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TMI Blog2018 (10) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... n the following grounds : "1. Whether on the facts and circumstances of the case, the Ld. CIT (A) has erred in holding that the assessee was not required to make TDS deduction u/s 195 of the Income Tax Act, 1961 on the payment of ₹ 1,06,53,926/- made to M/s Timken and thus deleting the disallowance made by the A.O. u/s 40(a)(i) of the Income Tax Act whereas such payment was chargeable to Income Tax in India. 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in holding that the assessee was not required to make TDS deduction u/s 195 of the Income Tax Act, 1961, on the payment made to M/s Timken and thus deleting the disallowance made by the AO u/s 40(a)(i) of the Income Tax Act without giving any findings contrary to the AO that M/s Timken Group has got permanent establishment in India and thus the income on this transaction was chargeable to tax in India on which TDS was to be deducted. 3.That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal." 2. The case was fixed for hearing on 13.9.2017, 21.11.2017 and 24.4.2018 but none appeared on behalf of the assessee. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en made to the nonresident which is a foreign company. The sale price includes GP/NP and there is a business connection in India. Therefore the TDS liability arises and he also referred to section 195 (2) and also relied on some case laws. During the course of assessment proceedings AO also observed from the website of www.timken.com that the said company had headquarters at Ohio, US and following plants in India :- Location Office Plant Technical/engineering centre Bangalore 1 - 1 Chennai - 1 - Jamsedpur 1 1 0 Kolkata 1 0 0 New Delhi 1 0 0 Pune 1 0 0 Total 5 2 1 6. From the above table it was observed that there are five offices and two plants and one technical/engineering centre of M/s. Timken group of companies in India and thus there is a permanent establishment of the seller in India and thus the income was chargeable in India on which TDS was to be deducted / withheld as per the provisions of section 195. In this regard further show cause notice was issued to the asseseee, in response to which, assesee submitted reply dated 16.12.2010 which is as under :- "Your goodself has further been pleased to enquire as to why provisions of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is a permanent establishment in India of the US based company from which assessee has purchased materials and there is also business connection in India. Therefore the order of the AO should be restored. Reliance is placed on the decision of Hon'ble Supreme Court in Transmission Corporation of A.P. Ltd. and Another vs. CIT, (1999) 239 ITR 587 (SC). 8. After hearing Ld. DR and going through the orders of lower authorities we observe that Ld. CIT(A) has rightly deleted the additions made by the AO in regard to the purchase of ₹ 1,06,53,926/- from M/s. Timken Company. The conclusions reached by the Ld. CIT(A) is as under :- 9.5 The contentions of the AO and the Appellant were taken on record and they were considered. Before considering the legal aspects it is pertinent to reproduce section 40, once again: "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 "Profit and gains of business or profession".- (a) in the case of any assessee - (i) any interest (not being interest on a loan issued by public subscription before the 1st day of April, 1938), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st not being interest referred to in section 194L8 or section 194LC) or section 194LO or any other sum chargeable under, the provisions of this Act not being income chargeable under the head "Salaries" shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (230) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O Explanation 1 - For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or Suspense account" or by any other name, in the books of account of the person liable to pay such income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd providing for all other matters connected therewith.} (6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.} (7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Boord may, by notification in the official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, 'by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub section (1) on that proportion of the sum which is so chargeable. " 9.8 To elaborate, Section 195 is a special provision for tax deduction at source from payments to non-residents, which are chargeable to tax. It covers all payments to non-residents except from salary. tater, interest on securities and other interests were also excluded from its purview. Explanation would make it clear that. even credit to non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness, professional activity, prima facie bears character of an income of recipient and, therefore, obligation u/s 195 springs up. As the payment made to the non-resident contained his GP/NP and therefore the income of the non-resident, which is chargeable under the provisions of this Act {Income Tax Act, 1961} as the income was arisen in India, the counsel was asked to show cause as to why the said purchases should not be disallowed u/s 40(a)(ia} of the Act as neither tax has been deducted nor certificate of no-deduction of tax from the A. O. has been obtained." 9.11 However the Counsel of the appellant has drawn by attention to the GE India Technology Centre Pvt Ltd v. CIT [20101 327 ITR 456 (SC) in which the Hon'ble Supreme Court has reversed the decision of the Hon'ble Karnataka High Court. A brief synopsis of that shall not be out of place. The facts of the case are that The assessee, an Indian company, made remittance to a foreign company for purchase of software. The assessee took the view that the payment was not chargeable to tax in India and did not deduct tax at source u/s 195. The AO & CIT {A} took the view that the payment constituted "royalty&qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e" under the Act i.e. chargeable u/s 4, 5 and 9 (v) As the High Court had not decided the question whether the payments for supply of software was "royalty" or not, the matters are remitted to the High Court for a decision on that point. 