TaxTMI 
TaxTMI 
2024 (2) TMI 933
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....i) Whether the ITAT fell in error in reversing the findings of the DRP with respect to the existence of the PEs in India?" 2. Since there was a difference of opinion between the judges who comprised the division bench concerning the answers to the questions of law framed on 29.04.2014, the matter was referred to a third judge. In the first instance, the bench which rendered the decision consisted of Hon'ble Mr Justice S. Muralidhar (as he then was) and Hon'ble Ms Justice Prathiba M. Singh. 2.1 A perusal of the decision dated 17.11.2017 discloses that while Hon'ble Mr Justice S. Muralidhar answered both questions in favour of the respondent/assessee, Hon'ble Ms Justice Prathiba M. Singh took a converse view, i.e., answered the questions in favour of the appellant/revenue. 3. The record also discloses that via the order dated 27.04.2018, the division bench stated the points of law on which they had differed while rendering their respective decisions on 17.11.2017. The relevant part of the order dated 27.04.2018 is thus extracted hereafter: "3. Each of us has, in our respective opinions, differed in the answers to the above two questions. The points of law of which w....
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....ugh various twists and turns. The record discloses that the AO passed a draft assessment order on 31.12.2009. Via the order dated 30.09.2010, the Dispute Resolution Panel (DRP) sustained the said addition, which resulted in the final assessment order dated 25.10.2010 being passed under Section 143(3)/144C of the Act. 6. At this stage, it would be relevant to note that Section 40 underwent amendments by virtue of the Finance Act (FA), 2004 and FA 2014. The amendment brought about by FA 2004 took effect from 01.04.2005, while the amendment triggered via FA 2014 took effect from 01.04.2015. Since the amendments brought about in Section 40(a)(i) of the Act are crucial to the conclusion, one may arrive at, for convenience, the original provision, along with amendments which were triggered w.e.f. 01.04.2005 and 01.04.2015 are captured below: SECTION 40 AS APPLICABLE IN HERBALIFE FOR AY 2001-02 SECTION 40-WEF 01.04.2005 SECTION 40 -AS AMENDED ON 1^ST APRIL, 2015 AMOUNTS NOT DEDUCTIBLE 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 "Profits and gains of....
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....ch such tax has been paid. Explanation - For the purposes of this sub- clause- (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (ia) any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), On which tax is deductible at source under Chapter XVII-B 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: Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the pr....
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....have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid on or before the due date specified in sub-section (1) of section 139. Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or, has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso. Explanation- For....
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....ther State in the same circumstances are or may be subjected. This provision shall apply to persons who are not residents of one or both of the Contracting States. xxx xxx xxx 3. Except where the provisions of paragraph 1 of article 9 (Associated Enterprises), paragraph 7 of article 11 (Interest), or paragraph 8 of article 12 (Royalties and Fees for Included Services) apply, interest, royalties and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State." [Emphasis is ours] 8. As evidenced by the narration of facts set forth hereinabove, question no. (i), as framed by the Court, concerns five (05) entities, i.e., MC (Japan), Metal One (Japan), Tubular (USA), Petro (Japan) and Metini (Japan). 8.1 Insofar as the aforementioned five (05) entities are concerned, the respondent/assessee seeks to assail the disallowance ordered by the AO on the ground that it violates the non-discrimination provision containe....
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....ot have a PE in India; an issue which is the subject matter of an appeal (ITA 113/2013) filed by the appellant/revenue in this Court. (v) The aforesaid facts would demonstrate that all seven (07) entities to whom the respondent/assessee had made payments had business connection in India. Therefore, having regard to the plain language of Sub-Section (1) of Section 195 of the Act, the respondent/assessee was obliged to deduct TAS, as the payments made constituted sums chargeable to tax under the Act. (vi) Therefore, the AO rightly invoked the provisions of Section 40(a)(i) of the Act and disallowed the deduction claimed by the respondent/assessee vis-à-vis payments made "outside India", as TAS had not been deducted, although the said payments were chargeable to tax in India. Thus, the payments made to the aforementioned seven (07) entities cannot be claimed by the respondent/assessee as a deduction while computing income under the head "profits and gains of business or profession". Failure to comply with provisions of Section 195(1), correctly resulted in the disallowance made by the AO under Section 40(a)(i) of the Act. [See Transmission Corporation of AP Lt....
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....issions: (i) This Court should confine itself to aspects referred to in the order dated 27.04.2018. This Court need not delve into those issues qua which findings have yet to be returned by the statutory authorities or into those aspects where no difference of opinion is articulated in the judgment under reference. (ii) Question no. (i) pertained to the applicability of the non- discrimination Clause found in the above-referred DTAAs. The decision qua question no. (ii) thus pivots on the existence of PE. (iii) The respondent/assessee has two separate sources of income, i.e., income from purchases and income earned through services rendered. Both sources are independent of each other. The deductions claimed by the respondent/assessee against payments made towards services rendered by it have not been disallowed under Section 40(a) of the Act. Thus, insofar as payments made for services are concerned, a transfer pricing adjustment was made, which was sustained by the DRP. The Tribunal, however, set aside the upward adjustment made by the TPO/DRP, a position that stands accepted by the TPO. Therefore, the two streams of payments made by the respondent/assess....
