TaxTMI 
TaxTMI 
2014 (2) TMI 554
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....d counsel for the assessee- respondent submitted that he wishes to raise a preliminary issue, by invoking Rule 27 of the Appellate Tribunal Rules, 1963, and that in the event of assessee being successful on this issue, all other issues in this appeal will be rendered academic and infructuous. The issue so being sought to be raised is covered by additional ground of appeal no. 2 before the CIT(A), which is reproduced below: "2. (i) Because the provisions of section 40(a)(i) of the Income Tax Act, 1961 can be invoked only to disallow the expenditure of the nature referred therein which is shown as 'payable' as on the date of Balance Sheet and is to be read pari-pasu with section 40(a)(ia). (ii) Because on appreciation of the decision of Hon'ble ITAT Special Bench, Vishakapatnam in case of Merilyn Shipping & Transport Vs. ACIT (2012) 136 ITD 23, the assessee has nil amount as payable on the Balance Sheet dated i.e. 31.03.2008 and hence disallowance made is liable to be deleted. The sum of Rs.1,07,27,465/- disallowed was paid during the year and was not outstanding at the end of the year. (iii) Because in any view of the case due to non-discrimination clause in the Double Taxa....
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....lant has not been found to tenable and hence dismissed, though the impugned addition has already been deleted by me while deciding the Ground no.2 & 3 and the first additional ground." 5. Learned counsel submits that even though the learned Commissioner (Appeals) has decided the above issue against the assessee, and even though the assessee is not in appeal or cross objection before the assessee, the assessee- respondent has a right, vested under rule 27, to support "the order appealed against, on any of the grounds decided against him (i.e. the assessee respondent)". We are thus urged to adjudicate on the impact of non discrimination clauses in the treaties, as read with the Special Bench decision in the case of Merilyn Shipping & Transport Vs ACIT (136 ITD SB 23), which, according to the learned counsel, stands approved by Hon'ble jurisdictional High Court in CIT Vs Vector Shipping Services Pvt Ltd (Judgment dated 9.7.2013 in ITA N0. 122 of 2013). Learned Departmental Representative does, however, submit that in case the assessee was really aggrieved of the impugned order, he should have filed a cross appeal or cross objection. Once he does not do so, there is no way that the ....
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....self. As we take note of this fine distinction, it is also important to bear in mind that the order, in strict legal terms, is confined to what is eventually decided, while, the process of reasoning which leads to this conclusion, is termed as reasons for arriving for arriving at the order. Under Section 253(4), one can challenge the conclusions. Under rule 27, one cannot challenge the conclusions, even though it can challenge the reasons for arriving at those conclusions, to the limited extent of the please which have been decided against the respondent, as it provides that the respondent "may support the order on any of the grounds decided against him". In effect thus, under rule 27, those grounds which have been decided against the respondent, even when the assessee does not challenge the same, can be agitated again, and to that extent, reasoning of even a favourable order can be called into question. However, cross objection under section 253(4) can call into question the conclusions arrived at in the impugned order, and, therefore, cross objections constitute a remedy against unfavourable portion of the order. It is thus clear that the scope and purpose of cross objections are....
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....g is to be rescheduled so as to allow the affected party "sufficient opportunity of being heard on that ground". 11. In view of the above discussions, and having taken note of the petition under rule 27 filed by the assessee respondent in response to our requisition to do so and particularly having taken note of very fair and gracious approach of the learned Departmental Representative, we admit the petition under rule 27 and proceed to decide the issue so raised on merits. The impact of non-discrimination clause under the tax treaties on the scope of Section 40(a)(i) 12. Let us now move on to adjudicate on merits the issue so raised by the assessee respondent under rule 27. As evident from a plain reading of the grounds of appeal set out earlier in this order, the short issue for our adjudication is whether or not the learned CIT(A) was justified in not holding that the scope of Section 40(a)(i), in view of the impact of non-discrimination clauses in respective tax treaties, cannot be any broader than the scope of Section 40(a)(ia) which, as is the legal position held by a Special Bench decision in the case of Merilyn Shipping & Transport Vs ACIT (136 ITD SB 23), restrict....
