TaxTMI Login
Just a moment...
Press 'Enter' to add multiple search terms. Rules for Better Search
Use comma for multiple locations.
---------------- For section wise search only -----------------
Accuracy Level ~ 90%
of 
Press 'Enter' after typing page number.
of Press 'Enter' after typing page number.
No Folders have been created
Are you sure you want to delete "My most important" ?
NOTE:
of Press 'Enter' after typing page number.
of Press 'Enter' after typing page number.
All Case Laws
of Press 'Enter' after typing page number.
of Press 'Enter' after typing page number.
All Case Laws
Join Channel
Note
Bookmark
Share
Don't have an account? Register Here
of Press 'Enter' after typing page number.
Issues: (i) Whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 for purchases made from entities in Japan and the USA was barred by the non-discrimination clauses in the applicable DTAAs for AY 2006-07. (ii) Whether payments made to entities in Thailand and Singapore attracted tax deduction at source and consequent disallowance when those entities had no permanent establishment in India. (iii) Whether the second question of law could be reframed after the judgment on the original reference.
Issue (i): Whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 for purchases made from entities in Japan and the USA was barred by the non-discrimination clauses in the applicable DTAAs for AY 2006-07.
Analysis: For AY 2006-07, the pre-2015 version of section 40(a) did not place resident purchase payments on the same footing as payments made outside India or to non-residents. The corresponding resident-side disallowance was introduced only later, and therefore parity had not yet been achieved for purchase payments. Since articles 24(3) and 26(3) of the relevant India-Japan and India-USA treaties required deductible treatment on the same conditions, the assessee could invoke the more beneficial treaty protection under section 90(2).
Conclusion: The disallowance for purchases from the Japan and USA entities was not sustainable and the issue was answered in favour of the assessee.
Issue (ii): Whether payments made to entities in Thailand and Singapore attracted tax deduction at source and consequent disallowance when those entities had no permanent establishment in India.
Analysis: The obligation under section 195(1) arises only where the sum paid is chargeable under the Act. The entities in Thailand and Singapore were found not to have a permanent establishment in India, and the business-connection approach could not override that treaty-based position. In the absence of chargeability to tax in India, no obligation to deduct tax at source arose, and the resulting disallowance could not stand.
Conclusion: The disallowance relating to the Thailand and Singapore entities was not sustainable and the issue was answered in favour of the assessee.
Issue (iii): Whether the second question of law could be reframed after the judgment on the original reference.
Analysis: After the reference had been answered, the question could not be reformulated so as to enlarge the controversy beyond the original terms of reference. The later reframing, which introduced business connection alongside permanent establishment, was therefore not accepted as a valid basis for the final determination.
Conclusion: The reframed formulation was not accepted and the issue was answered in favour of the assessee.
Final Conclusion: The appeal by the Revenue failed. The disallowances under section 40(a)(i) were set aside for the covered payments, and the reference questions were answered against the Revenue and in favour of the assessee.
Ratio Decidendi: For the relevant assessment year, tax deduction at source and disallowance under section 40(a)(i) can operate only where the payment is chargeable to tax in India, and treaty non-discrimination clauses may prevent differential treatment of non-resident payments when the domestic law had not yet imposed equivalent resident-side disallowance.
TaxTMI 
