As per Article 26(3) of Indo-US DTAA the AO cannot seek to invoke the provision of sec 40(a)

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH ‘’ NEW DELHI)

BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER

AND

SHRI T.S. KAPOOR, ACCOUNTANT MEMBER

I.T.A. No.2023, 2024, 2025, 2026, 2027 & 2028 /Del/202010

Assessment year: 1997-98, 98-99, 99-00, 00-01.01-02 & 02-03

Dy. CIT,

Circle-11 (1),

New Delhi.

(Appellant)

Vs.

M/s Incent Tours Pvt. Ltd.,

672-Kanwaljit Sandhu Block,

Asiad Village, New Delhi.

 (Respondent)

PAN /GIR/No.AAACI-0750-N

Appellant by: Shri Satpal Singh,.

Respondent by: Shri M.S. Syali, Sr. Advocate,

Shri V.S. Rastogi,

Shri Tarandeep Singh, C.A. &

Shri Maneeesh Upneja, C.A.

ORDER

PER I.P. BANSAL, JM:

All these appeals are filed by the revenue. They are directed against two orders of CIT(A) dated 26.2.2010 in respect of assessment years 1997-98 to 2001-02 and 2002-03 respectively. In all these appeals the grounds of appeals are identical except the difference in figures. The grounds raised by the revenue for assessment year 1997- 98 are as under:-

Assessment year: 1997-98:

1. The order of Ld CIT(A) is wrong, perverse, illegal and against the provisions of law, liable to be set aside.

2. On the facts and circumstances of the case and in law, Ld CIT(A) has erred in deleting the disallowance of `.19,56,000/- made by the Assessing Officer u/s 40a(i) of the Act.

3. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing.

1.1. The disallowances in respect of other years are as follows:-

Assessment year     Amount

1998-99                  19,09,440/-

1999-00                  22,73,268/-

2000-01                  22,46,763/-

2001-02                  33,52,476/-

2002-03                  24,98,058/-

1.2. For the sake of convenience all these appeals are being disposed of by a single order.

2. The facts as stated in the order of Assessing Officer as well as CIT(A) are that the assessee is in the business of inbound tour operation and it provides services to foreign tourists visiting the Indian subcontinent. The assessee does not have any branches/offices abroad. In order to generate business and to find new clients it entered into agreement with Mr. Patrice Dedeyn, 22 rue Lahire 75013 Paris France, a resident of France who was appointed as a business development representative of the assessee for Europe. His task, as per the agreement, is to find new clients and generate incremental business and his marketing activity principally to be concentrated around Belgium, France and Switzerland. He was to provide all possible commercial assistance as and when required by the existing clients, a list of which was to be provided to him and besides he was also to make proposals, prepare quotations and follow up on payments. The amount referred to in grounds of appeal relate to the payment made to said person by the assessee. The disallowance was a subject matter of consideration by the ITAT who vide order dated 31^st July, 2007 set aside the matter and restored it to the file of Assessing Officer for looking into the applicability of provisions of section 40a(i) of the Income Tax Act, 1961 and in pursuance of the said order of ITAT the impugned order has been passed by the Assessing Officer. The Assessing Officer referring to section 9(1)(i) & 9(1)(vii) held that the amount paid by the assessee was taxable under the provisions of section 9(1)(vii) read with explanation 2 thereof. Since no tax has been deducted by the assessee, the provisions of section 40a(i) were applicable and in this manner, the disallowance has been made in the impugned orders as mentioned above.

3. Before the CIT(A) it has been the case of the assessee that disallowance u/s 40a(I) is permissible only if the payment is chargeable to tax under the Act and tax ought to have been deducted at source and paid but was not so deducted and paid. It was submitted that no income was chargeable u/s 9(1)(i) as no operations of the non resident are carried out in India and no part of his income is attributable to any India operations; Since India has DTAA with France, the assessee is entitled to opt for the provisions of the said Treaty which are beneficial. Payment to Mr. P. Dedeyn does not fall within the definition of “fees for technical service” as per the Indo French Treaty; the provisions of non discrimination as contained in Article 26 of Indo French Treaty are applicable.

