2014 (2) TMI 554 - AT - Income Tax

Invocation of Rule 27 f the Appellate Tribunal Rules, 1963 right of the assessee in appeal before Tribunal - Held that - it is not right to suggest that when an assessee is not in cross appeal or cross objection, it is not permissible for the assessee to challenge correctness of the rejection of any of the grounds, which were rejected in the said order, even if, such grounds having been allowed, would have led to the same conclusion which were ultimately arrived at in the impugned order. All grounds raised by the assessee, if wrongly rejected by the Commissioner (Appeals) in the impugned order even if he has ultimately held the issue in favour of the assessee, can be pursued by the assessee in his capacity as respondent before the Tribunal - Rule 27 filed by the assessee respondent in response to requisition to do so and particularly having taken note of very fair and gracious approach of the learned Departmental Representative - the petition under rule 27 and proceed to decide the issue so raised on merits. Non-discrimination clause under the tax treaties on the scope of Section 40(a)(i) Held that - The OECD Model Convention Commentary has a role to play in construing the scope of provisions of the Indo-US tax treaty, only to the extent (i) the relevant provision, though based on OECD Model Convention, is not explained in the Technical Explanation to the US Model Convention, and (ii) specific reference is made to the OECD Model Convention Commentary, and the interpretation so given by the OECD Model Convention Commentary is not in conflict with the Technical Explanation to the US Model Convention - The case does not fit into any of the categories because while the relevant clause of the non-discrimination article is the same as art. 24(2) of the OECD Model Convention, the scope of non-discrimination is, as we will see a little later, well defined in the Technical Explanation and also because the scheme of non-discrimination in the OECD Model Convention and US Model Convention is materially different - a sound interpretation of a sub-article of non-discrimination article cannot be based on reading of that clause in isolation, but it would require that the non-discrimination clause as a whole, or even a treaty as a whole, is to be carefully analysed. Scope of non-discrimination clauses in the tax treaties Held that - A differential treatment to the PE of the US tax resident, by itself, cannot be treated as covered by the scope of rule prohibiting non-discrimination - The true test for deciding whether or not there is a non-discrimination is whether or not the resident enterprise and the PE of the other Contracting State, who are similarly situated, get the same tax treatment or not - There could indeed be different tax treatments to the PE of the other Contracting State and the enterprise of the source State, but, as long as such tax differentiation could be justified on the grounds of dissimilarities in their situation, the prohibition against discrimination cannot be invoked. Deletion made u/s 40(a)(ia) of the Act TDS not deducted on foreign remittances accounted under design and development expenses - Whether deduction neutrality is infringed upon in the cases of payments to non- residents vis- -vis residents Held that - It is necessary that the assessee should have deducted tax at sources so far as payments made during the relevant previous year are concerned - so far as payments made to the non-residents are concerned, it is an admitted position that the disallowance under section 40(a)(i) is also attracted as regards the payments made during the year itself without deduction of tax at source - the issue on the scope of section 40(a)(i) vis- -vis the controversy on whether amounts actually paid during the relevant previous year itself will be outside the ambit of such a disallowance thus, so far as payments made to the residents in Ireland, Denmark and Austria are concerned, CIT(A) was justified in upholding the disallowance under section 40(a)(i) Decided partly in favour of Assessee. Deletion made u/s 40(a)(i) of the Act- TDS not deducted for payments made to non-residents Held that - Section 40(a)(i) can only be invoked when the assessee had a liability withhold the taxes and the assessee failed to discharge such a liability tax withholding obligations under section 195 come into play only when income embedded in the payments is liable to be taxed in India - unless the income embedded in payments in question is held to be taxable in India, the provisions of Section 40(a)(i) cannot be invoked. Payments made to Spanish residents Held that - The Spanish vendor has invoiced for samples, sketches and photographs, as also designing lines and collection material - Just because the vendor has developed and transferred technical designs or plans in respect of shoes or such other material, it does not mean that it is not a technical design - the amounts paid seem to be covered by the scope of article 13(4) inasmuch as the payment is made for services which are consultancy and technical services - The payments are made for designs, sketches and photographs but these designs, sketches and photographs are in the context of assessee's line of business and, as stated by the assessee himself, for the purposes of product development by the assessee - The matter remitted back to the CIT(A) for fresh adjudication. The payments are made for the purchases of goods, and as the recipients do not have any PE in India - the transactions do not lead to any taxability in India with respect to its business profits - Business profits of Spanish enterprises can only be brought to tax in India under article 7, when those enterprise have a PE in India in terms of article 5, and then also the taxability is restricted to the extent the profits are attributable to the PE - It is only elementary that tax withholding liability is a vicarious liability, and where it can be shown that principal liability does not exist, the vicarious liability will also not survive - Since the assessee did not have any tax withholding liability in respect of these payments - CIT(A) was justified in deleting the disallowance under section 40(a)(i). Payments made to Italian residents Held that - The transactions are in the nature of sale of various types of products and samples - the payments are made for the purchases of goods, and as the vendors do not have any PE in India the transactions do not lead to any taxability in India with respect to its business profits - Business profits of such enterprises can only be brought to tax in India under article 7, when those enterprise have a PE in India in terms of article 5, and then also the taxability is restricted to the extent the profits are attributable to the PE. It is not even in dispute that the recipients do not have any PE in India - When there is no income embedded in these payments, there cannot be any occasion for the assessee to deduct tax at source from these payments - the assessee did not have any tax withholding liability in respect of these payments, CIT(A) was quite justified, to that extent, in deleting the disallowance under section 40(a)(i). Payment made to UK resident Held that - When a particular amount of expenditure is incurred and the sum is reimbursed as such, it cannot be considered as having any part of it in the nature of income - there is nothing to suggest that there is any income embedded in these payments - the assessee did not have any obligations to deduct the tax at source from this payment - the assessee did not have any tax withholding obligation from this payment, the very foundation of disallowance under section 40(a)(i) ceases to hold good in law thus, the CIT(A) rightly deleted the same. Payment to Belgian resident Held that - The payment has been made to N V Muderi, a business entity other than an individual thus, the provisions of article 14 do not come to the rescue of the assessee - the normal rule is that article 14 comes into play only when services are rendered by the individuals, whereas article 7 comes into play when services are rendered by entities other than individuals - the assessee ought to have deducted tax at source from payment to NV Muderi - failure to do so is to be visited with disallowance u/s 40(a)(i) of the Act - The relief granted by the CIT(A) is vacated and the disallowance by the AO is restored Decided partly in favour of Revenue.

