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2016 (11) TMI 113 - ITAT MUMBAI

2016 (11) TMI 113 - ITAT MUMBAI - TMI - TDS u/s 195 - dis allowance of professional fees under section 40(a)(ia) for the alleged non-deduction of tax at source - Indo-France DTAA - Held that:- Following, inter alia, the decisions of the ITAT Panaji Bench in the case of Ajit Ramakant Phatarpekar (2015 (4) TMI 261 - ITAT PANAJI ), of the ITAT Agra Bench in the case of Virola International (2014 (2) TMI 653 - ITAT AGRA ), we hold that the retrospective amendment made by Finance Act, 2010 w.e.f. 01. .....

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lowance made thereof under section 40(a)(i) could not have been made and being factually and legally unsustainable, we direct the AO to delete the same. It is accordingly ordered. On this short point, we allow the assessee's appeal. - IT APPEAL NO. 4401 (MUM.) OF 2013 - Dated:- 17-8-2016 - JASON P. BOAZ AND SAKTIJIT DEY, JJ. For The Appellant : Ronak Doshi For The Respondent : T. Roumauan Paite Ronak Doshi for the Appellant. T. Roumauan Paite for the Respondent. ORDER Jason P. Boaz, Accountant .....

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come Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 22.12.2011, wherein the income of the assessee was determined at ₹ 95,26,058/- in view of the following disallowances/addition:- (i) Disallowance of professional fees under section 37(1)- ₹ 30,80,000/- (ii) Disallowance under section 40(a)(i) - ₹ 26,05,239/- 2.2 Aggrieved by the order of assessment dat .....

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3. Aggrieved by the order of the CIT (A)-14, Mumbai, the assessee has preferred this appeal raising the following grounds:- "GROUND 1: DISALLOWANCE OF PROFESSIONAL FEES AMOUNTING TO ₹ 26,05,239/- UNDER SECTION 40(a)(ia) OF THE ACT: 1. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in upholding the action of the Additional Commissioner of Income-tax, Circle-6(1), Mumbai ("the AO") by disallowing professional fees amounting to ₹ .....

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of disallowance under section 40(a)(ia) of the Act would not arise. 3. The Appellant prays that the AO be directed to delete the disallowance of professional fees amounting to ₹ 26,06,239/-. GROUND II: GENERAL The Appellant craves leave to add, amend, alter and/or delete any/all of the above ground of appeal." 4. Ground I (1 to 3) - Disallowance of Professional fees of ₹ 26,05,239/- under section 40(a)(i) of the Act. 4.1 In these grounds, the assessee, assailing the impugned or .....

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39;OBT') was not exigible as per the provisions of section 195(1) of the Act and the Indo-France DTAA and therefore the question of disallowance would not arise. In view of the above, it is prayed that the AO be directed to delete the disallowance of professional fees amounting to ₹ 26,05,239/-. 4.2 At the outset the learned A.R of the assessee submitted that since 'OBT' rendered the services outside India, hence the income is not deemed to accrue or arise in India and therefor .....

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bmitted that the appeal may be decided on the short point of whether or not the disallowance under section 40(a)(i) of the Act can be made on the basis of Explanation to section 9(2) of the Act introduced by Finance Act, 2010 retrospectively w.e.f. 01.06.1976. In support of the proposition that the disallowance under section 40(a)(i) of the Act cannot be made on the basis of retrospective amendment by way of Explanation to Section 9(2) of the Act, the learned A.R of the assessee placed reliance .....

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ns of Departmental authorities, however, he agreed that the issue is covered in favour of the assessee by the decisions cited by the learned A.R. for the assessee. 4.3.1 We have heard the contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncements cited. There is no dispute with regard to the fact that the said remittance of professional fees of ₹ 26,05,239/- made by the assessee to 'OBT' was towards rendering o .....

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Act could not be made. The learned CIT (A), however, being of the view that the said remittances made to 'OBT', a non resident, was in the nature of fees for technical services, ('FTS'), held that the assessee was under obligation under section 195 of the Act to withhold tax at source from this payment and proceeded to uphold the disallowance made under section 40(a)(i) of the Act. According to the learned A.R of the assessee, even if by any stretch of imagination, the remittance .....

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ndment liability of TDS cannot be fastened upon the assessee under section 195, since as per the existing provision at the relevant period the income was not taxable, hence, assessee was not required to deduct tax at source. The learned D.R., though, supported the order of the CIT (A), however, he agreed that the legal issue raised by the assessee is covered by the decisions of ITAT cited by learned A.R. 4.3.2 We may observe, the aforesaid legal issue argued by the learned A.R. was not raised ei .....

