Disallowance on account of non-deduction of tax can be removed under non-discriminatory clause of India-Japan DTAA

Income Tax Return due date extended to 7th September 2015

Brief of the case: The ITAT New Delhi in the case of Mitsubishi Corporation India has ruled that the non-discriminatory clause is not applicable only for the limited purpose of transfer pricing adjustments and other additions to income can be removed by taking benefit of non-discriminatory clause of India-Japan DTAA.

Facts of the case:

• Assessee company made purchases from its associated enterprise Mitusubishi Corporation Japan (MCJ) and its branches.
• Assessee remitted the payment on account of purchases to MCJ without deducting tax at source because as per assessee TDS is not applicable under the non-discriminatory clause of Article 24 of India – Japan DTAA.
• AO did not agree with the claim of assessee on the ground thatnon-discriminatory clause cannot be applied as the case is covered by Article 9 which provides that in case of transaction between Associated Enterprises (AEs)discriminatory clause is not applicable .

Contention of Assessee:

• Article 24 provides that for the purposes of determining the taxable profits of an Indian enterprise, any disbursements made to a Japanese enterprise shall be deductiblein the same manner as if it had been made to an Indian resident.
• Thus, for the purpose of claiming deduction of any disbursements the non-resident can be treated as resident and such treatment is termed as non-discrimination.
• The provisions of Act not provide for tax deduction at source for payment made to resident on account of purchases.

Contention of Revenue:

• Article 9 has superseding effect over Article 9 and in case of transaction between AEs the benefit of non-discrimination clause cannot be taken.
• Therefore, addition made under Article 9 cannot be deleted by invoking non-discriminatory clause of Article 24.              

Held by ITAT New Delhi:

• The point of dispute is that whether assessee can claim the benefit of non-discriminatory clause under Article 24 of the DTAA between India and Japan for non-deduction of tax on import purchases from Japan.
• Para 3 of Article 24 provides that any payment made by an Indian enterprise to a Japanese enterprise towards interest, royalties and other disbursements shall be deemed as payment made to Indian enterprise.However, this para is subject to Article 9.
• Article 9 provides that transaction between two associated enterprises should be valued at arm’s lengthprice.
• On a joint reading of Article 9 and 24, it can be concluded that Article 9 even if having superseding effect over Article 24,does not make it totally ineffective. It is why because Article 9 provides that transfer pricing adjustments are not subject to the benefits provided under non-discriminatory clause of Article24.
• In the present case, assessee is not exercising the provisions of clause 24 for deleting transfer pricing adjustments but for removing the applicability of disallowance for non-deduction of taxu/s 40(a) (i).
• Disallowance u/s 40(a)(i) is an independent component of the computation of total income which is distinct from any transfer pricing adjustment.

• Thus, the disallowance cannot be made under Article 9 which is not applicable here and as such benefit of non-discriminatory clause of Article 24 can be very well taken to treat the payee as resident.