LINKEDIN TECHNOLOGY INFORMATION PRIVATE LIMITED,DELHI vs. PRINCIPAL COMMISSIONER OF INCOME-TAX, DELHI -4 , DELHI

PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-

This appeal by the assessee is preferred against the order of the

PCIT, Delhi – 4, dated 29.03.2024 pertaining to A.Y 2018-19.

ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT 2. The grounds of the assessee are:

Ground No. 1 - Order passed under section 263 of the Act is bad in law and liable to be quashed. On the facts and in the circumstances of the case and in law, the Order passed by the Learned Principal Commissioner of Income-tax ('Ld. Pr. CIT") under section 263 of the Act is bad in law, void ab initio, without jurisdiction and hence, liable to be quashed. The appellant submits that the main body of the impugned Order refers to the assessment order dated 7 April 2021 passed under section 143(3) of the Act as the order sought to be revised. However, para 5 and para 8 of the impugned Order refers to the reassessment order dated 28 March 2023 passed under section 147 read with section 144B of the Act as the order sought to be revised. Without prejudice to the above, the appellant submits that reassessment order dated 28 March 2023 passed by the Assessment Unit, Income Tax Department ('AO') under section 147 read with section 144B of the Act, itself is bad in law and void ab initio. Therefore, the consequent revisionary proceedings and the impugned Order passed by the Pr. CIT under section 263 of the Act to revise such a non-est reassessment order is also bad in law and without jurisdiction. The Appellant prays that the impugned Order, passed under section 263 of the Act be held as bad in law, void ab initio and hence, liable to be quashed.

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT that disallowance provision is applicable, the Ld. Pr. CIT has erred in invoking the revisionary jurisdiction under section 263 of the Act as the order sought to be revised is neither erroneous nor prejudicial to the interest of the revenue. 2.2. On the facts and in the circumstances of the case and in law, the Ld. Pr. CIT erred in directing the tax officer to disallow 100% instead of 30% of the payments made by the appellant to LinkedIn Corporation and HireRight LLC on account of non-deduction of tax, without considering the provisions of Article 26(3) of the India-USA tax treaty. 2.3. Without prejudice to ground no. 2.2 above, on the facts and in the circumstances of the case and in law, the Ld. Pr. CIT should not have exercised his jurisdiction under section 263 of the Act, as the reassessment order is in line with accepted legal position and reflects one of the possible views. 2.4. On the facts and in the circumstances of the case and in law, the Ld. Pr. CIT's direction to disallow 100% instead of 30% of the payments made by the appellant to LinkedIn Corporation and HireRight LLC are violative of the non- discrimination provisions under Article 26(3) of the India-USA tax treaty. The Appellant prays that the impugned Order passed under section 263 of the Act, to revise the order, which is neither prejudicial nor erroneous, and being violative of the provisions of Article 26(3) of the India-USA tax treaty, should be treated as bad in law and is liable to be quashed. The Appellant craves leave to add to, alter, amend, delete, modify or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. The Appellant prays that appropriate relief be granted based on the above grounds of appeal and the facts and circumstances of the case.

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT 3. The assessee has not pressed ground no 1, hence the same is

dismissed as not pressed.

that the PCIT erred in assuming jurisdiction u/s 263 of the Act as the

assessment order is neither erroneous nor prejudicial to the interest of

the Revenue. Representatives of both the sides were heard at length.

Case records carefully perused. Relevant documentary evidence brought

on record duly considered in light of Rule 18(6) of the ITAT Rules.

business of providing marketing and customer support services to

LinkedIn Singapore Pte Ltd., a subsidiary of the assessee. The assessee

also provides contract research and development services to LinkedIn

Ireland Unlimited Company. The said services are being provided to both

the parties at a pre-determined mark-up.

total income of Rs. 85,42,52,880/-. The case was selected for Complete

Scrutiny under CASS and assessment was completed under section 143(3)

r.w.s 143(3A) and 143(3B) of the Act on 07/04/2021, accepting the

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT returned income of Rs. 85,42,52,880/-. Subsequently, the assessment

was reopened u/s 147 of the Act on the basis of information that the

assessee company has made foreign remittances as FTS/FIS of the

amount of Rs.8,61,10,484/- and foreign remittance as FTS of

Rs.9,15,05,365/- without withholding tax. Thereafter, reassessment

order was passed for A.Y. 2018-19 on 28.03.2023 under section 147 r.w.s

143(3A) & 143(3B) of the Income tax Act, 1961, adding an amount of Rs

5,32,84,755/- which is equal to 30% of total remittance of Rs

17,76,15,849/-.

that during the impugned year, the assessee has made remittance to

Linkedin Corporation of Rs 8,61,10,434/- and to HireRight LLC of Rs

53,94,881/- totaling to Rs 9,15,05,365/-. The assessee submitted that

the Assessment Unit (AU) has considered disallowance of 30% of Rs.

