2016 (5) TMI 697 - HC - Income Tax

High Court upholds ITAT decision on deduction of administrative fees to non-resident entity under Indo-US DTAA

Commissioner of Income Tax Versus Herbalife International India Pvt. LTD.

The High Court upheld the ITAT's decision to allow the deduction of administrative fees paid to a non-resident entity, emphasizing the non-discrimination ... Taxability of administrative fee paid - Indo-US DTAA - applicability of Section 40 (a) (i)- Held that:- A plain reading of Section 90 (2) of the Act, makes it clear that the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the Assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision. In light of the above discussion, question (b) is answered in the affirmative, i.e., in favour of the Assessee and against the Revenue by holding that Section 40 (a) (i) of the Act is discriminatory and therefore, not applicable in terms of Article 26 (3) of the Indo-US DTAA. ITAT was correct in allowing a deduction being the administrative fee paid by the Assessee to HIAI. - Decided in favour of the Assessee Allowance of prior expenses - Held that:- The Court concurs with the view expressed by the ITAT in the present case, that the expenses for the period 1st January 2000 to 31st March 2000 accrued as a liability to the Assessee only during the previous year and that the said expenditure was rightly allowed as deduction during the AY in question - Decided in favour of the Assessee Payment of administrative fee - Held that:- The Court concurs with the view expressed by the ITAT that in respect of the fee paid for the period relating to the period 1st January 2001 to 31st March 2001, the liability should be held as accrued and arisen during the previous year relevant to the AY 2001-02 and therefore, is rightly allowed by the ITAT. - Decided in favour of the Assessee Issues Involved:1. Deductibility of administrative fees paid to a non-resident.2. Application of Section 40(a)(i) of the Income Tax Act in light of the Indo-US DTAA.3. Treatment of prior period expenses.4. Allowability of estimated administrative fees for a subsequent period.Detailed Analysis:1. Deductibility of Administrative Fees Paid to a Non-Resident:The Assessee, an Indian subsidiary of Herbalife International Inc., USA, paid administrative fees to Herbalife International of America Inc. (HIAI) under an Administrative Services Agreement (ASA). The Revenue disallowed this expenditure, arguing it was taxable as Fees for Technical Services (FTS) in India and the Assessee failed to deduct tax at source (TDS) as required under Section 40(a)(i) of the Income Tax Act. The ITAT allowed the deduction, holding that the payment was not taxable in India as business income since HIAI did not have a permanent establishment (PE) in India. The High Court upheld the ITAT's decision, stating that Section 40(a)(i) was discriminatory under Article 26(3) of the Indo-US DTAA, which mandates non-discrimination in the deductibility of expenses paid to residents and non-residents.2. Application of Section 40(a)(i) of the Income Tax Act in Light of the Indo-US DTAA:The Revenue argued that the non-discrimination rule under Article 26(3) of the DTAA should not apply without determining the character of the payment. The High Court disagreed, noting that the AO and CIT (A) had already classified the payment as FTS. The Court found that Section 40(a)(i) imposed a condition for deductibility that was not applicable to payments made to residents, creating a discriminatory effect. Consequently, the Court held that the non-discrimination clause of the DTAA overrode the provisions of Section 40(a)(i), allowing the deduction of administrative fees.3. Treatment of Prior Period Expenses:The Assessee claimed administrative fees for the period 1st January 2000 to 31st March 2000, which the Revenue disallowed as prior period expenses. The ITAT allowed the deduction, reasoning that the liability accrued only upon RBI's approval on 30th June 2000. The High Court upheld this view, citing the Supreme Court's decision in Nonsuch Tea Estates Limited v. CIT, which held that liability accrues only when the requisite approval is obtained. Thus, the expenses were rightly allowed as a deduction for the AY 2001-02.4. Allowability of Estimated Administrative Fees for a Subsequent Period:The Assessee claimed administrative fees for the period 1st January 2001 to 31st March 2001 based on an estimate from the previous year's bill. The AO disallowed this, arguing there was no evidence of RBI approval for this period. The ITAT allowed the deduction, noting that post-FEMA 1999, no RBI approval was required for such remittances. The High Court upheld this, referencing Bharat Earthmovers v. Commissioner of Income Tax, which allows deduction of business liabilities that are certain and reasonably estimable, even if not yet quantified. The liability was thus deemed to have accrued during the relevant period.Conclusion:The High Court dismissed the Revenue's appeal, affirming the ITAT's decision to allow the deduction of administrative fees and other related expenses. The Court emphasized the non-discrimination clause of the Indo-US DTAA, which mandates equal treatment for payments to residents and non-residents, thereby overriding conflicting provisions of the Income Tax Act.