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TMI Blog2017 (11) TMI 1427X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, the assertion by the Revenue in para 4 of its written submissions that “discrimination as held by CIT v. Herbal Life [Supra] has been done away with” is true only after 1st April, 2015 and not during the relevant AY 2006-07. The contention about the situs of payment has been raised for the first time in this Court in the written submissions. It was not the case of the Revenue earlier that the payments were made outside India and not in India. It was only argued that the discrimination pointed out in Herbalife HC no longer exists whereas, as demonstrated earlier, it did even during AY 2006-07. The inevitable conclusion is, therefore, that the decision of this Court in Herbalife HC squarely applies and answers question (i) against the Revenue. Since Section 40 (a) (i) of the Act as it stood in AY 2006-07 continued to discriminate in the above manner and was inconsistent with Article 24 (3) of the Indo Japan DTAA or Article 26 (3) of the Indo US DTAA, the Assessee was entitled to rely on the above DTAA provisions to claim deduction of the sums paid to entities in Japan and USA. - Decided in favour of the Assessee Payments made by the Assessee for purchases made to non-res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w materials and marketing finished products in India, through various Indian joint ventures of Mitsubishi Corporation, Japan (hereafter MC ). The return of income for AY 2006-07 was filed by the Assessee on 29th November, 2006 declaring a total income of ₹ 6,39,59,620/- and the same was assessed under the provisions of Section 143 (3) read with Section 144C of the Act. 4. The Assessing Officer ( AO ) passed a draft assessment order under Section 144C of the Act on 31st December, 2009 and made, amongst others, an addition of ₹ 97,89,54,176/-. The Assessee filed its objections before the Dispute Resolution Panel ( DRP ) on 2nd February, 2010. The DRP on 30th September, 2010 directed the AO to complete the assessment as per the draft order. 5. The final assessment order dated 25th October, 2010 was passed by the AO under Section 143(3)/144C of the Act and the addition of ₹ 97,89,54,176/- was confirmed under Section 40 (a) (i) of the Act and added to the total income of the Assessee. An addition of ₹ 155,27,14,989/- was also made on account of difference of Arm s Length Price determination by the TPO which is however, not the subject matter of the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO, there is an overlap between the functions of MI and the LOs of MC. The AO discussed the complete structure of MC and also notes that the various groups created in India and the divisions created thereunder including the Business Initiative Group, Energy Group, Chemical and Business Group, Metal Business Group, Living Essential Business Group, Machinery Group, are shared between the LOs and MI. The AO analyzed in detail the manner in which MC conducted its activities in various countries. The AO finally relies upon the letter dated 10th March, 2006 given by MC to the department, which stated that MC admitted that it would have no objection to pay tax in India by applying the gross profit rate of 2.75% for computing the profitability in respect of the Indian transactions of MC. This letter, as per the AO, meant that MC admitted to the existence of its Permanent Establishment ( PE ) in India. The AO, thus, concludes that since MC is taxable in India and this position is not contested by it, the provisions relating to TDS i.e. Section 195 of the Act, consequently, apply to MC. 9. Insofar as Metal One is concerned, the AO analyzed the management plan of Metal One as available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The AO also relied upon the judgment of the Karnataka High Court in Commissioner of Income Tax, International Taxation and the Income Tax Officer TDS-I v. Samsung Electronics Co. Ltd., India Software Operations [2010] 320 ITR 209 (Kar) (hereafter Samsung Electronics ) to support this view. The AO then concluded as under: 4.21 In light of the unambiguous legal position as emanates from the discussion made above under the observations of Hon'ble Apex Court and Hon'ble Karnataka High Court, the assessee was clearly under obligation to comply with the provisions of Sec.195 of the I. T. Act and to deduct tax at source on the payments made to nonresidents as discussed above. As a result of this default of the assessee, the payments made to nonresidents as above, are clearly disallowable u/s 40(a)(i) of the Income Tax Act, 1961 and I hold accordingly. 4.22 To sum up the above discussion, the payments made to non-residents are disallowable on the following grounds: 1. The non-resident entities to whom payment shave been made by the assessee are chargeable to tax in India in the light of their business model and presence in India under the provisions of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of Section 195 of the Act are not attracted. Consequently, according to the ITAT, the disallowance under Section 40 (a) (ia) is bad in law. 13. Thus, the ITAT set aside the order of the AO and deleted the additions so made by him. However, in respect of the addition made by the AO in respect of the Arm s length pricing, the ITAT remanded the matter to the AO for fresh adjudication on the issue of the determination of comparables and to conduct a fresh TP study and file additional evidences/comparables before the AO/TPO for consideration. Decision in Herbalife International India Pvt. Ltd. 14. The decision in Herbalife ITAT (supra) was