Article 24, India-Japan DTAA; sections 40(a)
(i), (ia), the Act – the exclusion in section 40(a) (ia), and its
retrospective effect, should be read into section 40(a)(i) to achieve
deduction neutrality envisaged in Article 24(3) of India- Japan DTAA.
Facts:
The
taxpayer was a wholly owned subsidiary of a Japanese company engaged in
general import and export trading of diverse range of products (known
as ‘sogo shosha’ in Japanese). During the relevant tax year the taxpayer
made payments to certain Associated Enterprises (‘AEs’) which included
Japanese entities, towards import of goods. The taxpayer did not
withhold tax from such payments. However in case where the recipient
entity had PE in India, the recipient had furnished its return of income
including the payments received from taxpayer and had also paid taxes
on such income.
As the taxpayer had not withheld tax from the
payments made to the non-resident entities, the tax authority disallowed
the payments.
The taxpayer contended that Article 24 of
India-Japan DTAA provides protection against discrimination vis-à-vis
resident taxpayers. The taxpayer contended that since the provisions of
section 40(a)(ia) of the Act read with section 201(1) of the Act,
exclude payments made to a resident payee without withholding tax if
certain conditions are fulfilled, the payments made to non-residents too
cannot be disallowed in view of non-discrimination provision in
India-Japan DTAA.
However, the tax authority contended that the
taxpayer being an Indian resident was not entitled to access
nondiscrimination provision under India-Japan DTAA.
Before proceeding with its ruling, the Tribunal segregated the payments into three broad categories.
Category
(a): where the tax authority’s claim of recipients having a PE in India
was negated by the judicial authorities (i.e., the recipients were
found to have no PE in India).
Category (b): where there was no
material on record with the tax authority that recipients had a PE and
the same was also not in dispute before any judicial authority.
Category (c): where the recipient entity had a PE in India.
Held:
Analysis of payments
Category
(a): in absence of PE there was no income chargeable to tax in India
and accordingly, there was no liability to withhold taxes1 .
Consequently, no disallowance can be made.
Category (b): the
onus is on the tax authority to establish that the non-resident entity
had PE in India and such onus was not discharged. Accordingly, there was
no failure by the taxpayer in not withholding tax from payments made to
such entity. Consequently, disallowance u/s 40(a)(i) cannot be made.
Category
(c): the taxpayer had made payment to a Japanese entity which had a PE
in India. That entity had accepted tax liability in respect of the
payments received from the taxpayer. In this case the taxpayer had
invoked the non-discrimination provision in India- Japan DTAA and had
contended that disallowance could not be made.
Indian resident accessing deduction non-discrimination Article under DTAA
In
Daimler Chrysler India Pvt Ltd vs. DCIT (29 SOT 202) (Pune), it was
held that being resident of a treaty country is not a pre-condition to
seek non-discrimination protection under DTAA and payment to a
nonresident who is a resident of a treaty country would be adequate to
invoke non-discrimination provision.
Since the payment was made
by the taxpayer to a Japanese tax resident, the non-discrimination claim
under India-Japan DTAA was tenable2.
Scope of non-discrimination Article under India-Japan DTAA
Deduction
neutrality provision in the non-discrimination article is designed to
primarily seek parity in eligibility for deduction between payments made
to residents and those made to non-residents.
UN Model convention
commentary on Article 24(4), which is similar to Article 24(3) of
India-Japan DTAA, mentions that the relevant paragraph is designed to
end deduction discrimination where unrestricted deductions are allowed
in respect of payments made by residents to other residents but such
payments to nonresidents are restricted or prohibited.
Thus, there
cannot be discrimination regarding deductibility of expenses in respect
of payments made to Japanese residents and on which no tax has been
withheld if there is no corresponding pre-condition visà- vis payments
made to Indian residents.
Differentiation simplicitor also results in discrimination
In
Automated Securities Clearance Inc. 118 TTJ 619, the Pune Tribunal had
held that, in order to establish discrimination, the taxpayer has to
demonstrate that it has been subjected to different treatment vis-à-vis
other taxpayers, which is unreasonable, arbitrary or irrelevant.
However, since the above decision was in the context of the India-US
DTAA, it cannot be automatically applied to any other DTAA.
In
Rajeev Sureshbhai Gajwani vs. ACIT [8 ITR (Trib) 616], Special Bench of
the Tribunal has held that differentiation simplicitor in deductibility
of payment is enough to invoke non-discrimination provision.
Impact on disallowance if tax paid by recipient nonresident
Though
the exclusion in second proviso to section 40(a)(ia) is in effect from
1st April 2013, several Tribunal decisions3 have held that the amendment
is retrospectively effective from 1st April 2005 when the disallowance
provision was introduced for payments made to residents. In Bharati
Shipyard4, Special Bench of Mumbai Tribunal had observed that an
amendment of a substantive provision aimed at removing unintended
consequences to make the provision workable has to be treated as
retrospective in application.
Since section 40(a)(i) does not have
exclusion clause similar to the second proviso to section 40(a)(ia),
payments made to non-residents in similar circumstances will be
disallowable. Thus, in terms of Article 24(3) of India-Japan DTAA, it
will be discrimination. Accordingly, the exclusion in section 40(a)(ia),
and its retrospective effect, should be read into section 40(a) (i) to
achieve deduction neutrality envisaged in Article 24(3) of India-Japan
DTAA.
Therefore, payments made by Indian tax residents to Japanese
tax residents without deduction of tax cannot be disallowed u/s.
40(a)(i) if the Japanese tax residents have furnished their return of
income, accounted such payments for computing income and have paid tax
due on their declared income.
