an AE, once the status is that of an AE the entire Article 26 (3) is ruled out. Exceptions to Article 26 (3) DTAA do not apply 31. The questions that have been framed by this .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

urposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. 33. There are specific kinds of payments mentioned in Article 26 (3) of the DTAA. These require treatment in the same manner vis-a-vis a resident and a non-resident. They include interest, royalty and other disbursements . Article 26 (3) therefore states that for the purpose of determining the taxable profits of a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s apply namely Article 9 (1) relating to AE, Article 11 (7) (interest) or Article 12 (8) (royalties and fees for Included Services). At the outset it requires to be noticed 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. Articl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 Bench of the ITAT did render its opinion on 23rd December 2009 reported at 2009 taxmann.com 1024 (Bangalore Tribunal) that TDS under Section .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

her the payment by the Assessee to HIAI qualifies as 'other disbursements' for the purpose of Article 26 (3) DTAA? 39. To recapitulate, the case of the Revenue is that the expression other disbursements should take colour from the context and would apply only to income which is of passive character just like interest and royalties. The Revenue invokes the doctrines of noscitur-a-sociis and ejusdem generis . It is submitted that FTS does not qualify as other disbursements since it is not .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is that the expression other disbursements should take the colour of interest and royalties . 41. The expression other disbursements occurring in Article 26 (3) of the DTAA is wide enough to encompass the administrative fee paid by the Assessee to HIAI which the Revenue has chosen to characterize as FTS within the meaning of Explanation 2 to Section 9 (1) (vii) of the Act. 42. At one stage of the proceedings, the Assessee sought to contend that the payment was FIS covered under Article 12 (4) of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

aid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. 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) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

chargeable under such law with reference to the value of the assets of, or the capital employed in, a business or profession carried on by the assessee, whether or not the debts of the business or profession are allowed 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" .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he amended section 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, whi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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) "fees for technical services" shall have the same meaning as in Explanat .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

um paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004; (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains; (iia) any sum paid on account of wealth-tax. Explanation.-For the purposes of this sub-clause, "wealth-tax" means wealth-tax chargeable under the Wealth-tax Act, 1957 (27 of 1957), or any tax .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

FTS to HIAI would be allowable in terms of Section 37 (1) of the Act but before such payment can be allowed the condition imposed in Section 40 (a) (i) of the Act regarding deduction of TDS has to be complied with. In other words if no TDS is deducted from the payment of FTS made to HIAI by the Assessee, then in terms of Section 40 (a) (i) of the Act, it will not be allowed as a deduction under Section 37 (1) of the Act for computing the Assessee's income chargeable under the head 'profi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

payments made in India to residents was inserted, for the first time by way of Section 40 (a) (ia) of the Act with effect from 1st April 2005. Then again as pointed out by Mr. M.S. Syali, learned Senior Advocate for the Intervener, Section 40 (a) (ia) refers only to payments of 'interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor etc. It does not include an amount paid to .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

al compliance of verification requirement which would not attract the non-discrimination rule. The OECD Expert Group noted that "the non-discrimination obligation under tax conventions is restricted in scope when compared with equal treatment or non-discrimination clauses in an investment agreement." Specifically, in relation to withholding taxes, the Expert Group in the note by its chairman titled Non-Discrimination in Bilateral Tax Conventions noted as follows: "6. The more limi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e profits of the payer. No such consequence was envisaged in terms of Section 40 (a) (i) of the Act as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under Article 26 (3) of the DTAA. 51. The arguments of counsel on both sides focussed on the expression same conditions in Article 26(3) of the DTAA. To recapitulate, a comparison was drawn by learned counsel for the Revenue with Article 26(1) which speaks of preventing discrimination o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of enquiry envisaged examining whether (a) the classification was based on an intelligible differentia and (b) whether the classification had a rational nexus with the object of the statute. 52. Section 40 (a) (i), in providing for disallowance of a payment made to a non-resident if TDS is not deducted, is no doubt meant to be a deterrent in order to compel the resident payer to deduct TDS while making the payment. However, that does not answer the requirement of Article 26 (3) of the DTAA that .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

esident, 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ch 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 to the economies of developing countries which need foreign investment. The Court felt that this was a matter best left to the discretion of the executive as it is "dependent upon several economic and political considerations." 55. Consequently, while deploying the nexus test to examine the justification of a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

om that when made to a resident. Under Section 40 (a) (i), as it then stood, the allowability of the deduction of the payment to a non-resident mandatorily required deduction of TDS at the time of payment. On the other hand, payments to residents were neither subject to the condition of deduction of TDS nor, naturally, to the further consequence of disallowance of the payment as deduction. The expression under the same conditions in Article 26 (3) of the DTAA clarifies the nature of the receipt .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

when the payment is to a non-resident has an adverse consequence to the payer. Since it is mandatory in terms of Section 40 (a) (i) for the payer to deduct TDS from the payment to the non-resident, the latter receives the payment net of TDS. The object of Article 26 (3) DTAA was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimina .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n 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 prov .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ndia has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to m .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rovisions of the Income tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC." 59. Consequently, the Court negatives the plea of the Revenue that unless there are provisions similar to Section 40 (a) (i) of the Act in the DTAA, a comparison cannot be made as to which is more beneficial provision. 60. The reliance by the Revenue on the decision of this Court in Hyosung Corporation v. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rocedure of filing a petition before the AAR and not as regards any substantive right. The decision of the Pune Bench of the ITAT in Automated Securities Clearance Inc. 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 t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

enses 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 accepted the plea of the Assessee that the remittance could not have been made to HIAI without prior approval of the RBI. The approval could be obtained .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

gh the remuneration paid by the Assessee to the managing agent related to the period prior to AY 1959-60, it was claimed during the said AY on the ground that the central government s approval was obtained only in the previous year related to AY 1959-60. The High Court did not agree with the plea of the Assessee but the Supreme Court reversed the High Court and held that liability towards royalty accrued only when the approval was granted by the Central Government for the appointment of the mana .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version