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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI H.S. SIDHU & SHRI L.P. SAHU
This is an appeal filed by the revenue against the order of the Ld. CIT(Appeals) Faridabad dated 19.9.2014 for the assessment year 2008-09 on the following grounds :
“1. Whether on the facts and circumstances of the case, the Ld. CIT (A) has erred in holding that the assessee was not required to make TDS deduction u/s 195 of the Income Tax Act, 1961 on the payment of Rs. 1,06,53,926/- made to M/s Timken and thus deleting the disallowance made by the A.O. u/s 40(a)(i) of the Income Tax Act whereas such payment was chargeable to Income Tax in India.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in holding that the assessee was not required to make TDS deduction u/s 195 of the Income Tax Act, 1961, on the payment made to M/s Timken and thus deleting the disallowance made by the AO u/s 40(a)(i) of the Income Tax Act without giving any findings contrary to the AO that M/s Timken Group has got permanent establishment in India and thus the income on this transaction was chargeable to tax in India on which TDS was to be deducted. 3.That the appellant craves for the permission to add, delete or amend the grounds of appeal
before or at the time of hearing of appeal.”
2. The case was fixed for hearing on 13.9.2017, 21.11.2017 and 24.4.2018 but none appeared on behalf of the assessee. Even on the last date of hearing, none attended on behalf of the assessee. We, therefore, have no option, but to decide the appeal exparte qua assessee after hearing the Ld. DR.
Brief facts of the case are that assessee is a dealer and distributor of USA based multinational company M/s. Timken Inc. Having registered office at 1835 Dueber Ave., S.W. Canton, Ohio 44706-2798. The assessee filed return of income declaring nil income on 29.9.2008. Later on the case was selected for scrutiny and statutory notices were issued to the assessee. During the course of assessment proceedings, the assessee had made payment to M/s. Paras Build Cell Pvt. Ltd. on account of office maintenance expenses at a sum of Rs. 1,74,420/- on which no TDS has been deducted. Therefore, the AO disallowed the entire payment u/s 40(a)(ia) of the Income Tax Act 1961.
4. Further it was observed by the AO that the assessee had purchased bearings of Rs. 1,06,53,926/- from foreign companies on which TDS has not been deducted u/s 195 of the Income Tax Act 1961. In this regard AO issued show cause notice and asked the assessee as to why these purchases should not be disallowed u/s 40(a)(i). In this regard the assessee furnished reply on 26.11.2010 which is as under :- “The assesee is engaged in the business of import of bearings. It purchases the goods from outside India from foreign Companies and sells them in India. Provisions of section 195 are applicable only for 3 import payment where TDS is involved. In the above mentioned case the question of TDS does not arise. The TDS provisions are not applicable for interest payments/credit and covers for payments made to Non resident other than a Company/foreign company. It does not cover for payment for purchases from Non Residents. In the case of the assessee, the payment is for purchase of goods from foreign companies. Moreover section 195 of the Income Tax Act says that the TDS is to be deducted as per the rates prescribed by the finance Act. However no TDS rates have been prescribed on the purchases of goods. Therefore the fact that TDS is not applicable on import payments for purchases of goods further gets strengthened.”