4. To support the contention that section 40a(i) are not applicable. It was submitted that tax itself was not deductible. For determining whether the tax was to be deducted at source, the basic requirement is that the amount paid should be chargeable to tax under the Act. Where the concerned payment is not chargeable to tax under the Act consequently, the question of invoking section 40a(I) does not arise. Reference was made to the following decisions:-

1. CIT v. Cooper Engineering Ltd. 68 ITR 457 (Bom.).

2. A1 Nisr Publishing 239 ITR 879 (AAR).

3. British Gas India Pvt. Ltd. in Re. 287 ITR 421 (AAR)

(Copy enclosed at pages 205 to 212 where (i) & (ii) were followed).

5. Reference was also made to application submitted to ITO (TDS), Ward International Taxation, authorizing to make the payment in respect of assessment year 2005-06, 2006-07 & 2007-08 wherein ITO (TDS) has authorized the assessee to make the payment to Mr. Patrice Dedeyn without deduction of tax vide orders dated 29.11.2005, 14.7.2006 and 27.7.2007.

6. Copy of agreement with Mr. Dedeyn was filed explaining the activities performed by him and reliance was placed on the decision of Authority for Advance Ruling in the case of Telesoft reported in 267 ITR 725 (AAR) wherein it was held that commission and retainer ship fee payable to foreign entities to secure orders from abroad for Indian business will not be taxable in India.

7. The provisions of section 9(1)(vii) read with explanation 2, are not applicable as the payment made by the assessee to Mr. Dedeyn did not refer to rendering services of managerial, technical or consultancy but was providing marketing support to generate incremental business to the assessee. This argument of the assessee was also supported by the aforementioned orders passed by the Assessing Officer u/s 195 of the Act. As the services by Mr. Dedeyn are rendered outside India, the income is not deemed to have arisen/accrued in India in terms of section 9(1) of the Income Tax Act, 1961.

8. In support of the second contention that the sum is paid is not chargeable to tax u/s 9(1)i) of the Act. The assessee relied upon the following decisions:-

1. CIT v. Toshoku 125 ITR 525 (SC) in which it has been held that if no operations of a business are carried out in taxable territories, the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India.

2. Carorandum & Co. v. CIT 108 ITR 335 (SC) wherein it was held that if all operations are carried out in the taxable territories, the profit & gain of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories.

3. CIT v. Tata Chemicals Ltd. 94 ITR 85 (Bom.).

4. Ind Telesoft P. Ltd. 267 ITR 725.

9. With regard to third objection that the payment does not fall to be taxed u/s 9(1)(vii)(b) read with Explanation thereto, it was submitted that the assessee is entitled to opt the provisions of DTAA with France being more beneficial to the assessee. Reference was also made to article 13(4) which defines fee for technical services and reference to protocol was made and also the reference was made to the decision of ITAT in the case of DCIT v. ITC Ltd., 82 ITD 239 (Kol.) wherein it was held that in all these DTAAs fees for technical services does not include fees received for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property and looking into the restricted “fees for technical services” as appearing in the three treaties with UK, USA and Switzerland, it was held that the scope of term “fees for technical services” was restricted vis-a-vis the scope of expression in Indo French DTAA. Reference was also made to various decisions to contend that section 9(1)(vii) read with Explanation was not applicable as no technical,. Knowledge, experience, skill know-how or process or consist of development and transfer of a technical plan or technical design has been made available. Reliance was also placed on the following decisions:-