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....e rejection of this plea by the CIT(A) and has raised the same issue before us as well. 14. We have heard the rival contentions, perused the material on record, and we have carefully considered factual matrix of the case as also the applicable legal position. 15. Even as learned counsel has referred to deduction neutrality clauses in the non-discrimination provisions in the relevant tax treaties, his primary contention is that it is discriminatory for the nationals of a country that the payments made to them by an Indian enterprise, under similar circumstances i.e. without deduction of tax at source, are allowed as not allowed as a deduction, whereas the payments made to by an Indian enterprise, without deducting tax at source, to another Indian domestic enterprise, is allowed as a deduction. Learned counsel has, in this regard, also referred to and relied upon a landmark decision of this Tribunal in the case of Herbalife (supra). 16. As we deal with this contention, it is necessary to first take a look at the scope of non-discrimination clauses in the respective treaties, so far as the issue of deductibility of payments, with respect to the payments made to the residents ....
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....tate 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 and under the same conditions are or may be subjected. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprise of that other State carrying on the same activities in the same circumstances or under the same conditions. 3. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to persons not resident in that State any personal allowances, reliefs and reductions for taxation purposes which are by law available only to persons who are so resident. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome t....
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....blishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of this Convention. 3. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to individuals not resident in that State any personal allowances, reliefs and reductions for taxation purposes which are by law available only to individuals who are so resident. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall n....
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....any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions. 6. In this Article, the term "taxation" means taxes which are the subject of this Convention. India Austria DTAA ARTICLE 24- Non-Discrimination 1. 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, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the....
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....he profits of a permanent establishment which an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State; (b) Belgium from imposing the movable property prepayment on dividends paid to a permanent establishment in Belgium of a company which is a resident of India. 4. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to persons not resident in that State any personal allowances, reliefs or reductions for tax purposes which are by law available only to persons who are so resident. 5. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirement to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same ....
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....o non-residents since these requirements are intended to ensure similar levels of compliance and verification in the case of payments to residents and non-residents (Emphasis by underlining supplied by us) 18. It is thus clear that while there can be addition information compliance requirement- which is not of our concern at present anyway, so far as payments made to non-residents is concerned, in the cases in which deduction neutrality clauses exist [such as Article 26(4) of India Spanish treaty, India Irish treaty, India Denmark treaty and India Austria treaty], there cannot be any discrimination so far as deductibility of the payments in the hands of the person making the payment is concerned. If appropriate tax withholding by the person making the payment is a sine qua non for business deduction so far as payments to non-residents are concerned, unless there is a similar pre-condition for deductibility of related expenses to the payments to residents as well, that disabling provision cannot be enforced in respect to payments made to non- residents either. 19. Learned Departmental Representative's contention is that just because a different treatment is given to the non....
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....gh one of us (i.e. the Accountant Member) in the case of Automated Securities Inc. Vs ITO (118 TTJ 619), had observed as follows: 30. A plain reading of this preamble would show that the US Model Convention is drawn from a variety of sources, including US Treasury Department's draft Model IT Convention, OECD Model Convention, prior US income-tax treaties, US negotiating experience, US tax laws, etc. OECD Model Convention is only one of the several inputs which have produced this US Model Convention. It is, therefore, futile to proceed on the basis that US Model Convention, or its underlying approach, is always in harmony with the approach of the OECD. It is also specifically mentioned that "references are made in the Technical Explanation to the OECD Commentaries, where appropriate, to note similarities and differences" which shows that Technical Explanation is to be considered on standalone basis--unless, of course, when a reference is made to the OECD Model to highlight similarities or differences. These factors, in our humble understanding, do not require us to view the US Model Convention's Technical Explanation necessarily in conjunction with OECD Commentary. On the contrar....
