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TMI Blog2024 (2) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the DRP with respect to the existence of the PEs in India?" 2. Since there was a difference of opinion between the judges who comprised the division bench concerning the answers to the questions of law framed on 29.04.2014, the matter was referred to a third judge. In the first instance, the bench which rendered the decision consisted of Hon'ble Mr Justice S. Muralidhar (as he then was) and Hon'ble Ms Justice Prathiba M. Singh. 2.1 A perusal of the decision dated 17.11.2017 discloses that while Hon'ble Mr Justice S. Muralidhar answered both questions in favour of the respondent/assessee, Hon'ble Ms Justice Prathiba M. Singh took a converse view, i.e., answered the questions in favour of the appellant/revenue. 3. The record also discloses that via the order dated 27.04.2018, the division bench stated the points of law on which they had differed while rendering their respective decisions on 17.11.2017. The relevant part of the order dated 27.04.2018 is thus extracted hereafter: "3. Each of us has, in our respective opinions, differed in the answers to the above two questions. The points of law of which we have differed and which would be required to be answered by Sanjiv Kh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dispute Resolution Panel (DRP) sustained the said addition, which resulted in the final assessment order dated 25.10.2010 being passed under Section 143(3)/144C of the Act. 6. At this stage, it would be relevant to note that Section 40 underwent amendments by virtue of the Finance Act (FA), 2004 and FA 2014. The amendment brought about by FA 2004 took effect from 01.04.2005, while the amendment triggered via FA 2014 took effect from 01.04.2015. Since the amendments brought about in Section 40(a)(i) of the Act are crucial to the conclusion, one may arrive at, for convenience, the original provision, along with amendments which were triggered w.e.f. 01.04.2005 and 01.04.2015 are captured below: SECTION 40 AS APPLICABLE IN HERBALIFE FOR AY 2001-02 SECTION 40-WEF 01.04.2005 SECTION 40 -AS AMENDED ON 1ST APRIL, 2015 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 1st day of Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (ia) 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), 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, (i) "commission or brokerage" shall have the same meaning as in Clause (i) of the Explanation to section 194H; (ii) "fees for technical service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, thirty per cent of 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, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso. Explanation- For the purposes of this sub-clause, (i) "commission or brokerage" shall have the same meaning as in Clause (i) of the Explanation to section 194H; (ii) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (iii) "professional se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Included Services) apply, interest, royalties and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes 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." [Emphasis is ours] 8. As evidenced by the narration of facts set forth hereinabove, question no. (i), as framed by the Court, concerns five (05) entities, i.e., MC (Japan), Metal One (Japan), Tubular (USA), Petro (Japan) and Metini (Japan). 8.1 Insofar as the aforementioned five (05) entities are concerned, the respondent/assessee seeks to assail the disallowance ordered by the AO on the ground that it violates the non-discrimination provision contained in Article 24(3)/26(3) of respective DTAAs executed by India with Japan and USA. Significantly, the challenge to the disallowance is not pivoted on the absence of a Permanent Establishment (PE) in India. However, except for MC Japan, qua the remaining four (04) entities, the stand of the respondent/assessee is that it has no PE in India. 8.2 Question no. (ii), thus, concerns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to deduct TAS, as the payments made constituted sums chargeable to tax under the Act. (vi) Therefore, the AO rightly invoked the provisions of Section 40(a)(i) of the Act and disallowed the deduction claimed by the respondent/assessee vis-à-vis payments made "outside India", as TAS had not been deducted, although the said payments were chargeable to tax in India. Thus, the payments made to the aforementioned seven (07) entities cannot be claimed by the respondent/assessee as a deduction while computing income under the head "profits and gains of business or profession". Failure to comply with provisions of Section 195(1), correctly resulted in the disallowance made by the AO under Section 40(a)(i) of the Act. [See Transmission Corporation of AP Ltd. v. CIT, (1999) 239 ITR 587 (SC)] (vii) The provisions of Article 24(3)/26(3) would have no application, as one of the exceptions to the applicability of the said Article(s) is Article 9 contained in the respective DTAAs. Article 9 incorporated in the said DTAAs is applicable. The transactions were entered into between Associated Enterprises (AEs), and therefore, the profit shown against service income by the respondent/ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. (ii) thus pivots on the existence of PE. (iii) The respondent/assessee has two separate sources of income, i.e., income from purchases and income earned through services rendered. Both sources are independent of each other. The deductions claimed by the respondent/assessee against payments made towards services rendered by it have not been disallowed under Section 40(a) of the Act. Thus, insofar as payments made for services are concerned, a transfer pricing adjustment was made, which was sustained by the DRP. The Tribunal, however, set aside the upward adjustment made by the TPO/DRP, a position that stands accepted by the TPO. Therefore, the two streams of payments made by the respondent/assessee cannot be clubbed for the purposes of Section 40(a) of the Act. The AO ordered disallowance for the purchases by invoking provisions of Section 40(a) of the Act. In contrast, payments received against services rendered were subjected to income adjustment. (iv) The appellant/revenue did not advance any argument based on the provisions of Article 9 of the DTAAs entered into by India with Japan and the USA. A perusal of the division bench judgment dated 17.11.2017 would show