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2022 (9) TMI 355 - Income Tax
TDS u/s 195 - disallowance u/s 40(a)(i) - Payment made to the Associate Enterprise (AE) in USA - income deemed to accrue or arise in India - primary contention of the assessee is that it cannot be made liable for default for non-deduction of tax at source when there is no such liability as per the law in force at the time of payment of the same to the foreign AE, namely, STI - HELD THAT:- In the instant case, the impugned assessment year is A.Y. 2008-2009. The law that was applicable is the law which existed during the impugned assessment year i.e., the aforesaid Explanation inserted by the Finance Act, 2007 and the laid down by the Supreme Court in the case of Ishikawajima – Harima Heavy Industries Ltd. [2007 (1) TMI 91 - SUPREME COURT] - the income is deemed to accrue or arise in India in the hands of the recipient when the services are rendered in India as well as utilized in India. In the instant case, admittedly, services by STI to the assessee are not rendered in India. The aforesaid Explanation was thereafter substituted by the Finance Act, 2010, w.r.e.f 01.06.1976.
The newly substituted Explanation provides that income is deemed to accrue or arise in India whether or not the nonresident has a residence or place of business or business connection in India; or whether or not the non-resident has rendered services in India. In other words, the even if the services are not rendered in India, the income of the non-resident is deemed to accrue or arise India. The said Explanation was made retrospective with effect from 01.06.1976.
We hold that the Explanation substituted by the Finance Act, 2010 w.r.e.f 01.06.1976 does not apply to the case of assessee (person responsible for deducting tax at source). Hence, the assessee is not liable to deduct tax at source for the reason that consideration received by the STI from the assessee could not have been regarded as income deemed to accrue or arise in India as per the law then existing. Since, we hold that the assessee is not liable to deduct tax at source at the relevant point of time, the other contentions raised by the assessee, whether payment made to STI is income deemed to accrue or arise in India is not adjudicated and is left open.
Whether as revenue invoked section 40(a)(i) of the I.T.Act implies that revenue is otherwise satisfied about the allowability of impugned expenditure under section 37(1)? - Similar expenditure was allowed as expenditure upto AY 2007-08. For the AY 2007-08, during the assessment proceedings the AO had raised the objection with regard to the non-deduction of tax for the payment made by Subex Ltd (parent company) to STI. The parent company filed its submissions. A.O. passed assessment order dated 30.12.2010 without making any disallowance under section 40(a)(i) - Such being the case, there cannot be any question about the allowability of deduction under section 37(1) - It is also to be mentioned that the aforesaid transaction being international transaction, the matter was referred to the TPO and the TPO had accepted the price of the international transaction to be arm’s length price.
In the present case, there is no question of alternating between section 37(1) of the I.T.Act and section 40(a)(i) of the I.T.Act for sustaining the disallowance. The question of going to section 40(a)(i) of the I.T.Act would arise only after the test of section 37(1) is passed by the assessee. In the present case, upon examination of all records and information, lower authorities being satisfied with the claim of section 37(1) of the I.T.Act, proceeded to invoke section 40(a)(i) of the I.T.Act. If section 40(a)(i) of the I.T.Act is held inapplicable, it is not open to the department to revisit the case under section 37(1) of the I.T.Act. This would amount to review of position already taken which is impermissible.