appealed to this Court and in its decision dated 13th May 2016 in CIT v. Herbalife International Pvt. Ltd. [2016] 384 ITR 276 (hereafter Herbalife ), this Court analyzed the provisions relating to non-discrimination, namely Article 26 (3) of the DTAA between India and U.S.A. After analyzing the extant provisions of the Act as applicable, read with the provisions of the DTAA, it was held that in the AY in question i.e. 2001-02, Section 40 (a) (i) did not provide for deduction of TDS where the payment was made in India to a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. There have since been amendments to the Act. The Finance Act, 2004, that came into operation with effect from 1st April, 2005, substituted/added sub-clauses (i), (ia) and (ib) to Section 40 (a) of the Act. Section 195 of the Act was also amended by the Finance Act, 2012, by adding Explanation 2 w.r.e.f. 1st April, 1962. The amended provisions as applicable to the AY in issue, read as under: Section 40 - Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession ,- (a) in the case of any assessee - (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or (B) in India to a non-resident, not being a companyor to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139: Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 194J; (iv) work shall have the same meaning as in Explanation III to section 194C; (v) rent shall have the same meaning as in clause (i) to the Explanation to section 194-I; (vi) royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (ib) any consideration paid or payable to a nonresident for a specified service on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016, and such levy has not been deducted or after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 : Provided that where in respect of any such consideration, the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such levy has been paid . 17. Section 195 (1) along with its newly added explanation as applicable to the AY in question reads as under: Section 195(1) Any person responsible for paying to a non-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Payable in India N.A. N.A. Position as amended by Finance Act, 1988 (Applicable in CIT v. Herbalife, [2016] 384 ITR 276 (Del) which dealt with AY 2001-02): Any payer to any resident payee Any payer to a non-resident payee Payable Outside India 40(a)(i) 40(a)(i) Payable in India N.A. N.A. Position as amended by Finance Act, 2003: Any payer to any resident payee Any payer to a non-resident payee Payable Outside India 40(a)(i)(A) 40(a)(i)(A) Payable in India N.A. 40(a)(i)(B) Position as amended by Finance Act, 2004 (Applicable to the present case for AY 2006-07): Any payer to any resident payee Any payer to a non-resident payee Payable Outside India 40(a)(i)(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chamber of Commerce, Ltd v. Ganpat Rai Hira Lal [1958] 33 ITR 245(SC) (hereafter Ganpat Rai ), to submit that even if a payee is located in a non-taxable territory, the deduction at source ought to be made by the entity located in the taxable territory. The question as to whether the amount is taxable in the hands of the payee, which is a non-resident, is a question to be addressed at the time of his assessment and not at the time of deduction at source. Mr. Singh also relies upon Azadi Bachao Andolan (supra) to submit that if there is no conflict between the DTAA and the provisions of the Act, then Section 90 of the Act is not triggered. Since the Indo-Thai and India-Singapore DTAAs do not have any conflicting provisions, the only law occupying the field is Section 195. According to Mr. Singh, Section 90 (2) of the Act does not, in any manner, come in the way of giving effect to Section 195. This is not a case where there is a conflict or a case where the Assessee is claiming any provision which is beneficial to it, as compared to the DTAA. 22. Mr. Rahul Chaudhary, learned Senior Standing Counsel also supports the case of the Revenue and submitted that the determination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that partnerships of both domiciles withhold tax in respect of the partnership shares of non-U.S. partners. In distinguishing between U.S. and Indian partners, the requirement to withhold on the Indian but not the U.S. partner s share is not discriminatory taxation, but, like other withholding on non-resident aliens, is merely a reasonable method for the collection of tax from persons who are not continually present in the United States, and as to whom it may otherwise be difficult for the United States to enforce its tax jurisdiction. If tax has been over with held, the partner can, as in other cases of over-withholding, file for a refund. Paragraph 3 prohibits discrimination in the allowance of deductions. When an enterprise of a contracting State pays interest, royalties or other disbursements to a resident of the other contracting State, the first-mentioned contracting State must allow a deduction for those payments in computing the taxable profits of the enterprise under the same conditions as if the payment had been made to a resident of the first-mentioned Contracting State . 23. As per the above technical explanation, it is clear that the payee can file for refun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n clauses in the said agreements. 