2016 (3) TMI 812 - AT - Income Tax

TDS u/s 195 - disallowance under section 40(a)(i) on account of any retrospective amendment - whether the payment was taxable as fees for technical services within section 9(1)(vii) and assessee should have deducted TDS? - Held that - It is an undisputed fact that the assessee has made payment to HGSL which is a nonresident company based at Switzerland. The payment has been made for training conducted by the HGSL to its delegates outside India. It is an admitted fact here that neither the services have been rendered in India nor such services have been utilized in India. Out of the total payment of 65, 49, 217/- the assessee had not deducted TDS on the payment aggregating to 33, 93, 493/- ( on the balance amount TDS has been deducted) on the ground that such payment relate to services rendered outside India. The revenue s case is that in view of the Explanation brought in the statute by the Finance Act 2010 which got the President s assent in May 2010 has been brought in the statute with retrospective effect form 1st June 1976 and such an Explanation is clarificatory in nature which now provides that the income of a non-resident shall be deemed to accrue in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included to the total income of the non-resident whether or not the non-resident has resident or place of business or business connection in India or a non-resident has rendered services in India. Though such an amendment has been brought in the statute with retrospective effect but at the time of making the payment there was no such provision under the Act and in fact the law of the land as laid down by the Hon ble Supreme Court was that if the services has not been rendered in India and such services are not utilized in India then there is no liability for deducting TDS. It is a trite legal maxim. lex non cogit ad impossiblia which means that the law cannot possibly compel a person to do something which is impossible to perform. Thus we hold that at the time of making the payment assessee could not have visualize to deduct TDS when there was no provision under the Act and in fact there was a already prevailing law laid down by the in the case of Ishika Wajima-Heavy Industries Ltd vs DIT reported in 2007 (1) TMI 91 - SUPREME COURT wherein it has been held that services rendered outside India will be taxable in India only if the services has been rendered in India and such services have been utilized in India no TDS was to be deducted then obvious conclusion is that on such payment no disallowance under section 40(a)(i) can be made. If the view and contention raised by the revenue is to be accepted that such a law fixing the liability on the assessee is to be reckoned from retrospective date then it will cause not only great hardship and injustice but also prejudice to the assessee. Accordingly we hold that disallowance under section 40(a)(i) on account of any retrospective amendment is wholly vitiated and cannot be sustained. - Decided in favour of assessee

Summary

Issues Involved:
Disallowance under section 40(a)(i) for failure to withhold tax on payments made to overseas group entity for training programs outside India; Interpretation of retrospective amendment to section 9(1) by Finance Act 2010; Nature of payments made for training programs and their tax liability under section 195 of the Income-tax Act.

Analysis:

1. Disallowance under Section 40(a)(i):
The appellant contested the disallowance of Rs. 33,93,493 under section 40(a)(i) for not withholding tax on payments to an overseas group entity for training programs outside India. The AO insisted that the payment was taxable as 'fees for technical services' under section 9(1)(vii), requiring TDS deduction. The CIT(A) upheld this view, emphasizing that the retrospective amendment clarified the scope of section 9(1)(vii) to include such payments. However, the ITAT ruled in favor of the appellant, citing the legal maxim "lex non cogit ad impossiblia," asserting that the law cannot compel the impossible. The ITAT reasoned that the appellant could not have foreseen the retrospective amendment at the time of payment, and the absence of a clear law mandated no TDS deduction, thus disallowance under section 40(a)(i) was unwarranted.

2. Interpretation of Retrospective Amendment:
The retrospective amendment to section 9(1) by the Finance Act 2010 was a key point of contention. The appellant argued that the amendment, effective from 1st June 1976, contradicted the earlier Supreme Court ruling regarding TDS deduction on services rendered outside India. The ITAT emphasized that the amendment aimed to counter the Supreme Court decision, but the lack of prior judicial interpretation and the impossibility for the appellant to anticipate the change rendered the disallowance unjust. The ITAT's decision highlighted the principle that a law cannot impose obligations retrospectively when they were not foreseeable or legally mandated at the time of the transaction.

3. Nature of Payments for Training Programs:
The case also involved a debate on the nature of payments made for training programs and their tax liability under section 195 of the Income-tax Act. The appellant argued that the payments were not subject to TDS as services were rendered outside India, aligning with the Supreme Court precedent. The ITAT's ruling reinforced the importance of legal clarity and the principle that taxpayers cannot be held liable for obligations that were not legally established at the time of the transaction. The decision underscored the need for clear legal provisions to avoid undue hardship and injustice to taxpayers.

In conclusion, the ITAT's judgment in this case highlighted the significance of legal clarity, foreseeability of obligations, and the principle that laws cannot impose retrospective obligations on taxpayers when such obligations were not legally mandated or foreseeable at the time of the transaction. The ruling favored the appellant, emphasizing the need for clear legal provisions to prevent undue hardship and injustice in tax matters.