Section 263 Cannot Override DTAA Non-Discrimination: Lessons from LinkedIn India ITAT Ruling
Background of the Dispute
The Delhi Bench of the ITAT examined whether the Principal Commissioner of Income Tax (PCIT) could validly invoke Section 263 of the Income Tax Act 1961 in the case of LinkedIn Technology Information Pvt. Ltd. for A.Y. 2018-19. The controversy centred on disallowance under Section 40(a)(i) for payments made to non-residents without deduction of tax at source, and whether the PCIT was justified in revising the reassessment order to enhance the disallowance from 30% to 100%.
At the heart of the decision lay the non-discrimination clause in Article 26(3) of the India-USA DTAA, and the binding precedent of the Delhi High Court in CIT vs Herbalife India P Ltd, which governs how disallowances on payments to non-residents must be aligned with similar disallowances on payments to residents.
The Tribunal ultimately held that although the reassessment order under Section 147 did contain an error in quantifying the disallowance base, it was not prejudicial to the interests of the Revenue once the India-USA DTAA was properly applied. Consequently, the jurisdiction assumed by the PCIT under Section 263 was declared invalid and the revision order was quashed.
Facts of the Case
Business Profile and Return Filing
The assessee, LinkedIn Technology Information Pvt. Ltd., is engaged in:
- Providing marketing and customer support services to LinkedIn Singapore Pte Ltd.
- Rendering contract research and development services to LinkedIn Ireland Unlimited Company.
Both service lines were carried out on a cost-plus mark-up basis as per inter-company arrangements.
The assessee filed its Return of Income on 30.11.2018, declaring total income of Rs. 85,42,52,880/-.
Original Scrutiny Assessment
- The case was picked up for Complete Scrutiny under CASS.
- Assessment was completed under
Section 143(3)read withSection 143(3A)andSection 143(3B)on 07.04.2021, accepting the returned income without any variation.
Reopening Under Section 147
Subsequently, the case was reopened under Section 147 based on information that the assessee had made:
- Foreign remittances as FTS/FIS amounting to Rs. 8,61,10,484/-, and
- Foreign remittances as FTS amounting to Rs. 9,15,05,365/-,
without deduction of tax at source under Section 195.
In the reassessment order dated 28.03.2023, passed under Section 147 read with Section 143(3A) and Section 143(3B), the Assessing Officer (AO) disallowed 30% of total remittances of Rs. 17,76,15,849/-, i.e., Rs. 5,32,84,755/-, applying Section 40(a)(i) read in line with Section 40(a)(ia) rate of 30%.
Proceedings Before the PCIT Under Section 263
Assessee’s Explanation in Revision
In Section 263 proceedings, the assessee submitted that during A.Y. 2018-19, it had:
- Remitted Rs. 8,61,10,434/- to LinkedIn Corporation, and
- Remitted Rs. 53,94,881/- to HireRight LLC,
aggregating to Rs. 9,15,05,365/-.
The assessee pointed out that the AO, while making the reassessment, had wrongly applied 30% to the entire figure of Rs. 17,76,15,849/-, thereby effectively disallowing the same amount twice to the extent of Rs. 8,61,10,434/-.
PCIT’s Findings and Directions
The PCIT, in order dated 29.03.2024, accepted that there was indeed a double disallowance to the extent of Rs. 8,61,10,434/-. However, the PCIT took the view that:
- The remittances of Rs. 8,61,10,434/- to LinkedIn Corporation and Rs. 53,94,881/- to HireRight LLC, totaling Rs. 9,15,05,365/-, constituted FTS.
- Consequently, the AO should have invoked 100% disallowance under
Section 40(a)(i), rather than restricting the disallowance to 30% (which is applicable underSection 40(a)(ia)for residents).
On this basis, the PCIT held that:
- The reassessment order dated 28.03.2023 was erroneous, and
- It was prejudicial to the interests of the Revenue,
and therefore set aside the reassessment order with a direction to reframe it by making 100% disallowance of Rs. 9,15,05,365/- under Section 40(a)(i).