18 May 2024

Direct Tax Amicus: March 2024


Disallowance under Section 40(a)(i) on payment made to non-residents – Whether violative of Non-Discrimination Article in tax treaty?
By Harshit Khurana and Kanupriya Sharma

This article in this issue of Direct Tax Amicus seeks to analyze the applicability of the non-discrimination article in tax treaties on disallowance of expenses on payment made to non-residents without withholding the applicable taxes. Decoding the legal position, the authors delve into the litigation trends and ponder over the question as to whether Section 40(a)(i) of the Income Tax Act, 1961 in its present form is violative of non-discrimination Article in tax treaty. They in this regard discuss various arguments which may be taken both by the taxpayer and the taxman. According to them, the strength of taxpayer’s arguments may outweigh the Taxman’s arguments.

Notifications & Circulars

  • Trusts – Taxability of balance 15% of donations made to other trust/fund
  • Trusts – Form 10B and 10BB – Timelines extended to 31 March 2024 in certain cases
  • Jurisdiction of certain Principal Chief Commissioners of Income-tax
  • Exchange of information with respect to taxes – Agreement between Government of India and Government of Samoa notified
  • Income Tax Return Forms 2, 3 and 5 – Certain changes notified
  • Income Tax Return-7 notified
  • Expenditure on scientific research under Section 35 – Panjab University notified

Ratio decidendi

  • Payment to non-residents not to be disallowed under Section 40(a)(i) (existing for AY 2006-07), being violative of non-discrimination article in tax treaty – Delhi High Court
  • Royalty and FTS under India-UK DTAA – Undertaking of background checks of employees or verification services is not covered – Delhi High Court
  • Disallowance under Section 14A cannot be computed without examining correctness of the claim regarding expenditure incurred for earning exempt income – ITAT Mumbai
  • Letter of comfort declared as contingent liability in financial statement should be treated as a corporate guarantee which requires charging of arm’s length consideration – ITAT Mumbai
  • Excess TDS deposited on basis of estimated earnings cannot be unjustifiably retained by Department if conditions of CBDT Circular dated 23 October 2017 are satisfied – Delhi High Court
  • Deemed dividend – Section 2(22)(e) is attracted in hands of entity who is beneficial owner of shares, and not in hands of borrower entity in which the beneficial owner holds substantial interest – ITAT Kolkata

August 2024/Issue-114 March 2024/Issue-114

Browse articles