|COURT:||Delhi High Court|
|CORAM:||S. Muralidhar J, Vibhu Bakhru J|
|SECTION(S):||195, 40(a)(i), 40(a)(ia), Article 26|
|GENRE:||Domestic Tax, International Tax|
|CATCH WORDS:||non-discrimination, TDS deduction, TDS disallowance|
|COUNSEL:||Ajay Vohra, M S Syali|
|DATE:||May 13, 2016 (Date of pronouncement)|
|DATE:||May 16, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 40(a)(i): The law in s. 40(a)(i) that failure to deduct TDS on payment to a non-resident will result in a disallowance violates the non-discrimination clause in Article 26 of the India-USA DTAA because a similar disallowance is not made on payments to residents (pre s. 40(a)(ia))|
The High Court had to consider whether Section 40 (a) (i) of the Act is discriminatory and therefore, not applicable as per provisions of Article 26 (3) of the Indo-US DTAA. HELD by the High Court affirming the order of the Tribunal reported in Herbalife vs. ACIT (101 ITD 450):
(i) Section 40 (a) (i) of the Act, as it was during the AY in question i.e. 2001-02, did not provide for deduction in the TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of Section 40 (a) (ia) of the Act with effect from 1st April 2005. Then again as pointed out by Mr. M.S. Syali, learned Senior Advocate for the Intervener, Section 40 (a) (ia) refers only to payments of “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” etc. It does not include an amount paid towards purchases. Correspondingly, there is no requirement of TDS having to be deducted while making such payment.
(ii) However, the element of discrimination arises not only because of the above requirement of having to deduct TDS. The OECD Expert Group which brought out a document titled “Application and Interpretation of Article 24(Non-Discrimination), Public discussion Draft, May 2007” did envisage deduction of tax while making payments to non-residents. It is viewed only as additional compliance of verification requirement which would not attract the non-discrimination rule. The OECD Expert Group noted that “the non-discrimination obligation under tax conventions is restricted in scope when compared with equal treatment or non-discrimination clauses in an investment agreement.”
(iii) The argument of the Revenue overlooks the fact that the condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from that when made to a resident. Under Section 40 (a) (i), as it then stood, the allowability of the deduction of the payment to a non-resident mandatorily required deduction of TDS at the time of payment. On the other hand, payments to residents were neither subject to the condition of deduction of TDS nor, naturally, to the further consequence of disallowance of the payment as deduction. The expression “under the same conditions” in Article 26 (3) of the DTAA clarifies the nature of the receipt and conditions of its deductibility. It is relatable not merely to the compliance requirement of deduction of TDS. The lack of parity in the allowing of the payment as deduction is what brings about the discrimination. The tested party is another resident Indian who transacts with a resident making payment and does not deduct TDS and therefore in whose case there would be no disallowance of the payment as deduction because TDS was not deducted. Therefore, the consequence of non-deduction of TDS when the payment is to a non-resident has an adverse consequence to the payer. Since it is mandatory in terms of Section 40 (a) (i) for the payer to deduct TDS from the payment to the non-resident, the latter receives the payment net of TDS. The object of Article 26 (3) DTAA was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimination brought about qua non-resident by requiring the TDS to be deducted while making payment of FTS in terms of Section 40 (a) (i) of the Act.
(iv) A plain reading of Section 90 (2) of the Act, makes it clear that the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the Assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision. In Union of India v. Azadi Bachao Andolan (supra) the Supreme Court took note of the Circular No. 333 dated 2nd April 1982 issued by the CBDT on the question as to what the assessing officers would have to do when they find that the provision of a DTAA treaty is not in conformity with the Act.