Delhi HC judges differ on
the interplay between Sec 40(a)(i) expense disallowance for Sec. 195 TDS
default on payment by assessee (Mitsubishi India, ‘MI’) to group companies
(based in Japan, US, Singapore, Thailand) including Mitsubishi Corporation,
Japan (‘MC’) and the application of 'non-discrimination' clause under
respective DTAAs for AY 2006-07, places the matter before Acting Chief
Justice for appropriate orders; Justice Prathiba M. Singh overturns ITAT order,
holds that co-ordinate bench decision in Herbalife (rendered in context of AY
2001-02) was not applicable to present case as the scheme of the Act has
undergone a substantial change subsequently; Rejects assessee’s argument that
the discrimination, qua payments made to residents and non-residents, continued
until April 1, 2015 when Sec. 40(a)(ia) was amended, remarks that this
argument “ignores the retrospective nature of the amendment made to Sec. 195 by
insertion of Explanation 2.”; Holds that SC's GE India Technology ruling is not
applicable as it relates to AY prior to insertion of Explanation 2 to Sec.195,
opines that "Addition of the said explanation, in the present case,
changes the nature of the payment inasmuch as it takes away the need to
establish existence of a PE or a business connection in India."; With
respect to assessee’s stand that payments were in the nature of purchases from
group companies (and TDS on goods purchases does not apply to an Indian
resident) , Justice Singh opines that “even if the payment is for purchase of
goods it does not exempt the payer from making deduction of tax at source”;
Justice Singh clarifies that "Section 195 and Section 40 operate in
different spaces - the former at the stage of payment by the payer to the
payee, and the latter at the stage of assessment of the payer. Insofar as the
payer is concerned, there may be interlinking of the two however, insofar as
the payee is concerned.. Section 40 is not triggered qua it at this
stage"; Further opines that a resident company per se cannot invoke
the discrimination provisions of the DTAA, unless raised by non-resident
payees; Justice Singh clarifies that a resident company is fully bound by the
provisions of the Act, and for the said purpose the existence of a PE of the
payee is not essential, “What is required to be seen is as to whether the sum
is chargeable under the provisions of the Act and for the said purpose even a
‘business connection’ is sufficient as per Explanation 2 to Section 9 of the
Act.”; However, Justice S. Muralidhar dissents and rules in favour of assessee,
approves ITAT view that Herbalife decision squarely applied to present case as
the element of discrimination continued in relevant AY; Comparing two
sub-clauses i.e. (i) and (ia) of Sec. 40(a), as they stood during AY 2006-07,
Justice Muralidhar notes that the expression ‘or other sum chargeable under the
Act’ occurring in sub-clause (i) was missing in sub-clause (ia), highlights the
distinction as regards the consequence of disallowance for non-deduction of TDS
on payment to non-resident for purchases, continued, which was ultimately done
away with only by the amendment of sub-clause (ia) w.e.f. April 1, 2015;
Extensively cites SC rulings in GE India Technology , Transmission Corporation,
opines that “Explanation 2 to Section 195 (1) will not compel deduction of TDS
where the payer is reasonably certain that the sum paid for purchases is not
chargeable to tax.”; Justice Muralidhar further clarifies that Explanation 2
does not dispense with the fulfilment of the pre-condition that the sum in
respect of which TDS is to be deducted has to be shown to be chargeable to
tax.:HC
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