TMI Blog2024 (2) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... endment in Section 40(a) w.e.f. 01.04.2005, unequal treatment, i.e., discrimination, obtained with regard to payments made against purchases to resident-vendors. The expenditure incurred on payments made to resident-vendors against purchases could thus, be taken into account while computing income chargeable under the head profits and gains of business or profession . This disparity was removed by FA 2014, albeit w.e.f. from 01.04.2015, when the ambit of disallowance was enlarged by bringing any sum payable to a resident within the four corners of Clause (ia) of Section 40(a). Since the period in issue is AY 2006-07, the amendment brought about in Section 40(a) by virtue of FA 2014 would have no relevance. Therefore, in my opinion, the equal treatment or the non-discrimination Clause obtaining in Articles 24(3) and 26(3) of the India-Japan/India-USA DTAAs would apply with regard to the payment for purchases made by the respondent/assessee concerning the following five companies: MC (Japan); Metal One Corporation (Japan); Tubular (USA); Petro (Japan) and Miteni (Japan). There can be no cavil with the proposition advanced on behalf of the respondent/assessee that since the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings of the DRP with respect to the existence of PEs as well as a business connection in India? - Ld' Judge could not have reformulated the question after the pronouncement of the judgment. As indicated above, the respondent/assessee could have taken recourse to the DTAAs qua the reformulated question since the provisions contained therein were more beneficial. [See Section 90(2) of the Act.] Therefore, the business connection test had no relevance once it was established that MC Metal (Thailand) and Metal One (Singapore) did not have a PE in India. Assessee appeal allowed. - HON'BLE MR. JUSTICE RAJIV SHAKDHER For the Appellant Through: Mr Ruchir Bhatia, Sr. Standing Counsel with Ms Deeksha Gupta, Adv. For the Respondent Through: Mr M.S. Syali, Sr. Advocate with Mr Mayank Nagi, Ms Husnal Syali Nagi, Mr Tarun Singh and Mr Sandeep Yadav, Advs. RAJIV SHAKDHER, J.: Preface 1. This appeal concerns Assessment Year (AY) 2006-07. Via the instant appeal, the appellant/revenue seeks to assail the order dated 23.08.2013 passed by the Income Tax Appellate Tribunal [in short, Tribunal ]. 1.1 The record shows that the instant appeal was admitted on 29.04.2014 when the coordinate bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducting tax at source [in short, TAS ]. The Assessing Officer (AO) took umbrage and disallowed the deductions claimed by the respondent/assessee. The AO ordered the disallowance under Section 40(a)(i) of the Income Tax Act, 1961 [in short, the Act ]. S. No. Name of the Group Company Country Disallowance u/s 40(a)(i) - Rs. 1 Mitsubishi Corporation [MC (Japan)] Japan 5,01,55,844 2 MC Metal Services Asia [MC Metal (Thailand)] Thailand 24,09,32,203 3 Metal One Asia P. Ltd. [Metal One (Singapore)] Singapore 10,06,99,115 4 Metal One Corporation [Metal One (Japan)] Japan 57,91,87,712 5 Mc.Tubular Inc. [Tubular (USA)] USA 11,60,956 6 Petro Diamond Corporation [Petro (Japan)] Japan 16,34,096 7 Miteni [Miteni (Japan)] Japan 51,84,250 5. Thus, in effect, on account of disallowances made by the AO under Section 40(a)(i) of the Act, Rs. 97,89,54,176/- was added to the income of the respondent/assessee. Addition was also made on account of an adjustment of Arm s Length Price (ALP) by the Transfer Pricing Officer (TPO), an aspect which, concededly, does not form the subject matter of the instant appeal. The record shows that the Tribunal remitted the case to the AO for reconsideration regarding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of section 9; NEW INSERTIONS AMOUNTS NOT DEDUCTIBLE 40. 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 1 st 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een paid, [on or before the due date specified in sub- section (1) of section 139] Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on that date of furnishing of return of income by the payee referred to in the said proviso. 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 9; (ia) thirty per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch nationals of that other Contracting State in the same circumstances are or may be subjected. This provision shall, notwithstanding the provision of article 1, also apply to persons who are not residents of one or both of the Contracting States. xxx xxx xxx 3. Except where the provisions of article 9, paragraph 8 of article 11, or paragraph 7 of article 12 apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first mentioned Contracting State. USA ARTICLE 26 NON-DISCRIMINATION 1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. This provision shall apply to persons who are not residents of one or both of the Contracting States. xxx xxx xxx 3. Except where the provisions of par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Delhi LO of MC (Japan) revealed that it constituted a PE of the respondent/assessee. The respondent/assessee has not disputed this position. (ii) Furthermore, the AO held that since Metal One (Japan) had an LO in India, logically, it would follow that it has a PE in India. Insofar as the remaining entities were concerned, the AO took recourse to the business connection test and proceeded to disallow deductions against payments made to the said entities. (iii) The finding returned by the AO that the LO of MC (Japan) constitutes a PE in India stands affirmed by the DRP and the Tribunal. The decision dated 17.11.2017 rendered by the division bench has not disturbed this finding. [See paragraphs 50 and 65 of the said judgment rendered by Justice Singh.] (iv) As far as Metal One (Japan) is concerned, the Tribunal via its order dated 11.05.2012 (concerning AY 2008-09) held that it did not have a PE in India; an issue which is the subject matter of an appeal (ITA 113/2013) filed by the appellant/revenue in this Court. (v) The aforesaid facts would demonstrate that all seven (07) entities to whom the respondent/assessee had made payments had business connection in India. Therefore, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned assessee was denied deduction. Thus, the purported discrimination due to disallowance of deduction concerning payments made outside India or to non-resident vis- - vis resident ceased, with effect from 01.04.2005. (xi) The Explanation 2 appended to Section 195 of the Act, which was introduced via FA 2012 with retrospective effect, i.e., 01.04.1962, is not the sole basis on which Justice Singh has sustained the disallowance. The judgment rendered by Justice Singh notices the amendment made to Section 40(a) of the Act. [See paragraphs 46, 47, 48 and 55]. 