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2010 (7) TMI 803 - AT - Income TaxTDS u/s 195 - Disallowance u/s 40A(a)(i)(A) - assessee has not deducted withholding tax on fees for technical services as per the provisions of DTAA - as submitted appellant was not the beneficial owner of Fees for Technical services and therefore the provision of DTAA does not apply - whether the assessee can be asked to do impossible Act i.e. to deduct tax for the past period? - HELD THAT - We find that by amendment in the Finance Act 2007 the Legislature inserted the explanation retrospectively with retrospective effect from 1-6-1976 to section 9(2) of the Act whereas the assessment year involved is 2004-05 relevant to previous year 2003-04 and it is impossible for the assessee to deduct tax in the financial year 1-4-2003 to 31-3-2004 when the obligation to deduct TDS was not on the assessee during that period. The provision of section 9 provides for situations where income is deemed to accrue or arise in India to a non-resident. We find that the Legislature vide Finance Act 1976 a source rule was provided in section 9 through insertion of clauses ( v ) ( vi ) and ( vii ) in sub-section (1) for income by way of interest royalty or fees for technical services respectively and the intention of introducing the source rule was to bring to tax interest royalty and fees for technical services by creating a legal fiction in section 9 even in cases where services are provided outside India as long as they are utilized in India but the Hon ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. 2007 (1) TMI 91 - SUPREME COURT held that despite the deeming fiction in section 9 for any such income to be taxable in India there must be sufficient territorial nexus between such income and the territory of India. In view of the above facts and legal position whether the assessee can be asked to do impossible Act i.e. to deduct tax for the past period. With the insertion of the explanation retrospectively by the Finance Act 2007 with retrospective effect from 1-6-1976 to section 9(2) of the Act whereas the assessment year involved is 2004-05 relevant to previous year 2003-04 it is impossible for the assessee to deduct tax in the financial year 1-4-2003 to 31-3-2004 when the obligation to deduct TDS was not on the assessee during that period. The argument canvassed by the Ld. counsel on the basis of a legal Maxim lex non cogit ad impossibilia meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform. This Maxim is accepted by different courts of this country including the Hon ble Supreme Court in the case of Krishnaswamy S. Pd. v. Union of India 2006 (2) TMI 75 - SUPREME COURT . At the relevant point of time it was impossible on the part of the assessee to deduct tax on the income of non-resident. Admittedly up to the insertion of explanation vide Finance Act 2007 the assessee was under bona fide belief not to deduct tax and accordingly he acted as per law. Accordingly we allow the appeal of assessee. In the result assessee s appeal is allowed.
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, 1961 Background: 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.
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