27. In case of the other transactions viz., with the entities in Thailand and Singapore, the question, according to Mr. Syali, is whether the non-deduction of TDS straightway attracts the disallowance. He submits that the reliance on the decision in Ganpat Rai (supra) is misplaced as even the said decision does not uphold that chargeability is an irrelevant consideration at the time of deduction of the TDS. According to Mr. Syali, the decision in Ganpat Rai (supra) was whether the determination of income is essential while deducting the tax at source. This judgment was not in the context of any DTAA. According to him, the question that arose was whether the payer needs to consider as to what constituted the taxable income of the payee at the time of deduction of the TDS, and this question was rightly answered by the Court in the negative. He submits that the computation of income is different from its chargeability. 28. Mr. Syali fairly submits that the amount paid by the payer to the payee constitutes income, but for the purpose of determining whether TDS is to be deducted, the chargeability of the said amount to tax has to be established. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (2) does not refer to a situation of conflict between the DTAA and the Act but merely provides that the provisions of DTAA would prevail so long as they are more beneficial to the Assessee; Rejoinder by the Appellant-Revenue 31. According to Mr. Singh, Section 195 is independent and stands on its own legs. Until and unless the Assessee can establish that any provision in the DTAA is more beneficial to the Assessee, chargeability cuts across all the transactions. Explanation 2 to Section 195 lessens the rigors to be established by the Revenue. He relies upon the article 23 (1) of Indo Japan DTAA to state that the laws of the Contracting State shall continue to govern the taxation of income. The question, whether the payee has a PE of its own, has to be established in the assessment proceedings of the payee and not at this stage. The ITAT observes clearly that after 1st April, 2004, there is equality between residents and non-residents. He again reiterates and derives support from Article 24 (3) of the India-Japan DTAA which clearly provides that tax is deductable on the same conditions as is deductible qua residents and thus Section 40 (i) (a) applies equally both for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident or a nonresident, would be included in the total income from whatever source derived. Section 4 (2) which is the charging section also stipulates that income tax shall be deducted at the source, in respect of income chargeable under Section 4 (1). Section 4 and Section 5 of the Act are extracted below: Section 4 - (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person : Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. Section 5 - (1) Subject to the provisions of this Act, the total income of any previous year of a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to non-resident is chargeable to tax under the provisions of the act or not? That sum may be income or income hidden or otherwise embedded therein. If so, tax is required to be deducted on the said sum. What would be the income is to be computed on the basis of various provisions of the Act including provisions for computation of the business income, if the payment is trade receipt. However, what is to be deducted is Income Tax payable thereon at the rates in force. Under the Act, total income for the previous year would become chargeable to tax under Section 4. Subsection (2) of Section 4 inter alia, provides that in respect of income chargeable under Sub-section (1), Income Tax shall be deducted at source where it is so deductible under any provision of the Act. If the sum that is to be paid to the non-resident is chargeable to tax, tax is required to be deducted. The sum which is to be paid may be income out of different heads of income provided under Section 14 of the Act, that is to say, income from salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. The scheme of Tax deduction at source applies not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GE India Technology (supra) by the Supreme Court where it was held If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words chargeable under the provisions of the Act in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not as assessable, there is no question of TAS being deducted. 39. This position was also reiterated in Vodafone International Holdings BV v. Union of India Anr. (2012) 6 SCC 613 (hereafter Vodafone ) wherein it was held Section 195 casts an obligation on the payer to deduct tax at source ( TAS , for short) from payments made to non-residents which payments are chargeable to tax. Such payment(s) must have an element of income embedded in it which is chargeable to tax in India. 40. From a conjoint reading of the Transmission Corporation (supra), GE India Technology (supra)and Vodafone (supra) it can be said that- A sum i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be under a common control; MI is not the user of the products purchased but is rendering services in the nature of intermediary between the seller and the end user; All the payees either have a PE or a business connection in India. 42. These findings, which are part of the record in the report of the DRP as also the AO s order, have not been disturbed by the ITAT. The ITAT has merely proceeded on the basis that Metal One does not have a PE in India and hence the sums are not taxable in India. This is clearly an erroneous finding by the ITAT. The ITAT has also held that TDS was not to be deducted without considering the chargeability of the sums to tax. This approach of the ITAT is contrary to the decisions in Transmission Corporation (supra) and GE India Technology (supra). 