5. From the submissions made by the assessee, AO was not satisfied and referred the provisions of Finance Act 2008 (Part-II, Section 1(b)(i)K as per which rates are 30%) and he observed that the payments had been made to the non- resident which is a foreign company. The sale price includes GP/NP and there is a business connection in India. Therefore the TDS liability arises and he also referred to section 195 (2) and also relied on some case laws. During the course of assessment proceedings AO also observed from the website of www.timken.com that the said company had headquarters at Ohio, US and following plants in India :-
Location Office Plant Technical/engineering centre Bangalore 1 - 1 Chennai - 1 - Jamsedpur 1 1 0 Kolkata 1 0 0 New Delhi 1 0 0 Pune 1 0 0 Total 5 2 1
From the above table it was observed that there are five offices and two plants and one technical/engineering centre of M/s. Timken group of companies in India and thus there is a permanent establishment of the seller in India and thus the income was chargeable in India on which TDS was to be deducted / withheld as per the provisions of section 195. In this regard further show cause notice was issued to the asseseee, in response to which, assesee submitted reply dated 16.12.2010 which is as under :- "Your goodself has further been pleased to enquire as to why provisions of Section 195 not be applicable to the assessee on Purchases made from parties abroad. In this connection, your kind attention is drawn towards our submission dated 6.8.2010 along with the details of purchase made during the year under consideration. On a perusal of the 5
same, it shall be observed that out of the total purchase of Rs.1.12 Crores purchases amounting to Rs.l.02 Crores have been made from Timken Singapore Pte Ltd. Singapore and Timken Wuxi Bearings Co. Ltd. Jiangsu, China. It is submitted that both these companies do not have any permanent establishment in India and hence the provisions of Section 195 are not applicable in the matter. Secondly, the purchases have directly been made from the sellers abroad without any involvement of any middle man. The goods have been cleared through the Indian Customs after payment of requisite Custom Duty and other clearing charges. That the documents in support of our averments have already been submitted before your good self. It is further submitted that since this transaction pertains to purchase of goods which have been subsequently sold in India, the provisions of Tax Deduction are not applicable. That our submission is also supported by the Hon'ble Delhi High Court in the case of CIT vs Van Oord ACS India (P) Ltd (ITA No.439 of 2008 dated 16.3.2010) where the Hort'ble Court opines that the obligation to 6 deduct tax at source arises only when he payment is chargeable under the provisions of the Income Tax and not otherwise. That in the matter before us, the purchases of goods are not a payment which is subjected to Tax deduction and hence the provisions of Section 196 are not applicable. In view of the above facts and submissions, it is requested that no adverse inference be drawn against the assessee."
After considering all the submissions of the assessee, the AO relied on some case laws and disallowed the payment of Rs. 1,06,53,926/-. Feeling aggrieved from the order of the AO the assessee appealed before the Ld. CIT(A) and Ld. CIT(A) after considering the order of the AO and submissions of the assessee deleted the addition of Rs. 1,06,53,926/-. Feeling aggrieved from the order of the Ld. CIT(A) the revenue is in appeal before the ITAT.
Ld. DR relied upon the order of the AO and submitted that the Ld. CIT(A) has wrongly deleted the additions of Rs. 1,06,53,926/- because there is a permanent establishment in India of the US based company from which assessee has purchased materials and there is also business connection in India. Therefore the order of the AO should be restored. Reliance is placed on the decision of Hon’ble Supreme Court 7 in Transmission Corporation of A.P. Ltd. and Another vs. CIT, (1999) 239 ITR 587 (SC). 8. After hearing Ld. DR and going through the orders of lower authorities we observe that Ld. CIT(A) has rightly deleted the additions made by the AO in regard to the purchase of Rs. 1,06,53,926/- from M/s. Timken Company. The conclusions reached by the Ld. CIT(A) is as under :-
9.5 The contentions of the AO and the Appellant were taken on record and they were considered. Before considering the legal aspects it is pertinent to reproduce section 40, once again: “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 "Profit and gains of business or profession".- (a) in the case of any assessee - (i) any interest (not being interest on a loan issued by public subscription before the 1st 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 deductable at source under Chapter XVI/-8 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: (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;" 9.6 Under the existing provision, of sub section (i) of clause (a) of section 40 of the Income tax act, no deduction is allowed in the computation of income on account of interest, royalty, fees for technical services or any other sum which is payable outside India, or in India to a non-resident or to a foreign company, if tax is not deducted at source from payments of these sum or after deduction 8 of tax at source, payment is not made to the account of the central government before the expiry of time prescribed under sub-section (1) of section 200 and in accordance with other provision of chapter XVII-B. Deduction of sum is, however, allowed where tax has been deducted, or after deduction has been paid in any subsequent year in computing the income of that previous year. With a view to rationalize the provision of sub section (i), the act has substituted the said sub-clause to provide that in any case in which 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 time prescribe under sub-section (1) of section 200, the sum from which tax has been so deducted or paid shall be allowed as deduction in computing the income of the previous year in which the tax has been paid to the account of central government. 