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TMI Blog2012 (10) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... mination 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. - IT APPEAL NOS. 2023 TO 2028 (DELHI) OF 2010 - - - Dated:- 11-5-2012 - I. P. Bansal And T. S. Kapoor, JJ. Satpal Singh for the Appellant M. S. Syali, V. S. Rastogi, Tarandeep Singh, Maneesh Upneja for the Respondent ORDER I. P. Bansal, Judicial Member All these appeals are filed by the revenue. They are directed against two orders of CIT(A) dated 26.2.2010 in respect of assessment years 1997-98 to 2001-02 and 2002-03 respectively. In all these appeals the grounds of appeals are identical except the difference in figures. The grounds raised by the revenue for assessment year 1997-98 are as under:- Assessment year: 1997-98: 1. The order of Ld. CIT(A) is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the amount paid by the assessee was taxable under the provisions of section 9(1)(vii) read with explanation 2 thereof. Since no tax has been deducted by the assessee, the provisions of section 40(a)(i) were applicable and in this manner, the disallowance has been made in the impugned orders as mentioned above. 3. Before the CIT(A) it has been the case of the assessee that disallowance u/s 40(a)(i) is permissible only if the payment is chargeable to tax under the Act and tax ought to have been deducted at source and paid but was not so deducted and paid. It was submitted that 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 India operations; Since India has DTAA with France, the assessee is entitled to opt for the provisions of the said Treaty which are beneficial. Payment to Mr. P. Dedeyn does not fall within the definition of fees for technical service as per the Indo French Treaty; the provisions of non discrimination as contained in Article 26 of Indo French Treaty are applicable. 4. To support the contention that section 40a(i) are not applicable. It was submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abroad through or from any business connection in India cannot be deemed to accrue or arise in India. 2. Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) wherein it was held 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. 3. CIT v. Tata Chemicals Ltd. [1974] 94 ITR 85 (Bom.). 4. Ind Telesoft (P.) Ltd.'s case (supra). 9. With regard to third objection that the payment does not fall to be taxed u/s 9(1)(vii)(b) read with Explanation thereto, it was submitted that the assessee is entitled to opt the provisions of DTAA with France being more beneficial to the assessee. Reference was also made to article 13(4) which defines fee for technical services and reference to protocol was made and also the reference was made to the decision of ITAT in the case of Dy. CIT v. ITC Ltd. [2002] 82 ITD 239 (Kol.) wherein it was held that in all these DTAAs fees for technical services does not include fees received for services that are ancillary a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gave a finding that services being rendered outside India, the income is not deemed to have accrued or arisen in India in terms of section 9(1) of the Act. It was, therefore, held that very applicability of section 40(a)(i) is thus ruled out at the initiate stage. He also referred to the subsequent assessment for assessment year 2006-07 and 2007-08 wherein the assessment order passed u/s 143(3) after proper scrutiny, no disallowance whatsoever was made u/s 40a(i) of the Act. 13. Ld. CIT(A) has also held that payment made to the assessee u/s 9(1)(i) of the Act are not liable to be assessed as rendering of services to the assessee was from outside India from his existing base in France and thus the matter is covered in favour of the assessee by the decisions of Hon'ble Supreme Court in the case of Toshoku Ltd. (supra) and in the case of Carborandum Co. (supra). 14. On the third contention of the assessee that the payment to Mr. Dedeyn did not fall to be taxed u/s 9(1)(vii)(b) read with Explanation 2 thereof, the Ld. CIT(A) has held that as Mr. Dedeyn was not making available to the assessee, any technical knowledge, experience, skill, know-how or process the payment so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Article 26(4) is general clause providing for indirect discrimination against non resident and interpreting similar provisions of India-US DTAA, it was so held by Delhi ITAT in the case of Herbalife International India (P.) Ltd. (supra). In that case, the assessee company was incorporated in India by this American Parents Co. H with approval of Ministry of Industry in carrying on business and trading and marketing of herbal products after manufacturing the same in India on contract basis. It entered into Administrative Service Agreement dated 10.11.1999 with H. Under the said agreement H agreed to render various services including data processing, accounting, financial and planning services in respect to its herbal products in lieu of some administrative fees payable by the assessee. The expenses incurred by H in USA for providing such