11. In sum, the argument was that the judgment rendered by Justice Singh should be sustained, including that part of the judgment whereby she reframed the second question. [See paragraph 64] 12. Mr Syali, on the other hand, made the following submissions: (i) This Court should confine itself to aspects referred to in the order dated 27.04.2018. This Court need not delve into those issues qua which findings have yet to be returned by the statutory authorities or into those aspects where no difference of opinion is articulated in the judgment under reference. (ii) Question no. (i) pertained to the applicability of the non- discr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the respondent/assessee were not towards composite transactions. (vi) Most of the issues raised in the appeal stand answered by the judgment rendered by the coordinate bench in the Herbal Life case. The decision rendered in the Herbal Life case has, apparently, been accepted by the appellant/revenue. It appears that the appellant/revenue has not preferred an SLP against the said judgment. Notably, the following aspects were dealt with in the Herbal Life case: (a) A resident could claim the benefit of provisions contained in the DTAA. (b) The argument based on Article 9 adverted to Article 24(3)/26(3) of the DTAAs entered by India with Japan and the USA was dealt with and rejected. (c) The division bench noticed and dealt with the impact of the insertion of Clause (ia) of the Act to Section 40(a) of the Act. The respondent/assessee was an intervenor in that case, an aspect which emerges upon perusal of paragraphs 30 and 48 of the judgment. (vii) The issue concerning chargeability to tax about the payments made requires scrutiny having regard to the provisions of the Act. Once chargeability is established, the provisions of the DTAAs have to be looked at only to soften the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of DTAAs executed between two nations is impermissible in law. Analysis and reasons 13. Having heard learned counsel for the parties and perused the record, which includes the judgments dated 17.11.2017 rendered by the learned judges, what emerges is the following: 13.1 The AO had ordered disallowances qua payments made by the respondent/assessee concerning purchases from its seven (07) group companies. The disallowance of the expenditure incurred for purchases made was triggered as TAS had not been deducted by the respondent/assessee. The AO took recourse to the provisions of Section 40(a)(i) of the Act. 13.2 Insofar as the income received by the respondent/assessee against services rendered by it for acting as an intermediary between the ultimate customer and the group companies was concerned, that was subjected to transfer pricing adjustment. This aspect is not the subject matter of the instant appeal. The Tribunal has, in fact, remitted this issue to the TPO/AO for fresh consideration. 13.3 It was neither the stand of the appellant/revenue nor was any finding of fact arrived at by the AO that the transactions entered into between the respondent/assessee and its seven (07) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 The rigour of the said provision, as it obtained prior to 01.04.2005, did not apply to the aforementioned specified payments made to residents. FA 2004 brought about an amendment in Section 40(a), whereby the resident was also brought within its sway, albeit with respect to payments specified in Clause (ia). The payments adverted to in Clause (ia) were the following: any 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, being resident, for carrying out any work (including supply of labour for carrying out any work) 15.2 Thus, although parity had been brought about with regard to the power of the AO to deny deduction where TAS was not deducted against payments made outside India or to non-residents and residents, it was limited to certain payments. As is evident upon perusal of Clause (ia) of Section 40(a), it did not bring payments made towards purchases to resident- vendors within its net. Therefore, the respondent/assessee argued that even after the amendment in Section 40(a) w.e.f. 01.04.2005, unequal treatment, i.e., discrimination, obtained with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dedly not the subject matter of the disallowance ordered under Section 40(a) of the Act. The disallowance under the said provision was confined to payments made by the respondent/assessee against purchases required to conform to the equal treatment clause or the non-discrimination Clause contained in Article 24(3)/26(3). Perhaps for this reason, the AO did not take recourse to the provisions of Article 9 of the respective DTAAs. 18. As regards the transactions entered into by the respondent/assessee with the remaining two entities, i.e., MC Metal (Thailand) and Metal One (Singapore), the respondent/assessee does not press the argument of equal treatment as the DTAAs entered into by India with Thailand and Singapore do not contain an equal treatment/non-discrimination clause. 18.1 In this behalf, the respondent/assessee has contended and, in my view correctly, that since the two companies referred to above, i.e., MC Metal Thailand and Metal One Singapore, do not have a PE in India, the payments made to them are not chargeable to tax in India. Articles 7 of the India- Thailand and India-Singapore DTAAs, respectively, provide complete clarity in that behalf. The AO, via convoluted log ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) [or section 194LD] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of Clause (23D) of section 10 or a public financial institution within the meaning of that Clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode : Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. Explanation 1. For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called Interest payable account or Suspense account or by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to 'the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, chargeable under the provisions of the Act . It is for this reason that vide Circular No. 728 dated 30-10-1995 that the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act The application of Section 195 (2) presupposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the income- tax Act by which a payer can obtain refund. Section 237 read with section 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so- called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words chargeable under the provisions of the Act to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax As stated hereinabove, Section 195(1) uses the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corpn. of AP Ltd.'s case (supra) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented income chargeable to tax in India , then it was necessary for him to make an ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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