2010 (12) TMI 1174 - AT - Income Tax

Tribunal rules in favor of assessee on TDS issue under India-UK DTAA

Sterling Abrasives Ltd. Versus The Income Tax Officer, TDS-3, Ahmedabad and vice-versa

Sterling Abrasives Ltd. Versus The Income Tax Officer, TDS-3, Ahmedabad and vice-versa - TMI Issues Involved:1. Liability of the assessee to deduct TDS on payments made to a non-resident advisor under Section 195 of the IT Act.2. Validity of the orders passed by the AO under Section 201(1) read with Section 201(1A) of the IT Act considering the orders as time-barred.3. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and the UK.4. Impact of retrospective amendments to Section 9(2) of the IT Act on the assessee's obligation to deduct TDS.Detailed Analysis:1. Liability of the Assessee to Deduct TDS:The assessee engaged a UK-based non-resident advisor and made payments for advisory services. The AO deemed these payments as fees for technical services under Section 9(1)(vii) of the IT Act, thereby requiring TDS under Section 195. The assessee argued that the services were rendered outside India and hence not taxable in India based on the Supreme Court's ruling in Ishikawajma-Harima Heavy Industries Ltd. However, the AO contended that retrospective amendments to Section 9(2) nullified this argument, making the payments taxable in India.2. Validity of Orders Passed by AO:The CIT(A) held that the orders for assessment years 2001-02 and 2002-03 were time-barred as they were passed beyond the four-year limitation period. The CIT(A) relied on precedents such as Century Textiles & Industries Ltd. and State Bank of India, which established that orders under Section 201 should be passed within four years from the end of the relevant financial year. Consequently, the orders for these years were canceled.3. Applicability of DTAA:The assessee argued that under the DTAA between India and the UK, the payments should be classified under Article 15 (Independent Personal Services) or Article 7 (Business Profits). According to the DTAA, such payments would be taxable in India only if the advisor had a permanent establishment or stayed in India for more than 90 days, neither of which was the case. The AO, however, classified the payments under Article 13 (Royalties and Fees for Technical Services), which does not require the advisor to have a permanent establishment in India.4. Impact of Retrospective Amendments:The Tribunal noted that the retrospective amendment to Section 9(2) by the Finance Act, 2007, could not impose an obligation on the assessee to deduct TDS for periods before the amendment. The Tribunal cited the legal maxim 'lex non cogit ad impossibilia' (the law does not compel a man to do the impossible) and various judicial precedents to support this view. Therefore, the assessee could not be held liable for not deducting TDS during the relevant assessment years.Tribunal's Findings:1. On the Liability to Deduct TDS: The Tribunal followed its earlier decision in the assessee's case for the assessment year 2004-05, holding that the assessee could not be compelled to deduct TDS retrospectively.2. On the Validity of AO's Orders: The Tribunal confirmed the CIT(A)'s finding that the orders for assessment years 2001-02 and 2002-03 were time-barred.3. On the Applicability of DTAA: The Tribunal did not specifically address this issue in detail but implicitly accepted the assessee's argument by setting aside the AO's orders.4. On Retrospective Amendments: The Tribunal emphasized that the retrospective amendment could not impose an obligation on the assessee to deduct TDS for past periods, aligning with the principle that the law cannot compel the performance of an impossible act.Conclusion:The Tribunal allowed the assessee's appeals, quashed the AO's orders, and deleted the resultant demand under Section 201(1) read with Section 201(1A) for all assessment years. The departmental appeals were dismissed, and the assessee's cross-objections were dismissed as time-barred. The order was pronounced in Open Court on 23-12-2010.