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....he scope of provisions of the Indo-US tax treaty, only to the extent (i) the relevant provision, though based on OECD Model Convention, is not explained in the Technical Explanation to the US Model Convention, and (ii) specific reference is made to the OECD Model Convention Commentary, and the interpretation so given by the OECD Model Convention Commentary is not in conflict with the Technical Explanation to the US Model Convention. The case before us does not fit into any of these categories because while the relevant clause of the non-discrimination article is the same as art. 24(2) of the OECD Model Convention, the scope of non-discrimination is, as we will see a little later, well defined in the Technical Explanation and also because the scheme of non-discrimination in the OECD Model Convention and US Model Convention is materially different. It is only elementary that a sound interpretation of a sub-article of non-discrimination article cannot be based on reading of that clause in isolation, but it would require that the non-discrimination clause as a whole, or even a treaty as a whole, is to be carefully analysed. Scope of non-discrimination clauses in the tax treaties ....
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....quirements imposed on a resident enterprise, because information may not be as readily available to the Internal Revenue Service from a foreign as from a domestic enterprise. Similarly, it would not be a violation of para 2 to impose penalties on persons who fail to comply with such a requirement [see, e.g., ss. 874(a) and 882(c)(2)]. ................ Sec. 1446 of the Code imposes on any partnership with income that is effectively connected with a US trade or business the obligation to withhold tax on amounts allocable to a foreign partner. In the context of the Model Convention, this obligation applies with respect to a share of the partnership income of a partner resident in the other Contracting State, and attributable to a US PE. There is no similar obligation with respect to the distributive shares of US resident partners. It is understood, however, that this distinction is not a form of discrimination within the meaning of para 2 of the article. No distinction is made between US and non-US partnerships, since the law requires that partnerships of both US and non-US domicile withhold tax in respect of the partnership shares of non-US partners. Furthermore, in distinguishing....
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....against non-discrimination is one of the fundamental rights granted by the Constitution of India. There are certain non-discrimination articles, e.g., Arts. 15 and 16, which are exclusively for the citizens, but Art. 14 of the Constitution of India specifically prohibits discrimination against any person, whether citizen or not, by guaranteeing that "the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India". While construing the scope of this right to equality, Hon'ble Supreme Court of India has time and again held that notwithstanding wide scope of this constitutional guarantee, art. 14 does not rule out classification for the purpose of legislation. In Kedar Nath Bajoria vs. State of West Bengal AIR 1953 SC 404, 406, Hon'ble Supreme Court has observed that "the equal protection of laws guaranteed by Art. 14 of the Constitution of India does not mean that all laws will have to be general in character and universal in application and that the State is no longer to have the power of distinguishing and classifying persons or things for the purposes of classification". A valid classification must be reasonable, an....
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....fied on the grounds of dissimilarities in their situation, the prohibition against discrimination cannot be invoked. 21. However, the views so articulated by the coordinate bench were with specific reference to the India US tax treaty, which, as we have noted above, is altogether a different pedestal in view of peculiarities of its provisions and the stand taken in the Technical Explanation accompanying the US Model Convention, which is a starting point for any US treaty negotiation. In any case, each tax treaty is a standalone instrument and the connotations of expressions employed in the tax treaties cannot have a universal meaning de hors the overall scheme of the tax treaty, which must remain valid in all situations. Not only in different tax treaties, even within a tax treaty, the same expression may have a different meaning depending on the context in which that expression is used. Explaining the manner in which tax treaties are required to be interpreted and pointing out such instances dealt in judicial precedents, a coordinate bench of this Tribunal, in the case of Hindalco Industries Ltd Vs ACIT (94 TTJ 945), observed as follows: 11. Elaborating upon the principles g....
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....e light of its objects and purpose. Literal meanings of these terms are not really conclusive factors in the context of interpretating a tax treaty which ought to be interpretated in good faith and ut res magis valeat quam pereat, i.e., to make it workable rather than redundant. 14. Hon'ble Supreme Court in the case of Union of India & Anr. vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC), had an occasion to deal with the principles governing the interpretation of tax treaties. In this regard, Hon'ble Supreme Court held that the principles adopted in the interpretation of treaties are not the same as those adopted in the interpretation of statutory legislation. Their Lordships quoted, with approval, following passage from the judgment of the Federal Court of Canada in the case of N. Gladden vs. Her Majesty the Queen 85 DTC 5188, at p. 5190, wherein the emphasis is on the 'true intentions' rather than 'literal meaning of the words employed' : "Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpreta....