43. In this case, the Assessee is an Indian Company. The question whether there is discrimination qua the non-resident payees is an issue to be decided if and when the said non-resident payees raise issues relating to discrimination. A resident company per se ought not to be allowed to invoke the provisions of the DTAA, inasmuch as the resident payer would be unable to either conclusivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be established in several ways and the underlying facts requiring that determination cannot be made in the payer's challenge. 45. Thus, under the applicable provisions in the AY in question, there existed a clear obligation to deduct tax at source, and both the AO and the DRP were right in holding that as per Section 195 of the Act, the Assessee was under an obligation to comply with the said provision. In so far as the judgment in GE India Technology (supra) is concerned, the transaction in the said case related to purchase of shrink wrap software wherein, the Supreme Court held that it is only if the sum is chargeable to tax in India, that the obligation to deduct tax arises. The Supreme Court further held that Transmission Corporation (supra) dealt with a case relating to a composite contract that included sums for payments of purchases as also installation and commissioning, part of which was clearly taxable in India. The Supreme Court rejected the contention of the Revenue that the moment there is a remittance, an obligation to deduct the TDS arises. This view of the Supreme Court in GE India Technology (supra) does not support the case of the Assessee inasmuch as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontractor etc. It does not include an amount paid towards purchases. Correspondingly, there is no requirement of TDS having to be deducted while making such payment . 47. This observation of the Court did not take into consideration (and rightly so) the insertion of Explanation 2 to Section 195, as the amendments in Section 40 (a) did not apply to the AY in question in Herbalife (supra). The submission of the Assessee that the discrimination, qua payments made to residents and non-residents, continues until 1st April, 2015 when Section 40 (a) (ia) was amended, ignores the retrospective nature of the amendment made to Section 195 by insertion of Explanation 2. The said explanation, in categorical terms, provides that the obligation to make tax deduction at source extends and shall be deemed to have always extended to all persons, resident or non-resident, in India. Moreover, in the present case, it is not a case of mere purchase of goods but the Petitioner is also rendering other services as recorded in the AO's order, thus the transactions are composite in nature. 48. The obligation under Section 195 operates and exists independently of Section 40. The question as to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in paragraph 7 above. In any event, the analysis qua the first four transactions would also in effect provide the basis and reasoning for the remaining three transactions, as would be evident below. Transaction with Mitsubishi Corporation, Japan 50. In relation to this transaction, the resultant disallowance was of ₹ 5,01,55,844/-.The fact that MC has a PE in India is not even disputed. Thus, for all intents and purposes, MC is to be treated as a resident company for which obligation to deduct tax existed upon MI. The AO has rightly held that, after analyzing the nature of activities of MC in India and relying upon the report of DRP, MC has accepted chargeability of its income to tax in India. Thus, Section 195 applies qua MC. Insofar as the Assessee s arguments with respect to MC are concerned, the argument that nondiscrimination clauses of the DTAAs continue to apply, is incorrect inasmuch as has been held above, there is no discrimination in view of the applicable statutory position. The obligation to deduct the tax applies when the payee is a resident or a non-resident so long as it is chargeable to tax. At the stage of deduction it cannot be said that the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02, TDS was not to be deducted where the payment was made in India which was inserted for the first time w.e.f. 1st April, 2005. Thus, the argument of discrimination no longer survives in the context of the India-Japan DTAA. The error in the Assessee s submissions is that the services mentioned in Section 40 (a) (ia) are not an exhaustive list of the services for which tax is deductible at source. Whereas Section 195 uses the term any other sum chargeable under the provisions of this Act , Section 40 (a) (ia) prior to 1st April, 2015 mentions some services for which tax is deductible and if not deducted, the said payments shall be included in computing the income of the Assessee. It is application of a deductive logic in an indirect manner resulting in reading services mentioned in Section 40 (a) (ia) as being the only services for which tax is deductible at source qua residents. Such a reading is not supported by the plain language of Section 195 of the Act and the clarification as issued by insertion of Explanation 2 to it. 54. It could easily be concluded that insofar as the sums paid for purchases to residents are concerned, though the tax is deductible as source, if the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. Thus, Metal One, clearly, has a business connection in India and under Section 9, all income arising from any business connection in India is income deemed to accrue or arise in India. Thus, at the stage of deduction of tax at source, it is not possible to hold that the payment is not a sum chargeable under the provisions of this Act. Thus, the Assessee had an obligation to