9.7 It has been envisaged that the payments with regard to which a payer is liable to withhold tax at source in case payments are made to a person situated outside India or to a non-resident situated the territories of India. The conditions are envisaged in the section 195 of the Act, the same is reproduced for quick reference: "Other sums. 195. (1) Any 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 194L8 or section 194LC) or section 194LO 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 (230) 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 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; (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such. sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub- section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1). (4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation. (5) The Board may, having regard to the convenience of assesses and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.} (6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.} (7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Boord may, by notification in the official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, 'by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub section (1) on that proportion of the sum which is so chargeable. ” 9.8 To elaborate, Section 195 is a special provision for tax deduction at source from payments to non-residents, which are chargeable to tax. It covers all payments to non-residents except from salary. tater, interest on securities and other interests were also excluded from its purview. Explanation would make it clear that. even credit to non-resident account or suspense account would tantamount to payment for the purpose of tax deduction at source. Section 195 (2) provides that a person responsible for deduction of tax deduction at source can apply to the Assessing Officer for general or special order for determination of appropriate proportion of the tax deductible. Where the amount paid could not be fully taxable, it follows that, where no part of the amount is taxable, the assessee responsible for tax deduction at source can ask for Nil deduction certificate. The non-residents himself or his agent can make an application for a certificate of Nil deduction or deduction at a lesser rate, such certificate being valid for a period for which it is issued. In the case of payment of interest to the non-resident, the procedure prescribed under section 197 and 197 A would have applied. "9.9 From the perusal of the relevant extracts and their elaboration, which has been done based upon the circulars issued by CBDT and various judgements, it is clear that when the Assessee is making a payment to any person outside India or to a non-resident in India and the receipt is chargeable to tax as per the provisions of the Income-tax Act, then the person is liable to withhold tax at source as per the specified rates. In the absence of tax withholding, the entire expenditure will be disallowed even though the conditions as stipulated in sections 30 to 38 had been fulfilled by the Assessee. 9.10 Returning to the case in hand, the AO based upon the materials collected by him from the website of M/s Timken and through other mediums has construed the Indian Subsidiary to be the Permanent Establishment of M/s Timken USA. The AO has based his decision drawing strength from the decision of the Hon'ble Karnatka High Court in the case of Samsung Electricals. The relevant part of the assessment order is as below: "The attention of the assessee was also drawn to the decision of the Karnataka High Court in the case of ClT (international taxation) vs. Samsung Electronics Co. Ltd. (2009) 185 Taxman 313 (Kar) wherein it has been held that as per mandate u/s 195(1), every payment made by a resident payer to a non resident recipient in respect of any goods/ services supplied by non-resident, which resident payer is making use of in running of its business or any other activity indulged in as a part of its business, professional activity, prima facie bears character of an income of recipient and, therefore, obligation u/s 195 springs up. As the payment made to the non-resident contained his GP/NP and therefore the income of the non-resident, which is chargeable under the provisions of this Act {Income Tax Act, 1961} as the income was arisen in India, the counsel was asked to show cause as to why the said purchases should not be disallowed u/s 40(a)(ia} of the Act as neither tax has been deducted nor certificate of no-deduction of tax from the A. O. has been obtained." 