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....aning". Their Lordships observed as follows : "....................The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be 'drafted with divine prescience and perfect clarity'. We can do no better than repeat the famous words of Judge learned Hand when he said : '... it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing : be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to thei....
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.... of Indo-USA tax treaty in which differentiation on the ground of reasonableness is institutionalized in the treaty and the Technical Explanation to the US Model tax treaty. Whether or not the same principles will apply in the case of India's tax treaties with other countries is yet to be examined". Therefore, revenue does not derive any advantage from the decision in the case of Automated Securities Clearance Inc (supra). In any event, a special bench of this Tribunal, in the case of Rajeev Sureshbhai Gajwani Vs ACIT (137 TTJ 1) not only virtually held that differentiation simplicitor is enough to invoke the non-discrimination clause, but proceeded to criticize the division bench decision in the Automated Securities Clearance Inc (supra) decision by observing as follows: 8.3 Having considered the rival submissions, we may now deal with them. In so far as the status of Commentary on OECD Model Convention is concerned, for interpretation of DTAA, it is clear from the decisions referred to by the learned counsel that the commentary does not lay down any binding precedent. The commentary contains the views of the author about the Model Convention. This view can be taken as an argum....
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.... view to provide fiscal incentives for export of computer software, a new s. 80HHE has been inserted in the Act for providing tax concession similar to the earlier s. 80HHC of the IT Act. We do not find anything in the circular which could be of aid in interpreting art. 26(2). Further, reference has been made to Circular No. 333, dt. 2nd April, 1982, issued in respect of "treaty override". The heading of the circular is "specific provision made in DTAA--whether it would prevail over general provisions contained in the IT Act". In para 3, it is mentioned that where DTAA provides for a particular mode of computation of income, the same should be followed irrespective of the provisions in the IT Act, which is the basic law, i.e., the IT Act will govern taxation of income. The case of the learned Departmental Representative on the basis of this circular is that since there is no provision in the DTAA analogous to s. 80HHE of the IT Act, the assessee is not entitled to the deduction. We are of the view that the interpretation placed on the circular by the learned Departmental Representative is misplaced. The reason is that the wording of art. 26(2) is to the effect that if a US enterpri....
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....ll in the prohibited category. Accordingly, the assessee's case has to be compared with the case of an Indian enterprise engaged in the business of exporting software. If that is done, the assessee would be entitled to deduction under s. 80HHE on the same footing and in the same manner as the deduction is admissible to a resident assessee. On the other hand, the case of the learned Departmental Representative is that various deductions under ss. 80HHE, 10A or 10B are area specific or industry specific. However, he was not able to carry this argument any further. The case of the learned counsel is that the provision contained in s. 80HHE is industry specific and the assessee is not precluded in any manner from conducting this business in India. We agree with this view as no debate seems to be feasible in this regard. Therefore, we are of the view that the assessee is carrying on the activities of export of software. An Indian company or any other resident person carrying on the business of export out of India of computer software or its transmission from India to a place outside India by any means is entitled to deduction under s. 80HHE. Therefore, the deduction admissible to an Ind....
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....eement, deduction neutrality clause in non-discrimination provisions is designed to primarily seek parity in eligibility for deduction between payments made to the residents and non-residents. Clearly, therefore, it will be contrary to the scheme of the tax treaties in question that if appropriate tax withholding by the person making the payment is a sine qua non for business deduction so far as payments to non-residents are concerned, unless there is a similar pre- condition for deductibility of related expenses to the payments to residents as well, that disabling provision cannot be enforced in respect to payments made to non-residents either. 24. However, so far as India Spain tax treaty is concerned, a protocol clause to the treaty states that, "Notwithstanding the provisions of paragraph 4 of Article 26 (Non-discrimination) it is understood that in the case of India, payments by way of interest, royalties and fees for technical services made by an enterprise of India to a resident of Spain, shall not be allowed as a deduction for the purpose of determining the taxable profits of such enterprise unless tax has been paid or deducted at source from such payments under Indian l....
