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Section 40(a)(i), Article 9 and 24 of India-Japan Double Taxation Avoidance Agreement (DTAA) – Disallowance for failure to withhold tax at source being discriminatory, and independent of Transfer Pricing (TP) adjustment under Article 9, Taxpayer is entitled to invoke Article 24.
Facts
The Taxpayer, an Indian company, made purchases from its AEs in Japan. Taxpayer did not withhold taxes on payments made towards purchase of goods from the AE. The Taxpayer contended that it was entitled to the benefit of Non-discrimination clause in terms of Article 24(3) of the India – Japan DTAA due to which, for the purpose of computing the taxable profit of an Indian enterprise, the provisions of Act shall apply, as if it is a transaction with an Indian enterprise. This is because there is no provision for withholding tax at source on payments for purchases made from an Indian resident; whereas purchases from a Non-resident (NR) is liable for tax withholding under the Act, which leads to non-permissible discrimination.
Tax Authority had made certain transfer pricing (TP) adjustment, though unrelated to the purchase of goods. The Tax Authority contended that since TP adjustment was made, Article 9 was applicable. Hence, Taxpayer cannot avail of the benefits of non-discrimination clause enshrined in Article 24(3) of the DTAA.
Held:
The contention of the Tax Authority that application of Article 24(3) is not possible in view of operation of Article 9 is not correct. The overriding effect of Article 9 over Article 24(3) is limited to the extent provided in Article 9. It does not render Article 24(3) redundant in totality.
A conjoint reading of these two Articles brings out that if there is some discrimination in computing the taxable income as a result of TP adjustments, then, such discrimination will continue as such. The rest of the discriminations will be removed by Article 24(3) to the extent as provided.
In the instant case, Taxpayer had sought the benefit of article 24 qua the disallowance for non-withholding of taxes and not in respect of an unrelated TP adjustment. Thus, Taxpayer is entitled to rely on Article 24 of the DTAA and will not be liable to suffer disallowance in respect of value of purchases for failure to withhold taxes under provisions of the Act.
