I paid administrative fees to my US group company without deducting TDS and the officer has disallowed the whole amount under section 40(a)(i). Can I use the treaty's non-discrimination article?
Yes, for years before the 2005 amendment. The Delhi High Court held that section 40(a)(i), as it stood for assessment year 2001-02, disallowed a payment to a non-resident for failure to deduct tax while an identical payment to a resident carried no such consequence. That lack of parity in deductibility is discrimination under Article 26(3) of the India-US treaty. Section 90(2) makes the treaty prevail, and the Court rejected the argument that a comparison needs a matching provision in the treaty. The Rs.5.83 crore administrative fee was allowed and the Revenue's appeal dismissed.
Decided by the High Court (High Court of Delhi - Justice S. Muralidhar and Justice Vibhu Bakhru (judgment by Dr S. Muralidhar, J)) on 2016-05-13, reported as ITA No. 7/2007 (Delhi High Court), reserved 30 March 2016, decided 13 May 2016. It bears on section 40(a)(i), section 90(2), section 37(1), section 40(a)(ia), section 195 of the Income Tax Act 1961, in Deductions & Disallowances and TDS Defaults matters.
This is the leading Indian High Court authority on the deduction non-discrimination clause, the treaty article practitioners most often forget exists. It settles three points the Revenue routinely argues the other way: that the comparison under "same conditions" is about the consequence of not deducting, not merely about whether a withholding obligation exists; that the Article 14 intelligible-differentia test does not transfer to a treaty, where the question is whether the classification defeats the treaty's object; and that section 90(2) lets a treaty override an Act provision even where the treaty has no corresponding clause. Its practical reach is limited: it rests on section 40(a)(i) as it stood before section 40(a)(ia) extended disallowance to resident payments from 1 April 2005, so for later years the parity argument has to be rebuilt on the differing scope of the two clauses.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee is the Indian subsidiary of Herbalife International Inc, USA, trading and marketing herbal products. It entered into an Administrative Services Agreement dated 10 November 1999 with Herbalife International America Inc (HIAI), which provided data processing, record keeping, distributor information, order and shipment processing, and financial and marketing services out of centralised costs allocated among group subsidiaries. For assessment year 2001-02 the assessee paid HIAI an administrative fee of Rs.5.83 crore without deducting tax at source, and the Assessing Officer disallowed it under section 40(a)(i). The officer also disallowed fees relating to 1 January 2000 to 31 March 2000 as prior period expenditure, and fees for 1 January 2001 to 31 March 2001 because no bill had been raised and no RBI permission was shown. The Tribunal allowed all of it by order dated 28 February 2006. The Revenue appealed under section 260A. Separately, the assessee's mutual agreement procedure had led the Bangalore Bench to hold 25 per cent of the administrative fee taxable in India.
The appeal was dismissed and every question answered in favour of the assessee. Section 40(a)(i), as it stood for assessment year 2001-02, is discriminatory and cannot be applied to the payment to HIAI in view of Article 26(3) of the India-US treaty read with section 90(2); the Rs.5.83 crore administrative fee is therefore deductible. On the prior period claim, the Court agreed with the Tribunal that the liability for 1 January to 31 March 2000 accrued only when HIAI first raised its debit note on 30 June 2000, there being no past precedent on which the liability could have been estimated earlier, so it was rightly allowed in the year in question. On the last quarter of the financial year 2000-01, the Court held that after FERA was replaced by FEMA on 1 June 2000 no RBI permission was needed, and that on Bharat Earthmovers principles a liability definitely incurred and capable of reasonable estimation is deductible even though the bill had not yet been raised.
The Court took as its starting point that fees for technical services paid to HIAI would be allowable under section 37(1) but for the condition in section 40(a)(i), so Article 26(3) required an enquiry into whether that condition differed for a resident payee. For assessment year 2001-02 it plainly did: there was no withholding requirement on payments to residents at all, section 40(a)(ia) having been inserted only from 1 April 2005, and consequently no disallowance. The Court held the discrimination lies not in the duty to withhold but in the consequence of failing to withhold. The Revenue's attempt to import the Article 14 test - intelligible differentia and rational nexus to the object of the statute - was rejected: a treaty is the product of bargaining in which each side trades revenue for other advantages, as Azadi Bachao Andolan recognised, so the nexus enquiry is whether the classification defeats the object of the treaty, not of the Act. It does, because the object of Article 26(3) is parity in the deductibility of a payment in the payer's hands whether the payee is resident or non-resident. The Court identified the tested party as a resident payer transacting with a resident payee who does not withhold and suffers no disallowance. On section 90(2) it held the treaty prevails unless the Act is more beneficial, irrespective of whether the Act has a provision corresponding to the treaty article, relying on CBDT Circular No. 333 of 2 April 1982 as approved in Azadi Bachao Andolan. Hyosung Corporation was distinguished as concerning only procedure before the Authority for Advance Rulings, and Automated Securities Clearance was treated as overruled by the Special Bench in Rajeev Sureshbhai Gajwani.