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....scrimination between residents on grounds of nationality, the commentary says that the 'underlying question' is whether two residents are being treated differently 'solely by reason of having a different nationality' ". It is not enough to invoke this clause that national of a tax treaty partner country may ends up getting discriminated, but what is equally, if not more, important is that person should be discriminated because of such nationality. It is not even necessary that a person seeking treaty protection under this clause should be resident of any of the Contracting States, and, therefore, residential status, which is all relevant in the present context, is irrelevant for this kind of a discrimination. It is also important to bear in mind the fact that this provision refers to the comparison between nationals 'in the same circumstances and similar conditions'. The expression "in the same circumstances" would be sufficient by itself to establish that a taxpayer who is a resident of a Contracting State and one who is not a resident of that State are not in the same circumstances. The situation that we are dealing with right now is the differentiation, if at all, between the tr....
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....an also be invoked in respect of expenditure relatable to payments made during the year. In the lead order, one of our distinguished colleagues, expressed the view that the scope of such disallowance must include all amounts, whether actually paid during the year or have remained unpaid at the year end. Speaking for the bench, thus, he proposed the opinion as follows, "(t)he provisions of section 40(a)(ia) of the Income Tax Act, 1961 are applicable not only to the amount which is shown as payable on the date of Balance Sheet but it is applicable to such expenditure which become payable at any time during the relevant previous year and was actually paid within that period." However, two other distinguished colleagues forming part of this special bench quorum, declined to, though with all respect and humility, concur. Speaking for the majority, however, another distinguished colleague of ours, expressed the view that, "the provisions of section 40(a)(ia) of the Act were applicable only to the amount of expenditure which are payable as on the date of 31 st March of every year and it cannot be invoked to disallow the expenditure which had already been paid during the previous year with....
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....e due date. By any intendment or liberal construction of such provision, the liability cannot be fastened if the plain meaning of the section does not so permit. 22. For the purpose of the said section, we are also of the opinion that the terms "payable" and "paid" are not synonymous. Word "paid" has been defined in Section 43(2) of the Act to mean actually paid or incurred according to the method of accounting, upon the basis of which profits and gains are computed under the head "Profits and Gains of Business or Profession". Such definition is applicable for the purpose of Sections 28 to 41 unless the context otherwise requires. In contrast, term "payable" has not been defined. The word "payable" has been described in Webster's Third New International Unabridged Dictionary as requiring to be paid: capable of being paid: specifying payment to a particular payee at a specified time or occasion or any specified manner. In the context of section 40(a)(ia), the word "payable" would not include "paid". In other words, therefore, an amount which is already paid over ceases to be payable and conversely what is payable cannot be one that is already paid. When as rightly pointed out ....
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....VII-B but such tax has not been deducted or if deducted not paid before the due date. This provision no-where requires that the amount which is payable must remain so payable throughout during the year. To reiterate the provision has certain strict and stringent requirements before the unpleasant consequences envisaged therein can be applied. We are prepared to and we are duty bound to interpret such requirements strictly. Such requirements, however, cannot be enlarged by any addition or subtraction of words not used by the legislature. The term used is interest, commission, brokerage etc. is payable to a resident or amounts payable to a contractor or sub-contractor for carrying out any work. The language used is not that such amount must continue to remain payable till the end of the accounting year. Any such interpretation would require reading words which the legislature has not used. No such interpretation would even otherwise be justified because in our opinion, the legislature could not have intended to bring about any such distinction nor the language used in the section brings about any such meaning. If the interpretation as advanced by the assessees is accepted, it would l....
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....further interpretation. This is the fundamental argument of the Tribunal in the case of M/s. Merilyn Shipping & Transports vs. ACIT (supra) to adopt a particular view. ................... 37. In our opinion, the Tribunal committed an error in applying the principle of conscious omission in the present case. Firstly, as already observed, we have serious doubt whether such principle can be applied by comparing the draft presented in Parliament and ultimate legislation which may be passed. Secondly, the statutory provision is amply clear. 38. In the result, we are of the opinion that Section 40(a) (ia) would cover not only to the amounts which are payable as on 31th March of a particular year but also which are payable at any time during the year. Of course, as long as the other requirements of the said provision exist. In that context, in our opinion the decision of the Special Bench of the Tribunal in the case of M/s. Merilyn Shipping &Transports vs. ACIT (supra), does not lay down correct law. 32. There was also a judgment to the same effect by Hon'ble Calcutta High Court, but, for our present purposes, it is not really necessary to deal with that decision in much detail. ....
