TaxTMI 
TaxTMI 
2016 (6) TMI 37
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.... 195 r.w.s 9(1)(vii) of the Act and the assessee having failed to do so, the payments were rendered ineligible for business deduction in view of the provisions of section 40(a)(i) of the Act. Detailed submissions were made by the assessee before the AO to the effect that the payments were not in the nature of fees for technical services within the meaning of that expression u/s 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 could not be brought to tax in India as business profits either. The assessee further stated that its entire expenditure could be bifurcated under the three heads as outlined at page 4-6 of the CIT(A) order as follows: " Purchase of material samples Rs. 1,48,48,888/ Off shore services Rs. 27,53,236/- Reimbursement of expenses Rs. 27,70,650/- After examining the details of each type of payments as mentioned above, the AO accepted payments amounting to Rs. 1,01,97,818/-out of details of purchase of material samples as being for outright purchase of goods without there being any element of ....
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.... of fee for technical services and the explanation inserted in section 9 vide Finance Act, 2010 was only clarificatory in nature. The income of the payee is also chargeable to tax in India in view of Article 13(2) read with 134(4) of the DTAA between India other countries. Therefore, the disallowance of Rs. 1,01,74,956/- has been made correctly by the AO for assessee's default in respect of deduction of tax at source u/s 40(a)(i) of the I.T. Act, 1961. 2. That the order of Ld. Commissioner of Income Tax (Appeals) being erroneous in law and on facts deserves to be quashed to be quashed and that of the Assessing Officer deserves to be restored. Further the assessee filed a Cross Objection against the findings of the CIT(A) raising the following grounds: 1. Because the learned authorities below have erred on facts and in law in considering the payments made to M/s Calzaturificio Effigi Style S.P.A a resident of Italy amounting to Rs. 26,74,320/- as fees for technical services within the meaning of section 9(1)(vii)(b) of the Income Tax Act, 1961. 2. Because the learned Commissioner of Income Tax (Appeals) has erred on facts and in law in not appreciating the under DTAA between ....
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....r of IT (2007) 288 ITR 408 (SC), wherein, while interpreting the provisions of s. 9(1)(vii)(c) of the 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) r....
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.... of income sought to be taxed in India must be (i) utilized in India, and (ii) rendered 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 9. However, this legal position did undergo a change when Finance Act 2010 received assent of the President of India on 8th 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 nonresident shall be deemed to accrue or arise in India under cl. (v) or cl. (vi) or cl.....
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....disallowance under section 40(a)(i) is not for the payments made to 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 8th 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 rende....