The lack of parity in the allowing of the payment as deduction is what brings about the discrimination.
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Handle my notice → Ask a CA on WhatsAppYes, for years before the 2005 amendment. The Delhi High Court held that section 40(a)(i), as it stood for assessment year 2001-02, disallowed a payment to a non-resident for failure to deduct tax while an identical payment to a resident carried no such consequence. That lack of parity in deductibility is discrimination under Article 26(3) of the India-US treaty. Section 90(2) makes the treaty prevail, and the Court rejected the argument that a comparison needs a matching provision in the treaty. The Rs.5.83 crore administrative fee was allowed and the Revenue's appeal dismissed. This was decided by the High Court (High Court of Delhi - Justice S. Muralidhar and Justice Vibhu Bakhru (judgment by Dr S. Muralidhar, J)) and bears on section 40(a)(i), section 90(2), section 37(1), section 40(a)(ia), section 195 of the Income Tax Act 1961. It is reported as ITA No. 7/2007 (Delhi High Court), reserved 30 March 2016, decided 13 May 2016. This is the leading Indian High Court authority on the deduction non-discrimination clause, the treaty article practitioners most often forget exists. It settles three points the Revenue routinely argues the other way: that the comparison under "same conditions" is about the consequence of not deducting, not merely about whether a withholding obligation exists; that the Article 14 intelligible-differentia test does not transfer to a treaty, where the question is whether the classification defeats the treaty's object; and that section 90(2) lets a treaty override an Act provision even where the treaty has no corresponding clause. Its practical reach is limited: it rests on section 40(a)(i) as it stood before section 40(a)(ia) extended disallowance to resident payments from 1 April 2005, so for later years the parity argument has to be rebuilt on the differing scope of the two clauses. If it applies to you, the first step is this: Check whether the payee's treaty carries a deduction non-discrimination clause (Article 26(3) in the India-US treaty; Article 24(4) of the OECD Model) before conceding a section 40(a)(i) disallowance.
The assessee is the Indian subsidiary of Herbalife International Inc, USA, trading and marketing herbal products. It entered into an Administrative Services Agreement dated 10 November 1999 with Herbalife International America Inc (HIAI), which provided data processing, record keeping, distributor information, order and shipment processing, and financial and marketing services out of centralised costs allocated among group subsidiaries. For assessment year 2001-02 the assessee paid HIAI an administrative fee of Rs.5.83 crore without deducting tax at source, and the Assessing Officer disallowed it under section 40(a)(i). The officer also disallowed fees relating to 1 January 2000 to 31 March 2000 as prior period expenditure, and fees for 1 January 2001 to 31 March 2001 because no bill had been raised and no RBI permission was shown. The Tribunal allowed all of it by order dated 28 February 2006. The Revenue appealed under section 260A. Separately, the assessee's mutual agreement procedure had led the Bangalore Bench to hold 25 per cent of the administrative fee taxable in India. The matter was decided on 2016-05-13 by the High Court (High Court of Delhi - Justice S. Muralidhar and Justice Vibhu Bakhru (judgment by Dr S. Muralidhar, J)). On those facts the High Court held as follows. The appeal was dismissed and every question answered in favour of the assessee. Section 40(a)(i), as it stood for assessment year 2001-02, is discriminatory and cannot be applied to the payment to HIAI in view of Article 26(3) of the India-US treaty read with section 90(2); the Rs.5.83 crore administrative fee is therefore deductible. On the prior period claim, the Court agreed with the Tribunal that the liability for 1 January to 31 March 2000 accrued only when HIAI first raised its debit note on 30 June 2000, there being no past precedent on which the liability could have been estimated earlier, so it was rightly allowed in the year in question. On the last quarter of the financial year 2000-01, the Court held that after FERA was replaced by FEMA on 1 June 2000 no RBI permission was needed, and that on Bharat Earthmovers principles a liability definitely incurred and capable of reasonable estimation is deductible even though the bill had not yet been raised.