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....case of Merilyn Shipping & Transport and that is precisely what the Special Bench had held. In these circumstances, the question that we should normally ask ourselves is whether we should proceed on the basis that the Special Bench decision in the case of Merilyn Shipping & Transport indeed stand approved by the Hon'ble jurisdictional High Court in the case of above mentioned decision in Vector Shipping (supra). 36. Of course, there is a school of thought the views expressed by Hon'ble Courts above, whether as a part of the decision or as on obiter dicta or in any other manner, should be given fullest possible respect, and, without going into much analysis, followed in letter and spirit. After all, everything we do is, and shall always remain, subject to the judicial scrutiny by Their Lordships, and, if there are any error and omission in our bonafide following the esteemed views of Their Lordships, these errors and omissions can be rectified at that stage of judicial scrutiny. One may possibly understand discomfort in treating the words of Hon'ble Courts above as a blind man's walking stick rather than as luminosity of judicial lamp enabling imparting of justice, and thus errin....
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....thought, wholly inappropriate to proceed on the basis of the ratio of Merilyn Shipping & Transport stands approved by the Hon'ble jurisdictional High Court particularly when that aspect of the matter was not even in challenge before Their Lordships. However, one of the demerits, if we can term it as a demerit, of this school of thought is that there is an inherent risk of being less than right in such a subjective decision, as in any cerebral pursuit. 38. We are, however, saved of taking this call as, at this stage, it is useful to take note of the CBDT Circular # 10/DV/2013 [F No. 279/Misc/M 61/2012 - Section 40 (a)(i) of the Income Tax Act, 1961] dated 16 th December 2013, which, inter alia, observes as follows: 3.3. The Hon'ble Allahabad High Court in CIT Vs Vector Shipping Services Pvt Ltd [2013] 38 taxmann.com 77 (Allahabad) has affirmed the decision of the Special Bench in Merilyn Shipping that for disallowance under section 40(a)(ia) of the Act, the amount should be payable and not which has been paid during the year............................ 39. The said circular then expressed the departmental view to the effect that the disallowance under section 40(a)(ia) will....
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....ed by the learned counsel for the assessee, the issue on the scope of section 40(a)(i) vis-à-vis the controversy on whether amounts actually paid during the relevant previous year itself will be outside the ambit of such a disallowance, the same is covered against the assessee, on merits, by this very bench of the Tribunal in the case of Metro & Metro Vs ACIT (2013 TII 195 ITAT AGRA). With these observations, in our considered view, so far as payments made to the residents in Ireland, Denmark and Austria are concerned, learned CIT(A) was justified in upholding the disallowance under section 40(a)(i). 41. In the result, the petition under rule 27, filed by the assessee, is partly allowed in the terms indicated above. The appeal filed by the Assessing Officer 42. We now turn to the appeal before us and proceed to adjudicate on the grievance raised by the Assessing Officer, on merits, against deletion of disallowance of Rs 1,05,27,465 section 40(a)(i) in respect of payments made to non-residents, without deducting tax at source. Background 43. In order to adjudicate on this controversy, it is necessary to take a look at the relevant material facts, as culled out ....
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....t by different countries. It requires managerial, technical and consultancy services in the nature of consultancy also. Such services fall under the definition of FTS as defined in Explanation below Section 9(1) of the Act. Explanation below section 9 clearly states that for accrual of FTS, there is no requirement of residence, place of business or business connection in India. If any payment is made by a person resident in India, to a non-resident person by way of FTS, income is deemed to accrue or arise in India. FTS is covered under Article 13 of DTAA between the Government of India and most other countries. Contents of Article 13 have also been examined. DTAA is of no help to the assessee as it simply states that FTS 'may' be taxed in the other contracting state, which means it is taxable in India also. On the facts and in the circumstances of the case, as discussed above, it is crystal clear that design and development charges is on account of technical cum consultancy services only. It is deemed to accrue or arise in India, and is taxable in India. Therefore, design and development charges paid to foreign nationals/ companies of Rs 1,05,27,465 without deduction of ta....
