2015 (11) TMI 1544 - AT - Income Tax

TDS u/s 195 - accrual of income in India - non deduction of tds on payment to foreign attorneys - existence of PE in India - effect of amaendment to act - retrospectivity - Held that - Till amendment in Explanation to sec. 9(2) of the Act, the prevailing legal position was that unless the technical services were rendered in India, the fees for such services could not be brought to tax under Section 9(1)(vii) of the Act. The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax deductor is not expected to know how the law will change in future. A retrospective amendment in law does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability, with retrospective effect. The tax withholding obligations from payments to non-residents, as set out in Section 195 of the Act, require that the person making the payment at the time of credit of such income to the account payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force . When these obligations are to be charged at the point of time when payment is made or credited, whichever is earlier, such obligations can only be discharged in the light of the law as it stands that point of time. Section 40(a)(i) of the Act provides that inter alia, notwithstanding anything to the contrary in sections 30 to 38 of the Act, any amount payable outside India, or payable in India to a non-resident, shall not be deducted in computing the income chargeable under the head profits and gains of business or profession on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted. Accordingly, the assessee cannot be faulted for not deducting TDS and consequently, the deletion of disallowance by CIT(A) is confirmed - Decided in favour of assessee.

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of TDS under Section 195.
2. Determination if payments to non-resident patent attorneys are chargeable to tax in India.
3. Application of Section 9(1)(vii)(b) and Section 5 of the Income-tax Act.
4. Interpretation of professional vs. technical services.
5. Retrospective application of amendments to the Income-tax Act.
6. Impact of CBDT Circulars and certificates issued by International Taxation Department.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of TDS under Section 195:
The common issue in the appeals was the disallowance made by the AO under Section 40(a)(i) for non-deduction of TDS on payments made to non-resident patent attorneys. The CIT(A) deleted the disallowance, concluding that the payments were not chargeable to tax in India and thus, TDS under Section 195 was not required. The Tribunal upheld this view, emphasizing that the services were rendered outside India and had no territorial nexus with India.

2. Determination if payments to non-resident patent attorneys are chargeable to tax in India:
The Tribunal examined whether the payments made to non-resident patent attorneys were chargeable to tax in India. It was noted that the services were rendered outside India, and the patents granted in foreign countries could only be utilized in those countries. The Tribunal agreed with the CIT(A) that there was no territorial nexus between the rendition of services and India, and thus, the payments were not chargeable to tax in India.

3. Application of Section 9(1)(vii)(b) and Section 5 of the Income-tax Act:
The AO's contention that the payments were for technical services utilized in India was rejected. The Tribunal held that the services were of a procedural nature and did not involve any technical information or consultancy. The Tribunal also noted that the income did not accrue or arise in India as per Section 9(1)(vii)(b) and Section 5, as the services were rendered outside India and the payments were made outside India.

4. Interpretation of professional vs. technical services:
The Tribunal distinguished between professional and technical services, noting that the services rendered by the non-resident attorneys were professional services related to obtaining patent/trademark registrations and not technical services. The Tribunal agreed with the CIT(A) that professional services are different from technical services, as defined in Section 194J and Section 9(1)(vii) of the Act.

5. Retrospective application of amendments to the Income-tax Act:
The Tribunal addressed the retrospective amendment to Section 9(2) by the Finance Act, 2010. It was held that while the amendment was retrospective, the tax withholding liability depends on the law as it existed at the time of payment. The Tribunal emphasized that a retrospective amendment cannot impose a tax withholding obligation retrospectively. Therefore, the assessee was not liable to deduct TDS based on the law prevailing at the time of the payments.

6. Impact of CBDT Circulars and certificates issued by International Taxation Department:
The Tribunal considered the relevance of CBDT Circulars and certificates issued by the International Taxation Department, which authorized the assessee to remit amounts without TDS. It was noted that these certificates indicated the Department's interpretation that the payments were not chargeable to tax in India. The Tribunal found this interpretation relevant and supportive of the assessee's position.

Conclusion:
The Tribunal confirmed the deletion of disallowance under Section 40(a)(i) by the CIT(A), concluding that the payments to non-resident patent attorneys were not chargeable to tax in India, and thus, TDS under Section 195 was not required. The appeals of the revenue were dismissed.

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