Case Law Details
In this case Assessing officer has made disallowance u/s. 40(a)(i) on payment for hiring charges for transponder, paid to PanAmSat Limited on the ground that no tax has been deducted at source by the assessee, u/s. 195 of the Act.
Argument of learned Departmental Representative that the amendment to the Finance Act, 2012 changes the position, we find that there is no change in the DTAA between India and USA. Thus, the amendments have no affect on our decision.
Even otherwise as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, section 195 will not apply to such cases as held by Hon’ble Supreme Court in the case of Vodafone International Holdings B.V. (WP No. 1942 of 2007) 341 ITR 1 (SC). Thus on this ground also no disallowance can be made u/s. 40(a)(i) of the Act.
Even under the non-discrimination clause the disallowance cannot be made. In the case of Herbelife International India (P) ltd., it is held as follows :-
“Held : The provisions of s. 40(a)(i) as it existed prior to its amendment by Finance Act, 2003, w.e.f. 1st April, 2004 provided for disallowance of payment made to a non-resident only where tax is not deducted at source on such payment at source. A similar payment to a resident does not result in disallowance in the event of non-deduction of tax at source. Thus, a nonresident left with a choice of dealing with a resident or a non-resident in business would opt to deal with a resident rather than a non-resident owing to the provisions of s. 40(a)(i). To this extent the non-resident is discriminated. Article 26(3) of In do-US DTAA seeks to provide against such discrimination and says that deduction should be allowed on the same condition as if the payment is made to a resident. Thus this clause in DTAA neutralizes the rigour of the provisions of s. 40(a)(i). By virtue of the provisions of s. 90(2) the law which is beneficial to the assessee to whom the DTAA applies, should be followed. Therefore, in view of art. 26(3) of Indo-US DTAA, the AO cannot seek to invoke the provisions of s. 40(a)(i) to disallow the claim of the assessee for deduction even on the assumption that the sum in question is chargeable to tax in India.”
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