1. DIT v. Sheraton International Inc.178 Taxman 84.

2. Raymond Ltd. v. DCIT 86 ITR 791 @ 836 para 92.

3. CESC Ltd. v. DCIT 275 ITR (AT) 15 Kol. @ page 49.

4. NQA Quality Systems Registrar Ltd. v. DCIT 2 SOT 249.

5. Nocil v. DCIT 96 TTJ (Mum.) 765 @ pages 76 & 77.

6. Anapharma 174 Taxman 124 (AAR).

7. Intertek Tersting Services India (P) Ltd. 175 Taxman 375 (AAR).

10. Fourthly, it was submitted by the assessee that provisions of section 40a(i) are not applicable because non discrimination contained in Article 26 by DTAA with France and reliance was placed on the following decisions:-

1. Herbal Life International India (P) Ltd. v. ACIT (2006) 101 ITD 450 (Del.).

2. Millennium Infocom Technologies Ltd. v. ACIT 309 ITR (AT) Del. 18.

11. The Ld CIT(A) referring to these submissions firstly has held that section 40a(i) could not be invoked if the sum payable is not chargeable to tax in India. For this purpose, he has placed reliance on the following decisions:-

1. CIT v. Cooper Engineering Limited. 68 ITR 457 (Bom).

2. Al Nisr Publishing vs. CIT (AAR) (supra).

12. Ld. CIT (A) also referred to the financial year 2005-06, 2006-07 & 2007-08 where on identical facts, in the course of dealing with applications u/s 195, the Directorate of International Taxation after examining necessary facts has given a concrete finding that the payment being not chargeable to tax under the Income Tax Act, 1961, there was no requirement to deduct tax at source. While passing such order, the Assessing Officer examined the agreement with Mr. Dedeyn and gave a finding that services being rendered outside India, the income is not deemed to have accrued or arisen in India in terms of section 9(1) of the Act. It was, therefore, held that very applicability of section 40(a)(i) is thus ruled out at the initiate stage. He also referred to the subsequent assessment for assessment year 2006-07 and 2007- 08 wherein the assessment order passed u/s 143(3) after prope scrutiny, no disallowance whatsoever was made u/s 40a(i) of the Act.

13. Ld CIT(A) has also held that payment made to the assessee u/s 9(1)(i) of the Act are not liable to be assessed as rendering of services to the assessee was from outside India from his existing base in France and thus the matter is covered in favour of the assessee by the decisions of Hon'ble Supreme Court in the case of CIT v. Toshoku (supra) and in the case of Carbonrandum & Co. (supra).

14. On the third contention of the assessee that the payment to Mr. Dedeyn did not fall to be taxed u/s 9(1)(vii)(b) read with Explanation 2 thereof, the Ld CIT(A) has held that as Mr. Dedeyn was not making available to the assessee, any technical knowledge, experience, skill, know-how or process the payment so made cannot be termed fees for technical services and for arriving such conclusion he also referred to the decision relied upon for the assessee as mentioned above in the above part of the order.

15. The last contention of the assessee before Ld. CIT (A) was that section 40a(i) is not applicable on the basis of decision of ITAT in the case of Herballife International India (P) Ltd. (supra) & Millennium Infocom Technologies Ltd. (supra). The CIT(A) has held that non discrimination provisions are contained in Article 26 of the Indo French Treaty and the aforementioned two judgments support the case of the assessee. The Assessing Officer cannot apply the provisions of section 40a(i) of the Act and for this additional reason there should not have been any disallowance. It is in this manner, the CIT(A) has deleted the addition. Aggrieved, the department is in appeal.

16. After narrating the facts, the Ld DR relying upon the assessment order which has been referred in detail in the above part of this order, pleaded that disallowance was rightly made by the Assessing Officer u/s 40a(i) of the Act as the assessee did not deduct TDS on the payments made by it to Mr. Dedeyn. Therefore, he submitted that the disallowance deleted by the CIT(A) should be set aside and addition should be restored.

