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2015 (11) TMI 1544 - ITAT KOLKATA

2015 (11) TMI 1544 - ITAT KOLKATA - TMI - TDS u/s 195 - accrual of income in India - non deduction of tds on payment to foreign attorneys - existence of PE in India - effect of amaendment to act - retrospectivity - Held that:- Till amendment in Explanation to sec. 9(2) of the Act, the prevailing legal position was that unless the technical services were rendered in India, the fees for such services could not be brought to tax under Section 9(1)(vii) of the Act. The law amended was undoubtedly re .....

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obligations from payments to non-residents, as set out in Section 195 of 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 onl .....

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he 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 Singh, JM & Shri M. Balaganesh, AM For the Appellant: Shri S. Srivastava, CIT For the Respondent: Shri J. P. Khaitan, Advocate ORDER Mahavir Singh, Judicial Member - All these revenues appeals are arising out of separate orders of CI .....

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010 and AY 2006-07 was framed by Dy. CIT, Circle-52, Kolkata u/s. 143(3) of the Act vide its order dated 29.12.2008. 2. The only common issue in these three appeals of revenue is against the order of CIT(A) in deleting the disallowance made by AO in respect to expenses claimed by the assessee of fee for technical services for non-deduction of TDS u/s. 195 of the Act thereby invoking the provisions of section 40(a)(i) of the Act. For this, revenue has raised common grounds and the grounds as rais .....

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tances case by disregarding the fact that the foreign attorneys were hired by the assessee who is situated in India and payment was made by the assessee on the invoices raised by the foreign attorneys in the name of assessee in India. 4. The ld. CIT(A) has erred intact and circumstances of case by disregarding the fact that the situs of payee and situs of utilization of service is in India and hence any sum paid to Foreign Attorneys covered u/s 9. 5. The ld. CIT(A) has erred in facts and circums .....

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torneys 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 s .....

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these three years, hence, we will take the facts from AY 2006-07 in ITA No. 2058/Kol/2009 and decide the issue. 3. Briefly stated facts are that the assessee is a patent law practitioner as an advocate specialized in Intellectual Property Laws (IPL) and renders services only in IPR services. The main claim of the assessee is that the services of assessee are utilized by its clients in India and its clients include multinationals, major corporate etc. The assessee also facilitates the filing of .....

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es. A patent granted in the US or any other country does not create any legal right in India to claim monopoly or to license or otherwise benefit from the patent in India. It was also explained before us that foreign national is not entitled to practice as a patent attorney in India and also a person cannot claim to be a patent attorney/agent in India unless such person qualifies the prescribed examination and is registered by the Government of India. Therefore, an inventor in India or his emplo .....

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s in their respective countries on behalf of the clients of assessee. All communications are routed through assessee and assessee facilitates the process and charges a nominal fee. The fees of the foreign attorneys are remitted by assessee 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 t .....

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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 in India who makes all travel arrangements for Indian nationals .....

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e the local foreign agent makes payment in foreign exchange. In the Singapore the local travel agent renders the services in Singapore by taking care of the guests and also arranging transportation and tours. Such services are availed and utilized wholly in Singapore and not in India, The Indian agent does not avail of the services or utilize such services and mere act of facilitation cannot be said to utilization of services only because the local agent charges his service charges. In the same .....

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ication and forwarding documents. 4. But the AO arrived at the finding that the assessee was deriving professional fee for rendering services in India to Indian principals and for effective rendering of services in India, the assessee has availed professional services of expert who are non-residents. He had also arrived at the finding that though services are performed outside India they were for the benefit of the assessee's profession, which was carried out in India and therefore payments .....

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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 relate .....

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and applications of mind. 11. I have considered the contentions of Assessing Officer as mentioned in the assessment order and the reasons given by him for disallowing the payments under section 40[a][i]. I have also considered the oral and written submissions made by the appellant. In my view, the disallowances under sec. 40[a][i] can be made only if the amounts remitted to non-residents are chargeable to Income Tax in India and the same are remitted without deduction of tax as required under s .....

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oreign associates. The fundamental question to be answered is whether the recipients of the various amounts in different countries performed any part of the services in India, whether the payments were received in India and whether the recipients had permanent establishment or business in India. These factual aspects are important to determine, whether income was taxable in India and consequently whether liability for deduction or non-deduction of TDS under section 195 existed. I am unable to ag .....

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were tax was required to be deducted at source under chapter XVII B but was not done. Under chapter XVII B "any sums" being payable to non-residents is dealt in Sec. 195 which casts an obligation on the person responsible for paying to the non-resident any sum which is chargeable under the provisions of the Act, to deduct tax at the time of credit of such income to the account of the payee. Therefore deduction has to be made from sums which are chargeable under the Act. In case the amo .....

