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2024 (2) TMI 933 - HC - Income TaxTDS u/s 195 - Addition u/s 40(a)(i) - remittances without deducting tax at source TAS - disallowances qua payments made by assessee concerning purchases from its seven (07) group companies - as per AO transactions entered into between the respondent/assessee and its seven (07) group companies were composite transactions - disallowance of the expenditure incurred for purchases made was triggered as TAS had not been deducted by assessee - Whether the ITAT fell into error in holding that Section 40(a)(i) of the Income Tax Act, 1961 cannot be applied in view of the provisions of the Double Tax Avoidance Agreement between the Indian (sic) and Japan and India and the US? AO concluded that all seven (07) group companies had PE in India - HELD THAT - As is evident upon perusal of Clause (ia) of Section 40(a), it did not bring payments made towards purchases to resident- vendors within its net. Therefore, the respondent/assessee argued that even after the amendment in Section 40(a) w.e.f. 01.04.2005, unequal treatment, i.e., discrimination, obtained with regard to payments made against purchases to resident-vendors. The expenditure incurred on payments made to resident-vendors against purchases could thus, be taken into account while computing income chargeable under the head profits and gains of business or profession . This disparity was removed by FA 2014, albeit w.e.f. from 01.04.2015, when the ambit of disallowance was enlarged by bringing any sum payable to a resident within the four corners of Clause (ia) of Section 40(a). Since the period in issue is AY 2006-07, the amendment brought about in Section 40(a) by virtue of FA 2014 would have no relevance. Therefore, in my opinion, the equal treatment or the non-discrimination Clause obtaining in Articles 24(3) and 26(3) of the India-Japan/India-USA DTAAs would apply with regard to the payment for purchases made by the respondent/assessee concerning the following five companies MC (Japan); Metal One Corporation (Japan); Tubular (USA); Petro (Japan) and Miteni (Japan). There can be no cavil with the proposition advanced on behalf of the respondent/assessee that since the provision of Article 24(3)/26(3) of the India-Japan and India-USA DTAAs respectively are more beneficial, it is entitled to rely upon the same, in support of its stand that the disallowance had been rightly deleted by the Tribunal. The argument advanced on behalf of the appellant/revenue that since provisions of Article 9 of the respective DTAAs apply, the equal treatment/non-discrimination clause incorporated in Article 24(3)/26(3) would have no application to my mind, is untenable for reason as Article 9 captures transactions that an assessee may enter with an AE, which may result in a transfer pricing adjustment. In the instant case, the transfer pricing adjustment impacted the payments received by the respondent/assessee against services rendered by it to its group companies. This aspect was concededly not the subject matter of the disallowance ordered under Section 40(a) of the Act. The disallowance under the said provision was confined to payments made by the respondent/assessee against purchases required to conform to the equal treatment clause or the non-discrimination Clause contained in Article 24(3)/26(3). Perhaps for this reason, the AO did not take recourse to the provisions of Article 9 of the respective DTAAs. Transactions entered into by the respondent/assessee with the remaining two entities, i.e., MC Metal (Thailand) and Metal One (Singapore) - Since the two companies referred to above, i.e., MC Metal Thailand and Metal One Singapore, do not have a PE in India, the payments made to them are not chargeable to tax in India. Articles 7 of the India- Thailand and India-Singapore DTAAs, respectively, provide complete clarity in that behalf - Given this position, as correctly argued on behalf of the respondent/assessee, it was not obliged to deduct TAS from payments made to MC Metal (Thailand) and Metal One (Singapore). Chargeability to tax is the paramount condition for triggering the obligation to deduct TAS. The plain language of sub-section (1) of Section 195 brings this aspect of the matter to the fore. The reliance on the judgment rendered by the Supreme Court in Transmission Corporation of AP Ltd. 1999 (8) TMI 2 - SUPREME COURT is misplaced, as that was a case involving a composite transaction where the trading receipt was embedded with a component of income. Question 2, however, is modified as - Whether the ITAT was in error in reversing the findings of the DRP with respect to the existence of PEs as well as a business connection in India? - Ld' Judge could not have reformulated the question after the pronouncement of the judgment. As indicated above, the respondent/assessee could have taken recourse to the DTAAs qua the reformulated question since the provisions contained therein were more beneficial. See Section 90(2) of the Act. Therefore, the business connection test had no relevance once it was established that MC Metal (Thailand) and Metal One (Singapore) did not have a PE in India. Assessee appeal allowed.
Issues Involved:
1. Applicability of Section 40(a)(i) of the Income Tax Act, 1961 in light of Double Tax Avoidance Agreements (DTAAs). 2. Existence of Permanent Establishments (PEs) in India for certain entities. 3. Reformulation of the second question concerning the existence of PEs and business connections. Summary: Issue 1: Applicability of Section 40(a)(i) and DTAAs The core issue was whether Section 40(a)(i) of the Income Tax Act, 1961 could be applied given the provisions of the DTAAs between India-Japan and India-USA. The Tribunal held that disallowances under Section 40(a)(i) violated the non-discrimination clauses in Articles 24(3) and 26(3) of the respective DTAAs. The Court found that the amendments to Section 40(a) by the Finance Act, 2004, which took effect from 01.04.2005, did not eliminate the discrimination since payments for purchases made to resident vendors were not included in the disallowance clause until the Finance Act, 2014. Therefore, the non-discrimination clause applied for the assessment year 2006-07, and the Tribunal's deletion of the disallowance was upheld. Issue 2: Existence of Permanent Establishments (PEs) The second issue revolved around whether entities like MC Metal (Thailand) and Metal One (Singapore) had PEs in India. The Tribunal found that these entities did not have PEs in India, and thus, payments made to them were not chargeable to tax in India. Consequently, the respondent/assessee was not obligated to deduct tax at source (TAS) under Section 195. The Court upheld this finding, noting that chargeability to tax is a prerequisite for the obligation to deduct TAS, as clarified by the Supreme Court in the G.E. India Technology Centre P. Ltd. v. CIT case. Issue 3: Reformulation of the Second Question The third issue concerned whether the second question could be reformulated post-judgment. Justice Singh had modified the question to include both PEs and business connections in India. However, the Court held that the question could not be reformulated after the judgment was pronounced. The business connection test was irrelevant once it was established that the entities did not have PEs in India. Therefore, the original questions framed on 29.04.2014 were answered in favor of the respondent/assessee and against the appellant/revenue. Conclusion The Court concluded that the Tribunal's decision to delete the disallowance under Section 40(a)(i) was correct, given the non-discrimination clauses in the DTAAs and the absence of PEs for certain entities. The reformulation of the second question by Justice Singh was found to be improper. All three questions were answered in favor of the respondent/assessee.
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