In its recent ruling in the Mitsubishi Corporation India Pvt. Ltd case, the Delhi Income Tax Appellate Tribunal (Tribunal) had to analyse the applicability of the DND clause on certain payments to its Japanese group entities having permanent establishment (PE) in India. These payments were made without complying with WHT provisions. However, the recipient Japanese entities filed their ROIs, including such payment as income and paid the necessary taxes. The tax authorities disallowed the payments for non-compliance of WHT provisions and contended that protection under the DND clause cannot be accessed by an Indian resident taxpayer. Aggrieved by this, the taxpayer appealed to the Tribunal.
The Tribunal held that though the DND clause impacts income determination of Indian residents, the subject matter is payment to a Japanese tax resident. The DND clause was therefore rightly invoked by the taxpayer. Additionally, the DND clause is designed to provide parity in eligibility for deduction between payments made to residents and those made to non-residents. If WHT is a pre-condition for deductibility of payments to non-residents, it cannot be enforced unless there is a similar pre-condition on payments to residents.
As the payment to a resident does not result in disallowance of expense for the taxpayer where the resident recipient complies with requisite conditions, it will have to be allowed as a deduction by applying the DND clause where the non-resident recipient also complies with the relevant conditions.
The Tribunal has also elucidated various facets of availing the benefit of the DND clause. Separately, by a recent amendment, ITL has restricted the disallowance on payments made to residents, without WHT, to 30% of the payment. A corresponding change has not been made for payments to non-residents. This ruling should help taxpayers avail deduction parity in appropriate cases by invoking the DND clause.