TMI Blog2015 (11) TMI 1544X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, require that the person making the payment "at the time of credit of such income to the account payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force". When these obligations are to be charged at the point of time when payment is made or credited, whichever is earlier, such obligations can only be discharged in the light of the law as it stands that point of time. Section 40(a)(i) of the Act provides that inter alia, notwithstanding anything to the contrary in sections 30 to 38 of the Act, any amount payable outside India, or payable in India to a non-resident, shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession" on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted. Accordingly, the assessee cannot be faulted for not deducting TDS and consequently, the deletion of disallowance by CIT(A) is confirmed - Decided in favour of assessee. - I.T.A No.1629/Kol/2012, I.T.A No.366/Kol/2012, I.T.A No.2058/Kol/2009 - - - Dated:- 27-11-2015 - Shri Mahavir Sing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intact and circumstances of case by disregarding the fact that these exists a business connection between the assessee and foreign attorneys both individually and separately with each other in capacity of principal and agent where each of them utilizes the others services for work done in their countries and get remunerated thereof and hence foreign attorneys are liable for taxation of their income u/s. 9(1)(i). 7. The ld. CIT(A) has erred in law by disregarding fact that there exists a distinction between the situs of service and situs of utilization of services of the foreign attorney by the assessee. In this case while the services of foreign attorneys were utilized by the assessee in India, the services were rendered in the respective countries. 8. The ld.CIT(A) has erred in facts and circumstances of case by disregarding the facts that services of expert who were non-resident were used for effective rendering of services in India by the assessee hence any sum paid to them is covered u/s. 9(i)(vii). 9. The ld. C1T(A) has erred in facts and circumstances of case by disregarding the fact that payment to a non-resident is liable to tax deduction u/s. 195 pending the filin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see upon receipt of payments/instructions from its clients and such amounts including the fees of assessee for the facilitation are borne by the clients. The services rendered by the foreign attorneys in their respective jurisdictions lead to grant of patents in their respective countries and the Indian company can utilize such rights in the respective countries in which such patents are granted. The job of assessee is to act as an interface between the client and foreign law firms and does not make any utilization of the services but acts merely as a facilitator. Most of the foreign assignments received by assessee relates to patents in respect of pharmaceutical products for which patents are obtained in the name of the company/person in whose name such patents are applied for. Therefore, the clients of assessee utilize such patent rights in the respective countries where patents are obtained. If a patent is granted in US to an Indian client of assessee in respect of a pharmaceutical product the job of assessee is to act as a facilitator. Assessee does not have the right or capability or the need to utilize such rights. The services of assessee may be compared with a travel agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to ₹ 5,38,36,097/- was disallowed. 5. Aggrieved, assessee preferred appeal before CIT(A), who allowed the claim of the assessee by observing in paras 10, 11 and 12 as under: 10. The appellant also filed complete list of remittances made to foreign associates, filed copies of some of the invoices raised upon the appellant by such foreign associates as also the order vide number ITO(IT)/Kol/NOC/2009-10/104, dated 16.06.2009 issued by Income Tax Officer, International Taxation 1(1), Kolkata, authorizing the appellant to remit amounts to one of his foreign associates without deduction of tax at source. It was submitted that although the NOC relates to a subsequent period, the departmental interpretation in the matter is clear from the order and the same would squarely apply to the year of assessment in question because the relevant provisions have not changed. It was also submitted that interpretation by International Tax Department of Income Tax authorities cannot be ignored particularly because such NOC has been issued by the Deptt. which is specialized in the relevant area of IT laws and which has issued the NOC after making enquiries and applications of mind. 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de from sums which are chargeable under the Act. In case the amount is not chargeable there is no responsibility for deduction of tax. Therefore only those sums which are chargeable under the Act, if paid without TDS, can be held as inadmissible u/s. 40(a)(i). If the sum is not chargeable to tax it cannot be held as inadmissible u/s.40(a)(i). Section 5 of the Income-tax Act defines the income which is chargeable under the Act. In the case of non-resident income received or deemed to be received in India or income accruing or arising or deemed to accrue or arise in India from whatever source is chargeable. Since the income is received outside India for services rendered outside India, it cannot be said to be received, accrue or arise in India. Section 9 gives the income which is deemed to accrue or arise in India. The income in the case of the recipient does not arise through or from any property or asset or from transfer of asset in India. The recipient of the sum does not carry out any part of his business or profession in India either