As assessee nt liable to deduct tax, disallowance u/s40(a)(i) (of Income Tax Act, 1961) can't be made,ITAT

Facts in Brief:

1. The assessee was engaged in business of export of iron ore. It made payments to foreign parties for monitoring, supervision of discharged cargo, draft survey, joint sampling of discharged cargo, photographs, sample preparation and sealing of samples, analysis of grade etc.

2. In assessment, Assessing Officer held, payments made by the assessee to foreign parties were taxable in India as fee for technical services in view of retrospective amendment of section 9(1)(vii) (of Income Tax Act, 1961) with effect from 1-6-1976 by Finance Act, 2010.

3. According to Assessing Officer, since assessee did not deduct tax at source while making payments in question under section 195 (of Income Tax Act, 1961), said payments were to be disallowed.

4. The Commissioner (Appeals) held, that since services had been rendered outside India, the income would accrue or arise outside India, where the actual service had been rendered. Nature of service rendered and source country of the payment immaterial in this context.

5. The Commissioner (Appeals) thus taking a view that no part of recipient's income was taxable in India, deleted disallowance made by the AO.

On appeal, ITAT held as under:

6. The assessee was not liable for deduction of tax under section 195 (of Income Tax Act, 1961). Since the assessee was not liable at that time to deduct the tax, the disallowance under section 40(a)(i) (of Income Tax Act, 1961) cannot be made. Thus, the order of the Commissioner (Appeals) deleting the addition is confirmed.

RELEVANT PARAS OF THE JUDGMENT ARE AS UNDER:

7. Once the payments made by the assessee to the non-residents are of the nature of technical fee, the legal position in view of the retrospective amendment with effect from 1-6-1976 in section 9 (of Income Tax Act, 1961) brought out by the Finance Act, 2010 is indisputably that the said income will be deemed to accrue and arise in India whether or not the non-resident has residence or place of business or business connection in India or the non-resident has rendered services in India. Under the amended Explanation to section 9(1) (of Income Tax Act, 1961) as it exists today it is specifically stated that the income of non-resident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of section 9(1) (of Income Tax Act, 1961) and shall be included in the total income whether or not (a) the non-resident has residence or place of business or business connection in India or (b) the non-resident has rendered services in India.

8. It is an undisputed fact that the Finance Act, 2010 received the assent of the President on 8-5-2010 and all the payments have been made by the assessee to the non-resident party prior to receiving of assent of the President making the retrospective amendment by adding Explanationto section 9(1) (of Income Tax Act, 1961). At the time when the assessee made the payment there was no provision under section 9(1) (of Income Tax Act, 1961) making the technical fees deemed to accrue or arise in India whether or not (a) the non-resident has residence or place of business or business connection in India or (b) the non-resident has rendered services in India.

9. It is not disputed by the revenue that the non-resident did not have residence or place of business or business connection in India. The non-resident has also not rendered services in India. The source of the income in the hands of the non-resident was outside India. Even the place of business which earned the income was also outside India. Since the technical fees was not deemed to accrue or arise in India at the time when the assessee made the payment as there was no provision under section 9(1) (of Income Tax Act, 1961), the income received by the non-resident as per the existing law at the time when the assessee made the payment, was not taxable in India under the IT Act.

10. Prior to the insertion of Explanation to section 9(1) (of Income Tax Act, 1961) by the Finance Act, 2010 with retrospective effect, the professional and consultancy services rendered outside India were not deemed to accrue or arise in India irrespective of the fact whether the party who rendered the services is having place of residence or place of business in India. It is only due to the retrospective amendment made by the Finance Act, 2010 that the position has become clear. If the income was not taxable in India it cannot be made taxable in view of the tax treaty.

11. This is a fact that as argued by the assessee the retrospective amendment brought to section 9(1)(vii) (of Income Tax Act, 1961) by the Finance Act, 2010 was not in existence at the time when the assessee had made the payments. The assessee submitted that it cannot be penalized for performing an impossible task of deducting TDS in accordance with the law which was brought into the statute book much after the point of time when the tax deduction obligation was to be discharged.

12. The revenue did not deny that the Finance Act, 2010 got the assent of the President on 8-5-2010 much later than the date when the assessee had made the payment to these parties. Therefore, it is held that the aforementioned amendment does not create any liability against the assessee as the legal position prevailing at the relevant time has to be considered when the payment was made by the assessee to the non-resident party.

Case Reference-Assistant Commissioner of Income-tax, Circle-2 (1), Panaji, Goa v. Ajit Ramakant Phatarpekar

IN THE ITAT PANAJI BENCH