deduct tax at source and the AO has rightly added the amount of payment made to Metal One, to the income of the Assessee, in the absence of such deduction. Transactions with MC Metal Services Asia, Thailand and Metal One Asia P. Ltd., Singapore 57. The relevant extracts of the non-discrimination clauses in the Indo-Thai DTAA and the India-Singapore DTAA are extracted herein below: Article 24 (1) of the Indo-Thai DTAA: The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. Article 26 (1) of the India-Singapore DTAA: T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties for them. As stated, the turnover of these companies were also agreed to be the part of turnover relatable to India on which permanent establishment was conceded by MC-Japan and tax was paid thereon. It is also noted that these companies form part of various divisions' viz metal division, chemical division etc and were accordingly consolidated in the global accounts of MC-Japan. Therefore, contention of the assessee that other AEs did not have their individual and separate presence in India is not very convincing. 60. This observation of the DRP led to the AO holding that Metal One, which was established as a new company in January, 2003, functions on identical lines as that of MC. Metal One, under which both MC Thailand and MO Singapore function, has an LO in India. Since the main company i.e., Metal One, is chargeable to tax in India, the fact that the transactions are routed through entities based in Thailand and Singapore does not obviate the obligation to deduct tax at source. Since both these entities have a business connection in India through the LO of Metal One, at this stage, it cannot be said that the said payments are not chargeable to tax. Other Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nection in India. This Court holds that MC admittedly has a PE. The other entities also do have a business connection in India. The question is thus, answered in the affirmative i.e. in favour of the Revenue and against the Assessee. 66. The appeal is accordingly allowed. There will be no order as to costs. PRATHIBA M. SINGH, J Per Dr. S. Muralidhar, J.: 1. Having gone through the judgment of my learned colleague Prathiba M. Singh, J., I am unable to agree with the conclusions reached by her on the two questions of law framed by this Court in the present case by order dated 29th April, 2014. The said questions read as under: (i) 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 and Japan and India and the US? (ii) Whether the ITAT fell in error in reversing the findings of the DRP with respect to the existence of the PEs in India? Scope of the two questions 2. In the present case, the questions arise in the context of Mitsubishi Corporation India Pvt. Ltd ( MI ), the Respondent Assessee, during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA, has a nondiscrimination clause in the form of Article 24 (3). It mandates inter alia that, for the purposes of taxation, the treatment afforded to payments made by Indian Assessees to non-resident companies incorporated in Japan, is to receive a treatment no different from payments to resident Indian entities. 6. Section 195 of the Act, which is in Chapter XXVII, requires TDS to be deducted while making payment to a non-resident entity of a sum chargeable to tax under the Act. Explanation 2 inserted in Section 195 by the FA 2012 with retrospective effect from 1st April 1962 clarifies that the obligation to TDS applies irrespective of whether the non-resident entity has a permanent establishment (PE), place of business or business connection or any other presence in India. 7. The consequence for the failure to deduct TDS as mandated by Section195 of the Act, is spelt out in Section 40 of the Act. The consequence is the denial of the said sum as a deduction from the income of the Assessee. Where the failure is to deduct TDS from any sum paid outside India or to non-residents, Section 40 (a) (i) of the Act applies. Where the failure is to deduct TDS from certain sums pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any other case, on or before the last day of the previous year Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted (A) during the last month of the previous year but paid after the saiddue date; or (B) during any other month of the previous year but paid after the endof the said previous year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid Explanation . 9. A careful comparison of the two sub-clauses i.e. (i) and (ia) of clause (a) of Section 40 of the Act, as they stood during AY 2006-07, would reveal that the expression or other sum chargeable under the Act occurring in sub-clause (i) is missing in sub-clause (ia). This means that while in the case of failure to deduct TDS from payments of any sum to non-resident entities (including payments for purchases), such sum would not be allowed as a deduction while computing the taxable income of the payer (Assessee), only certain payments to resident entities as spelt out in sub-clause (ia) would be disallowed as deductions if no TDS is deducted while making payment. Taking the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MC Japan had itself submitted to jurisdiction of the tax authorities in India and had paid tax on its income earned in India. Therefore according to the AO, Section 195 of the Act applied to the payments made to MC Japan and it was mandatory for MI to have deducted TDS from such payments. The failure to do so attracted the consequence under Section 40 (a) (i) of the Act. Since all its group entities followed the same business model, they should also be held to have