Delhi High Court grants relief by applying the non-discrimination article of the India-Japan tax treaty.

The High Court of Delhi decided an appeal applying non-discrimination provisions in the tax treaty between India and Japan. The judgment was pronounced on 16.02.2024.??

The case concerns an Indian company belonging to a Japanese multinational group. The taxpayer had not deducted tax from payments made for purchases from a Japanese group company with a permanent establishment in India. Section 195 of the Act required tax deduction from the payments made.?

Section 40 a (i) of the Indian Income Tax Act provides for non-deduction of amounts in the nature of interest, royalty, fee for technical services or any other sum chargeable under the Income Tax Act while computing income chargeable under the head profits and gains of business or profession, paid to a non-resident if the tax was not deducted as required under the Act.?

In this case, the tax authorities held that the income of the non-resident was taxable in India as it had a permanent establishment in India. The tax officer did not allow the deduction while computing the taxable income of the Indian company, considering the specific provisions contained in section 40 a(i) of the Act. The issue concerns the assessment year 2006-2007.?

The taxpayer argued the application of provisions in the India-Japan tax treaty's non-discrimination article [Article 24(3)]. The relevant provisions read as follows:?

Article 24 (3):?“ Except where the provisions of article 9, paragraph 8 of article 11, or paragraph 7 of article 12 apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned Contracting State.”??

The High Court accepted the taxpayer's argument that section 40 a(i), applicable for the relevant year, did not provide for disallowance in the case of a taxpayer when tax was not deducted out of similar payments made to a person resident in India. Therefore, though the deduction of payment of amounts under the same conditions to a resident was allowed, it was disallowed in case of payments to a non-resident, which created discriminatory treatment.

The High Court noted that though this disparity/discrimination was removed from the assessment year 2015-2016, the provisions were discriminatory during the year under consideration.?

Interested readers can access the judgment of the Honourable High Court by clicking the link below.?

https://dhccaseinfo.nic.in/jsearch/judgement.php?path=dhc/RAS/judgement/16-02-2024/&name=RAS16022024ITA1802014_143843.pdf

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