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

Brief facts of the case are that the assessee is engaged in the 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.

The assessee filed its Return of Income on 30.11.2018 declaring a 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 Page 4 of 16 [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/-.

In the proceeding u/s 263 before the PCIT, the assessee explained 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/.

The PCIT, Delhi-4, vide his order u/s 263 dated 29.03.2024, 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

Before us, the ld AR of the assessee placed the order u/s 147 r.w.

The issue before us for adjudication is therefore whether the PCIT was correct in law to set aside the reassessment order u/s 147 dated

The ld AR of the assessee further referred to the Article 26(3) of 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.

Per contra, the ld DR vehemently argued that the remittance made 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.

We have heard the rival submissions and perused the materials on record. The issue now that is to be decided is whether the order under Page 7 of 16 [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.

The issue of disallowance u/s 40(a)(i) @100% in juxtaposition to 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

In this context, we do not agree with the contention of Revenue 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.

Section 40 is in the nature of a non-obstante provision and therefore, it overrides the other provisions as contained in Sections 30 to 38 of the Act. This means that the expenditure which is allowable under Sections 30 to 38 of the Act in computing business income would be subject to deductibility condition in Section 40 of the Act. The payment of FTS to 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 'profits and gains of business'.

Article 26(3) of the DTAA calls for an enquiry into whether the above condition imposed as far as the payment made to HIAI, i.e., payment made to a non-resident, is any different as far as allowability of such payment as a deduction when it is made to a resident. ***** 50. **** As far as payment to a non-resident is concerned, Section 40 (a) (i) of the Act as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable 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. *****

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

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.

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 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."

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.

Though for AY 2018-19, the provision of law provides for 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 Page 14 of 16 [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.

In the result, the appeal of the assessee is partly allowed.