Payments made to a non-resident having subsidiary/Permanent Establishment in India on purchase of spare parts: Applicability of withholding tax provisions under Section 195 of the Act
Transaction: Computation of Income
- The Assessee was a subsidiary of M/s. Honda Motor Company Limited, Japan and it was into the business of manufacture and sale of premium segment passenger cars in India and outside India.
- During the year under assessment, it was also noticed from Form No.3CEB report that Assessee had made various payments totalling Rs.1057.30 Crs to the Associate Enterprise (AE) on account of various purchases including purchases of spare parts.
- The Assessing Officer concluded that the Assessee company was liable to deduct tax on these payments under Section 195 of the Act which the Assessee company had failed to deduct the tax.
- Consequently, provisions contained under Section 40(a)(i) of the Act were attracted and the said amount was liable to be disallowed under Section 40(a)(i) of the Act.
- The Tribunal placed reliance on the coordinate bench’s decision in Assessee’s own case, wherein reliance was placed on the decision of Hon’ble High Court in the case of Commissioner of Income Tax Vs. Herbalife International India in order to interpret the non-discrimination article of the Indo-Japan tax treaty.
- In the said case, it was observed that the expression under the same conditions in non discrimination article of the tax treaty clarified the nature of the receipt and conditions of its deductibility. It was relatable not merely to the compliance requirement of deduction of tax at source. The lack of parity in the allowing of the payment as deduction was what brought about the discrimination. The tested party was another resident Indian who transacted with a resident making payment and did not deduct tax at source and thus, in whose case there would be no disallowance of the payment as deduction because tax at source was not deducted. Thus, the consequence of non-deduction of tax at source when the payment was made to a non-resident had an adverse consequence to the payer. The object of non discrimination article was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee was 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 tax at source to be deducted while making payment in terms of Section 40(a)(i) of the Act.
- In the present facts of the case, following the interpretation of non-discrimination article as defined in the said case the Assessee was eligible to take the benefit of non-discrimination article under the Indo-Japan tax treaty on account of payment made for purchase of spare parts to Honda Motors, Japan.
- As per the Section 90(2) of the Act, the provisions of the tax treaty would prevail over the Act unless the Act was more beneficial to the Assessee. Therefore, disallowance made under section 40(a)(i) was to be deleted and the Assessee was not required to deduct tax at source under section 195 on payments made to Honda Motors, Japan as the tax treaty benefit was available to the Assessee.