Payments to Non-Resident Entities Without PE in India Not Chargeable to Tax: High Court of Delhi

In a landmark judgment, the Delhi High Court has upheld that payments made to non-resident entities without a Permanent Establishment (PE) in India are not subject to tax in India. This was held in the case of ‘The Commissioner of Income Tax-II vs Mitsubishi Corporation India P. Ltd.’, for the Assessment Year 2006-07, revolving around the interpretation of Section 40(a)(i) of the Income Tax Act, 1961.

At the heart of the judgment is the interpretation of Section 40(a)(i) of the Income Tax Act, 1961, focusing on the disallowance for non-deduction of tax at source on payments made to non-resident entities. The critical issue was whether this disallowance contradicted the non-discrimination provisions in the India-Japan and India-USA DTAAs.

The appeal by the revenue authority contested the Income Tax Appellate Tribunal’s order which overturned the disallowance under Section 40(a)(i) made by the Assessing Officer. The contention was on the payments to various non-resident group companies.

Justice Rajiv Shakdher, in his detailed assessment, highlighted the applicability and significance of the non-discrimination clauses in the DTAAs. He notably remarked, “The equal treatment or the non-discrimination Clause obtaining in Articles 24(3) and 26(3) of the India-Japan/India-USA DTAAs would apply concerning the payment for purchases made by the respondent/assessee.” This observation was crucial in determining the case’s outcome.

The Court upheld the Tribunal’s decision, affirming the deletion of the disallowance under Section 40(a)(i). Justice Shakdher concluded, “All three questions…have to be answered in favor of the assessee and against the revenue.” This effectively ruled that payments made to non-resident entities without a PE in India are not chargeable to tax in India.

Date of Decision: February 16, 2024.

‘The Commissioner of Income Tax-II vs Mitsubishi Corporation India P. Ltd.’