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f ITAT in Virola International's case (supra) the Bench was of the view that the legal position was that unless the services are rendered in India, the same cannot be brought to tax as 'FTS' under section 9 of the Act, but that this legal position did undergo a change when the Finance Act, 2010 received the assent of the President of India on 08.05.2010. The Tribunal further observed at para 8 thereof that till 08.05.2010, the prevailing legal position was that unless technical servi .....

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maxim 'lex non cogit ad impossibilia' would apply, meaning thereby that law cannot possibly compel a person to do something which is impossible to perform. Withholding tax ('TDS') obligations are to be discharged in the light of the law as it stands at that point of time. In the case on hand, in our view, the disallowance under section 40(a)(i) of the Act can be effected only if and when the assessee had an obligation to deduct tax at source on the remittance to 'OBT' and .....

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similar circumstances, on similar facts, Panaji Bench of the ITAT in the case of Ajit Ramakant Phatarpekar (supra) has held as under at para 5 and 6 thereof. '5. We heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below. The issue before us is whether any disallowance can be made u/s. 40(a)(i). The AO during the course of the assessment proceedings noted that the Assessee has made payment amounting 9 ITA NOS. 145 & 146/PNJ/2014 (A. .....

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id a sum of ₹ 11,44,950/- to De Long Minerals and Logistics Pte Ltd., Singapore for supervision of the vessel at the discharge port. The payment has been made through DBS Bank Ltd., Singapore. Details of the payments made are given at pg. 133 of the paper book. From these payments, it is apparent that the payment of ₹ 2,58,506/- does not relate to the impugned assessment year. Rest of the payments was made prior to 31.3.2010. The Revenue was of the opinion that due to retrospective a .....

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ted and due to explanation-2 to Sec. 9(1)(vii) fee for technical services means any consideration including any lump sum consideration for rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel). The technical services rendered in the case of the Assessee, according to the ld. DR, was taxable in the hands of the party who received it outside India as the said income is deemed to accrue or arise in India. In view of the .....

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ssee to the non-residents are of the nature of technical fee, the legal position in view of the retrospective amendment w.e.f. 1.6.1976 in Sec. 9 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 Sec. 9(1) as it exists today it is specifically stat .....

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er : "9. The legal proposition canvassed by the learned counsel, however, does no longer hold good in view of retrospective amendment with effect from 1-6-1976 in section 9brought out by the Finance Act, 2010. Under the amended Explanation to section 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 clause (v) or clause (vi) or clause (vii) of section 9(1), and shall be included in his total .....

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orting the proposition that rendition of services in India is a sine qua non for its taxability in India. 10. The concept of territorial nexus, for the purpose of determining the tax liability, is relevant only for a territorial tax system in which taxability in a tax jurisdiction is confined to the income earned within its borders. Under this system, any foreign income that is earned outside of its borders is not taxed by the tax jurisdiction, but then apart from tax heavens, the only prominent .....

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arned from wherever, to be taxed in the tax jurisdiction in which earner is resident. In the US tax system, this residence rule is further stretched to cover US taxation of all its citizens irrespective of their domicile, and the source rule is also concurrently followed. It is this conflict of source and residence rules which has been the fundamental justification of mechanism to relieve a taxpayer, whether under a bilateral treaty or under domestic legislations, of the double taxation either b .....

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s and the domestic law. It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems. This school of thought is now specifically supported by the retrospective amendment to section 9." 6. 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-resid .....

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ence 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 Sec. 9(1), 12 ITA NOS. 145 & 146/PNJ/2014 (A.Y 2010-11) the income received by t .....

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ing state in which they arise or accrue according to the laws of the state. Prior to the insertion of explanation to Sec. 9(1) by the Finance Act, 2010 with retrospective effect, the professional and consultancy services even though 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, .....

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the point of time when the tax deduction obligation was to be discharged. In this regard, we perused the decision of the co-ordinate bench in the case of Channel Guide India Ltd. v. ACIT, 139 ITD 49 (Mum.) as relied by the ld. AR. We noted that in this decision the co-ordinate bench of ITAT held as under : "25. In our opinion, the issue involved in the present case however, is relating to disallowance made u/s.40(a)(i) for non-deduction of tax-at-source from the payment made by the assessee .....

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y the Tribunal that it was impossible for the assessee to deduct tax in the financial year 2003-04 when as per the relevant legal position prevalent in the financial year 2003-04, the obligation to deduct tax was not on the assessee. The Tribunal based its decision on a 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 Krishna S .....

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s no question of disallowing the said amount by invoking the provisions of sec.40(a)(i). In that view of the matter, we delete the disallowance made by the AO u/s.40(a)(i) and confirmed by Ld. CIT (A) and allow ground no. 1 of the assessee's appeal." The ld. DR even though vehemently contended but 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. Even the ld. DR could not .....

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