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ise 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 .....

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pplicable as the patents can be utilized only in the respective territories and therefore the activity would fall within the exception - making or earning any income from any source outside India. The income of the payee was therefore not chargeable under the Act and cannot be held as inadmissible under Section 40(a)(i) for failure to deduct as there was no obligation under chapter XVIIB for deduction of tax at source. This conclusion is also supported by the analogy that can be drawn from CBDT .....

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nue. He first of all stated the facts that in this case the assessee has paid fees for obtaining technical information or consultancy services from foreign consultants in connection with profession carried out in India. He argued that the assessee is deriving fees for rendering services in India to its Indian principals and for rendering services in India, the assessee has availed technical services of experts who are non-residents. Though services are performed outside India they were for the b .....

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ical information or consultancy 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 .....

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ior 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 attorneys without deduction of income tax at source are to be disallowed under section 40(a)(i) of the Income-tax Act 1961 ("the Act")'. According to him, first aspect of the case is that the assessee was not required to deduct any tax at source since the amounts paid were not .....

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ees paid to the non-resident attorneys were income deemed to accrue or arise in India since the services were utilized by the assessee in his profession in India. He thus held that the assessee should have deducted tax at source. According to Sh. Khaitan, the finding of the AO that the assessee obtained technical information or consultancy services from non-resident attorneys which were used by him for effective rendering of services in India to his clients is contrary to the factual position. T .....

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lso granted them Powers of Attorney. No technical information or consultancy service was provided by the non-resident attorneys to the assessee and there was no question of the assessee using any information or service which he did not obtain. The assessee merely acted as a facilitator between the Indian client and the non-resident attorney and in his invoices sought reimbursement of the amount as per the non-resident attorney's invoice and separately charged his fee for his work as facilita .....

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le 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 d .....

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fessional service and not a technical service. Even otherwise, having regard to the nature of service rendered by the non-resident attorneys, namely that of registration and renewal of patents and trademark, it cannot be said that such service is a managerial, technical or consultancy service within the meaning of Explanation 2 to Section 9 (1)(vii) of the Act. 9. The third aspect argued by Sh. Khaitan was that the assessee was granted no objection certificate for remittance of non-resident atto .....

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owance can be made under section 40(a)(i) where law relating to tax deduction at source is retrospectively amended or circular in that behalf is subsequently withdrawn. 10. Ld. Counsel also argued the factual aspect that the revenue sought to invoke section 9(1)(i) of the Act but having failed, shifted ground and sought to invoke Section 9(1)(vii)(b) of the Act. The order of the Tribunal dated November 4, 2009 with respect to section 9(1)(i) of the Act in ITA No. 491/KOL/2009 for the assessment .....

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the Act has no application in the facts and circumstances of the instant case. 11. Ld. Counsel further explained that as far as assessee is concerned it does not utilize the services for which the fees are payable 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 eve .....

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e 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/trademark applications. The foreign attorneys filed such applications, dealt with objectio .....

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opinion as none was sought by the assessee for its clients. All these would have been clear if the AO had applied his mind and examined the transactions in the correct perspective. It is sheer ignorance of the AO that he failed to realize that the client of the assessee in India had actually made the innovation in India and all technical developments took place in India. All technical information relating to the invention were communicated to the foreign practitioners/attorneys to enable them to .....

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sted. All documents were made available to the AO but his findings does not contain reference to a single document or any transaction related thereto and also no evidence is on record before Tribunal which is placed or relied upon by the revenue in support of the finding that consultancy services were obtained from foreign consultants. Consultancy means giving some sort of consultation de hors the performance or the execution of any work. In the present case each of the attorneys executed and pe .....

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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 techn .....

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and sent to foreign attorneys for filling in prescribed forms and taking all procedural steps and filing applications at their respective IP offices. Therefore the services availed was only limited to standard procedural and professional work which a patent attorney does on a day-to-day basis and such work did not involve rendering any consultancy or advise to the assessee or to its clients. The instructions of the clients of the assessee were followed by the foreign attorneys. 13. Ld. Counsel .....

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t did not even strike to the AO as to why an Indian lawyer should seek consultancy from a foreign lawyer so as to use such advice in India in its business. Not one single transaction has been cited which goes to show that the assessee utilized in India consultancy and technical services received from foreign law firm. No such evidence is placed in the proceedings before Tribunal. Insofar as the well settled law is concerned what was material to be determined by the AO from the facts of the case .....

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s that assessee is not liable to TDS for the reason that certificates for non-deduction of tax was obtained by assessee under old law and even new law and in turn revenue had granted non-deduction certificate. From this, it is clear that the revenue i.e. International Taxation after considering the representation and after application of mind arrived at a considered opinion and such opinion is of relevance for the purpose of the nature of the services which is relevant for the purpose of Section .....