17,76,15,849/- instead of Rs. 9,15,05,365/- in the reassessment order

demonstrating that there was a double disallowance of Rs.8,61,10,434/.

accepted that there is a double disallowance of Rs. 8,61,10,434/-. The

PCIT however, held that in so far as remittance to Linkedin Corporation

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT of Rs 8,61,10,434/- and to HireRight LLC of Rs 53,94,881/- totaling to Rs

9,15,05,365/- is concerned, the same are FTS on which TDS should have

been made @100% u/s 40(a)(i) instead of 30% u/s 40(a)(ia). The PCIT

therefore held that the reassessment order u/s 147 dated 28.03.2023 is

erroneous and prejudicial to the interest of the Revenue on the ground

that the AO should have disallowed 100% of remittance of Rs

9,15,05,365/- u/s 40(a)(i) of the Act instead of 30% disallowance u/s

40(a)(ia) and set aside the reassessment order to the AO. Aggrieved the

assessee is before us against the order of PCIT.

263 r.w.s.144B of the Act dated 14.02.2025 to show that the AO did not

consider the amount of Rs 8,61,10,434/- remitted to Linkedin

Corporation for disallowance u/s 40(a)(i) on the ground that the DRP

vide its order dated 19.01.2025 in the case of Linkedin Corporation for

AY 2018-19, held the payment received from the assessee as non-taxable

being cost-to cost reimbursement. The AO, however considered the

amount remitted to HireRight LLC of Rs 53,94,881/- as FTS and

disallowed 100% of the same u/s 40(a)(i) of the Act.

was correct in law to set aside the reassessment order u/s 147 dated

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT 28.03.2023 as erroneous and prejudicial to the interest of the Revenue

on account of the fact that the AO should have disallowed 100% of Rs

9,15,05,365/- including remittance of Rs 53,94,881/- u/s 40(a)(i) of the

Act instead of 30% disallowance.

the India-USA DTAA and submitted that only 30% of disallowance can be

made u/s 40(a)(i) and relied on the decision of Delhi High Court in the

case of CIT Vs Herbalife India P Ltd (2016) 69 taxmann.com 205(Delhi)

and Mitsubishi Corporation India Pvt. Ltd. [TS-106-HC-2024 (DEL)] for

the proposition that provisions of 100% disallowance in section 40(a)(i)

is violative of Article 26(3) of the DTAA.

by the assessee to Linkedin Corp and HireRight LLC was towards FTS and

the AO’s order u/s 147 was clearly erroneous and prejudicial to the

interest of the revenue as he had made disallowance @30% instead of

disallowance @100% u/s 40(a)(i). The ld DR submitted that

discriminatory clause of DTAA should not apply to TDS.

record. The issue now that is to be decided is whether the order under

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT section 263 of the PCIT is valid in law. We have seen as above that the

AO under section 147 of the act has considered remittance of an amount

of ₹17,76,15,849/- for disallowance. This aspect of the AO’s order is

clearly erroneous as accepted by the PCIT himself who held that there

is a double disallowance and only remittance to Linkedin Corporation of

Rs 8,61,10,434/- and to HireRight LLC of Rs 53,94,881/- totaling to Rs

9,15,05,365/-, qualifies for disallowance @ 100% u/s 40(a)(i) of the Act.

For the PCIT however, to assume jurisdiction under section 263 of the

Act, the PCIT has to show that the order of the AO is prejudicial to the

interest of the revenue as well. Both the condition of AO’s order being

erroneous and the same being prejudicial to the interest of revenue has

to be established cumulatively. We find that though the AO’s order is

erroneous as far as quantum for disallowance is concerned, we have to

examine whether the rate of disallowance @30% taken by the AO is

prejudicial to the interest of the revenue.

the non-discrimination clause under Article 26(3) of the India-USA DTAA,

is dependent on the fact whether the conditions for disallowing an

expense are applied similarly to both residents and non-residents and

the judicial interpretation which holds that where the provisions of

Income Tax Act are found to be discriminatory, it is the DTAA provision

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT which would prevail over the Income Tax Act. Historically, the original

