Article on Section 40a(i) of the
Income Tax Act, 1961
Date: 19-1-2016
In this article, analysis is being done to analyse whether section 40(a)(i), which provides for disallowance of expenses, payable to Non-resident , on non-deduction/ non-deposit of TDS thereon, still holds force in view of certain recent developments.
The expenses are Royalty, Interest, fees for technical services or other sum chargeable under this Act.
The utility of section 40a(i) is being judged specially with reference to
Interest, Royalty, fees for technical services, hereinafter referred to as specified expenses.
The entire analysis is divided into two parts
1. |
Point of time (paid or payable basis) of incurring specified expenses, non -deduction of TDS thereon will trigger disallowance u/s 40a(i). |
2. |
Point of time (paid or payable basis) at which specified expenses is chargeable to tax in the hands of Non-resident and consequent liability to deduct TDS thereon.
Point of time (paid or payable basis) of incurring specified expenses, non -deduction
of TDS thereon will trigger disallowance u/s 40a(i). |
Section 40a(i), as amended by Finance Act (No. 2), 2014, provides as under:-
1. |
Interest, Royalty or fees for Technical Services (Specified Expenses) is payable by assessee to Non-Resident in assessment year. |
2. |
Assessee either fails to deduct TDS on such specified Expenses or after deducting TDS, failed to deposit TDS before due date of filing Income Tax Return for said assessment year as per section 139(1). |
3. |
Assessee will not be allowed deduction of such specified expenses for said assessment year. |
Thus under section 40a(i), two types of TDS default are contemplated:-
a)Non-deduction of TDS on specified Expenses
b)Non-deposit of TDS deducted on specified expenses
Hereinafter analysis is being done in case, where no TDS has been deducted on
specified expenses.
Till certain judicial pronouncements, disallowance u/s 40a(i) is applicable in both of the following situations:-
a) Specified Expenses PAID in Financial Year and TDS is not deducted thereon
b) Specified Expenses PAYABLE as at the end of financial and TDS is not deducted thereon.
Recently, the words “PAYABLE” appearing in section 40a(i) was matter of interpretation at highest level of judicial forum and it was held by Supreme Court in Vector Shipping that words “PAYABLE” be taken in its ordinary sense and accordingly disallowance contemplated u/s 40a(i)
• |
will be applicable to only specified expenses payable at the end of financial year on which no TDS is deducted and |
• |
will not be applicable to specified expenses paid during the financial year on which no TDS is deducted |
Disallowance u/s 40a(i) for non-deduction of TDS will be applicable to only those cases where deduction of TDS is mandated by section 195. Section 195 provides for deduction of TDS on following amount paid or payable to Non-resident
a) Interest
b) Any other sum chargeable under the Act, which inter-alia includes Royalty and Fees forTechnical services.
The point of taxability or chargeability of Interest , Royalty or fees for Technical Services in the hands of Non-resident is evaluated with reference to Provisions of Income Tax Act or DTAA
Provisions of Income Tax Act
a) |
Section 5 provides that, among other things, total income of non-resident shall include theincome deemed to accrue or arise in India |
b) |
Clause v, vi & vii of Section 9(1), inter-alia, provides that Interest , Royalty or fees for Technical services shall be deemed to accrue or arise in India, when same is payable by person resident in India. |
Thus under Income Tax Act, the Interest, Royalty or fees for Technical Services are taxable or chargeable in the hands of Non-resident on accrual basis.
Provisions under DTAA
The DTAA entered into by India are mostly based on UN model and relevant article dealing with Interest, Royalty or Fees for Technical Services are analysed as under:-
Article 11- Interest
1. |
Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. |
2. |
However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State--- |
Article 12- Royalty
1. |
Royalties arising in a Contracting State and paid to a resident of the other Contracting State maybe taxed in that other State. |
2. |
However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State,---- |
Fees for Technical Services
The UN model does have specific clause for Fees for Technical Service, but in various DTAA entered into by India, the clause relating to FTS, wherever specifically provided is as under:-
1. |
Fees for Technical Services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. |
2. |
However, such fees for Technical Services may also be taxed in the Contracting |
State in which they arise and according to the laws of that State,----
Thus, afore-said clauses in the context of Indian Resident and Non-resident can be interpreted as under:-
a) Interest, Royalty or Fees for Technical Services PAID by Indian resident to non-
resident is taxable in the county of non-resident.
b) SUCH Interest , Royalty & fees for Technical services are also taxable in India at prescribed rates
Now question of consideration is that whether word “Paid” is to be interpreted in strict sense or in liberal sense to cover payable also.
In certain recent judicial decisions rendered in the context of Royalty & FTS, the words PAID is interpreted in strict sense and held that Royalty & FTS is taxable in the hands of non-resident in India on paid basis or not on accrual basis.
| a) |
CSC Technology Singapore Pte. Ltd. vs ADIT (2012) 50 SOT 399 (Delhi) |
b) |
Siemens Aktiengesellschaft vs JCIT (2009) 34 SOT 16 (Mumbai) |
c) |
The above decision of Mumbai Tribunal Confirmed by Mumbai High Court - (2012-TII-59-HC-MUM-INTL) dated October 22, 2012 |
d) |
ADIT vs Pizza Hut International LLC (2012) 54 SOT 425 |
e) |
Booz Allen and Hamilton India Ltd. and Co. Kg. vs ADIT (2013) 56 SOT 96 Based on afore-said ruling, similar interpretation can be drawn for taxability of Interest also. |
Thus point of taxability of Royalty, Interest or fees of Technical Services are summarised as under:-
a) Income Tax Act- Payable basis.
b) DTAA- Paid basis
Thus in terms of DTAA, Interest, Royalty or Fees for Technical Services will be not considered as Income Chargeable to Tax in India, till same is paid to Non-resident.
Now in respect of Royalty, Interest or fees for technical services payable, at the end of year, assessee can always take the position that since said amount is not taxable in the hands of Non-resident under DTAA, there is no liability to deduct TDS u/s 195 on said amount.
Thus based on afore-said discussion , with reference to expenses on account of Royalty, Interest or fees for technical services, there will not be any disallowance u/s 40a(i) on account of non-deduction of TDS as under:-
a) |
Non deduction of TDS on amount paid in Financial Year- No disallowance as per Ruling of SC in Vector shipping |
b) |
Non Deduction of TDS on amount payable at the end of Year- Such amount is not chargeable to tax in the hands of Non-resident in said financial year under DTAA and hence no liability to deduct TDS u/s 195 |
|