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Income Tax Appellate Tribunal, L Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Saktijit Dey
This appeal by the assessee is directed against the order of the CIT (A)-14, Mumbai dated 22.02.2013 for A.Y. 2009-10.
The facts of the case, briefly, are as under: - 2.1 The assessee company, engaged in business as management consultants, filed its return of income for A.Y. 2009-10 on 26.09.2009 declaring income of `19,79,012/-. On 28.03.2011, the assessee filed a revised return declaring income of `38,40,819/-. The returns were processed under section 143(1) of the Income 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/- Ashok Piramal Management Corporation Ltd. 2.2 Aggrieved by the order of assessment dated 23.12.2011 for A.Y. 2009-10, the assessee preferred an appeal before the CIT(A) -14, Mumbai contesting the aforesaid two disallowances. The learned CIT(A) disposed off the appeal vide the impugned order dated 22.02.2013 allowing the assessee partial relief, i.e. by allowing the assessee’s claim for the expenditure incurred of `30,80,000/- on account of professional fees. The learned CIT(A), however, upheld the disallowance of Rs.26,05,239/- under section 40(a)(i) of the Act.
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 RS.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 Rs.26,05,239/- under section 40(a)(ia) of the Act for the alleged non-deduction of tax at source under section 195 of the Act on remittance made to Orfis Baker Tilly, being a tax resident of France.
2. The learned CIT(A) erred in upholding the action of the AO and failed to appreciate that the remittance of professional fees made to Orfis Baker Tilly would not be taxable under the provisions of section 195 of the Act read with the relevant Article of the Indo- France DTAA and therefore the question 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 Rs.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 Rs.26,05,239/- under section 40(a)(i) of the Act. 4.1 In these grounds, the assessee, assailing the impugned order of the learned CIT(A), contends that the learned CIT(A) erred in upholding the action of the Assessing Officer (AO) on the disallowance of professional fees of Rs.26,05,239/- under section 40(a)(i) of the Act for alleged non deduction of tax at source under section 195 of the Act on remittance Ashok Piramal Management Corporation Ltd. made to Orfis Baker Tilly, a resident of France. It is contended that in doing so, the learned CIT(A) failed to appreciate that the remittance of professional fees paid to Orfis Baker Tilly (‘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 Rs.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 therefore the remittance is not chargeable to tax under section 9 of the Act. Therefore, there was no requirement for the assessee to withhold tax under section 195 of the Act in respect of the said remittance in the period relevant to A.Y. 2009-10 as the assessee’s case is covered by the decision of the Hon’ble Apex Court in the case of Ishikawajima-Harima Heavy Industries Ltd. (288 ITR 408) (SC) which then held the ground. Both the learned A.R of the assessee and the learned D.R. for Revenue submitted 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 on the following judicial pronouncements of various Benches of the Tribunal: - i) Channel Guide India Ltd. (139 ITD 49) (Mum. Trib) ii) Sterling Abraive Ltd. (140 TTJ 68) (Ahmd Trib) iii) Infotech Enterprises Ltd. (160 TTJ 142( (Hyd Trib) iv) Virola International (147 ITD 519) (Agra Trib) v) Ajit Ramakant Phatarpekar (154 ITD 144) (Panaji Trib) The learned D.R., though, relied upon the observations 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.