17. On the other hand, referring in detail to the order of CIT(A), it was pleaded by Ld AR that the CIT(A) was right in deleting the addition. He submitted that in any case, the decision of CIT(A) is well covered by the aforementioned two judgments which have later on to be followed

by ITAT Chennai Bench in the case of Asia Net Communication Ltd. v. DCIT reported in (2010) 1 ITR (Trb.) 683 (Chennai), copy of which has been also filed from pages 59 to 72 of the paper book. To elaborate, it is the case of the Ld AR that section 40 (a) as it existed before amendment by Finance (No.2 Act) of 2004 w.e.f. 1.4.2005 read with Article 26 of DTAA with India & France should be interpreted, that there is no obligation of the assessee to deduct tax out of payments made by it to Mr. Dedeyn as Article 26(4) regulates a non discrimination clause. Article 26(1) says that Nationals of one Contracting State shall not be subjected to in the other Contracting State to any taxation or any requirement connected therewith which is much more onerous, then it is on the nationals of that other Contracting State. Article 26(4) is general clause providing for indirect discrimination against non resident and interpreting similar provisions of India-US DTAA, it was so held by Delhi ITAT in the case of Herballife International India (P) Ltd. (supra). In that case, the assessee company was incorporated in India by this American Parents Co. H with approval of Ministry of Industry in carrying on business and trading and marketing of herbal products after manufacturing the same in India on contract basis. It entered into Administrative Service Agreement dated 10.11.1999 with H. Under the said agreement H agreed to render various services including data processing, accounting, financial and planning services in respect to its herbal products in lieu of some administrative fees payable by the assessee. The expenses incurred by H in USA for providing such services were not only services for providing services to the assessee but also to its various other subsidiaries across the world by maintaining its centralized staff and other resources and the cost to incurred was apportioned and claimed from the assessee on a scientific basis, as administrative fees. The assessee claimed an expenditure equivalent to `.5.83 crores towards administrative fees paid to H which included the fee for the period from 1.1.2000 to 31.3.2000. The Assessing Officer held that services rendered by H fell within the definition of “Fees for Technical Services” as per provisions of section 9(1)(vii) and since there was a failure to deduct tax at source he disallowed the same by invoking provisions of section 40a(i) of the Act and on these facts reading the provisions of Article 26 of India–US DTAA as well as provisions of section 40a(i) (pre amendment by Finance (No.2) Act, 2003 w.e.f. 1.4.2005. It was held that the payment in question by assessee to H attracted the provisions of Indo-US DTAA. The payment in question, if at all, would be taxable in the hands of H in India only if it was a payment for included services within the meaning of Article 12(4) of said DTAA and not taxable in India otherwise. The sum in question could not be taxed as business income, since H admittedly did not have a permanent establishment in India. If the income was considered or having accrues or arisen in India, yet it could be taxed in India only if it was fees for included services. Even if the payment was considered as “fee for technical services” within the meaning of the Act, yet it could not be taxed because “fees for technical services” and “fees for included services” under Indo-US DTAA had different meaning and they were not one and the same. If the revenue wanted to tax the payment by the assessee to H in the hands of H in India, it had to bring its case within the ambit of Article 12(4) of DTAA i.e. fees for included services. Therefore, the payment have to be judged in the context of DTAA as to whether it was taxable in India or not. It was further held that the provisions of section 40a(i) as it existed prior to its amendment by Finance Act, 2003 provided for disallowance for payment made to non resident only where tax is not deducted at source and on such a similar payment made to a resident does not result in disallowance in the event of non deduction of tax at source. Thus a resident left with a choice of dealing with a resident or a non resident in business, would opt to deal with a resident rather than a non resident owing to the provisions of section 40a(i) of the Act. To that extent, the non resident is discriminated. Article 26(3) of Indo- US DTAA seeks to provide against such discrimination and says that deduction should be allowed on the same condition as if the payment is made to a resident. Thus, this clause in DTAA neutralizes the rigour of the provisions of section 40[a(i), by virtue of the provisions of section 90(2) of the Act, the law, which is beneficial to the assessee to whom the DTAA applies should be followed. Therefore, in view of Article 26(3) of Indo-US DTAA, the Assessing Officer could not seek to invoke the provisions of section 40[a(i) to disallow the claim of the assessee for deduction and even on the assumption that the sum in question was chargeable to tax in India.