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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. .....

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00. According to Hon'ble High court it did not have retrospective effect and accordingly, in the relevant accounting year tax did not have to be deducted. Hon'ble High court held as under: "8. Referring to this decision, in Catholic Syrian Bank Limited versus Commissioner of Income Tax, (2012) 3 SCC 784, it has been observed that the Central Board of Direct Taxes has statutory right to issue circulars under Section 119 of the Act to explain or tone down the rigours of law and to ens .....

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The Board may have withdrawn this circular and other circulars vide Circular No. 7, dated 22nd October, 2009 but the said withdrawal cannot be retrospective. Circular No. 7 of 2009 cannot be classified as explaining or clarifying the earlier circulars issued in 1969 and 2000. This assertion in the assessment order is far-fetched and does not merit acceptance. Circular No. 7 does not clarify the earlier circulars but withdraws them. This is obvious and apparent. Circulars in force in the relevant .....

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ia) 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 N .....

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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 in India but these services should also be rendered in India. Analyzing this legal position, Hon'ble Bombay High Court has, in the case of Clifford Chance v. Dy. CIT (318 ITR 237), observed as follows: "The apex Court had occasion to consider the above question in the case of Ishikawajma-H .....

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on in its plain sense, as per the apex Court it requires two conditions to be met-the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. In .....

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ct and the provisions of the DTAA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of s. 5(2) of the Act subject to the compliance with 90 days rule.' As per the above judgment of the apex Court, the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxa .....

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. 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, .....

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any income from any source in India'. It is thus, evident that s. 9(1)(vii)(c), read in its plain, envisages the fulfilment of two conditions : services, which are source of income sought to be taxed in India must be (i) utilized in India, and (ii) rendered in India. In the present case, both these conditions have not been satisfied simultaneously." 7. The law laid down by Hon'ble Supreme Court, in the case of Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax (supr .....

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TJ 291), has explained thus: . . . . . . .(this legal position) does no longer hold good in view of retrospective amendment w.e.f. 1st June, 1976 in s. 9 brought out by the Finance Act, 2010. Under the amended Explanation to s. 9(1), as it exists on the statute now, it is specifically stated that the income of the non-resident shall be deemed to accrue or arise in India under cl. (v) or cl. (vi) or cl. (vii) of s. 9(1), and shall be included in his total income, whether or not (a) the non-reside .....

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ervices in India is a sine qua non for its taxability in India. 8. It is thus clear that till 8th May, 2010, the prevailing legal position was that unless the technical services were rendered in India, the 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 .....

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e 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 time. Section 40(a)(i) provides that, inter alia, notwithstanding anything to the contr .....

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urce but tax has not been deducted, and such deductibility of tax at source, as we have discussed above, has to be in the light of the legal position as it stood at the point of time when payment was made or credited- whichever is earlier . Clearly, therefore, the disallowance under section 40(a)(i) can come into play only when the assessee had an obligation to deduct tax at source from payments to non-residents, and the assessee fails to comply with such an obligation. In view of these discussi .....

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impugned payments were made, were rendered in India. Therefore, the assessee did not have any liability under section 195 r.w.s. 9(1)(vii) to deduct tax at source from these payments. Once we come to the conclusion that the assessee did not have any obligation to deduct tax at source from these payments, in the light of the above discussions and as corollary thereto, no disallowance can be made in respect of these payments. As we have come to these conclusions in the light of the provisions of .....

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nnai 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 conc .....

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the technical services were rendered in India, the fees for such services could not be brought to tax under Section 9(1)(vii) of the Act. 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 is not expected to know how the law will change in future. A retrospective amendment in law does change t .....

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ereon 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 cha .....

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and it was impossible for the assessee to deduct tax in the financial years 2005-06, 2007-08 &2008-09, when as per the relevant legal position prevalent in these financial years, the obligation to deduct tax was not on the assessee. He based his argument on the legal Maxim lex non cogit ad impossiblia meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform and relied on the decision of Hon'ble Supreme Court in the case of Krishnaswamy .....

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ant 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 0 .....

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rious foreign countries such as USA, Pakistan, Lebanon, Argentina, Germany. The Asstt. Director of IT-2(1), International Taxation, Kolkata heard submissions of the assessee and passed an order dated 09.09.2010, which read as under:- "On prima facie examination of your application and the submission made thereafter it appears that services rendered are for legal and professional services. Hence, you are hereby authorized to remit the said amount as legal fees without deduction of tax at sou .....

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ove, we are of the view that till amendment in Explanation to sec. 9(2) of the Act, the prevailing legal position was that unless the technical services were rendered in India, the fees for such services could not be brought to tax under Section 9(1)(vii) of the Act. 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 .....

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