Brief: In view of non-discrimination clause under the India-USA tax treaty, the non-resident should be given same treatment as given to resident’s taxpayers. Accordingly, the payment made to USA entities cannot be disallowed on account of non deduction of tax at source.
Citation: Central Bank of India Vs. DCIT (ITA No. 4155/M/2003, 4156/M/2003 and 4157/M/2003)
Court : Income-tax Appellate Tribunal, Mumbai
Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Central Bank of India v. DCIT (ITA No. 4155/M/2003, 4156/M/2003 and 4157/M/2003) (the taxpayer) held that the taxpayer was not liable to withhold taxes while making payments to the USA based credit card agencies in view of non-discrimination clause under Article 26(3) of the India-USA tax treaty (the tax treaty). Accordingly, such payments cannot be disallowed under Section 40(a)(i) of the Income-tax Act, 1961 (the Act) on account of non deduction of tax at source while making payments to non-residents.
The Tribunal observed that Article 26(3) of the tax treaty protects the interest of the non-residents vis-à-vis residents and provides that payment made to the non-resident will be deductible under the same conditions as if the payment were made to a resident. Therefore, even if payments made to the non-residents were taxable in India, withholding of tax was not required.
Facts of the case
1. The taxpayer issued credit cards to its customers which were affiliated to two USA based international agencies i.e. Master Card and VISA card. The international agencies were operating to facilitate credit card transactions of a large number of issuing banks.
2. These agencies also provided customized software and hardware to the member banks to facilitate the transactions made through credit cards. The agencies charged the member bank for the various services provided by them. The amount charged depended upon the volume of transactions. The taxpayer made payments to these agencies on which tax was not deducted. The Assessing Officer (AO) disallowed the taxpayer’s claim of deduction of payments made to the non-resident agencies under the provisions of Section 40(a)(i) of the Act.
3. The Commissioner of Income-tax (Appeals) [CIT(A)] observed that the USA companies were having permanent establishment in India through their networking computers and through leased telephone lines. Therefore, the income received by non-residents was taxable in India. Accordingly, CIT(A) confirmed the order of AO
4. The payments made by the taxpayer were not taxable in the hands of the non residents since they did not have any permanent establishment in India. Even if the income of non-residents was taxable in India no tax was required to be deducted in view of Article 26(3) of the tax treaty. As per Article 26(3) of the tax treaty, the payments made to non residents has to be allowed if the same was allowable as if the payments were made to residents.
5. The taxpayer relied on the decision of Delhi Tribunal in the case of Harbalife International India Pvt. Ltd. v. ACIT  103 TTJ 78 (Del) where it was held that even if the payments were taxable in case of the non residents, no dis allowance could be made on account of non deduction of tax in view of Article 26(3) of the tax treaty.
6. Further, the exceptions (See Note-1) provided under Article 26(3) of the tax treaty were not applicable to the present case. Though provisions of Article 12(8) (See Note-2) of the tax treaty relating to Royalties and Fees for Included Services were relevant in the present case, since taxpayer had no relationship with the payee the provisions of the said Article was not applicable to the taxpayer.
This is a welcome decision by the Mumbai Tribunal where the nondiscrimination clause under the tax treaty has been applied in favor of the taxpayer to construe that payment cannot be disallowed under Section 40(a)(i) of the Act because payment made to a non-resident will be deductible under the same conditions as if the payments were made to residents.
The Delhi Tribunal in the case of Millennium Info com Technologies Ltd. v. ACIT  21 SOT 152 (Del) dealt with a similar issue and held that Article 26(3) of the tax treaty provides relief against discrimination that may arise pursuant to Section 40(a)(i) of the Act and the tax department cannot disallow the payments made to a non-resident under Section 40(a)(i) of the Act for non deduction of tax while making payments no non-residents.
It is important to note that the Protocol to the Indian-Spain tax treaty specifically provides that payments by way of interest, royalties and fees for technical services made by India resident to a resident of Spain shall not be allowed as a deduction unless tax has been paid or deducted at source from such payments under the provisions of the Act and in accordance with the provisions of the said treaty.
1. Article 26(3) of the tax treaty provides that except where the provisions dealing with Associated enterprises [Article 9(1)], Interest [Article 11 (7)], Royalties and fees for included services [Article 12(8)] apply, interest, royalties, and other disbursements paid by a resident of one country to a resident of another country, be deductible under the same conditions as if they had been paid to a resident.
2. Article 12(8) of the tax treaty deals with the transactions, in the nature of royalties or fees for included services, between related persons which are not at arm’s length.