a PE in India and it was incumbent on MI to deduct TDS from the payments to them as well. 14. As regards the reliance placed by MI on the DTAA, the AO held: (i) MI being a resident could not invoke the DTAA. (ii) In any event in view of the decision of the Supreme Court in Transmission Corporation of AP Ltd. v. CIT 1999 239 ITR 587 (SC) as followed by the Karnataka High Court in CIT (International Transaction) v. Samsung Electronics Co. Ltd. (2010) 320 ITR 209 (Kar) the chargeability to tax of the other receipt , for the purposes of Section 195 of the Act, was clearly established. Therefore the failure by MI to deduct TDS from the payments to the Japan and US entities would attract non-allowability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties are not taxed in India. Under these circumstances, we have to necessarily hold that the payments made to these entities for purchases from these entities are not taxable in India as these entities have not (been) held as having a PE in India and hence the provisions of S.195 are not attracted and consequently the disallowances made u/s 40 (a) (ia) [(sic 40 (a) (i)] are bad in law. 19. It requires to be noticed that against the above decision dated 11th May 2012 of the ITAT in the case of Metal One Corporation, the Revenue s appeal being ITA 113 of 2013 has been admitted by this Court and is pending consideration. Revenue s submissions 20. In the present appeal the Revenue s submissions as regards question (i) have centred around the fact that after insertion of sub-clause (ia) in Section 40 (a) with effect from 1st April 2005, the discrimination pointed out by this Court in Commissioner of Income Tax v. Herbalife International Pvt. Ltd. [2016] 384 ITR 276 (Delhi) ( Herbalife HC ) has now been done away with. It is contended that the different treatment under Section 40(a) (i) of the Act is not dependent on the fact that disbursements has been paid by an In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o conflicting provision that deduction of tax at source can only be made if PE is determined. On the other hand, Article 23(1) of the DTAA states that the laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting State except where express provisions to the contrary are made in this Convention. Assessee s submissions 23. The learned counsel for the Assessee points out that as far as question (i) is concerned, all the submissions of the Revenue have been comprehensively answered against it in the decision of this Court in Herbalife HC. As regards question (ii) which pertains to the applicability of Section 195 of the Act, the decision in Transmission Corporation (supra) is sought to be distinguished on facts. Reliance on the other hand is placed on the later decision of the Supreme Court in GE India Technology Centre Pvt. Ltd. v CIT [2010] 327 ITR 456 (SC) (hereafter GE India). 24. As regards question (ii), it is pointed out that the AO held that Metal One Corporation, Japan had a liaison office (LO) in India which exceeded the mandate of RBI and hence its LO constituted a PE in India. This dict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore misplaced and out of context. (b) The finding of the AO that the sum paid for purchases was taxable in India was as a result of the earlier finding that the non-resident entities to which the payments were made had PEs in India. However, the AO proceeded on the basis that the payment was only for purchases and nothing else. (c) As far as the assessee is concerned it is asserted throughout and in particular in para 2.6 of its written submissions that: There is no dispute that the payment made to non-resident, in the present case, is neither 'Royalty' nor 'Fee for technical services'. It is a case of payment made for purchases from the non-resident. (d) Even the Revenue does not dispute that the payments were made by MIto the non-resident entities for purchases. There is nothing to the contrary stated either in the memorandum of appeal or even its written submissions. 28. The payment for purchases comes within the purview of the expression other disbursements in Article 24 (3) of the Indo Japan DTAA and Article 26 (3) of the Indo US DTAA. It also comes within the purview of the expression other sum chargeable in Section 40 (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s unable to agree with the above submissions of the Revenue. In the context in which the expression other disbursement occurs in Article 26 (3), it connotes something other than interest and royalties . If the intention was that other disbursements should also be in the nature of interest and royalties then the word 'other' should have been followed by such or such like . There is no warrant, therefore, to proceed on the basis that the expression other disbursements should take the colour of interest and royalties . 