Summary

Issues Involved:
1. Deletion of disallowance under Section 40(a)(i) in respect of foreign remittances without deducting tax at source.
2. Invoking Rule 27 of the Appellate Tribunal Rules, 1963.
3. Impact of non-discrimination clauses under tax treaties on the scope of Section 40(a)(i).
4. Taxability of payments made to non-residents under various tax treaties.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 40(a)(i):
The assessee challenged the correctness of the Commissioner (Appeals)'s order, which deleted the disallowance of Rs 1,05,27,465 made under Section 40(a)(i) for foreign remittances accounted under 'design and development expenses' without deducting tax at source. The Assessing Officer argued that the Commissioner (Appeals) erred in deleting this disallowance. The Tribunal analyzed whether the payments were taxable in India under various tax treaties and whether the assessee had an obligation to deduct tax at source.

2. Invoking Rule 27 of the Appellate Tribunal Rules, 1963:
The assessee's counsel invoked Rule 27, arguing that if the assessee succeeded on this preliminary issue, other issues would become academic. The Tribunal noted that Rule 27 allows the respondent to support the order appealed against on any grounds decided against him. The Tribunal admitted the petition under Rule 27 and decided to adjudicate on the impact of non-discrimination clauses in the treaties.

3. Impact of Non-Discrimination Clauses under Tax Treaties:
The Tribunal examined whether the non-discrimination clauses in the respective tax treaties restricted the scope of Section 40(a)(i) to be no broader than Section 40(a)(ia). The Tribunal referred to various tax treaties (e.g., Indo Spanish, Indo Italian, Indo Irish, Indo UK, Indo Danish, Indo Austrian, Indo Belgian) and noted that some treaties had specific clauses ensuring deduction neutrality. The Tribunal concluded that for payments made to residents of Ireland, Denmark, and Austria, the non-discrimination clauses protected these payments from disallowance under Section 40(a)(i).

4. Taxability of Payments Made to Non-Residents:
The Tribunal analyzed the taxability of payments made to non-residents from Spain, Italy, UK, Belgium, Ireland, Denmark, and Austria. For each payment, the Tribunal examined whether the payments were for technical services, consultancy, or business profits, and whether the recipients had a permanent establishment in India. The Tribunal concluded that:
- Payments to Spanish residents required further examination to determine if they were for professional services or technical services.
- Payments to Italian residents for professional services were not taxable as the service providers did not have a fixed base in India.
- Payments to UK residents were reimbursements and did not have income embedded, thus not taxable.
- Payments to Belgian residents were for consultancy services and taxable under Article 12(3)(b) of the Indo Belgian tax treaty.
- Payments to residents of Ireland, Denmark, and Austria were protected by deduction neutrality clauses in the respective tax treaties.

Conclusion:
The Tribunal partly upheld the petition under Rule 27, partly upheld the relief granted by the Commissioner (Appeals), and partly remitted the matter for adjudication de novo. The appeal was partly allowed.