18. At the outset, not going into any other aspect of the issue, Ld Sr. counsel has rested his case for all these years on the basis of later observations of the Bench in the case of Herballife International India (P) Ltd. (supra) particularly on para 26 and thus it was pleaded that order of CIT(A) may be upheld on this ground only. It was submitted that the decision of the ITAT later on followed in the case of Millennium Infocom Technologies Ltd. (supra) and in the case of Asia Net Communication Ltd. (supra). Therefore, it was pleaded that these appeals are covered by the aforementioned decisions and the appeals filed by the revenue should be dismissed.

19. We have heard the parties and perused the material available on record. The provision of Article 26(3) of DTAA as considered by the Tribunal in the case of Herballife International India (P) Ltd. (supra) and DTAA with Indo-US are reproduced below:-

“26(3): Except where the provisions of paragraph -1 of Article 19 (Associated Enterprises), paragraph 7of Article -11 (interest) of paragraph-8 of Article -12 (Royalties and Fees for included services) apply, interest, royalty and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State, shall, for the purpose of determining the taxable profits of the first mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first mentioned state.”

20. Article 26(4) of DTAA with Indo-France are reproduced below:-

“26 (4): Except where the provisions of Article 10, paragraph 7 of Article 12 or paragraph 8 of Article 13, apply interest, royalties and other disbursements paid by an enterprise of one of the 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. Similarly, any debts of the enterprise of one of the Contracting State to a resident of the other Contracting State shall for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first mentioned Contracting State.”

21. The assessments involved in the present case are also prior to assessment year 2005-06, therefore, section 40a(i) as prior to its amendment by the Finance Act, 2003 w.e.f. 1.4.2004 will be applicable. It can be seen from the aforementioned wording of Article 26 which in both the DTAAs, are almost pari materia. The main substance of this article is that by applying non discriminatory clause what is really to be seen is whether two persons of the resident of the same state and were being treated differently. If the facts of present case are considered in the light of decision of Coordinate Bench in the case of Herballife International India (P) Ltd. (supra) where considering the similar provisions, it has been held that the provisions of section 40a(i) as it existed prior to its amendment by the Finance Act, 2003 w.e.f. 1.4.2004 applied to payments made by the assessee outside India to a non resident only. After 1.4.04, the provisions apply equally to both resident and non-resident. A similar payment made to a resident prior to amendment does not result in disallowance in the event of non deduction of tax at source. Thus, a resident has been left with a choice of dealing with a resident or a non resident in business, would opt to deal with a resident rather than a non resident owing to the provisions of section 40a(i) of the Act. To that extent, the non resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide against such discrimination and says that deduction should be allowed on the same condition as if the payment is made to a resident. By virtue of provisions of section 90(2) of the Act which is beneficial to assessee to whom the DTAA is applied should be followed. Therefore, respectfully following the aforementioned decision, we hold that the Assessing Officer could not seek to invoke the provisions of section 40a(i) of the Act to disallow the claim of the assessee even on the assumption that the sum in question is chargeable to tax in India. For the sake convenience, these observations of the Coordinate Bench are reproduced below:-