41. The expression other disbursements occurring in Article 26 (3) of the DTAA is wide enough to encompass the administrative fee paid by the Assessee to HIAI which the Revenue has chosen to characterize as FTS within the meaning of Explanation 2 to Section 9 (1) (vii) of the Act. 32. In Herbalife HC the Court was dealing with the AY 2001-02, it noted the changes that had been brought about by insertion of Section 40(a)(i) with effect from 1st April, 2005 as regards the requirements of deduction of tax at source ( TDS ) for the payments made in India as well. However, discrimination did not arise as a result of non-deduction of TDS alone b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etation of Article 24(Non-Discrimination), Public discussion Draft, May 2007 did envisage deduction of tax while making payments to non-residents. It is viewed only as additional compliance of verification requirement which would not attract the nondiscrimination rule. The OECD Expert Group noted that ―the nondiscrimination obligation under tax conventions is restricted in scope when compared with equal treatment or nondiscrimination clauses in an investment agreement. Specifically, in relation to withholding taxes, the Expert Group in the note by its chairman titled ―Non Discrimination in Bilateral Tax Conventions noted as follows: 6. The more limited non-discrimination obligations in tax conventions reflect the practical problems of cross-border taxation. For example, countries frequently collect taxes from non-residents through a system of withholding at source. Withholding is most frequently imposed on passive income, such as dividends, interest, rents, and royalties. Because the recipient may have no connection with the country of source other than the investment generating the income, withholding at the time of payment is likely to be the only realistic opp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her the classification had a rational nexus with the object of the statute. 52. Section 40 (a) (i), in providing for disallowance of a payment made to a non-resident if TDS is not deducted, is no doubt meant to be a deterrent in order to compel the resident payer to deduct TDS while making the payment. However, that does not answer the requirement of Article 26 (3) of the DTAA that the payment to both residents and non-residents should be under the same conditions not only as regards deduction of TDS but even as regards the allowability of such payment as deduction. It has to be seen that in those same conditions whether the consequences are different for the failure to deduct TDS. 53. It is argued by the Revenue that since in the present case no condition of deduction of TDS was attracted, in terms of Section 40 (a) (i) of the Act as it then stood, to payments made to a resident, but only to payments made to non-residents, the two payments could not be said to be under the same condition . The further submission is that if they are not made under the same condition', the nondiscrimination rule under Article 26 (3) of the DTAA is not attracted. 54. In the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rings about the discrimination. The tested party is another resident Indian who transacts with a resident making payment and does not deduct TDS and therefore in whose case there would be no disallowance of the payment as deduction because TDS was not deducted. Therefore, the consequence of non-deduction of TDS when the payment is to a non-resident has an adverse consequence to the payer. Since it is mandatory in terms of Section 40 (a) (i) for the payer to deduct TDS from the payment to the non-resident, the latter receives the payment net of TDS. The object of Article 26 (3) DTAA was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimination brought about qua non-resident by requiring the TDS to be deducted while making payment of FTS in terms of Section 40 (a) (i) of the Act. (emphasis supplied) 34. The Court in Herbalife HC thereafter noted Section 90(2) of the Act as well as the decision of the Supreme Court in Azadi Bachao Andolan and negated the Revenue s plea that unless there are provisions similar to Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porated in Thailand and Singapore. 40. As noticed earlier, the AO drew an inference that the above entities alsohad a PE in India since their business model was no different from that of Metal One Corporation Japan which was held to have a PE in India. The subsequent development was that the said decision of the AO in the case of Metal One Corporation was set aside by the ITAT. That decision is of course the subject matter of a separate appeal pending in this Court. 41. The factual finding of the ITAT is that other than Metal One Corporation, the Department has not passed any orders holding that any of the other entities including the two in Thailand and Singapore had a PE in India. This factual finding has not been shown by the Revenue to be perverse. The Revenue has not argued before this Court that either the entity in Thailand or the one in Singapore have even an LO in India. If their profits are, therefore, not chargeable to tax in India, the question of applying Section 195 of the Act to deduct TDS from the payments made to them for purchases cannot arise. These reasons are therefore sufficient to answer question (ii) also in the negative i.e. in favour of the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transactions with whom were governed by the respective DTAA, this question is even more relevant. 45. In this context, it requires to be noticed that Section 195 does not begin with a non-obstante clause. It is subject to the other provisions of the Act and in particular Section 90 (2) of the Act in terms of which if there is a provision of the Act that is more beneficial to the Assessee than the DTAA provision, then the Act will apply. Conversely, the provision of the DTAA would apply, if it is more favourable to the Assessee than the provision of the Act. The decision of the Supreme Court in Azadi Bachao Andolan (supra) clarifies the position. In any event for determining the chargeability of a sum to tax, the provisions of the DTAA where applicable, would have to be taken into account. The decision in the Transmission Corporation case 46.1 The decision of the Supreme Court in Transmission Corporation (supra) and that of the Karnataka High Court in CIT (International Transaction) v. Samsung Electronics