2010 (7) TMI 803 - AT - Income Tax

Tribunal allows appeal regarding non-deduction of TDS on technical services under DTAA

Sterling Abraive Ltd. Versus Assistant Commissioner of Income-tax, Circle-8, Ahmedabad

Sterling Abraive Ltd. Versus Assistant Commissioner of Income-tax, Circle-8, Ahmedabad - [2011] 44 SOT 652 (Ahd.) Issues Involved:1. Disallowance under section 40(a)(i)(A) of the Income-tax Act, 1961 due to non-deduction of withholding tax on fees for technical services as per DTAA provisions.Detailed Analysis:Issue 1: Disallowance under Section 40(a)(i)(A) of the Income-tax Act, 1961Background:The assessee-company made payments to a UK resident, Mr. Whitehead, for services rendered under a contractual agreement. The Assessing Officer disallowed these payments under section 40(a)(i)(A) of the Act, as the assessee failed to deduct TDS on the payments, which were considered fees for technical services under the Double Taxation Avoidance Agreement (DTAA).CIT(A) Findings:The CIT(A) confirmed the disallowance, noting the services provided (e.g., marketing strategies, manufacturing process advice) were of a nature that benefited the assessee on a reasonably permanent basis. The CIT(A) concluded that these services fell under Article 13 clause 4(c) of the DTAA, making the assessee liable for TDS deduction, which was not done.Assessee's Arguments:1. The assessee argued that under section 90 of the Act, it opted for the DTAA provisions, which were more beneficial.2. The services provided by Mr. Whitehead did not constitute technical services under DTAA, as they were not made available to the assessee in a manner that required TDS deduction.3. The retrospective amendment to section 9 of the Act, which removed the requirement for services to be rendered in India, should not impose a retrospective burden on the assessee for TDS deduction.Tribunal's Analysis:1. Retrospective Amendment: The Tribunal noted that the Finance Act, 2007 inserted an explanation to section 9(2) with retrospective effect from 1-6-1976, making it impossible for the assessee to comply with the TDS deduction requirement for the financial year 2003-04.2. Legal Maxim: The Tribunal applied the legal maxim 'lex non cogit ad impossibilia' (the law does not compel a man to do what he cannot possibly perform), citing various precedents where courts held that law cannot compel an impossible act.3. Bona Fide Actions: The Tribunal found that the assessee acted in good faith based on the prevailing legal interpretation at the time, particularly the Supreme Court's decision in Ishikawajma-Harima Heavy Industries Ltd. v. DIT, which required services to be rendered and utilized in India for TDS applicability.Conclusion:The Tribunal held that it was impossible for the assessee to deduct TDS for the relevant period due to the retrospective amendment. The assessee's actions were bona fide and in compliance with the law as understood at the time. Consequently, the appeal was allowed, and the disallowance under section 40(a)(i)(A) was overturned.Result:The assessee's appeal was allowed.Summary:The Tribunal addressed the disallowance of Rs. 17,92,240 under section 40(a)(i)(A) of the Income-tax Act, 1961, due to non-deduction of TDS on fees for technical services under the DTAA. The Tribunal concluded that the retrospective amendment to section 9 made it impossible for the assessee to comply with the TDS requirement for the financial year 2003-04. Applying the legal maxim 'lex non cogit ad impossibilia,' the Tribunal allowed the appeal, overturning the disallowance and confirming the assessee's bona fide actions based on the prevailing legal interpretation.