CEEQUENCE TECHNOLOGIES PVT. LTD.,CHENNAI vs. DCIT CORPORATE CIRCLE-1(2), CHENNAI

PER G.MANJUNATHA, AM: This appeal filed by the assessee is directed against order

passed by the learned Commissioner of Income Tax (Appeals)-

1, Chennai, dated 19.03.2019 and pertains to assessment year

2012-13.

“1. The order of the Commissioner of Income Tax (Appeals) —1, Chennai dated 19.03.2019 in ITA 20/CIT (A)-1/2018-19 for the above mentioned Assessment Year in so far as the issues raised in this appeal is contrary to law, facts, and in the circumstances of the case.

ITA No. 1528/Chny/2019

filed its return of income for the assessment year 2012-13 on

29.09.2012 declaring total income of Rs.87,02,260/-. The

3 ITA No. 1528/Chny/2019

assessment has been completed u/s.143(3) of the Income Tax

Act, 1961, on 13.03.2015 and determined total income at

Rs.1,34,76,758/- by making additions of Rs.46,99,302/-

u/s.40(a)(ia) of the Act for non-deduction of TDS u/s.195 of the

Income Tax Act, 1961. The assessee carried the matter in

appeal before the first appellate authority, but could not

succeed. The learned CIT(A) sustained additions made by the

Assessing Officer towards disallowance of expenses

u/s.40(a)(ia) of the Act. The assessee carried the matter in further appeal before the Tribunal and the Tribunal vide its

order in ITA No.138/Mds/2017 dated 28.12.2017 set aside the

issue to the file of the Assessing Officer and directed the

Assessing Officer to reexamine claim of the assessee in light

of material that may be filed by the assessee and also Double

Taxation Avoidance Agreement between India & USA.

Accordingly, the Assessing Officer has taken up case for fresh

examination on applicability of TDS and consequent

disallowances of payment made to certain non-residents

u/s.40(a)(ia) of the Income Tax Act, 1961. The Assessing Officer after considering relevant facts and also amendment to

provisions of section 9(1)(vi) / 9(1)(vii) by the Finance Act,

4 ITA No. 1528/Chny/2019

2012, with retrospective effect from 01.06.1976, held that

payment made by the assessee to non-resident is in the nature

of royalty within the meaning of section 9(1)(vi) read with

Article 12 of the DTAA between India and USA and thus, made

addition of Rs.46,99,302/- u/s.40(a)(ia) of the Act, for non-

deduction of TDS u/s.195 of the Income Tax Act, 1961.

preferred an appeal before the learned CIT(A). Before the

learned CIT(A), the assessee has challenged additions made

by the Assessing Officer towards disallowance of certain

payments made to non-residents without deduction of TDS and

argued that payments made by the assessee to non-residents

is not in the nature of royalty or fees for technical services,

because services were rendered by non-residents outside

India and in absence of any business connection in India,

same cannot be brought to tax under Indian Income Tax Act.

Therefore, the assessee is not required to withhold tax on

payment u/s.195 of the Income Tax Act, 1961, and

consequently, payment made by the assessee to non-residents

cannot be disallowed u/s.40(a)(ia) of the Act. The learned

5 ITA No. 1528/Chny/2019

CIT(A), after considering relevant submissions of the assessee

and also taken note of various facts allowed partial relief to the

assessee, where he had deleted additions made by the

Assessing Officer towards payment made to M/s. Cinenet

Communications and M/s. Novatel Ltd. by holding that services

rendered by two non-residents does not fall within the definition

of royalty as per Article 12 of the DTAA between India and USA

and also under section 9(1)(vi) / 9(1)(vii) of the Act. However, in

respect of payment made to M/s.Tata communications

(America) Inc. payments were made for internet private line

charges and such services has been rendered by the non-

resident service provider through equipment in USA and such

service is coming within the definition of royalty and thus,

sustained additions made by the Assessing Officer towards

disallowance of payment made for internet private line charges.

Aggrieved by the learned CIT(A) order, the assessee is in

appeal before us.

assessee could not deduct TDS u/s.195 of the Act, on payment

made to non-residents service provider, because there was

6 ITA No. 1528/Chny/2019

ambiguity in the definition of royalty, as defined under section

9(1)(vi) / 9(1)(vii) before insertion of Explanation 4 to section

9(1)(vi) expanding definition of royalty and thus, in absence of

clarity on the issue, the assessee was unable to deduct TDS .