Co. Ltd. (supra) were relied upon by the AO in the present case to hold that it was mandatory for MI to have deducted TDS while making payment to the non-resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of a plant in India which gave rise to taxable income of the payee (non-resident) in India. Secondly, the question whether the payment would be governed by the provisions of a DTAA did not arise and in any event was not considered by the Supreme Court when it gave the above decision. Thirdly, the Supreme Court did emphasise that for deducting TDS in terms of Section 195 (1) of the Act a pre-condition was that the sum paid had to be chargeable to tax. The decision in GE India 47.1 The issue regarding deductibility of TDS for payments made to nonresident entities was revisited by the Supreme Court in GE India (supra). A detailed analysis was undertaken by the Supreme Court of Section 195 (1) of the Act. The Supreme Court in the said decision used the expression deduction of Tax at Source (TAS). The following observations in that regard are relevant: 7. Under Section 195 (1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the Income-tax Act in the case of nonresidents only and not in the case of residents. Failure to deduct the tax under this section may disentitle the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he is required to make an application to the ITO (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO (TDS) that the question of making an order under Section 195 (2) will arise. ..While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195. . 8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words chargeable under the provisions of the Act in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not as assessable, there is no question of TAS being deducted. 9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t tax. As stated hereinabove, Section 195(1) uses the expression sum chargeable under the provisions of the Act. We need to give weightage to those words. Further, section 195 uses the word 'payer' and not the word assessee . The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfil the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The abovementioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the Incometax Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income-tax Act for the said sum as an expenditure . Under section 40(a) inserted vide Finance Act, 1988 with effect from 1-4-1989, payment in respect of royalty, fees for technical services or other sums chargeable under the Income-tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses where the payment made is a composite payment in which a certain proportion of payment has an element of income chargeable to tax in India. It is in this context that the Supreme Court stated, If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such `sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS . If one reads the observation of the Supreme Court, the words such sum clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all chargeable to tax in India , then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y set aside that decision of the AO in the case of Metal One Corporation, Japan and held that even the latter did not have a PE in India. In the circumstances, the conclusion of the ITAT in this regard cannot be faulted. Question (ii) is accordingly answered in the negative, i.e. in favour of the Assessee and against the Revenue. Points of divergence 51. The reasons for the divergence of views are, therefore, obvious. As far asquestion (i) is concerned, one fundamental reason is the premise on which the opinion of my learned colleague proceeds viz., in para 41 of her opinion that Moreover, as per the facts of this case it is not a case of only purchase of goods or a trading receipt ..the Assessee s income is for rendering services as an intermediary between the customer and the vendor. Further in para 47 she observes: Moreover, in the present case, it is not a case of mere purchase of goods but the Petitioner is also rendering other services as recorded in the AO's order, thus the transactions are composite in nature. 52. The issue here is about the Assessee not being allowed a deduction under section 40 (a) (i) of the Act in respect of the sums paid by it fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nes in the Indo-Japan and Indo US DTAAs. Factually, it has been held by the ITAT that neither entity has even an LO in India. The finding of the AO that that both entities had a PE was based only on his decision in the case of Metal One Corporation Japan, which decision has been set aside by the ITAT. I also, therefore, do not agree that question (ii) requires to be modified to include the question whether the said entities have a business connection in India. 55. Finally, as regards Explanation 2 to Section 195 (1) of the Act, inserted by the FA 2012 with retrospective effect from 1st April 1962, I have concluded that the said Explanation, obligates the payer , whether a resident or a non-resident, to deduct TDS. It does not dispense with the fulfilment of the pre-condition that the sum in respect of which TDS is to be deducted has to be shown to be chargeable to tax. In this regard I rely on the decision in GE India (supra) as well as the Explanatory Memorandum to the said amendment inserted by FA 2012. 56. I also have taken note of the CBDT Circular dated 30th October 1995 which clarifies that the payer who is expected to deduct TDS can take into consideration the effec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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