TaxTMI 
TaxTMI 
2014 (2) TMI 653
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....rse of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has, inter alia, made payments aggregating to Rs 51,98,819 to various non-residents, without deducting any taxes at source, towards 'design and development expenses'. The Assessing Officer was of the view that the assessee was under an obligation to deduct tax at source from these payments, as required under section 195 r.w.s. 9(1)(vii) of the Act, and that the assessee having failed to comply with these tax withholding requirements, these payments were rendered ineligible for business deduction in view of the provisions of Section 40(a)(i) of the Act. It was in this backdrop that the assessee was required to show cause as to why the amount of Rs 51,98,819 not be disallowed under section 40(a)(i) of the Act. Elaborate submissions were made by the assessee to the effect that the payments so made are not in the nature of fees for technical services within meaning s of that expression under section 9(1)(vii) of the Act or under the applicable double taxation avoidance agreement. It was also submitted that since none of these persons had any permanent establishment in India, the amounts in question ....
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.... Act, the Supreme Court held as under (p. 444): 'Sec. 9(1)(vii)(c) of the Act states that 'a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source of India'.' Reading the provision in its plain sense, as per the apex Court it requires two conditions to be met--the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. In the above judgment, the apex Court observed that (p. 444) : 'Sec. 9(1)(vii) of the Act must be read with s. 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income'. According to the apex Court, the global income of a reside....
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....dered in India. In the present case, both these conditions have not been satisfied simultaneously." 7. The law laid down by Hon'ble Supreme Court, in the case of Ishikawajma-Harima Heavy Industries Ltd. vs. Director of Income Tax (supra), binds everyone under Article 141 of the Constitution of India. The legal position thus was that unless the services are rendered in India, the same cannot be brought to tax as 'fees for technical services' under Section However, this legal position did undergo a change when Finance Act 2010 received assent of the President of India on 8 th May 2010. Explaining the scope of this amendment, a coordinate bench of this Tribunal, in the case of Ashapura Minichem Ltd Vs ADIT (131 TTJ 291), has explained thus: ......(this legal position) does no longer hold good in view of retrospective amendment w.e.f. 1st June, 1976 in s. 9 brought out by the Finance Act, 2010. Under the amended Explanation to s. 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 cl. (v) or cl. (vi) or cl. (vii) of s. 9(1), and shall be included in his total income, whether or not ....
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....non-residents, which are taxable in India, but for the payments on which tax was deductible at source but tax has not been deducted, and such deductibility of tax at source, as we have discussed above, has to be in the light of the legal position as it stood at the point of time when payment was made or credited- whichever is earlier . Clearly, therefore, the disallowance under section 40(a)(i) can come into play only when the assessee had an obligation to deduct tax at source from payments to non-residents, and the assessee fails to comply with such an obligation. In view of these discussions, so far as payments made before 8 th May 2010 are concerned, the assessee did not have any tax withholding liabilities from foreign remittances for fees for technical services unless such services were rendered in India, and a fortiori no disallowance can be made under section 40(a)(i) for assessee's failure to deduct tax at source from such payments. 9. In the case before us, there is no material whatsoever to demonstrate and establish that the design and development services, for which impugned payments were made, were rendered in India. Therefore, the assessee did not have any liability....