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.... EURO 209.10 12,475 49. As far as payment of EUR 43,000 to Javier Vera Palao (JVP, in short) is concerned, this payment is made for samples, photographs and sketches supplied by JVP. Copies of the invoices raised on the assessee were placed before us at pages 103 to 105 of the paper-book, and a copy of JVP's passport was placed before us at paper-book page 106. The details of services rendered by JVP, as evident from the invoices raised, are as follows: - Samples, sketches and photographs Season 08/09 EUR 10,000 - Samples, sketches and photographs EUR 10,000 - Sale of 20 designing lines EUR 20,000 - Moxy Collection Materials EUR 3,000 50. Learned CIT(A) has deleted disallowance under section 40(a)(i), in respect of the above payments, after extensively reproducing from the written submissions filed by the assessee, and observing as follows: I agree with the learned AR that such payments made by the assessee (appellant) for this category of design and development charges is nothing but payments made on purchases of commercial information, by way of sample, drawing, photograph, design of shoes etc, from foreign parties outside India, and hence these payments ....
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....ding the provision of services of technical or other personnel. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply. 6. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or fixed base in connection with ....
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....e an integral part of the Convention. .............. ............... 7. The competent authorities shall initiate the appropriate procedures to review the provisions of Article 13 (Royalties and fees for technical services) after a period of five years from the date of its entry into force. However, if under any Convention or Agreement between India and a third State which is a Member of the OECD, which enters, into force after 1st January, 1990, India limits its taxation at source on royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of incomes, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention or Agreement, whichever enters into force later. ................... 52. While the scope of 'fees for technical services' under the Indo Spanish tax treaty is on the traditional model inasmuch as, under article 13(4), it includes all kind of technical and consultancy services, th....
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....e years for which this Convention has effect, (A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub- division or a public sector company; and (B) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. 3. The term 'royalties' as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection ....
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....Ashmore India Limited (190 ITR 626) it is only when there is an outright sale of drawings and designs that the consideration for such drawings and designs cannot be treated as royalties or fees for technical services. He submits that here is a case in which though assessee has paid for drawings, designs and photographs, there is nothing to suggest that there is a sale of such drawings, designs and photographs inasmuch as nothing restrains the seller from selling the same items to others. He also submits that it is a clearly a case of fees for technical services, whether under the provisions of the Act or under the provisions of the applicable tax treaty. Learned counsel's submissions are two fold. His first line of defence is that since, by the virtue of protocol clause in Indo Spanish DTAA, the provisions of Article 12 of India US tax treaty are to be taken into account under which the fees for technical services can only be said to have been made available when there is a transfer of technology in the sense that recipient of services is enabled to use these services in future without recourse to the service provider. He further submits that in any case the payment was made to an ....
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.... lines and collection material. Just because the vendor has developed and transferred technical designs or plans in respect of shoes or such other material, it does not mean that it is not a technical design. We may, in this regard, also refer to decision of a co-ordinate bench, in the case of Sintex Industries Ltd Vs ADIT (141 ITD 98), which has held that payment made to UK based consultant for providing fabric along with its details in writing, which can be used by assessee to process and produce garments and it can also sell and transfer such fabric design to outsider for consideration, amounts to FTS under the Indo UK tax treaty. In any event, all these important aspects of the matter have not even been looked at by the authorities below. 57. As regards the scope of article 13(4) of the Indo Spanish tax treaty, which include, its scope, consideration for services of a technical or consultancy nature, we find that the amounts paid seem to be covered by the scope of article 13(4) inasmuch as the payment is made for services which are consultancy and technical services. The payments are made for designs, sketches and photographs but these designs, sketches and photographs are i....