“20. At the outset, we take up for consideration the question whether in view of the provisions of Article 26(3) of the DTAA between India- and USA, even. assuming that the payment in question is not a. reimbursement of expenses and even assuming that they were. fees for included services within the meaning of Article 12(4) of the said DTAA between India and USA, whether the provisions of section 40(a)(l) of the Act, cannot be applied in this case and consequently no disallowance can be made. A decision on this question, in our view; will obviate the necessity of deciding the other questions raised in point (A) above. We may at this stage itself mention that apart from the consequence of disallowance of expenditure for nondeduction f tax at source at the time of making payment to a non-resident, the assessee as a person responsible for making payment of any sum chargeable to tax to a nonresident is obliged to deduct tax at source under the provisions of section 195 of the Act. On such failure the person responsible for deduction of tax at source is liable to pay the tax deductible together with interest from the date on which such tax is due to the date on which such tax is paid under the provision of section 201(1) and (1A) of the Act. In the present case the payment to M/s. HIAI had been made by the assessee office at Bangalore and, therefore, the officer having jurisdiction over the branch office at Bangalore had already initiated proceeding against the assessee under the provisions of Chapter XVII of the Act dealing with "collection and recurring of tax" and Part B thereof dealing with deduction at source. The assessee has, in such proceedings, taken a plea that the payment in question is not chargeable to tax. In such 'proceedings, which is now pending disposal before the ITAT Bangalore Benches, the questions, arising in this appeal, other than the applicability of Article 26(3) of DTAA between India-USA, is subject matter for consideration. If applicability of Article 26(3) of DTAA between India and USA in the context of section 40(a)(l) is decided in favour of the assessee, the other questions can be decided in the appeal pending before the IT AT Bangalore Benches, which we feel is an appropriate forum to decide as to whether the payment by assessee to M/s HIAI is chargeable to tax in India in the hands of M/s. HIAI and the assessee as a person responsible for making payment ought to have deducted tax at source.

21. We may also incidentally point out that Article 27 of the DTAA between India and USA contemplates a situation where a person considers that actions of one or both the Contracting State s result or result will for in taxation not in accordance with the provisions of the DTAA, then he may without prejudice to other remedies available to him under the local law, present his case to a competent authority of the Contracting state of which he is a resident or national. The assessee has made a reference under the Mutual Agreement procedure provided under Article 27 of India-

USA DTAA.

The provisions of section 40(a)(i) as it stood prior to it's amendment by the Finance Act, 2003, with effect from 1-4- 2004 applied to payments by an assessee outside India to a non-resident only . After 1.4.2004, the provisions apply equally to both resident and non-resident. In this appeal we are concerned with assessment year 2001-02 in which the provisions of section 4 (a)(I)a5 It existed prior to 1-4-2004

23. A question may arise for consideration is as to whether assessee who is a resident could take benefit under this clause i.e. Article 26(3). A plain reading of Article 26(3)clearly suggests that the assessee can claim 'the' benefit. In this regard it would be relevant to refer to the provisions of section 90(2) of the Act, which reads as follows:

"90(2) where the Central Government has entered into an Agreement with the Government of any other country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation then in relation to the assessee to whom such agreement applies, the provisions of this Act, shall apply to the extent they are more beneficial to that assessee."

The payment in question by assessee to M/s. HIAI attracts the provisions of the Indo-US DTAA, The payment in question if at all will be taxable in the hands of M/s. HIAI in India only if it is a payment for included services within the eaning 6f Article 12(4) of the said DTAA 'and not taxable in India otherwise; , The sum in question cannot be taxed as Business income, since M/s HIAI admittedly does not have a permanent establishment in In9ia. If the income is considered as having _accrued or arisen to M/s. HIAI in India, yet they can be taxed in India only if they are fees for included services. Even if the payment is c6nsidered as 'fees for Technical Services~ within the meaning of Income-tax Act, 1961, yet they cannot be taxed because 'fees for Technical Service's' and 'fees for Included Services' under India-US DTAA have different meaning and they are not one 'and the same. If the Revenue wants to tax the payment by assessee to M/s, HIAI in the hands of M/s. HIAI in India it has to bring its case within the ambit of Article 12(4) of the DTAA i.e. fees for Included Services. The payment in-question would therefore have to be judged in the context of the DT AA as to whether it is taxable in India or not.

