Central Bank of India vs. DCIT (ITAT Mumbai)

DATE: (Date of pronouncement)
DATE: October 12, 2010 (Date of publication)

Click here to download the judgement (central_bank_TDS_non-discrimination.pdf)

Under Art 26(3) of India-USA DTAA payments to Non-Residents are equated with payments to Residents & so s. 40(a)(i) disallowance not valid

The assessee made payments to Master Card and VISA Card, international credit card companies, based in USA, for services in respect of credit cards issued by the assessee. As the assessee had not deducted tax at source on payments made, the AO disallowed the claim of deduction u/s 40(a)(i). The CIT (A) upheld the disallowance on the ground that VISA & Mastercard had a permanent establishment in India through the networking computers and leased telephone lines and the sums paid to them were taxable in India. In appeal before the Tribunal, the assessee raised the alternative argument that even if the income of Master Card and VISA was taxable in India, no tax was required to be deducted in view of Article 26(3) of the India-USA DTAA which protects the non residents against any discrimination vis-à-vis residents. HELD allowing the appeal:

Article 26(3) of the India-USA DTAA protects the interest of non residents vis-a-vis residents. Article 26(3) provides that payment made to a non-resident will be deductible under the same conditions as if the payment were made to a resident. The exceptions provided in Article 26(3) are not applicable on facts. As per s. 40(a)(i), no disallowance can be made in respect of payments to residents on the ground of non-deduction of tax at source. Therefore, in view of Article 26(3), no disallowance can be made even in case of payments to non-residents even if the amount is found taxable in India in their hands. Herbal Life International 101 ITD 450 (Del) followed.

Note: S. 40(a)(ia) inserted w.e.f AY 2005-06 provides for TDS even in respect of payment to residents. See Also Bapushaeb Nanasaheb Dhumal vs. ACIT (ITAT Mumbai). For the law on non-discrimination see Automated Securities vs. ITO 118 TTJ (Pune) 619 & DaimlerChrysler India vs. DCIT 120 TTJ (Pune) 803

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