directly or through any person in India. All the services are rendered outside India and even the deliverables in the form of patent are specific f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services from foreign consultants in connection with profession carried out in India. (ii) The assessee is deriving fees for rendering services in India to Indian principals. (iii) For effective rendering of services in India the assessee has availed technical services of experts who are non-residents. (iv) Though services are performed outside India they were for the benefit of the assessee's business/profession which was carried out in India. Sh. Srivastava further argued that fees paid for obtaining technical information or consultancy services from foreign consultants in connection with profession carried out in India by the assessee is directly covered by the Explanation 2 of section 9(l)(vii)(b) of the Act and newly substituted Explanation to section 9(2) of the Act. He referred to the relevant provision which was substituted by the Finance Act, 2010 w.r.e.f. 01.06.1976. 7. On the other hand, ld. Counsel for the assessee Sh. JP Khaitan, ld. Senior Advocate argued on behalf of the assessee and stated the facts that all the three appeals involve a common issue, which is as under:- 'whether the payments made by the assessee to non-resident patent attorn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 7000/-. Sh. Khaitan has not disputed that the non-resident attorneys provided services outside India but according to him the assessee did not receive or use such services in India. Even from the point of view of assessee's clients, the services could have been utilized by them only outside India inasmuch as the protection of registration of patent/trademark is available only in the countries where such registration is obtained. A trademark or patent registration affords protection on territorial basis only in the country of registration and nowhere else. 8. The second aspect argued by Sh. Khaitan is that the services rendered by the non-resident attorneys were professional services and not any technical service within the meaning of Section 9(1)(vii) of the Act. According to him professional services are different from technical services, which are clearly defined by Act itself separately. Section 194J of the Act applies to fees for professional services, which have been defined in Explanation (a) to the section to mean, inter alia, services rendered by a person in the course of carrying on legal profession. The same section also covers fees for technical services which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to the non-resident entities because it has no right to utilize such services. Accordingly, no income accrues or arise or deemed to accrue or arise in India under section 9 (1) (vii) (b) of the Act as he has no business connection or permanent establishment in India. The AO did not even understand as to what is the role of the assessee and that what services were sought from the foreign law firms and the services rendered. To appreciate such services the AO was required to examine each of the transactions and given his findings on fact followed by his decision with reasons. The AO did not even understand as to who was the recipient of the service i.e. the assessee or the clients of the assessee. There is no evidence in the proceedings before Tribunal to support the case of the revenue. The AO failed to understand that the creation of the work e.g. inventions were made in India by the clients of the assessee the patent specifications were prepared in India by the clients of the assessee and/or the assessee and that the technical information was duly possessed by the clients of assessee and he had passed on such information to the foreign attorneys for filing patent applications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to its principals as held by the AO. The relationship between the assessee and the clients is on principal to principal basis and not principal and agent. The assessee charges its clients for all professional activities on a case to case basis and the charges depend on the services obtained by its clients. The AO did not even appreciate the relationship between the assessee and its clients. In any event taxes have been deducted by the clients of the assessee in respect of payments made to the assessee paid towards amounts paid to the assessee in India for the services rendered by the assessee to its clients. For effective rendering of services in India, the assessee has availed technical services of experts who are non-residents. There is no dispute that services were availed from IPR law professionals in different countries. The AO has failed to appreciate that all inventions for which protections were sought in different countries were made by the client of the assessee and the details of the inventions were captured in the form of technical specification by the clients of the assessee which were prepared in India by the client of the assessee. All documents were prepared and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevance for the purpose of the nature of the services which is relevant for the purpose of Section 9 (1) (vii) of the Act to determine, Whether services rendered amount to fees for technical services within meaning of Section 9 (1) (vii) of the Act in the given facts and circumstances of the case Accordingly, ld. Counsel Sh. Khaitan finally closed the arguments. 