ITAT Delhi Quashes Section 263 Revision on 100% Disallowance of FTS to Non-Residents

ITAT Delhi Quashes Section 263 Revision on 100% Disallowance of FTS to Non-Residents

LinkedIn Technology Information Pvt. Ltd., engaged in providing marketing support and contract R&D services to overseas LinkedIn group entities, filed its return for AY 2018-19 declaring income of Rs. 85.42 crore. The original scrutiny assessment under Section 143(3) accepted the returned income. Thereafter, reassessment proceedings under Section 147 were initiated on the ground that the assessee had made foreign remittances towards fees for technical services (FTS) without deduction of tax at source.

The reassessment order disallowed 30% of total foreign remittances amounting to Rs. 17.76 crore under Section 40(a)(i). During Section 263 proceedings, the Principal Commissioner accepted that there was a double disallowance and held that only remittances of Rs. 9.15 crore made to LinkedIn Corporation and HireRight LLC were relevant. However, the PCIT held that the Assessing Officer erred in restricting the disallowance to 30% and directed 100% disallowance under Section 40(a)(i), holding the reassessment order to be erroneous and prejudicial to the interests of the Revenue.

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Issue Raised: Whether the PCIT was justified in invoking revisionary jurisdiction under Section 263 by directing 100% disallowance under Section 40(a)(i), despite the applicability of the non-discrimination clause under Article 26(3) of the India-USA DTAA.

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Tribunal’s Decision: The ITAT held that for invoking Section 263, both conditions must coexist. While the reassessment order suffered from an error in computing the quantum of remittance, the restriction of disallowance to 30% was legally sustainable in view of Article 26(3) of the India-USA DTAA.

The Tribunal held that disallowance of 100% of payments made to non-residents, as against 30% disallowance for similar payments to residents under Section 40(a)(ia), amounted to discriminatory treatment. Relying on Herbalife India Pvt. Ltd., the Tribunal ruled that Section 40(a)(i), insofar as it mandates 100% disallowance, violates the non-discrimination clause of the DTAA.

Since the Assessing Officer had already applied a 30% disallowance in line with treaty protection, the reassessment order could not be said to be prejudicial to the interests of the Revenue. Hence, the assumption of jurisdiction by the PCIT under Section 263 was held to be invalid, and the revisionary order was quashed.

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