9.11 However the Counsel of the appellant has drawn by attention to the GE India Technology Centre Pvt Ltd v. CIT [20101 327 ITR 456 (SC) in which the Hon'ble Supreme Court has reversed the decision of the Hon'ble Karnataka High Court. A brief synopsis of that shall not be out of place. The facts of the case are that The assessee, an Indian company, made remittance to a foreign company for purchase of software. The assessee took the view that the payment was not chargeable to tax in India and did not deduct tax at source u/s 195. The AO & CIT {A} took the view that the payment constituted "royalty" and was chargeable to tax and that the assessee was liable u/s 201 for failure to deduct tax at source though this was reversed by the Tribunal. On appeal by the department, the High Court reversed the Tribunal by taking the view in CIT vs. Samsung Electronics320 ITR 209 that the assessee was not entitled to consider whether the payment was chargeable to tax in the hands of the non-resident or not and had to deduct tax u/s 195 on all payments. On appeal by the assessee, HELD reversing the High Court: (i) S. 195(1) uses the expression "sum chargeable under the provisions of the Act". This means that a person paying interest or any other sum to a non-resident not liable to deduct tax if such sum is not chargeable to tax. Also s. 195(1) 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 fulfill the statutory obligation u/s 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; (ii) S. 195(2) applies where the payer is in no doubt that tax is payable in respect of some part of the remittance but is not sure as to what is the taxable portion. In that situation} he is required to make an application to the ITO(TDS) for determining the amount. S. 195(2) & 195(3) are safeguards and of practical importance; (iii) The department's apprehension that if tax is not deducted on all payments} there will be a seepage of revenue is ill founded because there are adequate safeguards in the Act to prevent the payer from wrongly not deducting tax at source such as s. 40(a)(i) which disallows deduction for the expenditure; (iv) The Karnataka High Court in CIT vs. Samsung Electronics 320 ITR 209 misunderstood the observations inTransmission Corporation of AP 239 ITR 387. 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 in them. The controversy was different and the Court held that if some part of the payment was taxable} an application u/s 195(2) had to be made. The High Court's interpretation completely loses. sight of the plain words of s. 195(1) which in clear terms lays down that tax at source is deductible only from "sums chargeable" under the Act i.e. chargeable u/s 4, 5 and 9 (v) As the High Court had not decided the question whether the payments for supply of software was "royalty" or not, the matters are remitted to the High Court for a decision on that point. 9.12 Thus based on this decision of the Hon'ble Supreme Court above, the addition made by the AD appears to be bad in law. 9.13 Now we come to the legal sanctity of the second argument of the Appellant i.e. benefit of Article 26 [Non-discrimination clause] of the DTAA as entered between India and USA (reported in 187 ITR 102 and as amended]. The counsel of the appellant after relying upon the non- discrimination clause has argued that the non-discrimination clause is incorporated in a DTAA to provide the non-residents with the same privileges to which only a resident of the state is eligible for. Reliance in this regard was placed on the judgement of:' I. Dy. CIT vs. Incent Tours Pvt. ltd. reported in 2025,2026, 2027 & 2028 /DeI/202010; II. Herbalife International India Pvt. ltd. reported in 101 ITD 450; 103 TIJ 78; III. Millennium Infocom Technologies Ltd. reported in 117 ITO 114; 117 ITJ 456; and IV. Rajeev 5ureshbhai Gajwani (58) reported in 137 ITJ 1; 8 ITR(Trib) 616; 9.14 It was vehemently argued that the transaction between the Appellant and the non-residents is not only to be read loud based upon the Act but, the DTAA will also play an equally important role in determining the taxability of these transactions. Further, Income-tax does not mandate for a resident to deduct tax when it is making payment for the purchase of goods from a resident, in the same manner the resident is not liable to deduct tax when making payment for purchase of goods from a non-resident. 9.15 Further rellance was placed on the Circular No. 333 [F. No. 506/42/81-FTO] dated 2-4-1982, same is reproduced herein below: "1. It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the Assessing Officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961. .
The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the Income-tax Act. In fact that the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective countries except where provisions to the contrary have been made in the agreement.
3. Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the some should be followed, irrespective of the provisions in the Income-tax Act. Where provision in the agreement, it is basic law, i.e. the Income –tax Act, that will govern the taxation of income.” 9.16 Based upon the circular it was argued that the Ld. AO grossly erred in not following the circular which was binding upon him. Reliance in this regard was placed upon the 5 judges bench of Hon'ble Supreme Court in the matter of CIT vs. Ratan Melting and Wire Industries reported in (2008) 14 DTR (SC) 324, where in inter alia the Hon'ble apex court held: I. Once the circular has been issued it is binding on the revenue authorities and even if it runs counter to the decision of this Court, the revenue authorities cannot say that they are not bound by it. II. The circulars issued by the Board are not binding on the assessee but are binding on revenue authorities. It was submitted that once the Board issues a circular, the revenue authorities cannot take advantage of a decision of the Supreme Court. The consequences of issuing a circular are. that the authorities cannot act contrary to the circular. III. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of Apex Court or the High Court.