He further submitted that the assessee cannot be asked to

perform impossibility of performing contract, because the

assessee cannot foreseen amendment to the definition of

royalty and withheld taxes. Therefore, he submitted that since

there was an ambiguity in the definition of royalty and such

ambiguity has been clarified by the Finance Act, 2012, by

insertion of Explanation 4 with retrospective effect from

01.04.1976, the assessee cannot foresee said amendment and

deduct TDS. Hence, for non-deduction of TDS, disallowances

cannot be made u/s.40(a)(ia) of the Act. In this regard, the

learned AR relied upon the decision of the Hon'ble Supreme

Court in the case of Engineering Analysis Centre of Excellence

Pvt.Ltd Vs. CIT in Civil Appeal No.8733 & 8734 of 2018.

is no merit in the arguments of the assessee that definition of

royalty was not clear before insertion of Explanation 4,

7 ITA No. 1528/Chny/2019

because services rendered by the assessee are held to be

coming within the ambit of definition of royalty and thus, even

before amendment, the assessee was required to deduct TDS

on payment made to non-residents. Since, the assessee failed

to deduct TDS, the Assessing Officer has rightly disallowed

payment made to non-residents u/s.40(a)(ia) of the Income

Tax Act, 1961, and the learned CIT(A), after considering

relevant facts has rightly held that same is liable for TDS

u/s.195 of the Act, and for non-deduction of TDS, the Assessing

Officer has rightly disallowed payment made to non-residents

u/s.40(a)(ia) of the Act.

available on record and gone through orders of the authorities

below. The assessee has made certain payments to M/s. Tata

communications (America) Inc. for rendering internet private

line services and such services were rendered by the recipient

through an equipment in USA and the India via internet. The

Assessing Officer has considered payments made to non-

residents as royalty u/s.9(1)(vi) / 9(1)(vii) read with Article 12

of the DTAA between India and USA and disallowed said

8 ITA No. 1528/Chny/2019

payment for non-deduction of TDS u/s.195 of the Income Tax

Act, 1961.

reasons given by the Assessing Officer in light of arguments of

the assessee and we ourselves do not subscribe to the reasons

given by the Assessing Officer for simple reason that the issue

before the Assessing Officer is not taxability of payment made

by the assessee to non-resident, but it was on the issue of

applicability of provisions of section 195, and consequent

disallowance of payment u/s.40(a)(ia) of the Income Tax Act,

1961. The definition of royalty, before insertion of Explanation 4

by the Finance Act, 2012 with retrospective effect from

01.04.1976 does not cover payment made to non-resident for

rendering services outside India and also receipt of services

outside India. However, definition has been expanded by

insertion of Explanation 4 by the Finance Act, 2012, with

retrospective effect from 01.06.1976 and as per amended

definition, even if services rendered outside India, but if such

services are received in India, then payment made to non-

residents partakes nature of royalty and consequently,

9 ITA No. 1528/Chny/2019

withholding tax is applicable as per provisions of section 195 of

the Act. In the present case, payment made by the assessee to

non-residents was prior to amended definition of royalty by the

Finance Act, 2012. Further, at the time of payment made by the

assessee to non-residents, there was an ambiguity in the

definition of royalty and because of this the assessee could

not deduct TDS as per provisions of section 195 of the Act.

Although, the definition has been amended by the Finance Act,

2012, with retrospective effect, but because there was an

ambiguity in the definition, the assessee cannot do impossible

things by foreseeing an amendment to the definition of royalty

and deduct TDS on payment made to non-residents. This

principle is supported by the decision of the Hon'ble Supreme

Court in the case of Engineering Analysis Centre of Excellence

Pvt. Ltd Vs. CIT in Civil Appeal No.8733 & 8734 of 2018, where

it was held that “person” mentioned in section 195 of the

Income Tax Act cannot be expected to do the impossible,

namely, to apply the expanded definition of “royalty” inserted by

Explanation 4 to section 9(1)(vi) of the Income Tax Act, for the

assessment years in question, at a time when such explanation

was not actually and factually in the statute. Therefore, we are

10 ITA No. 1528/Chny/2019

of the considered view that the Assessing Officer was erred in

making addition towards payment made to non-residents

u/s.40(a)(ia) of the Act, for non-deduction of TDS u/s.195 of the

Income Tax Act, 1961. The learned CIT(A), without

appreciating facts has simply confirmed additions made by the

Assessing Officer. Hence, we reverse findings of the learned

CIT(A) and direct the Assessing Officer to delete additions

made towards payments made to non-residents u/s.40(a)(ia) of

the Act, for non-deduction of TDS u/s.195 of the Income Tax

Act, 1961.

Sd/- Sd/- (वी. दुगा� राव) (जी. मंजुनाथ) (V.Durga Rao) (G. Manjunatha) #या�यक सद&य /Judicial Member लेखा सद&य / Accountant Member

चे#नई/Chennai, )दनांक/Dated 9th March, 2022 DS आदेश क� ��त+ल,प अ-े,षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु.त (अपील)/CIT(A) 4. आयकर आयु.त/CIT 5. ,वभागीय ��त�न2ध/DR 6. गाड� फाईल/GF.