provisions of section 40(a)(i) provided for 100% disallowance of payment

made to non-resident, without making TDS whereas no such

disallowance was contemplated for payments made to a resident

without TDS. The amendment vide Finance Act 2004, consequence of

non-deduction of TDS on payment to resident, was bought at parity with

payment made to a non-resident, with introduction of clause (ia) to

section 40(a) of the Act. The subsequent amendment vide the Finance

Act 2014, covered within the ambit of Section 40(a)(ia), all payments

made to residents without deduction of applicable TDS, but the quantum

of disallowance was restricted to 30% of the payment. As far as parity of

disallowance for payments without TDS, remained the same for non-

residents and residents, the difference in the quantum of disallowance

persisted: 100% for non-residents under Section 40(a)(i) versus 30% for

residents under Section 40(a)(ia). The question that arises now is

whether this difference in quantum would still be considered differential

tax treatment in transactions involving residents and non-residents, and

whether the same falls within the ambit of the non-discrimination clause

of Article 26(3). In our opinion, the disallowance on non-resident

payments to 100% leads to less favorable treatment as compared to a

similar payment to a resident under "same conditions", having 30%

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT disallowance. Thus such disparity, in our view, would trigger the non-

discrimination clause in Article 26(3) of tax treaty as excess disallowance

of 70%, in case of payment to non-residents, has to be considered as

discriminatory as compared to allowability of similar payment made to

residents.

that the scope of non-discrimination article is restricted to differential

treatment of expenses incurred towards residents and non-residents and

it does not refer to the quantum of expense which can be disallowed.

We are of the considered view that Section 40(a)(i), in its present form,

is violative of non-discrimination Article 26(3) of India-USA DTAA as far

as quantum of disallowance is concerned. In the relevant assessment

year of AY 2018-19, in the instant case, Section 40(a)(i) imposed a

stringent condition of 100% disallowance for payments to non-residents

as compared to disallowance of 30% for payments to residents for the

same default of not deducting TDS. The substantive law laid down in the

decision of the hon’ble Delhi High Court in Herbalife India P Ltd

(supra),which pertained to AY 2001-02, holding that Section 40(a)(i) was

discriminatory and violated the non-discrimination article 26(3) of DTAA,

as there was no disallowance for similar payments to residents, and

negating the Revenue action of disallowance u/s 40(a)(i) for payments

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT to non-resident without making TDS, still holds relevance. The hon’ble

jurisdictional Delhi High Court in the case of Herbalife India P Ltd (supra) held in favour of the Assessee as under:

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT 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 the payment to both residents and non-residents should be under the ‘same conditions' not only as regards deduction of TDS but even as regards the allowability of such payment as deduction. It has to be seen that in those ‘same conditions' whether the consequences are different for the failure to deduct TDS. ***** 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 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 classification under a treaty like the DTAA, the line of enquiry cannot possibly be whether the classification has nexus to the object of the ‗statute' for the purposes of Article 14 of the Constitution of India, but whether

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT the classification brought about by Section 40 (a) (i) of the Act defeats the object of the DTAA. 56. The argument of the Revenue also overlooks the fact that the condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from 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 and conditions of its deductibility. It is relatable not merely to the compliance requirement of deduction of TDS. The lack of parity in the allowing of the payment as deduction is what brings about the discrimination. The tested party is another resident Indian who transacts with a resident making payment and does not deduct TDS and therefore in whose case there would be no disallowance of the payment as deduction because TDS was not deducted. Therefore, the consequence of non-deduction of TDS 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 discrimination brought about qua non-resident by requiring the TDS to be deducted while 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 Page 13 of 16

ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT 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." 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.

disallowance of payments of FTS made to non-resident as well as

resident, to that extent section 40(a)(i) is no longer discriminatory. In

view of the hon’ble Delhi High Court in the Herbalife (supra) as above

however, the application of disallowance @100% u/s 40(a)(i) is held as

discriminatory in so far as quantum of disallowance is concerned. The

quantum of disallowance for resident is restricted to 30% u/s 40(a)(ia),

and therefore to meet the requirement of discriminatory clause of

Article 26(3) of DTAA, the disallowance for payment made to non-

resident, without deducting TDS, should as well be restricted to 30% u/s

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT 40(a)(i) of the Act. We have seen that the AO has made a disallowance

@ 30% of remittance which is similar to the rate of disallowance @30%

under the non-discriminatory clause of Article 26(3) of the DTAA,

therefore there is no occasion to say that the revenue is prejudiced as

far as quantum of disallowance is concerned. We are therefore of the

considered view that the second condition of action of the AO, being

prejudicial to the interest of the Revenue, is not satisfied. Since both

the ingredients of provisions of section 263 of the Act i.e., the order of

the AO being erroneous and prejudicial to the interest of the Revenue,

is not satisfied, the assumption of jurisdiction by the PCIT u/s 263 cannot

be held as valid under the law. We accordingly quash the order of PCIT

u/s 263 as being invalid in law. The ground 2.2 and 2.4 of the assessee

is accordingly allowed.

The order is pronounced in the open court on 09.01.2026.

Sd/- Sd/-

[VIKAS AWASTHY] [NAVEEN CHANDRA] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 09th January, 2026.

VL/

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ITA No. 2492/DEL/2024 [A.Y 2018-19] LinkedIn Technology Information Vs. PCIT