IV. Clarifications/circulars issued by the Central Government and of the State Government are merely their understanding of the statutory provisions. They are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive." 9.17 Based upon the above case laws and circular the appellant has argued that the Ld. AD has grossly erred in not allowing the legitimate relief which the appellant was eligible for, under the provisions of the Income-tax read with DTAA as entered between India and USA. The relevant part of the DTAA between India & USA is reproduced below: "ARTICLE 26 - Non dlscrlmlnation-
1. 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 that other State in the same circumstances are or moy be subjected. This provision shall apply to persons who are not residents of on~ or both of the Contracting States.
2. Except where the provisions of paragraph 3 of-the article 7 (Business Profits) apply, the taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State thon the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.
3. Except where the provisions of paragraph 1 of article 9 (Associated Enterprises), paragraph 7 of article 11 (Interest), or paragraph 8 of article 12 (Royalties and Fees for 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 deductable under the same conditions as if they had been paid to a resident of the first-mentioned State.
Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to an taxation or any requirement connected therewith which is other or more burdensome than the taxation connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.
Nothing in this article shall be construed as preventing either Contracting State from imposing the taxes described in Article 14 (Permanent Establishment Tax) or the limitations described in paragraph 3 of Article 7 (Business profits). “ 9.18 To interpret the Article the best method is to rely on the judgements of higher forum.
The relevant extracts of the judgements as cited by the counsel were considered,the relevant extracts are reproduced herein below:
• Special Bench of ITAT in the matter of Rajeev Sureshbhai Gajwani vs. ACIT reported in 137• TIJ 1 and 8 ITR (Trib) 616, inter alia the Hon'ble Bench Concluded: “8. We have considered the facts of the case and the submissions made before us. Facts, in short, are that assessee is a citizen of America and is a non- resident person in India in all the years under consideration. He has carried on the business of export of software out of India. Profits earned from this business are claimed to be not-taxable in view of the provisions contained in Article 26(2) of the DTAA. It is admitted position of law, conceded by the rival parties, that but for this article, the assessee would not have been entitled to deduction u/s 80 HHE of the Act, so as to exclude profits from this business from the total gross income. …………………………………. ……………………………….
8.6 There is also a dispute regarding the words "same activities" used in article 2Q. The case of the Ld. Counsel is that the assessee is engaged in the business 'Of export of software in the same manner in which a number of Indian enterprises are exporting software. The fact that the assessee has been. allowed to export software shows that the business does not fall in the prohibited category. Accordingly, . the, assessee's case has to be compared with the case of an Indian enterprise -engaged in the business of exporting software. If that is done, the assessee would be entitled to deduction under section BOHHE on the same footing and in the same manner as the deduction is admissible to a resident assesseee. On the other hand, the case of the Ld. DR is that various deductions under section BOHHE, lOA or lOB are area specific or industry specific However, he was not able to carry this argument any further. The case of the Ld. Counsel is that the provision contained in section BOHHE is industry specific and the assessee is not precluded in any manner from conducting this business in India. We agree with this view as no debate seems to be feasible in this regard. Therefore, we are of the view that the assessee is carrying on the activities of export software. An Indian Company or any other resident person carrying on the business of export out of India of computer software or its transmission from India to a place outside India by any means is entitled to deduction u/s BOHHE. Therefore, the deduction admissible to an Indian company or a person resident in India will be allowable to the assessee also." • Hon'ble ITAT Delhi Bench in the matter of Herbalife International India (P) Ltd. vs. ACIT reported in 101 1TD 450 and 103 TTJ 78. "23. A question may arise for consideration is as to whether assessee who is a resident could take benefit under this clause, i.e. art. 26(3). A plain reading of art. 26(3) clearly suggests that the assessee can claim the benefit. In this regard . it would be relevant to refer to the provisions of s. 90(2) of the Act, which reads as follows :
"Sec. 90. Where the Central Government has entered into an agreement with the Government of any other country outside India under sub-so (1) for granting relief of tax, or as the case may be, avoidance of double taxation then in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee.
