2016 (11) TMI 113 - AT - Income Tax

Tribunal rules in favor of assessee on disallowance of professional fees under Income Tax Act

The Tribunal held that the disallowance of professional fees under section 40(a)(i) of the Income Tax Act could not be sustained as the assessee was not ... Disallowance under section 40(a)(i) - tax deduction at source under section 195 - taxability under section 9 - retrospective amendment to Explanation to section 9(2) by Finance Act, 2010 - fees for technical services (FTS) - lex non cogit ad impossibiliaDisallowance under section 40(a)(i) - tax deduction at source under section 195 - retrospective amendment to Explanation to section 9(2) by Finance Act, 2010 - fees for technical services (FTS) - lex non cogit ad impossibilia - Whether disallowance under section 40(a)(i) can be sustained for non-deduction of TDS under section 195 on professional fees paid to a non-resident where the alleged taxability arises only by a retrospective amendment to section 9(2). - HELD THAT: - The Tribunal examined whether the assessee was obliged to deduct tax at source under section 195 in respect of professional fees remitted to a non-resident (OBT) for services rendered outside India, and whether a retrospective amendment (Explanation to section 9(2) introduced by Finance Act, 2010 w.e.f. 01.06.1976) could be applied to fasten TDS liability for payments made prior to the amendment receiving Presidential assent. The Tribunal noted that as per the law prevailing at the time of payment (period relevant to Financial Year 01.04.2008 to 31.03.2009), services rendered outside India were not taxable in India as FTS under section 9 and therefore no obligation to withhold under section 195 arose. Applying the legal maxim lex non cogit ad impossibilia, the Tribunal held that a retrospective amendment which post-dates the payment cannot be used to create a withholding obligation that was impossible to discharge at the time of payment. The Tribunal followed coordinate decisions of ITAT benches which reached the same conclusion on materially similar facts, and observed that while the retrospective amendment alters taxability, it does not retroactively impose a withholding obligation on taxpayers who had no such duty when making the payments. Consequently, since there was no contemporaneous obligation to deduct TDS, the disallowance under section 40(a)(i) was unsustainable. [Paras 4]Disallowance under section 40(a)(i) deleted; AO directed to delete the addition made for non-deduction of TDS on the remittance to OBT.Final Conclusion: The assessee's appeal is allowed on the short point that retrospective amendment to Explanation to section 9(2) cannot be invoked to create a past obligation to deduct tax under section 195; the disallowance under section 40(a)(i) is deleted and the AO is directed to delete the addition. Issues Involved:1. Disallowance of professional fees under section 40(a)(i) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance of Professional Fees under Section 40(a)(i) of the Act:Facts of the Case:The assessee company, engaged in management consultancy, filed its return of income for A.Y. 2009-10 declaring income of Rs. 19,79,012/-. The revised return declared income of Rs. 38,40,819/-. The assessment was completed under section 143(3) of the Act, determining the income at Rs. 95,26,058/- due to disallowances, including Rs. 26,05,239/- under section 40(a)(i) for non-deduction of tax at source on remittance made to Orfis Baker Tilly (OBT), a tax resident of France.Assessee's Appeal:The assessee contested the disallowance of Rs. 26,05,239/- under section 40(a)(i), arguing that the remittance to OBT was not taxable under section 195 of the Act, read with the Indo-France DTAA, as the services were rendered outside India.Arguments and Submissions:The assessee's representative argued that since OBT rendered services outside India, the income was not deemed to accrue or arise in India under section 9 of the Act, and therefore, there was no requirement to withhold tax under section 195. The representative cited the Hon’ble Supreme Court decision in Ishikawajma-Harima Heavy Industries Ltd. v. DIT 288 ITR 408, which held that services rendered outside India were not taxable in India.Revenue's Position:The Revenue contended that the remittance was in the nature of fees for technical services (FTS) and thus taxable in India, requiring the assessee to deduct tax at source under section 195. The CIT (A) upheld the disallowance, agreeing with the Revenue's view.Tribunal's Findings:The Tribunal observed that the remittance to OBT was for services rendered outside India, and thus, under the prevailing law at the time (before the Finance Act, 2010), the income was not taxable in India. The Tribunal noted that the retrospective amendment to Explanation to section 9(2) by Finance Act, 2010, which deemed such income taxable, could not impose a TDS obligation retrospectively.Legal Precedents:The Tribunal referred to multiple judicial pronouncements supporting the view that retrospective amendments could not impose a TDS obligation for past payments:- Channel Guide India Ltd. v. Asstt. CIT [2012] 139 ITD 49 (Mum. - Trib.)- Sterling Abraive Ltd. v. Asstt. CIT [2011] 44 SOT 652 (Ahd.)- Infotech Enterprises Ltd. v. Addl. CIT [2014] 63 SOT 23 (Hyd. - Trib.)- Dy. CIT v. Virola International [2014] 147 ITD 519 (Agra - Trib.)- Asstt. CIT v. Ajit Ramakant Phatarpekar [2015] 154 ITD 144 (Panaji - Trib.)Conclusion:The Tribunal concluded that the disallowance under section 40(a)(i) could not be sustained as the assessee was not liable to deduct tax at source under section 195 at the time of remittance. The law at that time did not require TDS for services rendered outside India, and the retrospective amendment could not impose such an obligation. Therefore, the Tribunal directed the AO to delete the disallowance of Rs. 26,05,239/-. The assessee's appeal was allowed on this ground.