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....and dealt with the impact of the insertion of Clause (ia) of the Act to Section 40(a) of the Act. The respondent/assessee was an intervenor in that case, an aspect which emerges upon perusal of paragraphs 30 and 48 of the judgment. (vii) The issue concerning chargeability to tax about the payments made requires scrutiny having regard to the provisions of the Act. Once chargeability is established, the provisions of the DTAAs have to be looked at only to soften the rigour of the concerned provision of the Act. There is no dispute regarding chargeability; what needs to be answered is whether its impact is mitigated having regard to the provisions of the DTAA. (viii) The taxation of business profits under the DTAA is possible only if the concerned assessee has a PE in India [See Article 7]. The concept of business connection is alien to the matter in question. [See UAE Exchange Center Ltd. v. Union of India & Anr, 313 ITR 94 (Delhi) and Danisco India Pvt. Ltd. v. Union Of India & Ors., 404 ITR 539 (Delhi)] (ix) Section 195 is a machinery provision that effectuates the chargeability of income to tax as per Section 4 of the Act. Section 195 is not a standalone....
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.... the income received by the respondent/assessee against services rendered by it for acting as an intermediary between the ultimate customer and the group companies was concerned, that was subjected to transfer pricing adjustment. This aspect is not the subject matter of the instant appeal. The Tribunal has, in fact, remitted this issue to the TPO/AO for fresh consideration. 13.3 It was neither the stand of the appellant/revenue nor was any finding of fact arrived at by the AO that the transactions entered into between the respondent/assessee and its seven (07) group companies were "composite transactions". In other words, the suggestion that an element of taxable income was embedded in the transactions executed between the respondent/assessee and its seven (07) group companies does not emerge from the record. The AO ordered disallowance under Section 40(a)(i) of the Act concerning payments made by the respondent/assessee to its group companies on the ground that they were chargeable to tax in India. The conclusion reached by the AO about the taxability of the payments made by the respondent/assessee in India was based on the rationale that since MC Japan had acquiesced to the ju....
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....pply of labour for carrying out any work)" 15.2 Thus, although parity had been brought about with regard to the power of the AO to deny deduction where TAS was not deducted against payments made outside India or to non-residents and residents, it was limited to certain payments. As is evident upon perusal of Clause (ia) of Section 40(a), it did not bring payments made towards purchases to resident- vendors within its net. Therefore, the respondent/assessee argued that even after the amendment in Section 40(a) w.e.f. 01.04.2005, unequal treatment, i.e., discrimination, obtained with regard to payments made against purchases to resident-vendors. The expenditure incurred on payments made to resident-vendors against purchases could thus, be taken into account while computing income chargeable under the head "profits and gains of business or profession". This disparity was removed by FA 2014, albeit w.e.f. from 01.04.2015, when the ambit of disallowance was enlarged by bringing any sum payable to a resident within the four corners of Clause (ia) of Section 40(a). 15.3 Since the period in issue is AY 2006-07, the amendment brought about in Section 40(a) by virtue of FA 2014 would h....
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....gapore), the respondent/assessee does not press the argument of equal treatment as the DTAAs entered into by India with Thailand and Singapore do not contain an equal treatment/non-discrimination clause. 18.1 In this behalf, the respondent/assessee has contended and, in my view correctly, that since the two companies referred to above, i.e., MC Metal Thailand and Metal One Singapore, do not have a PE in India, the payments made to them are not chargeable to tax in India. Articles 7 of the India- Thailand and India-Singapore DTAAs, respectively, provide complete clarity in that behalf. The AO, via convoluted logic, has concluded that since MC (Japan) had a LO in India, on account of the similarity of business models, it ought to be concluded that these two companies, amongst other companies, also had PE in India. On the other hand, the Tribunal has returned a finding that MC Metal Thailand and Metal One Singapore do not have a PE in India. The following paragraph from the Tribunal's order, being relevant, is extracted hereafter: "9.7 In the above decision the Tribunal has concluded that Metal One Corporation does not have a PE in India. The Assessing Officer on the analo....
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.... in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of Clause (23D) 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, residen....
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.... It is for this reason that vide Circular No. 728 dated 30-10-1995 that the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act The application of Section 195 (2) presupposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO (TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO (TDS) that the question of making an order under Section 195 (2) will arise. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195... 8. If the contention of the ....
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....erefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so- called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax As stated hereinabove, Section 195(1) uses the expression "sum chargeable under the provisions of the Act." We need to give weightage to those words. Further, section 195 uses the word 'payer' and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfil the statutory obligation under Section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in....
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....luded an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corpn. of AP Ltd.'s case (supra) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented "income chargeable to tax in India", then it was necessary for him to make an application under Section 195(2) of the Act to the ITO (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this Court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the ITO (TDS) to compute the amount which was liable to be deducted at source. In our view, Section 195(2) is based on the "principle of proportionality". The said sub-....