Ashok Piramal Management Corporation Ltd. 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 Rs.26,05,239/- made by the assessee to ‘OBT’ was towards rendering of services in respect of due diligence of ‘DIAM Group of France. The assessee was of the view that since these services were rendered by ‘OBT’ outside India, the same was not taxable in India and therefore the assessee did not have any obligation to deduct tax at source under section 195 of the Act while making the said payment. It was thus contended that since there was no obligation on the part of the assessee to deduct tax at source, the disallowance under section 40(a)(i) of the 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 was considered as ‘FTS’, no TDS was required to be made at the time of remittance as per the law existing at that time (i.e. in the period relevant to Financial year 2008-09) because the said services were not rendered in India. The learned A.R. submitted, by virtue of amendment to Explanation to section 9(2) by Finance Act, 2010 w.e.f. 01.06.1976 even income received from services rendered outside India is to be treated as FTS. However, he submitted, by virtue of such retrospective amendment 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 either before the AO or before the CIT(A). However, as per Ashok Piramal Management Corporation Ltd. the submissions counsels of both the parties that the appeal can be decided on this limited issue, we proceed to deal with the same. The question for consideration before us is whether or not the disallowance under section 40(a)(i) of the Act can be made based on the effect of the retrospective amendment in Explanation to section 9(2) of the Act which was inserted by Finance Act, 2010 w.e.f. 01.06.1976. In the decision of the Agra Bench of ITAT in Virola International (2014) 42 taxmann.com 286 (Agra Trib) 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 services were rendered in India, the fees for such services could not be brought to tax under section 9 of the Act. Though the law was amended retrospectively, but as far as tax withholding liability was concerned, it would depend on the law as it existed at that point of time when the payments, from which tax was to be deducted, was made. A retrospective amendment in law does change the tax liability in respect of an income, but it cannot change the withholding tax liability. In our view, the legal 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 the assessee fails to comply with such obligation. In this view of the matter, so far as the payments/remittances were made before 08.05.2010, the assessee did not have any liability to deduct tax on remittance to ‘OBT’ which were rendered outside India and therefore in our view no disallowance under section 40(a)(i) of the Act can be made or was sustainable since the assessee made Ashok Piramal Management Corporation Ltd. the remittances to ‘OBT’ in the period relevant to AY 2009-10 which is before 08.05.2010. 4.3.2 In similar circumstances, on similar facts, Panaji Bench of the ITAT in the case of Ajit Ramakant Phatarpekar (2015) 56 taxmann.com 57 (Panaji Trib) 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 & 146/PNJ/2014 (A.Y 2010-11) to Rs. 28,87,983/- to Hongkong and Singapore parties, Rs. 17,43,033/- to Zhao Long (Asia) Ltd. for monitoring, supervision of discharged cargo, draft survey, joint sampling of discharged cargo, photographs, sample preparation and sealing of samples, analysis of the grades etc. Copies of the bills were placed at pg. 134-140 of the paper book. From all the bills it is apparent that these services were rendered in the People's Republic of China. Similarly, the Assessee has paid a sum of Rs. 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 Rs. 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 amendment made by the Finance Act, 2010 w.e.f. 1.6.1976 the income of the non-resident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of sub-section (1) and shall be included in the total income of the non-resident 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. The destination sample charges are consultant/technical charges paid for gradation of the iron ore exported 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 provisions of Sec. 40(a)(i) any interest or fee for technical services which is payable outside India on which tax is deductible at source under Chapter 17B is not allowable unless TDS is deducted. This is an undisputed fact that in this case the Assessee has not deducted the tax. We are 10 ITA NOS. 145 & 146/PNJ/2014 (A.Y 2010-11) not going on the merits of the taxability of the payments made by the Assessee to the non- resident company as, in our opinion, once the payments made by the Assessee 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 stated that the income of non-resident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of Sec. 9(1) and shall be included in the total income whether or not (a) the non- resident has residence or place of business or business connection in India or (b) the non-resident has rendered services in India. Similar view has been taken by the co-ordinate Mumbai bench of this Tribunal in the case of Ashapura Minichem Ltd. vs. ADIT, 40 SOT 220 (Mum.) in which it was observed as under : "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 income, whether or not (a) the non-resident has a residence or place of business or business connection in India; or (b) the non- resident has rendered services in India. It is thus no longer necessary that, in order to attract taxability in India, the services must also be rendered in India. As the law stands now, utilization of these services in India is enough to attract its taxability in India. To that effect, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its taxability in India.
