TaxTMI 
TaxTMI 
2018 (10) TMI 239
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....nd 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. Even on the last date of hearing, none attended on behalf of the assessee. We, therefore, have no option, but to decide the appeal exparte qua assessee after hearing the Ld. DR. 3. Brief facts of the case are that assessee is a dealer and distributor of USA based multinational company M/s. Timken Inc. Having registered office at 1835 Dueber Ave., S.W. Canton, Ohio 44706-2798. The assessee filed return of income declaring nil income on 29.9.2008. Later on the case was selected for scrutiny and statutory notices were issued to the assessee. During the course of assessment proceedings, the assessee had made payment to M/s. Par....
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.... 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 Section 195 not be applicable to the assessee on Purchases made from parties abroad. In this connection, your kind attention is drawn towards our submission dated 6.8.2010 along with the details of purchase made during the year under consideration. On a perusal of the same, it shall be observed that out of the total purchase of Rs. 1.12 Crores purchases amounting to Rs.l.02 Crores have been made from Timken Singapore Pte Ltd. Singapore and Timken Wuxi Bearings Co. Ltd. Jiangsu, China. It is submitted that both these companies do not have any ....
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..../- 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), 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 company or to a foreign company, on which tax is deductable at source under Chapter XVI/-8 and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200: (B) "fees for technical services" shall have th....
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....he 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, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Explanation 2. - For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be . deemed to have always extended to all persons, resident or nonresident, whether or not the non-resident person has - ....
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....on-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-resident account or suspense account would tantamount to payment for the purpose of tax deduction at source. Section 195 (2) provides that a person responsible for deduction of tax deduction at source can apply to the Assessing Officer for general or special order for determination of appropriate proportion of the tax deductible. Where the amount paid could not be fully taxable, it follows that, where no part of the amoun....
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.... 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" and was chargeable to tax and that the assessee was liable u/s 201 for failure to deduct tax at source though this was reversed by the Tribunal. On appeal by the department, the High Court reversed the Tribunal by taking the view in CIT vs. Samsung Electronics320 ITR 209 that the assessee was not entitled to consider whether the payment was chargeable to tax in the hands of the non-resident or not and....
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....ome 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; and IV. Rajeev 5ureshbhai Gajwani (58) reported in 137 ITJ 1; 8 ITR(Trib) 616; 9.14 It was vehemently argued that the transaction between the Appellant and the non-residents is not only to be read loud based upon the Act but, the DTAA will also play an equally important role in determining the taxability of these transactions. Further, Income-tax does not m....
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.... 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 appellant has argued that the Ld. AD has grossly erred in not allowing the legitimate relief which the appellant was eligible for, under the provisions of the Income-tax read with DTAA as entered between India and USA. The relevant part of the DTAA between India & USA is reproduced below: "ARTICLE....
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.... 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 the Act, so as to exclude profits from this business from the total gross income. ........................................ ..................................... 8.6 There is also a dispute regarding the words "same activities" use....
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....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 'fees for included services' under India-US DTAA have 'different meaning and they are not one and the same. If the Revenue wants to tax the payment by assessee to M/s HIAI in the hands of M/s HIAI in India it has to bring its case within the ambit of art. 12(4) of the DTAA, i.e., fees for included services. The payment in question would, therefore, have to be judg....
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....o 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 the question whether the sum is chargeable to tax is left open for adjudication by the appropriate forum in the appropriate proceedings already referred to in this order. 27. This takes us to question (8) framed by (JS, viz. if the sum in question is held to be not chargeable to tax and consequently not disallowable under s. 40(a)(i) of the Act whether the disallo....
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....essee 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 deduction while computing the' profits and gains of business or profession. A similar view was taken by ITAT Delhi Bench in the case of Herbalife International India (P.) Ltd. (supra). To sum up, the payments made on account of rentals for hosting of websites on servers are not in nature of interest or royalties or fee for technical ser....