9.12 Thus based on this decision of the Hon'ble Supreme Court above, the addition made by the AD appears to be bad in law. 9.13 Now we come to the legal sanctity of the second argument of the Appellant i.e. benefit of Article 26 [Non-discrimination clause] of the DTAA as entered between India and USA (reported in 187 ITR 102 and as amended]. The counsel of the appellant after relying upon the nondiscrimination clause has argued that the non-discrimination clause is incorporated in a DTAA to provide the non-residents with the same privileges to which only a resident of the state is eligible for. Reliance in this regard was placed on the judgement of:' I. Dy. CIT vs. Incent Tours Pvt. ltd. reported in I.T.A. No. 2023,2024, 2025,2026, 2027 & 2028 /DeI/202010; II. Herbalife International India Pvt. ltd. reported in 101 ITD 450; 103 TIJ 78; III. Millennium Infocom Technologies Ltd. reported in 117 ITO 114; 117 ITJ 456; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court, the revenue authorities cannot say that they are not bound by it. II. The circulars issued by the Board are not binding on the assessee but are binding on revenue authorities. It was submitted that once the Board issues a circular, the revenue authorities cannot take advantage of a decision of the Supreme Court. The consequences of issuing a circular are. that the authorities cannot act contrary to the circular. III. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of Apex Court or the High Court. IV. Clarifications/circulars issued by the Central Government and of the State Government are merely their understanding of the statutory provisions. They are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive." 9.17 Based upon the above case laws and circular the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle shall be construed as preventing either Contracting State from imposing the taxes described in Article 14 (Permanent Establishment Tax) or the limitations described in paragraph 3 of Article 7 (Business profits). " 9.18 To interpret the Article the best method is to rely on the judgements of higher forum. The relevant extracts of the judgements as cited by the counsel were considered,the relevant extracts are reproduced herein below: • Special Bench of ITAT in the matter of Rajeev Sureshbhai Gajwani vs. ACIT reported in 137• TIJ 1 and 8 ITR (Trib) 616, inter alia the Hon'ble Bench Concluded: "8. We have considered the facts of the case and the submissions made before us. Facts, in short, are that assessee is a citizen of America and is a non- resident person in India in all the years under consideration. He has carried on the business of export of software out of India. Profits earned from this business are claimed to be not-taxable in view of the provisions contained in Article 26(2) of the DTAA. It is admitted position of law, conceded by the rival parties, that but for this article, the assessee would not have been entitled to deduction u/s 80 HHE of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, which reads as follows : "Sec. 90. Where the Central Government has entered into an agreement with the Government of any other country outside India under sub-so (1) for granting relief of tax, or as the case may be, avoidance of double taxation then in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee. 24. The payment in question by assessee to M/s HIAI attracts the provisions of the Indo-US DTAA. The payment in question if at all will be taxable in the hands of M/s HIAI in India only if it is a payment for included services within the meaning of art. 12(4) of the said DTAA and not taxable in India otherwise. The sum in question cannot be taxed as business income, since M/s HIAI admittedly does not have a PE in India. If the income is considered as having accrued or arisen to M/s HIAI in India, yet they can be taxed in India only if they are fees for included services. Even if the payment is considered as "fees for technical services" within the meaning of IT Act, 1961, yet they cannot be taxed because 'fees for technical services' and 'f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03, w.e.f. 1st April, 2004 provided for disallowance of payment made to a non-resident only where tax is not 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 or a nonresident in business would opt to deal with a resident rather than a nonresident owing to the provisions of s. 40(aj(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 s. 40(a)(i). By virtue of the provisions of s. 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 art. 26(3) of Indo-US DTAA, the AO cannot seek to invoke the provisions of s. 40(a)(i) 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee. Hence by virtue of the provisions of section 90(2), the law which is beneficial to the assessee to whom DTAA applies, should be followed. This view is supported by the decision of Hon'ble Supreme Court in the case of Union of India v. Azadi Bacboo Andolan [2003]2631TR 7061. Hon'bteSupreme Court held as under:- "No provision of the Double Taxation Avoidance Agreement can possibly fasten a tax liability where the liability is not imposed by the Act, the Agreement may be restored to for negativing or reducing it; and, in case of difference between the provisions of the Act and the agreement, the provisions of the Agreement would prevail over the provisions of the Act and can be enforced by the appellate authorities and the court. ..... ..... 8.17 We therefore hold that in view of the provision of article 26(3) of DTAA, the Assessing Officer cannot seek to invoke the provisions of section 40(a)(i) of the Act for de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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