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 countries that are 11 & 146/PNJ/2014 (A.Y 2010-11) considered territorial tax systems are France, Belgium, Hong Kong and the Netherlands, and in those countries also this system comes with certain anti abuse riders. In other major tax systems, the source and residence rules are concurrently followed. On a conceptual note, source rule of taxation requires an income sourced from a tax jurisdiction to be taxed in this jurisdiction, and residence rule of taxation requires income, earned 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 by way of exclusion of income from the scope of taxability in one of the competing jurisdictions or by way of tax credits. Except in a situation in which a territorial method of taxation is followed, which is usually also a Ashok Piramal Management Corporation Ltd. lowest common factor in taxation policies of tax heavens, source rule is an integral part of the taxation system and any double jeopardy, due to inherent clash of source and residence rule, to a taxpayer is relieved only through the specified relief mechanism under the treaties 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."
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-resident party prior to receiving of assent of the President making the retrospective amendment by adding explanation to Sec. 9(1). At the time when the Assessee made the payment there was no provision u/s 9(1) making the technical fees deemed to accrue or arise in India whether or not (a) the non- resident has residence or place of business or business connection in India or (b) the non-resident has rendered services in India. It is not disputed by the ld. DR that the non-resident did not have residence 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 & 146/PNJ/2014 (A.Y 2010-11) the income received by the non-resident as per the existing law at the time when the Assessee made the payment, in our opinion, was not taxable in India under the Income Tax Act. We are not going through the tax treaty which under Article 12 provides that any fees for technical/consultancy services arising in a contracting state and paid to a resident of other contracting state may be taxed in that other state. This article also provides that such royalty and technical/ consultancy fees may also be taxed in the contracting 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, 2010 that the position has become clear. If the income was not taxable in India it cannot be made taxable in view of the tax treaty. This is a fact that as argued by the ld. AR the retrospective amendment brought by the Finance Act, 2010 was not in existence at the time when the Assessee had made the payments. The ld. AR submitted that the Assessee cannot be penalized for performing an impossible task of deducting TDS in accordance with the law which was brought into the statute book much after the point of time when the tax deduction obligation was to be discharged. In this regard, we perused the Ashok Piramal Management Corporation Ltd. decision of the co-ordinate bench in the case of Channel Guide India Ltd. vs. 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 to SSA and as held by Ahmedabad Bench of this Tribunal in the case of Sterling Abrasives Ltd. by its order dated 23.12.2010 cited by the Ld. Counsel for the assessee, the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective 13 & 146/PNJ/2014 (A.Y 2010-11) effect. In the said case, Explanation to sec.9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976 and it was held by 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 Swamy S. PD and Another v. Union of India and others 281 ITR 305 wherein the said legal Maxim was accepted by the Hon'ble apex court.
In view of the above discussion, we are of the view that the amount in question paid by the assessee to SSA was not taxable in India in the hands of SSA either u/s.9(1)(vi) or 9(1)(vii) as per the legal position prevalent at the relevant time and the assessee therefore was not liable to deduct tax at source from the said amount paid to M/s. SSA and there was 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 site any contrary decision. Therefore, we hold that the aforementioned amendment does not create any liability against the Assessee as the legal position prevailing at the relevant time has to be considered when the payment was made by the Assessee to the non-resident party. Accordingly, we hold that the Assessee was not liable for deduction of tax u/s 195 of the Income Tax Act. Since the Assessee was not liable at that time to deduct the tax, the disallowance u/s 40(a)(i) cannot be made. We accordingly confirm the order of CIT(A) deleting the addition though on a different ground pleaded by the ld. AR. Thus, this ground stands dismissed.” 4.3.3 Following, inter alia, the decisions of the ITAT Panaji Bench in the case of ACIT vs. of Ajit Ramakant Phatarpekar (supra), of the ITAT Agra Bench in the case of DCIT Vs. Virola International (supra), we hold that the retrospective amendment made by Finance Act, 2010 w.e.f. 01.06.1976 in Ashok Piramal Management Corporation Ltd. Explanation 2 to section 9(2) of the Act, which received the assent of the President of India on 08.05.2010, does not create any liability to the assessee in the case on hand for deduction of tax under section 195 of the Act on the remittance to ‘OBT’ since the payment was made much earlier; in the period relevant to Financial Year 01.04.2008 to 31.03.2009. Since the assessee was not liable at that point in time to deduct tax at source in respect of the remittance e to ‘OBT’ the disallowance 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. Order pronounced in the open court on 17th August, 2016.