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.... PE in India, it is clear that these transactions do not lead to any taxability in India with respect to its business profits. Business profits of Spanish enterprises can only be brought to tax in India under article 7, when those enterprise have a PE in India in terms of article 5, and then also the taxability is restricted to the extent the profits are attributable to the PE. It is not even in dispute that the recipients do not have any PE in India. It is only elementary that tax withholding liability is a vicarious liability, and where it can be shown that principal liability does not exist, the vicarious liability will also not survive. Since the assessee did not have any tax withholding liability in respect of these payments, learned CIT(A) was quite justified in deleting the impugned disallowance under section 40(a)(i) to that extent. Payments made to Italian residents 64. We now take up the payments covered by Indo Italian tax treaty. These payments are as follows: Sl.No. Name and Address of the Non Resident Country of residence Payment in Foreign Currency Amount Rs. 1 RENZI MASSIMO VIA CAVOUR 2 63018 PORTO SANTE' ELPIDIO (AP) ITALY EURO 36,0....
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.... work, including cinematography films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The term "fees for technical services" as used in this Article means payments of any amount to any person other than payments to an employee of the person making payments, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical s....
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....nt previous year. The amounts paid to him are, therefore, not taxable as income under the head 'independent personal services' under article 15 of the Indo Italian tax treaty either. Even if we proceed on the basis that the payment is in the nature of cost contribution, there will be no tax implications in India because in such a situation it will have to be treated as reimbursement of expenses which does not necessarily include income element. In view of these discussions, as also bearing in mind entirety of the case, we uphold the action of the CIT(A) so far as deleting the disallowance under section 40(a)(i) in respect of this payment. 69. So far as taxability of EUR 36,000 to Renzi Massimo is concerned, the conclusions arrived at by the CIT(A) are upheld. 70. The next payment to the Italian residents, as mentioned in the chart above, is for EUR 19,000 to Martello Lucio. 71. We find that copies of relevant invoices are placed at pages 113-114 which, in the description column, merely state that "Saldo prestazione eseguita presso Nostra sede" and that English translation of these invoices is not on record. As we could make out, with the help of unauthentic translation thr....
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....table to the PE. It is not even in dispute that the recipients donot have any PE in India. When there is no income embedded in these payments, there cannot be any occasion for the assessee to deduct tax at source from these payments. As the assessee did not have any tax withholding liability in respect of these payments, learned CIT(A) was quite justified, to that extent, in deleting the impugned disallowance under section 40(a)(i) . We uphold the order to that extent. Payment made to UK resident 74. During the relevant previous year, the assessee had also made a payment to UK resident, as detailed below, in respect of the Assessing Officer had made a disallowance under section 40(a)(i):- Sl.No. Name and Address of the Non Resident Country of residence Payment in Euros Amount in I Rs. 1 ARDEN FOOTWEAR LTD UNIT 14 NARBOROUGH WOOD BUSINESS PARK LEICHESTER UNITED KINGDOM GBP 6000 4,83,900 75. As far as this payment of GBP 6,000 is concerned, as a copy of the relevant invoice, a copy of which was placed before us at page 118 of the paper-book, shows, the payment was made for the following reimbursement: Development Costs: April 2007 to March 20....
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....Royalties and Fees for Technical Services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 20 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. (b) the term "fees for technical services" as u....
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....t can also sell and transfer such fabric design to outsider for consideration, amounts to fees for technical services, even under narrower scope of that expression. 82. However, as learned counsel has, on the strength of a coordinate bench decision in the case of MSEB Ltd Vs DCIT (90 ITD 793), contended that even the benefit of taxability under the head 'independent personal service' under article 14 is not restricted to individuals, let us also deal with that aspect of the matter. To complete learned counsel's contention, in a case an amount could be of such a nature as it could be taxed under article 14 as income from 'independent personal services', those provisions being narrower in scope, the provisions of article 12 will not come into play. In all fairness to learned counsel, his plea is, in principle, supported by an AAR ruling in the case of Dieter Eberhand Gustav Van Der Mark Vs CIT (235 ITR 698). 83. The provision regarding taxability of independent personal services, as set out in the Indo Belgian tax treaty, are as follows: Article 14- Independent Personal Services 1. Income derived by an individual who is a resident of a Contracting State from the performan....