The payment in question by assessee to M/s HIAI attracts the provisions of the Indo-US DTAA. The payment in question if at all will be taxable in the hands of M/s HIAI in India only if it is a payment for included services within the meaning of art. 12(4) of the said DTAA and not taxable in India otherwise. The sum in question cannot be taxed as business income, since M/s HIAI admittedly does not have a PE in India. If the income is considered as having accrued or arisen to M/s HIAI in India, yet they can be taxed in India only if they are fees for included services. Even if the payment is considered as "fees for technical services" within the meaning of IT Act, 1961, yet they cannot be taxed because 'fees for technical services' and 'fees for included services' under India-US DTAA have 'different meaning and they are not one and the same. If the Revenue wants to tax the payment by assessee to M/s HIAI in the hands of M/s HIAI in India it has to bring its case within the ambit of art. 12(4) of the DTAA, i.e., fees for included services. The payment in question would, therefore, have to be judged in the context of the DTAA as to whether it is taxable in India or not.
We shall now revert to art. 26(3) of the DTAA which deals with non-discrimination. To illustrate as to what extent the non-discrimination clause would apply, we may make a reference to such clauses in the OECD Model of "Double Taxation Convention". Organization for Economic Co-operation and Development ("OECD") is an organization, comprising of member countries, for economic co-operation. Its fiscal committee had taken up for consideration the study of questions relating to double taxation and of other fiscal questions of a similar technical nature. The committee after examining methods by which taxation can be used to promote improved allocation and use of economic resources, both domestically and internationally and after considering ways of increasing the effectiveness of taxation as a policy instrument for achieving Government objectives, have made a model Double Taxation Convention. The member countries generally use this model as a basis for negotiating Double Taxation Conventions. India is not a member. of the OECD. We may at this stage set out the provisions of non-discrimination as contained in the OECD model. Artcile 24(4) of the OECD model is in pari materia the same as that of art. 26(3) of the Indo- US DTAA and the same reads thus: "Article 24 (4): Except where the provisions of para 1 of art. 9, para 6 of art. 11 or para 4 of art. 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 to a resident of the first mentioned State." [Other portion of art. 24(4) are not repeated as they are not relevant to the present issue).
As already observed by us the provisions of s. 40(a)(O as it existed prior to its amendments by Finance Act, 2003, w.e.f. 1st April, 2004 provided for disallowance of payment made to a non-resident only where tax is not deducted at source on such payment at source. A similar payment to a resident does not result in disallowance in the event of non-deduction of tax at source. Thus a non- resident left with a choice of dealing with a resident or a nonresident in business would opt to deal with a resident rather than a nonresident owing to the provisions of s. 40(aj(i). To this extent the non-resident is discriminated Article 26(3) of Indo-US DTAA seeks to provide against such discrimination and says that deduction should be allowed on the same condition as if the payment is made to a resident. Thus this clause in DTAA neutralizes the rigour of the provisions of s. 40(a)(i). By virtue of the provisions of s. 90(2) the law which is beneficial to the assessee to whom the DTAA applies, should be followed. We, therefore, hold that in view of art. 26(3) of Indo-US DTAA, the AO cannot seek to invoke the provisions of s. 40(a)(i) of the Act to disallow the claim of the assessee for deduction even on the assumption that the sum in question is chargeable to tax in India. We however make it clear that the question whether the sum is chargeable to tax is left open for adjudication by the appropriate forum in the appropriate proceedings already referred to in this order.
This takes us to question (8) framed by (JS, viz. if the sum in question is held to be not chargeable to tax and consequently not disallowable under s. 40(a)(i) of the Act whether the disallowance of the sum attributable for the period from 1st Jan., 2000 to 31st March, 2000 ..... ......