25. We· shall now revert to Article 26(3) of the DTAA which deals with non discrimination. To illustrate as to what extent the non-discriminate clause would apply, we may make a reference to such clauses in the OECD Model of "Double Taxation Convention", Organization for Economic Cooperation and Development ("OECD") is an organization, comprising of member countries, for economic cooperation. It's Fiscal Committee had taken up for consideration the study of questions relating to double taxation and of other fiscal questions of a similar technical nature. The Committee after examining methods by which taxation can be used to promote improved allocation and use of economic resources, both domestically' and internationally and after considering ways of increasing the effectiveness of taxation as a policy instrument for achieving Government objectives, have made a model Doable Taxation Convention. The member countries

generally use this model as a basis for negotiation Double Taxation Conventions. India is not, a member of the GECD. We may at this stage set out the provisions of non discrimination as contained in the OECD model. Article 24(4) of the OECD model is in pari materia the same as that of Article 26(3) of the Indo-US DTAA and the same reads thus:

"Article 24(4) : Except where the provisions of paragraph 1 of Article-9, paragraph 6 of Article-11 or paragraph 4 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 State. Other portion of Article 24(4) are not repeated as they are not relevant to the present issue]."

Mr. Philip Baker, Author of the book on "Double Taxation Conventions and International Tax Law" A Manual on the OECD Model Tax Convention on Income and on Capital, 1992, Second Edition at page 396 to page 397 has the following to stay on Article 24(4): "

"Article 24(4): Deduction of interest, royalties and other disbursements 24-18-Article 24(4) is not concerned with the discriminatory treatment of nationals etc. of one State in the other Contracting State, but the treatment of enterprises of a Contracting State under the tax law of that

State. Subject to the position where a special relationship exists between the enterprise and the recipient, interest, royalties and other disbursements paid to a resident of the other Contracting State should be deductible to the same extent that they would be 'deductible if paid to a resident

of the same State. Thus this prevents the indirect discrimination which would arise if the sums were not deductible. A similar provision is included in the Article relation to the deduction of debts owed to residents of the other Contracting State in determining the taxable capital of the enterprise."

At page 411, the following commentaries are found on Article 24(4):

"This paragraph is designed to end a particular form of discrimination resulting from the fact that in certain countries the deduction of interest, royalties and other disbursements allowed without restriction when the recipient is resident, is restricted or even prohibited when he is a non-resident. The me situation may also be found in the sphere of capital taxation, as regards debts contracted to a on-resident. It is however open to Contracting States to modify this provision in bilateral conventions to avoid its use for tax avoidance purpose.

26. As already observed by us the provisions of section 40(a)(i) as it existed prior to it's amendment .by Finance Act, 2003, with "effect from 1-4-2004 provided for disallowance of payment made to a nonUresident only where tax is not deducted at source' on such payment at source. A similar payment to a resident does not result in disallowance in the event of non-deduction of tax at source, Thus a non- resident left with a choice of dealing with' a resident for a non-resident in business would opt to deal with a resident rather than anon-resident owing to the provisions of section 40(a)(i). To this extent the nonresident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide against such discrimination and says that deduction should be allowed on the same condition as if the payment is made to a resident, Thus this clause in.

DTAA neutralizes the rigour of the provisions of section 40(a)(i). By virtue of the provisions of section 90(2) the law which is beneficial to the assessee to whom the DT AA applies should be followed. We therefore hold that In view of Article 26(3) of Indo - US DTAA, the Assessing Officer cannot seek to invoke the provisions of section 40(a)(/) of the Act to disallow the claim of the assessee for deduction even on the assumption that the sum in question is chargeable to tax in India. We however make' it clear that the question whether the sum is chargeable to tax is left open for adjudication by the appropriate forum in the appropriate proceedings already referred to in this order.”

22. Since on the above aspect of the matter, it is held that Ld CIT(A) has rightly deleted the addition. We do not consider it necessary to go into other aspects of the matters and the appeals filed by the revenue are dismissed.

23. In the result, the appeals filed by the revenue are dismissed.

24. Order pronounced in the open court on the 11th day of May, 2012.

                                                Sd/-                                    Sd/-

                                       (T.S. KAPOOR)                (I.P. BANSAL)

                             ACCOUNTANT MEMBER   JUDICIAL MEMBER

Dt. 11.5.2012.

HMS/dk

Copy forwarded to:-

1. The appellant

2. The respondent

3. The CIT

4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi.

True copy.

By Order

(ITAT, New Delhi).