that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute regarding chargeability; what needs to be answered is whether its impact is mitigated having regard to the provisions of the DTAA. (viii) The taxation of business profits under the DTAA is possible only if the concerned assessee has a PE in India [See Article 7]. The concept of business connection is alien to the matter in question. [See UAE Exchange Center Ltd. v. Union of India & Anr, 313 ITR 94 (Delhi) and Danisco India Pvt. Ltd. v. Union Of India & Ors., 404 ITR 539 (Delhi)] (ix) Section 195 is a machinery provision that effectuates the chargeability of income to tax as per Section 4 of the Act. Section 195 is not a standalone provision; it cannot apply if the charging provision has no applicability. [Union of India v. Azadi Bachao Andolan & Anr., 263 ITR 706 (SC)] (x) The provisions of Section 195 follow once income comes within the sway of the provisions of Section 4/5/90 of the Act. The tax burden is on the payee and not the payer; the only obligation cast on the payer is to deduct tax. Mere chargeability to tax under the Act only forecloses some issues. Justice Singh's judgment does not take into consideration the impact of the provisions of Section 90 and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions". In other words, the suggestion that an element of taxable income was embedded in the transactions executed between the respondent/assessee and its seven (07) group companies does not emerge from the record. The AO ordered disallowance under Section 40(a)(i) of the Act concerning payments made by the respondent/assessee to its group companies on the ground that they were chargeable to tax in India. The conclusion reached by the AO about the taxability of the payments made by the respondent/assessee in India was based on the rationale that since MC Japan had acquiesced to the jurisdiction of the appellant/revenue [as it had a LO located in India, which was treated as its PE], the business model of the remaining group companies being identical, they would stand on the same footing. In other words, the AO concluded that all seven (07) group companies had PE in India. 13.4 Thus, the AO, having regard to the provisions of Explanation 2 appended to Section 195 of the Act (which was inserted in the Act via FA 2012, albeit with effect from 01.04.1962) concluded that payments made by the respondent/assessee to its group companies were chargeable to tax in India and hence, the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 15.3 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). 16. There can be no cavil with the proposition advanced on behalf of the respondent/assessee that since the provision of Article 24(3)/26(3) of the India-Japan and India-USA DTAAs respectively are more beneficial, it is entitled to rely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that since MC (Japan) had a LO in India, on account of the similarity of business models, it ought to be concluded that these two companies, amongst other companies, also had PE in India. On the other hand, the Tribunal has returned a finding that MC Metal Thailand and Metal One Singapore do not have a PE in India. The following paragraph from the Tribunal's order, being relevant, is extracted hereafter: "9.7 In the above decision the Tribunal has concluded that Metal One Corporation does not have a PE in India. The Assessing Officer on the analogy that the functions of Metal One Asia Pte. Ltd. Thailand are similar to that of Metal One Corporation, drew an inference that Metal One Asia Pt. Ltd. have a PE in India. Similar inference has been drawn in the case of MC. Tubular Inc. USA, Petro Diamond Corp. Japan and Miteni Japan. As the ITAT had, in the case of Metal One Corporation held that the entity does not have a PE in India, on the facts and circumstances of the case, the ratio applies to all other entities other than Mitsubishi Corporation, Japan. We are informed that, for none of the entities, other than Metal One Corporation, Japan the Revenue authorities have passed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Explanation 2.-For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has- (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India." 19.1 This is also the dicta of the judgment rendered by the Supreme Court in GE India Technology, as is evident from a perusal of the following extract: "7. Under Section 195 (1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the Income-tax Act in the case of non-residents only and not in the case of residents. Failure to deduct the tax under this section may disentitle the payer to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to make an application to the ITO (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO (TDS) that the question of making an order under Section 195 (2) will arise. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195... 8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words "chargeable under the provisions of the Act" in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not as assessable, there is no question of TAS being deducted. 9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Section 195(1) uses the expression "sum chargeable under the provisions of the Act." We need to give weightage to those words. Further, section 195 uses the word 'payer' and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfil the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the Income tax Act. When the payer remits an amount to a non- resident out of India he claims deduction or allowances under the Income-tax Act for the said sum as an "expenditure". Under section 40(a) inserted vide Finance Act, 1988 with effect from 1-4-1989, payment in respect of royalty, fees for technical services or other sums chargeable under the Income-tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the Income-tax Act. This provision ensures e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India", then it was necessary for him to make an application under Section 195(2) of the Act to the ITO (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this Court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the ITO (TDS) to compute the amount which was liable to be deducted at source. In our view, Section 195(2) is based on the "principle of proportionality". The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India ..... X X X X Extracts X X X X X X X X Extracts X X X X
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