services were not only services for providing services to the assessee but also to its various other subsidiaries across the world by maintaining its centralized staff and other resources and the cost to incurred was apportioned and claimed from the assessee on a scientific basis, as administrative fees. The assessee claimed an expenditure equivale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 40a(i), by virtue of the provisions of section 90(2) of the Act, the law, which is beneficial to the assessee to whom the DTAA applies should be followed. Therefore, in view of Article 26(3) of Indo-US DTAA, the Assessing Officer could not seek to invoke the provisions of section 40a(i) to disallow the claim of the assessee for deduction and even on the assumption that the sum in question was chargeable to tax in India. 18. At the outset, not going into any other aspect of the issue, Ld Sr. counsel has rested his case for all these years on the basis of later observations of the Bench in the case of Herbalife International India (P.) Ltd. (supra) particularly on para 26 and thus it was pleaded that order of CIT(A) may be upheld on this ground only. It was submitted that the decision of the ITAT later on followed in the case of Millennium Infocom Technologies Ltd. (supra) and in the case of Asianet Communications Ltd. (supra). Therefore, it was pleaded that these appeals are covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra) where considering the similar provisions, it has been held that the provisions of section 40a(i) as it existed prior to its amendment by the Finance Act, 2003 w.e.f. 1.4.2004 applied to payments made by the assessee outside India to a non resident only. After 1.4.04, the provisions apply equally to both resident and non-resident. A similar payment made to a resident prior to amendment does not result in disallowance in the event of non deduction of tax at source. Thus, a resident has been left with a choice of dealing with a resident or a non resident in business, would opt to deal with a resident rather than a non resident owing to the provisions of section 40a(i) of the Act. To that 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. By virtue of provisions of section 90(2) of the Act which is beneficial to assessee to whom the DTAA is applied should be followed. Therefore, respectfully following the aforementioned decision, we hold that the Assessing Officer could not seek to invoke the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appeal pending before the ITAT Bangalore Benches, which we feel is an appropriate forum to decide as to whether the payment by assessee to M/s HIAI is chargeable to tax in India in the hands of M/s. HIAI and the assessee as a person responsible for making payment ought to have deducted tax at source. 21. We may also incidentally point out that Article 27 of the DTAA between India and USA contemplates a situation where a person considers that actions of one or both the Contracting States result or result will for in taxation not in accordance with the provisions of the DTAA, then he may without prejudice to other remedies available to him under the local law, present his case to a competent authority of the Contracting state of which he is a resident or national. The assessee has made a reference under the Mutual Agreement procedure provided under Article 27 of India-USA DTAA. The provisions of section 40(a)(i) as it stood prior to it's amendment by the Finance Act, 2003, with effect from 1-4-2004 applied to payments by an assessee outside India to a non-resident only . After 1.4.2004, the provisions apply equally to both resident and non-resident. In this appeal we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Economic Cooperation and Development ( OECD ) is an organization, comprising of member countries, for economic cooperation. It's 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 Doable Taxation Convention. The member countries generally use this model as a basis for negotiation Double Taxation Conventions. India is not, a member of the GECD. We may at this stage set out the provisions of non discrimination as contained in the OECD model. Article 24(4) of the OECD model is in pari materia the same as that of Article 26(3) of the Indo-US DTAA and the same reads thus: Article 24(4) : Except where the provisions of paragraph 1 of Article-9, paragraph 6 of Article-11 or paragraph 4 of Article-12, apply, interest, royalties and other disbursements paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for a non-resident in business would opt to deal with a resident rather than anon-resident owing to the provisions of section 40(a)(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 section 40(a)(i). By virtue of the provisions of section 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 Article 26(3) of Indo - US DTAA, the Assessing Officer cannot seek to invoke the provisions of section 40(a)(/) 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 lef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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