September 2019

Article 7, India-Malaysia DTAA; Article 7, India-UK DTAA Compensation paid for contractual default, being business profit, was not taxable in India if recipient had no PE in India Rebate given for quality issues effectively being discount in sale price, was not taxable; even otherwise, rebate being business profit, was not taxable in India if recipient had no PE in India

Geeta Jani| Dhishat B. Mehta
Chartered Accountants

19.  [2019] 108 taxmann.com 79 (Vizag. Trib.) 3F Industries Ltd. vs. ACIT, Circle-1, Eluru ITA No.: 01 (Viz.) of 2015 A.Y.: 2007-08 Date of order: 17th July, 2019;

 

Article 7, India-Malaysia DTAA; Article 7, India-UK DTAA Compensation paid for contractual default, being business profit, was not taxable in India if recipient had no PE in India Rebate given for quality issues effectively being discount in sale price, was not taxable; even otherwise, rebate being business profit, was not taxable in India if recipient had no PE in India

 

FACTS

The assessee was an Indian company engaged in trading of certain products. The assessee procured the products from suppliers in India and exported the same to foreign customers. Among others, it had entered into export contracts with a Malaysian company (Malay Co) and a UK company (UK Co). In respect of the contract with the Malay Co, as the price in the Indian market was substantially higher the assessee could not procure the products and did not fulfil the contract. Hence, the Malay Co claimed compensation towards the losses suffered because of default by the assessee. To maintain its business reputation and relationship with the Malay Co, the assessee agreed upon the amount of compensation and paid up. In respect of its contract with the UK Co, there were certain quality issues. Hence, the UK Co claimed price rebate. Again, to maintain its business reputation and relationship with the UK Co, the assessee agreed to a rebate.

 

The AO completed the assessment u/s 143(3) of the Act. Subsequently, CIT undertook revision of the order u/s 263 and held that as payment was made to a foreign company and no tax was deducted u/s 195 of the Act, the assessment was erroneous and prejudicial to the interest of the Revenue. He directed the AO to examine disallowance u/s 40(a)(i) of the Act. The AO proposed disallowance, which the DRP upheld.

 

HELD

Compensation for contractual default

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