2012 (10) TMI 237 - AT - Income Tax

Disallowance u/s 40(a)(i) - Income accruing or arising in India - Fees paid for Technical Services to Non- Resident - The assessee contended that Disallowance u/s 40(a)(i) is permissible as the Income is not chargeable to tax under the Act and tax ought not to have been deducted at source. As no income was chargeable u/s 9(1)(i) as no operations of the non resident are carried out in India and no part of his income is attributable to any Indian operation and India has DTAA with France, the assessee is entitled to opt for the provisions of the said Treaty which are beneficial.As decided in case of Carborandum Company Versus Commissioner of Income-Tax, 1977 (4) TMI 2 - SUPREME COURT That if all operations are carried out in the taxable territories, the profit & gain of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. Held that - Article 26(3) of Indo-US DTAA seeks to provide against 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 section 40(a)(i). - The payment in question by assessee attracts the provisions of the Indo-US DTAA, and will not be taxable in India as it is a payment for included services within the meaning of Article 12(4) of the said DTAA and the recipient does not have a permanent establishment in India - in favour of assessee.

Issues Involved:
1. Applicability of Section 40(a)(i) of the Income Tax Act, 1961.
2. Taxability of payments made to a non-resident under Section 9(1)(i) and Section 9(1)(vii) of the Act.
3. Interpretation of Double Taxation Avoidance Agreement (DTAA) between India and France.
4. Non-discrimination clause under Article 26 of the Indo-French DTAA.

Detailed Analysis:

1. Applicability of Section 40(a)(i) of the Income Tax Act, 1961:
The primary issue was whether the disallowance under Section 40(a)(i) was applicable for payments made to Mr. Patrice Dedeyn, a non-resident, without deducting tax at source. The Assessing Officer had disallowed these payments, citing that they were taxable under Section 9(1)(vii) and no tax was deducted at source. However, the CIT(A) held that Section 40(a)(i) could not be invoked if the sum payable is not chargeable to tax in India, referencing decisions such as CIT v. Cooper Engg. Ltd. [1968] 68 ITR 457 (Bom.) and Al Nisr Publishing v. CIT [1999] 239 ITR 879/105 Taxman 308 (AAR - New Delhi).

2. Taxability of Payments Made to a Non-Resident:
The payments made to Mr. Dedeyn were argued not to be taxable under Section 9(1)(i) as no operations were carried out in India, and therefore, no part of the income was attributable to Indian operations. The CIT(A) supported this view by referring to CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC) and Carborandum Co. v. CIT [1977] 108 ITR 335 (SC), which held that income accruing or arising abroad through any business connection in India cannot be deemed to accrue or arise in India if no operations are carried out in India. Additionally, the CIT(A) determined that the payments did not constitute "fees for technical services" under Section 9(1)(vii) read with Explanation 2, as Mr. Dedeyn was providing marketing support, not technical or consultancy services.

3. Interpretation of DTAA Between India and France:
The assessee argued that under the Indo-French DTAA, the payments to Mr. Dedeyn did not fall within the definition of "fees for technical services" and thus were not taxable. Article 13(4) of the DTAA was referenced, which defines "fees for technical services" and excludes services that are ancillary and subsidiary to the sale of property. The CIT(A) agreed, citing various decisions including DIT v. Sheraton International Inc. [2009] 178 Taxman 84 (Delhi) and Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.).

4. Non-Discrimination Clause Under Article 26:
The CIT(A) also addressed the non-discrimination clause under Article 26 of the Indo-French DTAA, which prevents indirect discrimination against non-residents. This was supported by decisions such as Herbalife International India (P) Ltd. v. Asstt. CIT [2006] 101 ITD 450 (Delhi) and Millennium Infocom Technologies Ltd. v. Asstt. CIT [2009] 117 ITD 114 (Delhi), which held that the provisions of Section 40(a)(i) should not apply if it leads to discrimination against non-residents. The Tribunal upheld this view, stating that the Assessing Officer could not invoke Section 40(a)(i) to disallow the claim even if the sum in question was chargeable to tax in India, as per the non-discrimination clause.

Conclusion:
The Tribunal dismissed the appeals filed by the revenue, upholding the CIT(A)'s decision that the disallowance under Section 40(a)(i) was not applicable, the payments were not taxable under Section 9(1)(i) or Section 9(1)(vii), and the non-discrimination clause of the Indo-French DTAA prevented the application of Section 40(a)(i).

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