15. We have heard rival submissions and gone through facts and circumstances of the case. We have also gone through elaborate arguments of ld. Senior Advocate and also gone through assessee's papers and documents and case records. First we will deal with the argument of ld. Counsel Sh. Khaitan, that the amended law effective May 8, 2010 will not be applicable in the present case inasmuch as the orders relate to Assessment Years 2006-2007, 2008-09 and 2009-2010 and the Law was amended after the assessment years in question. The law in this regard is already clearly laid down by the High Court and also by coordinate Bench of ITAT. We find that the case law of Hon'ble Delhi High Court in the case of CIT v. Angelique International Ltd. [2013] 359 ITR 9, wherein dismissing the appeal of revenue that by circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India) Private Limited [2009] 312 ITR 225 (SC) and G.E India Technologies Centre Private Limited v. CIT [2010] 327 ITR 456 (SC), once the income was not exigible or chargeable to tax, TDS was not required to be deducted. Money paid to the third parties, who did not have any office or permanent establishment in India, was exempt and not chargeable to tax. Thus on the said payments or income, TDS was not required to be deducted. We also note that the payments in question were made prior to circular No. 7/2009. On this aspect, there is no dispute. We, therefore, do not find any reason to interfere with the order passed by the Tribunal deleting the addition made by the Assessing Officer under Section 40(a)(i) of the Act. The appeal, being devoid of merit, is dismissed. 16. Similarly, coordinate bench of ITAT, Agra in the case of Dy. CIT v. Virola International [2014] 147 ITD 519 (Agra) has considered the similar issue and held as under: 6. Hon'ble Supreme Court, in the case of Ishikawajima Harima Heavy Industries Ltd. v. Dy. IT (288 ITR 408), had held that in order to bring a fees for technical services to taxability in India, not only that such services should be utilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle and the DTAA, no extended meaning can be given to the words 'income deemed to accrue or arise in India' as expressed in s. 9 of the Act. Sec. 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a non-resident by way of fees for services, thus, would not always come within the purview of s. 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of s. 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilized in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India. It must have a direct link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the DTAA. A distinction may also be made between rendition of services and utilization thereof. With the above understanding of law laid down by the apex Court, if one turns to the facts of the case in hand and examines them on the touchstone, s. 9(1)(vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for such services could not be brought to tax under Section 9(1)(vii). The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax deductor cannot be expected to have clairvoyance of knowing how the law will change in future. A retrospective amendment in law does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability, with retrospective effect. The tax withholding obligations from payments to non-residents, as set out in Section 195, require that the person making the payment at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force . When these obligations are to be discharged at the point of time when payment is made or credited, whichever is earlier, such obligations can only be discharged in the light of the law as it stands that point of ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the light of the legal position discussed above, will be academic in the present context. As regards learned Departmental Representative vehement reliance on a decision of Chennai A bench of this Tribunal in the case of Addl. CIT v. Evolv Clothing Pvt Ltd. [(2013) 33 taxmann.com 309] wherein on the basis of taxability of income alone, the coordinate bench has confirmed the disallowance under section 40(a)(i), we can only say that a decision cannot be an authority for a legal question which has not been dealt with in that decision, or not having been raised in that case. 10. In view of these discussions, as also bearing in mind entirety of the case, we uphold the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. As we have decided this appeal on this short legal point regarding scope of section 40(a)(i) r.w.s section 195, we see no need to deal with other erudite contentions of the parties as also findings of the learned CIT(A), which, given our adjudication on this legal issue, are now rendered academic in the present context. 17. It is thus clear that till 8th May, 2010, the prevailing legal position was that unless the technical servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon'ble Supreme Court in the case of Krishnaswamy S. Pd v. Union of India [2006] 281 ITR 305, wherein the said legal Maxim was accepted by the Hon'ble Supreme court. 19. This view is even taken by the revenue authorities, on this issue, from the very beginning that assessee is not liable to TDS for the reason that Certificates of Non-Deduction Of Tax At Source u/s 197(1) of the Act was obtained by assessee under old law and even new law. He stated that under old law, in order to confirm that its understanding and interpretation of the relevant provisions of the Act was correct, the assessee made an applications dated 06.05.2009 and 08.06.2009 before the ITO-2(1), International Taxation-Kolkata for the issuance of certificate for Non-Deduction Of Tax At Source with respect to remittances in respect of professional services rendered by a law firm in the UK. The ITO of the International Taxation-2(1), Kolkata passed an order dated 16.06. 2009 in which the relevant passages read as under:- Please refer to your petitions, dated 06.05.2009 and 08.06.2009 requesting for authorization to remit a sum of Euro 7,541.33 towards professional fees to Harrison Goddard Foote of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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