We, therefore, hold that the claim of the assessee for deduction of the entire sum of Rs. 5,83,68,396 being administrative fee paid to M/s HIAI should be allowed-as a deduction. The AO is directed to allow the deduction accordingly. The third ground of appeal
of the assessee is allowed, to the extent and on the basis indicated above." • Hon'ble ITAT Delhi Bench in the matter of Millennium Infocom Technologies Ltd. vs. ACIT reported in 117 ITD 114, 117 TIJ 456 and 2008
21. SOT 152. "8.16 Now question arises as to whether the resident assessee could take advantage of provisions of article 26(3) of DTAA. As already observed by us, the provisions of section 40(a)(O as it existed prior to its amendment by the Finance (No.2) Act, 2004 with effect from 1-4-2005 and subsequent amendment by the Taxation Laws (Amendment) Act, 2006 with retrospective effect from 1-4-2006, provided for disallowance of payments made to a non- resident only where tax is not deducted at source at the time of remittance. However, a similar payment to a resident does not result in disallowance in the event of non-deduction of tax at source. Thus, a non-resident left with a choice of dealing with a resident or a non- resident in business would opt to deal with a resident owing to the provisions of section 40(a)(i) of the Act. To this extent the non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide relief against such discrimination by saying that deduction should be allowed on the same condition as if the payment is made to a resident. Thus, this clause in DTAA neutralizes the rigour of the provisions of section 40(a)(i) of the Act. In this regard it would be relevant to refer to the provisions of section 90(2) of the IT Act, 1961. It reads thus :-
"90(2) Where the Central Government has entered into an agreement with the Government of any other country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee. Hence by virtue of the provisions of section 90(2), the law which is beneficial to the assessee to whom DTAA applies, should be followed. This view is supported by the decision of Hon'ble Supreme Court in the case of Union of India v. Azadi Bacboo Andolan [2003]2631TR 7061. Hon'bteSupreme Court held as under:- "No provision of the Double Taxation Avoidance Agreement can possibly fasten a tax liability where the liability is not imposed by the Act, the Agreement may be restored to for negativing or reducing it; and, in case of difference between the provisions of the Act and the agreement, the provisions of the Agreement would prevail over the provisions of the Act and can be enforced by the appellate authorities and the court. ..... ..... 8.17 We therefore hold that in view of the provision of article 26(3) of DTAA, the Assessing Officer cannot seek to invoke the provisions of section 40(a)(i) of the Act for deduction while computing the' profits and gains of business or profession. A similar view was taken by ITAT Delhi Bench in the case of Herbalife International India (P.) Ltd. (supra). To sum up, the payments made on account of rentals for hosting of websites on servers are not in nature of interest or royalties or fee for technical services or other sum chargeable to tax in India. Central Board of Direct taxes has revised the procedure for deduction of tax at source on remittances made out of the country. The provisions of DTAA are also in favour of the assessee. Accordingly, the assessee was not required to deduct tax at source under section 195 of the Act while making payments outside India. We decide this issue in favour of the assessee. Hon'ble Delhi ITAT in the matter of Dy. ClT vs. Incent Tours Pvt. Ltd. reported in I,T.A. No. 2023, 2024, 2025, 2026, 2027 & 2028 /Del/2010, has relied on the judgement of co-ordinate Bench in the matter of Herbalife International India (P}ltd. (supra) and after comparing the Article 26(3) of the Indo-US DTAA with that of Indo-France DTAA has concluded that the AO has erred in invoking section 40(a)(i) for the payments made to non-resident in France when during the relevant financial year, a resident was not liable to deduct TDS while making a payment of same nature to a resident. 9.19 Based upon the case laws cited by tf counsel, it is ostensible that because of the Non- discrimination clause, the AO has erred in making the disallowance u/s 40(a)(i) of the Act. 9.20 Thus based upon the above discussions wherein both the lines of argument of the appellant have been examined the disallowance to the tune of Rs. 1,06,53,926/- made u/s 40(a)(i) is deleted.