The Court took as its starting point that fees for technical services paid to HIAI would be allowable under section 37(1) but for the condition in section 40(a)(i), so Article 26(3) required an enquiry into whether that condition differed for a resident payee. For assessment year 2001-02 it plainly did: there was no withholding requirement on payments to residents at all, section 40(a)(ia) having been inserted only from 1 April 2005, and consequently no disallowance. The Court held the discrimination lies not in the duty to withhold but in the consequence of failing to withhold. The Revenue's attempt to import the Article 14 test - intelligible differentia and rational nexus to the object of the statute - was rejected: a treaty is the product of bargaining in which each side trades revenue for other advantages, as Azadi Bachao Andolan recognised, so the nexus enquiry is whether the classification defeats the object of the treaty, not of the Act. It does, because the object of Article 26(3) is parity in the deductibility of a payment in the payer's hands whether the payee is resident or non-resident. The Court identified the tested party as a resident payer transacting with a resident payee who does not withhold and suffers no disallowance. On section 90(2) it held the treaty prevails unless the Act is more beneficial, irrespective of whether the Act has a provision corresponding to the treaty article, relying on CBDT Circular No. 333 of 2 April 1982 as approved in Azadi Bachao Andolan. Hyosung Corporation was distinguished as concerning only procedure before the Authority for Advance Rulings, and Automated Securities Clearance was treated as overruled by the Special Bench in Rajeev Sureshbhai Gajwani. In the words reproduced by the source cited on this page: "The lack of parity in the allowing of the payment as deduction is what brings about the discrimination."
It was decided by the High Court on 2016-05-13 and is reported as ITA No. 7/2007 (Delhi High Court), reserved 30 March 2016, decided 13 May 2016. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 40(a)(i), section 90(2), section 37(1), section 40(a)(ia), section 195, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed and every question answered in favour of the assessee. Section 40(a)(i), as it stood for assessment year 2001-02, is discriminatory and cannot be applied to the payment to HIAI in view of Article 26(3) of the India-US treaty read with section 90(2); the Rs.5.83 crore administrative fee is therefore deductible. On the prior period claim, the Court agreed with the Tribunal that the liability for 1 January to 31 March 2000 accrued only when HIAI first raised its debit note on 30 June 2000, there being no past precedent on which the liability could have been estimated earlier, so it was rightly allowed in the year in question. On the last quarter of the financial year 2000-01, the Court held that after FERA was replaced by FEMA on 1 June 2000 no RBI permission was needed, and that on Bharat Earthmovers principles a liability definitely incurred and capable of reasonable estimation is deductible even though the bill had not yet been raised. It arises in Deductions & Disallowances and TDS Defaults matters, on section 40(a)(i), section 90(2), section 37(1), section 40(a)(ia), section 195 of the Income Tax Act 1961, and was decided by High Court of Delhi - Justice S. Muralidhar and Justice Vibhu Bakhru (judgment by Dr S. Muralidhar, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Frame the comparison as the Court did: identify a resident payee receiving the same kind of payment and show that non-deduction there carries no disallowance. Raise section 90(2) expressly and be ready for the argument that the treaty must contain a matching provision - this judgment rejects it. For assessment year 2006-07 onwards, work out the actual difference between section 40(a)(i) and section 40(a)(ia) on your facts; do not assume this judgment decides those years.
Still good law. I read the judgment through to the operative order dismissing the Revenue's appeal. Its reasoning is expressly tied to section 40(a)(i) as it stood for assessment year 2001-02, before section 40(a)(ia) brought resident payments within the disallowance from 1 April 2005; for later years the comparison the Court drew no longer holds in the same terms. I could not check whether the Revenue took the matter to the Supreme Court. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested page is clipped in the middle: pages 12 to 21 of 35 are absent, covering roughly paragraphs 25 to 44 - the remainder of the Revenue's submissions, the assessee's submissions, and the opening of the Court's own analysis, including any treatment of the character of the payment under section 9(1)(vii) and section 195. Everything above is drawn from the surviving parts, which include the framed questions, the Article 26(3) reasoning at paragraphs 45 to 62, and the operative conclusion. The batch line listed section 9(1)(vii); the appeal as harvested is decided on section 40(a)(i) with Article 26(3) and section 90(2), and any chargeability discussion falls in the missing pages. The source page carried no reporter citations, so the case number is given instead. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed and every question answered in favour of the assessee. Section 40(a)(i), as it stood for assessment year 2001-02, is discriminatory and cannot be applied to the payment to HIAI in view of Article 26(3) of the India-US treaty read with section 90(2); the Rs.5.83 crore administrative fee is therefore deductible. On the prior period claim, the Court agreed with the Tribunal that the liability for 1 January to 31 March 2000 accrued only when HIAI first raised its debit note on 30 June 2000, there being no past precedent on which the liability could have been estimated earlier, so it was rightly allowed in the year in question. On the last quarter of the financial year 2000-01, the Court held that after FERA was replaced by FEMA on 1 June 2000 no RBI permission was needed, and that on Bharat Earthmovers principles a liability definitely incurred and capable of reasonable estimation is deductible even though the bill had not yet been raised.
TaxSphere, “CIT v Herbalife International India Pvt Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-herbalife-international-india-p-ltd/ (validity last checked 2026-08-29)
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