2017 (5) TMI 585 - HC - Income Tax

TDS u/s 195 - commission paid to the subsidiary for services rendered - non deduction of tds - Held that - GE International had in AY 1998-99 paid tax on gross basis as regards the payment received from the Assessee, the question of again remanding the matter to the AO for verification of the above tax payment by GEI was wholly unnecessary. Instead a categorical consequential finding ought to have been rendered by the ITAT that there was no obligation on the Assessee to deduct any tax under Section 195 of the Act on the payments made to GEI in Japan and therefore the question of disallowance under Section 40 (a) (i) of the Act of the payment of ₹ 9.10 crores in the AY 1998-99 did not arise. Consequently, question (i) framed above is answered in the negative i.e. in favour of the Assessee by holding that the ITAT ought not to have remanded to the AO the issue concerning the tax paid by GEI on the payments made to it by the Assessee. The claim for deduction of ₹ 9.10 crores ought to have been allowed in full to the Assessee in the AY in which was incurred i.e. AY 1998-99. - Decided against revenue.

Summary

Issues:
- Interpretation of tax obligations under the India Japan Double Taxation Avoidance Agreement (DTAA)
- Justification of remanding the matter for verification of tax payments
- Disallowance of expenditure on commission paid to subsidiary

Interpretation of Tax Obligations under the DTAA:
The High Court considered appeals by the Assessee, Sumitomo Corporation, against orders of the Income Tax Appellate Tribunal (ITAT) for two assessment years. The main issue revolved around whether the ITAT was correct in remanding the matter to the Assessing Officer (AO) for verifying the tax already paid by M/s. G.E. International, US, despite a finding by the Commissioner of Income Tax (Appeals) that the Assessee was not obligated to deduct tax under the India Japan DTAA. The Court analyzed previous judgments and held that the Assessee was not required to deduct tax at source on payments made to GE International. The Court found that the remand for verification of tax payments by GEI was unnecessary as the facts indicated that GE International had already paid taxes on the income received from the Assessee. Consequently, the Court ruled in favor of the Assessee, stating that the claim for deduction should have been allowed in full for the relevant assessment year.

Justification of Remand for Verification of Tax Payments:
The Court examined the argument presented by the Revenue that the remand by the ITAT was innocuous and merely for verifying whether tax was paid by GEI. However, the Court noted that the CIT (A) had already verified the tax payment by GEI in a previous order. The Court emphasized that since it was clear that GE International had paid taxes on the income received from the Assessee, there was no need for further verification by the AO. The Court concluded that the remand for verification of tax payments was unnecessary and that the Assessee should have been allowed the deduction in full for the relevant assessment year.

Disallowance of Expenditure on Commission Paid to Subsidiary:
Additionally, the Court addressed a specific question regarding the disallowance of expenditure on commission paid to a subsidiary for services rendered. The Court answered this question in favor of the Assessee and against the Revenue. However, further proceedings were scheduled to address another question related to this issue.

In summary, the High Court ruled in favor of the Assessee, holding that the remand for verification of tax payments by GEI was unnecessary as the Assessee was not obligated to deduct tax under the DTAA. The Court directed that the claim for deduction should have been allowed in full for the relevant assessment year. The Court also addressed the disallowance of expenditure on commission paid to a subsidiary, ruling in favor of the Assessee.